<PAGE> 1
PROSPECTUS SUPPLEMENT As filed pursuant to Rule 424(b)(2)
(To Prospectus dated August 29, 1996) under the Securities Act of 1933
Registration No. 333-09401
$90,000,000
PROTECTION ONE ALARM MONITORING, INC.
6 3/4% CONVERTIBLE SENIOR SUBORDINATED NOTES DUE 2003
CONVERTIBLE INTO THE COMMON STOCK OF,
AND UNCONDITIONALLY GUARANTEED BY,
PROTECTION ONE, INC.
------------------------
Interest payable March 15 and September 15
------------------------
Protection One Alarm Monitoring, Inc. ("Monitoring") is a direct, wholly owned
subsidiary of Protection One, Inc. ("POI").
------------------------
The Convertible Notes are convertible into Common Stock of POI at any time
after 90 days following the latest date of the original issuance thereof
and prior to maturity, unless previously redeemed, at a conversion
price of $17.95 per share, subject to adjustments in certain
events. See "Description of Convertible Notes -- Conversion
of Notes." The reported last sale price for the Common
Stock on the Nasdaq National Market on September 16,
1996 was $14.50 per share.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE S-6 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE CONVERTIBLE NOTES OFFERED HEREBY.
------------------------
THE CONVERTIBLE NOTES ARE NOT REDEEMABLE BY MONITORING PRIOR TO SEPTEMBER 19,
1999. THEREAFTER, THE CONVERTIBLE NOTES WILL BE REDEEMABLE ON AT LEAST 30
DAYS' NOTICE AT THE OPTION OF MONITORING, IN WHOLE OR IN PART, AT ANY
TIME, AT THE REDEMPTION PRICES SET FORTH IN THIS PROSPECTUS SUPPLEMENT,
IN EACH CASE TOGETHER WITH ACCRUED INTEREST. THE CONVERTIBLE NOTES
MAY ALSO BE REDEEMED AT THE OPTION OF THE HOLDER IF THERE IS A
FUNDAMENTAL CHANGE (AS DEFINED), AT DECLINING REDEMPTION
PRICES, SUBJECT TO ADJUSTMENT IN CERTAIN EVENTS AS
DESCRIBED HEREIN, TOGETHER WITH ACCRUED AND UNPAID
INTEREST THEREON TO THE DATE OF PURCHASE. SEE
"DESCRIPTION OF CONVERTIBLE NOTES -- OPTIONAL
REDEMPTION BY MONITORING" AND " -- REDEMPTION
AT OPTION OF HOLDERS." THE CONVERTIBLE NOTES
ARE UNCONDITIONALLY GUARANTEED ON A SENIOR
SUBORDINATED BASIS BY POI.
------------------------
THE CONVERTIBLE NOTES HAVE BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK
EXCHANGE, SUBJECT TO OFFICIAL NOTICE OF ISSUANCE, UNDER THE
SYMBOL "ALRM 03."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
PRICE 100% AND ACCRUED INTEREST, IF ANY
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
------------------ ------------------ ------------------
<S> <C> <C> <C>
Per Convertible Note............................ 100.0% 3.0% 97.0%
Total(4)........................................ $90,000,000 $2,700,000 $87,300,000
</TABLE>
- ---------------
(1) Plus accrued interest, if any, from September 20, 1996.
(2) Monitoring and POI have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(3) Before deducting expenses payable by the Company estimated at $750,000.
(4) Monitoring has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an additional $13,500,000 of
Convertible Notes at the price to the public less underwriting discounts and
commissions to cover over-allotments, if any. If the Underwriters exercise
the option in full, the total price to public, underwriting discounts and
commissions and proceeds to Monitoring will be $103,500,000, $3,105,000 and
$100,395,000, respectively. See "Underwriters."
------------------------
The Convertible Notes are offered, subject to prior sale, when, as and if
accepted by the Underwriters and subject to approval of certain legal matters by
Shearman & Sterling, counsel for the Underwriters. It is expected that delivery
of the Convertible Notes will be made on or about September 20, 1996, at the
office of Morgan Stanley & Co. Incorporated, New York, New York, against payment
therefor in immediately available funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
BEAR, STEARNS & CO. INC.
MONTGOMERY SECURITIES
September 16, 1996
<PAGE> 2
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS (THE
"PROSPECTUS") AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED OR
INCORPORATED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF
THE SECURITIES OFFERED HEREBY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE CONVERTIBLE
NOTES OFFERED HEREBY, MONITORING'S 13-5/8% SENIOR SUBORDINATED DISCOUNT NOTES
DUE 2005 OR THE COMMON STOCK OF PROTECTION ONE, INC., AT LEVELS ABOVE THOSE
WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NEW YORK STOCK EXCHANGE (AS TO THE CONVERTIBLE NOTES), THE
NASDAQ NATIONAL MARKET (AS TO THE COMMON STOCK) OR OTHERWISE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... S-1
Risk Factors.......................... S-6
Use of Proceeds....................... S-14
Price Range of Common Stock and
Dividend Policy..................... S-14
Capitalization........................ S-15
Selected Consolidated Financial
Data................................ S-16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-18
<CAPTION>
PAGE
----
<S> <C>
Business.............................. S-30
Management............................ S-42
Description of Convertible Notes...... S-44
Certain Federal Income Tax
Considerations...................... S-56
Underwriters.......................... S-60
Legal Opinions........................ S-61
Index to Consolidated
Financial Statements
(follows Prospectus)................ F-1
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 3
The Company........................... 4
Risk Factors.......................... 4
Use of Proceeds....................... 4
Ratio of Earnings to Fixed Charges.... 4
Description of Debt Securities........ 4
Limitations on Issuance of Bearer Debt
Securities.......................... 12
Description of Capital Stock.......... 13
Plan of Distribution.................. 15
Legal Matters......................... 16
Experts............................... 16
</TABLE>
As used in this Prospectus Supplement, "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 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 does not measure profitability or performance, and does not include
any allowance for future attrition or 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
subscriber accounts, (ii) amortization of debt issuance costs and original issue
discount ("OID"), (iii) interest expense, net, (iv) amortization of subscriber
accounts and goodwill, (v) depreciation expense, (vi) performance warrants
compensation expense, and (vii) 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 long-term value of companies with recurring
cash flows from operations and net losses.
<PAGE> 3
SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus Supplement
or the Prospectus or incorporated by reference herein. The following contains
certain forward-looking statements and potential investors should carefully
review the "Risk Factors" section of this Prospectus Supplement with respect to
such forward-looking statements. Unless otherwise indicated or the context
otherwise requires, references to "Protection One" or "the Company" are to
Protection One, Inc., a Delaware corporation, and its direct and indirect,
wholly owned subsidiaries; "POI" means solely Protection One, Inc., excluding
its subsidiaries; and "Monitoring" means Protection One Alarm Monitoring, Inc.,
a direct, wholly owned subsidiary of Protection One, Inc.
THE COMPANY
Protection One provides security alarm monitoring services for residential
and small business subscribers. Based on its 188,132 subscribers as of June 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 six western states of Arizona, California, Nevada,
New Mexico, Oregon and Washington.
The Company's strategy is to enhance its position as the largest
residential security alarm monitoring company in the western United States by
pursuing a balanced growth plan incorporating the purchase of subscriber
accounts from independent security alarm systems dealers with whom the Company
has exclusive purchase agreements (the "Dealer Program"), acquisitions of
portfolios of subscriber accounts, the sale of enhanced services and new alarm
systems and possible joint ventures and other strategic alliances.
The Company grew rapidly in the twelve months ended June 30, 1996, as
illustrated by an increase of 43.4% in the number of subscriber accounts from
131,166 at June 30, 1995 to 188,132 at June 30, 1996 and a 43.8% increase in its
MRR from $4.0 million at June 30, 1995 to $5.8 million at June 30, 1996. (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.)
Total revenues increased by 38.4% from $49.7 million for the twelve months ended
June 30, 1995 to $68.7 million for the twelve months ended June 30, 1996.
Revenue growth and operating efficiencies led to a 49.4% increase in EBITDA(1),
from $19.8 million for the twelve months ended June 30, 1995 to $29.6 million
for the twelve months ended June 30, 1996. In addition, EBITDA as a percentage
of revenues increased from 39.8% for the twelve months ended June 30, 1995 to
43.0% for the twelve months ended June 30, 1996. Operating income increased by
46.6% from $5.0 million for the twelve months ended June 30, 1995 to $7.3
million for the twelve months ended June 30, 1996. The Company's loss
attributable to common stock decreased from $17.5 million for the twelve months
ended June 30, 1995 to $13.3 million for the twelve months ended June 30, 1996.
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 nine months ended
June 30, 1996, monitoring and service revenues represented 89.5% 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
- ---------------
(1) See footnote (3) to Selected Consolidated Financial Data for a discussion
of how EBITDA is derived. 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
long-term value of companies with recurring cash flows from operations and net
losses.
S-1
<PAGE> 4
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 11 branch offices. Enhanced security
services provided by the Company include two-way voice communication, supervised
monitoring services, pager service, wireless backup service and extended service
protection.
Management believes that numerous acquisition opportunities are available,
and the Company is pursuing, and intends to continue to pursue, acquisitions of
portfolios of subscriber accounts, some of which may be significant. As of the
date of this Prospectus Supplement, the Company believes that no such
significant acquisition is probable. During fiscal 1995 and the first nine
months of fiscal 1996, the Company increased its emphasis on the Dealer Program,
which became a more significant source of growth than in prior years. The
Company expects to continue this emphasis because of the greater predictability
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.
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, 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 Prospectus Supplement, the Company has reached an agreement in
principle with PacifiCorp to offer co-branded security alarm systems and
monitoring services. In addition, the Company is discussing with several other
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. Other
than the agreement in principle with PacifiCorp, the Company has not entered
into any agreement or arrangement for any such strategic alliance, nor does the
Company presently consider any such agreement or arrangement to be probable.
RECENT DEVELOPMENTS
PACIFICORP AGREEMENT
In August 1996, the Company and PacifiCorp, a Portland, Oregon-based
utility holding company ("PacifiCorp"), agreed in principle to enter into a
licensing agreement (the "License Agreement") pursuant to which the Company will
offer co-branded security alarm systems and monitoring services (the "Co-Branded
Program") to residences and small businesses in PacifiCorp's service territories
in the western United States. The Company anticipates that prospective
subscribers generated through marketing efforts, which may include television,
radio and print advertising for the Co-Branded Program, will be forwarded to
participants in the Dealer Program and that the Company will purchase, subject
to its customary due diligence, the monitoring contracts obtained by the dealers
in connection with the sale and installation of the co-branded alarm system.
Under the contemplated terms of the License Agreement, the Company will remit to
PacifiCorp a percentage of the MRR from the subscriber accounts created through
the Co-Branded Program as compensation for the support of PacifiCorp's customer
service and marketing staff, the use of PacifiCorp's brand name and access to
PacifiCorp's customers. Although the Company believes it is probable that the
License Agreement will be entered into in the next several months, there can be
no assurance that such agreement will be signed or that if such agreement is
signed, that the terms will not be materially different from those described
above. In addition, there can be no assurance that the Co-Branded Program will
be successful.
METROL ACQUISITION
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, POI
issued 417,885 shares of its Common Stock to Metrol's stockholders and borrowed
S-2
<PAGE> 5
$24.0 million under Monitoring's revolving credit facility (the "Revolving
Credit Facility"). At the time of the acquisition, Metrol was 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 provided other ancillary security services, including guard
services, a national accounts program, a commercial 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 monthly 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 it has enhanced its position as
the largest residential security alarm monitoring company in Arizona. For
additional information with respect to Metrol, see Note 20 of the Notes to
Consolidated Financial Statements included herein.
AMENDMENT OF CREDIT AGREEMENT
On June 7, 1996, the agreement governing the Revolving Credit Facility (the
"Credit Agreement") was amended to, among other things, increase the maximum
amount of borrowings available under the Revolving Credit Facility to $100
million, to reduce the interest rate payable on such borrowings and to extend
the term of the Revolving Credit Facility to January 3, 2000.
THE OFFERING
<TABLE>
<S> <C>
Issuer........................ Protection One Alarm Monitoring, Inc., a wholly owned
subsidiary of Protection One, Inc.
Securities Offered............ $90,000,000 principal amount of 6 3/4% Convertible Senior
Subordinated Notes due 2003 (the "Convertible Notes")
($103,500,000 principal amount of Convertible Notes, if the
Underwriters' over-allotment option is exercised in full).
Interest Payment Dates........ March 15 and September 15, commencing March 15, 1997.
Conversion.................... The Convertible Notes will be convertible into Common Stock,
par value $.01 per share, of POI (the "Common Stock") at any
time after 90 days following the latest date of original
issuance thereof and prior to maturity, unless previously
redeemed, at a conversion price of $17.95 per share, subject
to adjustment.
Subordination................. The Convertible Notes will be subordinated to all Senior
Indebtedness (as defined herein) of Monitoring. As of June
30, 1996, after giving effect to the offering of the
Convertible Notes and the application of the estimated net
proceeds thereof to the repayment of the $80.9 million of
indebtedness then outstanding under the Revolving Credit
Facility, there would have been no Senior Indebtedness
(excluding $1.2 million of contingent reimbursement
obligations under outstanding letters of credit) and
Monitoring would have had unused borrowing capacity under the
Revolving Credit Facility of $100.0 million.
Guarantees.................... The Convertible Notes will be fully and unconditionally
guaranteed on a senior subordinated basis by POI (together
with any subsidiary of POI that becomes a guarantor as
provided herein, the "Guarantors"). Each such guarantee
("Note Guarantee") will be an unsecured senior subordinated
obligation of the Guarantor and will rank junior in right of
payment to all existing and future Guarantor Senior
Indebtedness (as defined herein) of such Guarantor, including
any guarantee by such Guarantor of borrowings under the
Revolving Credit Facility. See "Description of Convertible
Notes -- Guarantees."
</TABLE>
S-3
<PAGE> 6
<TABLE>
<S> <C>
Redemption.................... The Convertible Notes are not redeemable by Monitoring prior
to September 19, 1999. Thereafter, the Convertible Notes will
be redeemable on at least 30 days' notice at the option of
Monitoring, in whole or in part at any time, at the
redemption prices set forth in "Description of Convertible
Notes," in each case together with accrued interest.
Fundamental Change............ The Convertible Notes may also be redeemed at the option of
the holder if there is a Fundamental Change (as defined
herein), at declining redemption prices, subject to
adjustment in certain events, together with accrued and
unpaid interest thereon to the date of purchase. See
"Description of Convertible Notes -- Redemption at Option of
Holders."
Use of Proceeds............... The net proceeds from the issuance of the Convertible Notes
will be used to repay borrowings outstanding under the
Revolving Credit Facility; any remaining proceeds will be
used for general corporate purposes, including capital
expenditures and working capital. See "Use of Proceeds."
Listing....................... The Convertible Notes have been approved for listing on the
New York Stock Exchange, subject to official notice of
issuance, under the symbol "ALRM 03."
Common Stock Outstanding...... 12,738,175 shares(1)
</TABLE>
- ---------------
(1) Based upon the number of shares outstanding at July 31, 1996. Excludes (i)
1,351,158 shares of Common Stock issuable upon the exercise of warrants with
a weighted average exercise price of $3.19 per share, all of which warrants
were exercisable at such date, and (ii) 1,272,060 shares of Common Stock
issuable upon exercise of options and management performance warrants with a
weighted average exercise price of $5.79 per share, of which options and
performance warrants to purchase 503,980 shares of Common Stock were
exercisable at such date.
S-4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR SUBSCRIBER AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
-------------------------------------- -----------------
1992 1993 1994 1995 1995 1996
------- ------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Monitoring and service revenues......... $12,408 $14,850 $27,109 $ 46,308 $32,622 $46,377
Total revenues.......................... 17,598 21,890 34,480 55,882 38,965 51,795
Operating income (loss)(1).............. (1,963) (777) 2,978 5,496 3,456 5,221
Loss attributable to common stock....... (5,033) (4,635) (9,161) (18,453) (16,521) (11,347)
Net loss per common share............... $(48.40) $(44.57) $(31.10) $ (2.12) $ (1.92) $ (1.06)
OTHER DATA:
EBITDA(2)............................... $ 1,043 $ 3,609 $12,294 $ 22,247 $15,267 $22,579
MRR(3).................................. $ 1,015 $ 1,208 $ 2,737 $ 3,924 $ 4,011 $ 5,769
Number of subscribers at end of
period................................ 35,538 39,527 85,269 129,420 131,166 188,132
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-------------------------
AS
ADJUSTED(4)
ACTUAL -----------
--------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................................... $(11,042) $ (5,441)
Total assets...................................................... 274,429 283,480
Total debt........................................................ 207,050 216,101
Total stockholders' equity........................................ 30,909 30,909
</TABLE>
- ---------------
(1) Excludes non-cash compensation expense of approximately $4.5 million related
to the vesting of management performance warrants in fiscal 1994.
(2) 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. 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 subscriber accounts,
(ii) amortization of debt issuance costs and OID, (iii) interest expense,
net, (iv) amortization of subscriber accounts and goodwill, (v) depreciation
expense, (vi) performance warrants compensation expense, and (vii) loss on
acquisition terminations.
(3) MRR is 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.
(4) Adjusted to give effect to the issuance of the Convertible Notes and the
application of the proceeds therefrom.
S-5
<PAGE> 8
RISK FACTORS
Prospective purchasers of the Convertible Notes offered hereby should
consider carefully the factors set forth below, as well as other information set
forth in this Prospectus Supplement and the accompanying Prospectus, in
evaluating an investment in the Convertible Notes. This Prospectus Supplement
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that
involve risks and uncertainties. The Company's actual results and the timing of
certain events could differ materially from those anticipated by such
forward-looking statements as a result of certain factors discussed in this
Prospectus Supplement, including the factors set forth below and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
Risks Related to High Leverage. The Company is, and will continue to be
after the issuance of the Convertible Notes, highly leveraged. At June 30, 1996,
the Company's consolidated indebtedness was $207.1 million, and Monitoring had
unused borrowing capacity of $19.1 million under the Revolving Credit Facility.
As of June 30, 1996, after giving effect to the offering of the Convertible
Notes and the application of the estimated net proceeds thereof, the Company's
consolidated indebtedness would have been $216.1 million (excluding $1.2 million
of contingent reimbursement obligations under outstanding letters of credit),
and Monitoring would have had unused borrowing capacity under the Revolving
Credit Facility of $100.0 million. Future additions of subscriber accounts
through the Dealer Program and acquisitions of subscriber account portfolios
will require additional borrowings under the Revolving Credit Facility, thereby
further increasing the Company's leverage. See "-- Risks Related to
Acquisitions." All borrowings then outstanding under the Revolving Credit
Facility are currently due in full on January 3, 2000. See "Summary -- Recent
Developments -- Amendment of Credit Agreement." Although Monitoring 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 present maturity date, there can be no
assurance that Monitoring will be able to do so. In addition, the principal
amount of Monitoring's 13 5/8% Senior Subordinated Discount Notes due 2005 (the
"Discount Notes") will accrete in value until June 30, 1998, and Monitoring will
be required to make cash payments of interest on the Discount Notes beginning on
December 31, 1998. Based on the Discount Notes' interest rate of 13 5/8%, such
interest payment will be $11.3 million semiannually, or $22.6 million per year.
There can be no assurance that the Company's cash flows from operations will be
sufficient to make the required interest payments on the Convertible Notes, the
Discount Notes and borrowings under the Revolving Credit Facility.
The indenture pursuant to which the Convertible Notes will be issued (the
"Convertible Notes Indenture") does not provide for any current amortization of
principal or require the establishment of any reserves or sinking funds in
respect of the payment of principal. As a result, Monitoring will be required to
repay the full principal amount of the Convertible Notes ($90.0 million, or
$103.5 million if the Underwriters' over-allotment option is exercised in full)
on September 15, 2003. There can be no assurance that the Company will have the
cash necessary to repay the Convertible Notes at maturity or will be able to
refinance such obligations.
Monitoring's ability to pay the principal of and interest on the
Convertible Notes and continue to service its other indebtedness will be subject
to various business, financial and other factors, many of which are beyond the
Company's control. In addition, each of the indenture governing the Discount
Notes (the "Discount Notes Indenture"), the Credit Agreement and, to a lesser
extent, the Convertible Notes Indenture includes covenants that restrict the
operational and financial flexibility of the Company. Failure to comply with
certain covenants would, in some instances, permit the holders of the Discount
Notes or the lenders under the Revolving Credit Facility to accelerate the
maturity of the Company's obligations thereunder, and in other instances could
result in cross-defaults permitting the acceleration of all such debt and debt
under other agreements.
The Company's high degree of leverage may have important consequences to
holders of the Convertible Notes or the Common Stock issuable upon conversion of
the Convertible Notes, including the following: (i) a substantial portion of the
Company's cash flow from operations is, and will continue to be, dedicated to
the
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payment of the principal of and interest on the Company's indebtedness, thereby
reducing the funds available to the Company for its operations and future growth
or other business opportunities; (ii) the Company's ability to obtain additional
financing in the future for working capital, the Dealer Program, acquisitions of
portfolios of subscriber accounts, capital expenditures, general corporate
purposes or other purposes may be impaired; (iii) the Convertible Notes
Indenture, the Discount Notes Indenture and the Credit Agreement contain, and
are expected to continue to contain, certain restrictive covenants, including
certain covenants that require the Company to obtain the consent of the lenders
under the Revolving Credit Facility and to maintain certain financial ratios in
order to undertake significant acquisitions of portfolios of subscriber
accounts; (iv) the Company's borrowings under the Revolving Credit Facility are
at floating rates of interest, causing the Company to be vulnerable to increases
in interest rates; (v) the Company will be more vulnerable to a downturn in the
Company's business or the economy generally; and (vi) the Company's ability to
compete against other less leveraged companies may be adversely affected.
Subordination. The Convertible Notes and the Guarantees will be unsecured
and subordinated in right of payment in full to all existing and future Senior
Indebtedness (as defined herein), including borrowings under the Revolving
Credit Facility. As a result of such subordination, in the event of bankruptcy,
liquidation or reorganization of Monitoring or any Guarantor upon acceleration
of the Convertible Notes due to an event of default, the assets of Monitoring or
the applicable Guarantor will be available to pay obligations on the Convertible
Notes only after all Senior Indebtedness has been paid in full, and there may
not be sufficient assets remaining to pay amounts due on any or all of the
Convertible Notes then outstanding. The Convertible Notes are structurally
subordinated to the liabilities, including trade payables, of Monitoring's
subsidiaries. The Convertible Notes Indenture does not prohibit or limit the
incurrence of Senior Indebtedness or the incurrence of other indebtedness and
other liabilities by the Company, and the incurrence of additional indebtedness
and other liabilities by the Company could adversely affect the Company's
ability to pay its obligations on the Convertible Notes. As of June 30, 1996,
the Company's consolidated indebtedness was $207.1 million, and Monitoring had
unused borrowing capacity of $19.1 million under the Revolving Credit Facility.
As of June 30, 1996, after giving effect to the offering of the Convertible
Notes and the application of the estimated net proceeds thereof, the Company's
consolidated indebtedness would have been $216.1 million (excluding $1.2 million
of contingent reimbursement obligations under outstanding letters of credit),
and Monitoring would have had unused borrowing capacity under the Revolving
Credit Facility of $100.0 million. The Company anticipates that from time to
time it will incur additional indebtedness, including Senior Indebtedness, and
other additional liabilities. See "Description of Convertible
Notes -- Subordination of Notes."
Risks Related to Acquisitions. A principal element of the Company's
business strategy is to acquire portfolios of alarm monitoring accounts. During
the fiscal 1992-1995 period, the Company completed 87 acquisitions of the
portfolios of subscriber accounts of other alarm service companies, and those
acquisitions were the primary source of the Company's growth during that period.
Although the Dealer Program is anticipated to be an increasingly important
component of the Company's growth, an additional 27 portfolios of subscriber
accounts were acquired during the first nine months of fiscal 1996, and
acquisitions of portfolios of subscriber accounts are expected to continue. See
"Summary -- Recent Developments -- Metrol Acquisition." The Company faces
competition for the acquisition of portfolios of subscriber accounts, and may be
required to offer higher prices for acquired accounts than the Company has in
the past. See "-- Competition." In addition, due to the continuing consolidation
of the security alarm industry and the acquisition by the Company and other
alarm companies of a number of large portfolios of subscriber accounts, there
may in the future be fewer large portfolios of subscriber accounts available for
acquisition. There can be no assurance that the Company will be able to find
acceptable acquisition candidates or, if such candidates are identified, that
acquisitions can be consummated on terms acceptable to the Company.
Acquisitions of portfolios of subscriber accounts involve a number of
special risks, including the possibility of unanticipated problems not
discovered prior to the acquisition, account attrition and the diversion of
management's attention from other business activities in order to focus on the
assimilation of accounts. For acquisitions that are structured as the purchase
of the stock of other alarm companies, the Company may assume unexpected
liabilities and must dispose of the unnecessary assets of the acquired
companies.
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Because the Company's primary consideration in acquiring a portfolio of
subscriber accounts 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 directly tied to such MRR. The price paid varies based on the number
and quality of accounts being purchased from the seller, the historical activity
of such accounts and other factors. The seller typically does not have audited
historical financial information with respect to the acquired accounts; thus, in
making acquisitions the Company generally has relied on management's knowledge
of the industry, due diligence procedures and representations and warranties of
the sellers. There can be no assurance that such representations and warranties
are true and complete or, if such representations and warranties are inaccurate,
that the Company will be able to recover damages from the seller in an amount
sufficient to fully compensate the Company for any resulting losses. The Company
expects that future acquisitions will present at least the same risks to the
Company as its prior acquisitions.
An important aspect of the Company's acquisition program is the
assimilation of subscriber accounts into the Company's operations after
purchase. Depending on the size, frequency and location of acquisitions, the
assimilation of subscribers may adversely affect the provision of field repair
services to existing subscribers, which may cause subscriber attrition to
increase. In addition, if the Company's corporate or branch operations fail to
assimilate a substantial portion of acquired subscriber accounts, the Company
may experience higher attrition in the future.
History of Losses. The Company incurred losses attributable to common
stock of $11.3 million for the nine months ended June 30, 1996, $18.5 million
for fiscal 1995, $9.2 million for fiscal 1994, $4.6 million for fiscal 1993 and
$5.0 million for fiscal 1992. ("Losses attributable to common stock" means the
Company's net loss, less dividends payable on preferred stock.) These losses
reflect, among other factors, the substantial charges incurred by the Company
for amortization of purchased subscriber accounts, interest incurred on the
Company's indebtedness and extraordinary losses on early extinguishment of debt.
Such charges, with the exception of the extraordinary losses, will increase as
the Company continues to purchase subscriber accounts, if the Company's
indebtedness increases, or if interest rates increase. The Company's earnings
have been insufficient to cover its fixed charges since the Company was formed,
and there can be no assurance that the Company will attain profitable
operations.
Risks Related to the Dealer Program. During fiscal 1995 and the first nine
months of fiscal 1996, the Company increased its emphasis on the Dealer Program,
which became a more significant source of growth than in prior years. The
Company expects that this emphasis will continue. Several of the Company's
competitors also have dealer programs, and there can be no assurance that the
Company will be able to retain or expand its current dealer base or that
competitive offers to the Company's dealers will not require the Company to pay
higher prices to the Company's dealers for subscriber accounts than previously
paid. The Company's five highest producing dealers generated 47.0% of the total
subscriber accounts purchased by the Company through the Dealer Program in the
first nine months of fiscal 1996. The loss of any of such dealers would
negatively impact the Company's subscribers, revenues and EBITDA.
Need for Additional Capital. In fiscal 1995 and the first nine months of
fiscal 1996, the Company invested a total of $138.9 million in acquisitions of
portfolios of subscriber accounts and purchases of subscriber accounts through
the Dealer Program. Net cash provided by operating activities totaled $25.1
million during such period, and the Company used borrowings under the Revolving
Credit Facility and proceeds from offerings of debt and equity securities to
fund the remainder of the Company's investing activities. The Company intends to
continue to pursue subscriber account growth through the Dealer Program and
acquisitions. As a result, the Company will be required to seek additional
funding from additional borrowing under the Revolving Credit Facility and the
sale of additional securities in the future, which may lead to higher leverage
or the dilution of then existing holders' investment in the Common Stock. See
"-- Risks Related to High Leverage." Any inability of the Company to obtain
funding through external financings is likely to adversely affect the Company's
ability to increase its subscribers, revenues and EBITDA. There can be no
assurance that external funding will be available to the Company on attractive
terms or at all.
POI Note Guarantee; Reliance on Dividends from Monitoring. POI is a
holding company with no operations of its own and no significant assets other
than its ownership of the capital stock of Monitoring. POI
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will, therefore, be dependent upon the receipt of dividends or other
distributions from Monitoring to fund any obligations that it incurs, including
obligations under its Note Guarantee. The Discount Notes Indenture and the
Credit Agreement do not, however, permit distributions from Monitoring to POI,
other than for certain specified purposes. Accordingly, if Monitoring should at
any time be unable to pay interest on or principal of the Convertible Notes, it
is unlikely that it will be permitted to distribute to POI the funds necessary
to enable POI to meet its obligations under its Note Guarantee.
Management of Growth. The Company's business strategy is to grow rapidly
through the addition of subscriber accounts. This expansion has placed and will
continue to place substantial demands on the Company's management and
operational resources and system of financial and internal controls. The
Company's future operating results will depend in part on the Company's ability
to continue to implement and improve the Company's operating and financial
controls and to expand, train and manage the Company's employee base.
Significant changes in quarterly revenues and costs may result from the
Company's execution of its business strategy, resulting in fluctuating financial
results. Additionally, management of growth may limit the time available to the
Company's management to attend to other operational, financial and strategic
issues.
Attrition of Subscriber Accounts. The Company experiences attrition of
subscriber accounts as a result of, among other factors, relocation of
subscribers, adverse financial and economic conditions, and competition from
other alarm service companies. In addition, the Company loses certain accounts,
particularly acquired accounts, to the extent the Company does not service those
accounts adequately or does not assimilate new accounts into the Company's
operations. An increase in such attrition could have a material adverse effect
on the Company's revenues and earnings.
When acquiring accounts, the Company seeks to withhold a portion of the
purchase price as a partial reserve against excess subscriber attrition. If the
actual attrition rate for the accounts acquired is greater than the rate assumed
by the Company at the time of the acquisition, and the Company is unable to
recoup its damages from the portion of the purchase price held back from the
seller, such attrition could have a material adverse effect on the Company's
financial condition or results of operations. There can be no assurance that the
Company will be able to obtain purchase price holdbacks in future acquisitions,
particularly acquisitions of large portfolios. The Company is not aware of any
reliable historical data relating to account attrition rates prepared by
companies from whom the Company has acquired accounts, and the Company has no
assurance that actual account attrition for acquired accounts will not be
greater than the attrition rate assumed or historically incurred by the Company.
In addition, because some acquired accounts are prepaid on an annual,
semi-annual or quarterly basis, attrition may not become evident for some time
after an acquisition is consummated.
At June 30, 1996, the cost of subscriber accounts and intangible assets,
net of previously accumulated amortization, was $238.9 million, which
constituted 87.1% of the book value of the Company's total assets. The Company's
purchased subscriber accounts are amortized on a straight-line basis over the
estimated life of the related revenues. To estimate such life, the Company first
determines gross subscriber attrition, defined by the Company for a period as a
quotient, the numerator of which is equal to the number of subscribers who
disconnect services during such period and the denominator of which is the
average of the number of subscribers at each month end during such period. Gross
subscriber attrition was 18.6% and 19.9% for the twelve months ended June 30,
1995 and 1996, respectively. The Company offsets gross attrition by adding new
accounts from subscribers who move into premises previously occupied by Company
subscribers and in which security alarm systems are installed ("reconnects"),
conversions of accounts that were previously monitored by other alarm companies
to the Company's monitoring services ("conversions") and accounts for which the
Company obtains a guarantee from the seller that provides for the Company to
"put" back to the seller canceled accounts ("guaranteed accounts"). The
resulting figure is used as a guideline to determine the estimated life of
subscriber revenues. It is the Company's policy to review periodically actual
account attrition and, when necessary, adjust the remaining estimated lives of
the Company's purchased accounts to reflect assumed future attrition. In fiscal
1993, the Company made such an adjustment to the estimated life of subscriber
accounts, reducing such estimated life from 12 years to 10 years. There could be
a material adverse effect on the Company's results of operations and financial
condition if actual account attrition significantly
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exceeds assumed attrition and the Company has to make further adjustments with
respect to the amortization of purchased subscriber accounts.
Impact of Accounting Differences for Account Purchases and New
Installations. A difference between the accounting treatment of the purchase of
subscriber accounts (including both purchases of subscriber account portfolios
and purchases under ongoing agreements with independent alarm dealers) 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 are capitalized and amortized over 10 years on a
straight-line basis. Also included in capitalized costs are certain acquisition
transition costs that reflect the Company's estimate of costs associated with
incorporating the purchased subscriber accounts into the Company's operations.
Such costs include costs incurred by the Company in fulfilling the seller's
pre-acquisition obligations to the acquired subscribers, such as providing
warranty repair services. In contrast, all of the Company's costs related to the
marketing, sales and installation of new alarm monitoring systems generated by
the Company's sales force are expensed in the period in which such activities
occur. The Company's marketing, sales and installation expenses for new systems
generally exceed installation revenues.
The Company's purchase activity increased significantly during fiscal 1994,
fiscal 1995 and the first nine months of fiscal 1996. See "-- Risks Related to
Acquisitions." In addition, during those periods the Company reduced the
Company's sales of new systems and related marketing expenditures. As a result
of the difference in the methods by which such activities are accounted for, the
combined effect of these two factors was to improve operating results during
fiscal 1994, fiscal 1995 and the first nine months of fiscal 1996. The Company
does not expect to further reduce sales of new systems by Company personnel and
related marketing expenditures in the remainder of fiscal 1996 or in fiscal
1997. There can be no assurance that the Company will not increase its emphasis
on the marketing and sales of new alarm system installations in the future,
particularly in connection with a joint venture or other strategic alliance; any
such increase could adversely affect results of operations. The Company
anticipates that subscriber accounts added through the proposed Co-Branded
Program with PacifiCorp will be purchased through the Dealer Program rather than
generated through sales of new alarm systems by Company personnel. See
"Summary -- Recent Developments -- PacifiCorp Agreement."
Possible Adverse Effect of "False Alarm" Ordinances. According to certain
data concerning the residential security alarm market prepared in December 1995
by J.P. Freeman & Co. (the "Freeman Data"), approximately 97% of alarm
activations that result in the dispatch of police or fire department personnel
are not emergencies, and thus are "false alarms." Significant concern has arisen
in certain municipalities about this high incidence of false alarms. This
concern could cause a decrease in the likelihood or timeliness of police
response to alarm activations and thereby decrease the propensity of consumers
to purchase or maintain alarm monitoring services.
A number of local governmental authorities have considered or adopted
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. Enactment of
such measures could adversely affect the Company's future business and
operations.
Possible Adverse Effect of Future Government Regulations; Risks of
Litigation. The Company's operations are subject to a variety of 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 the Company's business. The loss of such
licenses, or the imposition of conditions to the granting or retention of such
licenses, could have a material adverse effect on the Company.
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The Company's advertising and sales practices are regulated by both the
Federal Trade Commission and state consumer protection laws. Such regulations
include restrictions on the manner in which the Company promotes the sale of
security alarm systems and the obligation of the Company to provide purchasers
of alarm systems with certain rescission rights. While the Company believes that
it has complied with these regulations in all material respects, there can be no
assurance that none of these regulations was violated in connection with the
solicitation of the Company's existing subscriber accounts, particularly with
respect to accounts acquired from third parties, or that no such violation will
occur in the future.
From time to time, subscribers have submitted complaints to state and local
authorities regarding the Company's sales and billing practices, which in some
instances have resulted in discussions with, or actions by, such authorities. In
August 1994, as a result of certain complaints by subscribers, three California
governmental authorities brought an action against the Company, and concurrently
settled such action. In connection with the settlement of such action, the
Company agreed to the filing of an injunction requiring the Company to provide
notices of certain increases in charges for its services and to comply with
certain restrictions in its marketing, billing and collection activities, and
paid restitution to subscribers in the amount of $31,000 and civil penalties of
$30,000. Any violation by the Company of the terms of such injunction could have
a material adverse effect on the Company.
The Company does not believe that any of the investigations or actions
described herein has had or will have a material adverse effect on the Company.
However, there can be no assurance that other actions that may be taken in the
future by these or other authorities as a result of subscriber complaints will
not have such adverse effect on the Company.
Risks of Liability from Operations. 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.
Most of the Company's alarm monitoring agreements and other agreements pursuant
to which the Company sells its products and services contain provisions limiting
liability to subscribers in an attempt to reduce this risk. However, in the
event of litigation with respect to such matters there can be no assurance that
these limitations will be enforced, and the costs of such litigation could have
an adverse effect on the Company.
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 screens and trains its employees, the provision of alarm response
service subjects the Company to greater risks related to accidents or employee
behavior than other types of businesses. Reduction of police participation in
the handling of emergencies could expose the Company's patrol officers to
greater hazards and further increase the Company's risk of liability.
The Company carries insurance of various types, including general liability
and errors and omissions insurance providing coverage of $15.0 million on both
an aggregate and a per claim basis. 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.
Geographic Concentration. The Company's existing subscriber base is
geographically concentrated in certain metropolitan areas and surrounding
suburbs in the six western states in which the Company operates. Accordingly,
the performance of the Company may be adversely affected by regional or local
economic conditions.
As a result of acquisitions or strategic alliances, the Company may from
time to time expand its operations into regions outside of the Company's current
operating area. The acquisition of subscriber accounts in other regions, or in
metropolitan areas in which the Company does not currently have subscribers,
requires an investment by the Company in local branches and personnel necessary
to service such accounts. In order for the Company to expand successfully into a
new area, the Company must obtain a sufficient number,
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and density, of subscriber accounts in such area to support the additional
investment. There can be no assurance that an expansion into new geographic
areas would generate operating profits.
Competition. The security alarm industry is highly competitive and highly
fragmented. The Company competes with larger national companies, as well as
smaller regional and local companies, in all of the Company's operations.
Furthermore, new competitors are continuing to enter the industry and the
Company may encounter additional competition from such future industry entrants.
Certain of the Company's current competitors have, and new competitors may
have, greater financial resources than the Company. In addition, other alarm
services 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 these companies may
be willing to offer higher prices than the Company is prepared to offer to
purchase subscriber accounts. The effect of such competition may be to reduce
the purchase opportunities available to the Company, thus reducing the Company's
rate of growth, or to increase the price paid by the Company for subscriber
accounts, which would adversely affect the Company's return on investment in
such accounts and the Company's results of operations.
Dependence Upon Senior Management. The success of the Company's business
is largely dependent upon the active participation of the Company's executive
officers. The loss of the services of one or more of such officers for any
reason may have a material adverse effect on the Company's business.
Effect of Change of Control; Delaware Anti-takeover Law. The Company is
required to make an offer to purchase all of the Discount Notes at a price equal
to 101% of their Accreted Value (as defined in the Discount Notes Indenture) on
any repurchase date prior to June 30, 1998, or at a purchase price equal to 101%
of the principal amount thereof plus accrued and unpaid interest to any
repurchase date on or after June 30, 1998, upon the occurrence of any "change of
control" as defined in the Discount Notes Indenture. A "change of control" also
constitutes an event of default under the Revolving Credit Facility. If such a
triggering event were to occur, the Company may not be able to repay all of its
obligations that would then become payable. Such provisions, together with
certain provisions of Delaware law, could delay or prevent a change in control
of the Company, could discourage acquisition proposals and could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Common Stock
or over a stockholder's cost basis in the Common Stock. In addition, the Board
of Directors, without further stockholder approval, may issue preferred stock,
which could have the effect of delaying, deferring or preventing a change in
control of the Company. The issuance of preferred stock could also adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others.
Shares Eligible for Future Sale. Of the 12,738,175 shares of Common Stock
outstanding at July 31, 1996, 9,790,649 shares are freely tradeable in the
public market, and an additional 2,947,526 shares are eligible for sale pursuant
to Rule 144 under the Securities Act. In addition, as of July 31, 1996, an
aggregate of 1,855,138 shares of Common Stock were issuable upon the exercise of
outstanding warrants, performance warrants and options, most of which shares
also will be freely tradeable in the public market. Certain stockholders of the
Company also have certain demand and "piggyback" registration rights pursuant to
a stockholders' agreement among such stockholders and the Company. Sales and
potential sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market price of the Common Stock.
Limitations on Redemption of Convertible Notes. Upon a Fundamental Change
(as defined herein), each holder of Convertible Notes will have certain rights,
at the holder's option, to require Monitoring to redeem all or a portion of such
holder's Convertible Notes. If a Fundamental Change were to occur, there can be
no assurance that Monitoring would have sufficient funds to pay the redemption
price for all Convertible Notes tendered by the holders thereof. In addition,
the terms of the Revolving Credit Facility prohibit the Company from purchasing
or redeeming any Convertible Notes and also provide that a Fundamental Change
would constitute an event of default thereunder. Any future credit agreements or
other agreements relating to other indebtedness (including other Senior
Indebtedness) to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Fundamental Change occurs at a time
when the
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Company is prohibited from purchasing or redeeming Convertible Notes, the
Company could seek the consent of its lenders to the purchase of Convertible
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company would remain prohibited from purchasing or redeeming
Convertible Notes. In such case, the Company's failure to redeem tendered
Convertible Notes would constitute an Event of Default under the Convertible
Notes Indenture, which would, in turn, constitute a further default under the
Revolving Credit Facility and the Discount Notes Indenture and may constitute a
default under the terms of other indebtedness that the Company may enter into
from time to time. In such circumstances, the subordination provisions in the
Convertible Notes Indenture would likely restrict payments to the holders of
Convertible Notes. See "Description of Convertible Notes -- Redemption at Option
of Holders."
Absence of Prior Public Market for the Convertible Notes. Prior to this
offering, there has been no trading market for the Convertible Notes. Although
the Underwriters have advised the Company that they currently intend to make a
market in the Convertible Notes, they are not obligated to do so and may
discontinue such market making at any time without notice. In addition, such
market making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act. Accordingly, there can be no assurance that any market
for the Convertible Notes will develop or, if one does develop, that it will be
maintained. If an active market for the Convertible Notes fails to develop or be
sustained, the trading price of such Convertible Notes could be materially
adversely affected.
Dividend Policy, 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 Credit Agreement and the Discount Notes Indenture
restrict POI's ability to declare or pay any dividend on, or make any other
distribution in respect of, the Common Stock. See "Price Range of Common Stock
and Dividend Policy."
Possible Volatility of Prices of Convertible Notes and Common Stock. The
stock market has from time to time experienced extreme price and volume
fluctuations that have been unrelated to the operating performance of particular
companies. The market prices of the Convertible Notes and the Common Stock may
be significantly affected by quarterly variations in the Company's operating
results, litigation involving the Company, general trends in the security alarm
industry, actions by governmental agencies, national economic and stock market
conditions, industry reports and other factors, many of which are beyond the
control of the Company. Due to all of the foregoing factors, it is likely that
the Company's operating results will fall below the expectations of the Company,
securities analysts or investors in some future quarter. In such event, the
trading price of the Common Stock would likely be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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USE OF PROCEEDS
The net proceeds to be received by Monitoring from the sale of the
Convertible Notes offered hereby will be used to repay indebtedness outstanding
under the Revolving Credit Facility, together with accrued interest. Any
remaining net proceeds will be used for general corporate purposes, including
capital expenditures and working capital. Principal repaid will be available for
reborrowing, subject to meeting the borrowing requirements imposed by the Credit
Agreement. As of June 30, 1996, borrowings outstanding under the Revolving
Credit Facility were $80.9 million. After giving effect to the use of the
estimated net proceeds of this offering as described above, there would have
been no borrowings outstanding under the Revolving Credit Facility (excluding
$1.2 million of contingent reimbursement obligations under outstanding letters
of credit), and $100.0 million would have been available for reborrowing.
Pending application of the net proceeds as described above, the remainder of the
net proceeds may be invested in short-term marketable securities.
All borrowings under the Revolving Credit Facility are due in full on
December 3, 2000, at which time the Revolving Credit Facility will terminate if
its maturity date is not further extended. The interest rate on borrowings under
the Revolving Credit Facility is, at the option of Monitoring, either (a) 1.0%
plus the higher of (i) the Bank Prime Loan Rate announced by the Board of
Governors of the Federal Reserve System or (ii) the Federal Funds Effective
Rate, or (b) LIBOR plus 2.5%. The amounts currently outstanding under the
Revolving Credit Facility bear interest as of the date of this Prospectus
Supplement at 8.0%. Monitoring used substantially all of the currently
outstanding borrowings under the Revolving Credit Facility to acquire subscriber
account portfolios and to purchase subscriber accounts through the Dealer
Program, and intends to use future borrowings under the Revolving Credit
Facility to fund growth and for working capital and general corporate purposes,
as described above. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,"
"Business -- The Dealer Program" and "Business -- The Acquisition Program."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock has been traded on the Nasdaq National Market since
September 29, 1994 under the symbol "ALRM." The following table sets forth, for
the periods indicated, the high and low closing sales prices per share of the
Common Stock, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
September 29-30, 1994........................................................... $6 5/8 $6 7/32
Fiscal year ended September 30, 1995:
First quarter................................................................. 7 4 7/8
Second quarter................................................................ 6 7/8 5
Third quarter................................................................. 7 4 7/1
Fourth quarter................................................................ 9 3/4 6 1/8
Fiscal year ending September 30, 1996:
First quarter................................................................. 10 1/2 7 9/3
Second quarter................................................................ 14 9/16 9
Third quarter................................................................. 17 5/16 13 3/8
Fourth quarter (through September 16, 1996)................................... 16 5/8 12 3/8
</TABLE>
On September 16, 1996 the last sale price for the Common Stock was $14 1/2
per share, as reported on the Nasdaq National Market.
The Company has not paid any cash dividends on the Common Stock and has no
plans to pay cash dividends on the Common Stock in the foreseeable future. In
addition, the Credit Agreement and the Discount Notes Indenture restrict the
payment of cash dividends on the Common Stock.
S-14
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996 and as adjusted to give effect to the sale of the Convertible Notes
offered hereby (assuming the over-allotment option granted to the Underwriters
is not exercised) and the application of the estimated net proceeds therefrom,
including the repayment of indebtedness. See "Use of Proceeds." The financial
data at June 30, 1996 in the following table is derived from the Company's
unaudited condensed consolidated balance sheet as of June 30, 1996.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
ACTUAL AS ADJUSTED
-------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Revolving Credit Facility......................................... $ 80,949 $ --
Discount Notes.................................................... 126,007 126,007
Convertible Notes................................................. -- 90,000
-------- ---------
Total long-term debt........................................... 206,956 216,007
-------- ---------
Stockholders' equity:
Common Stock, $.01 par value; 24,000,000 shares authorized;
12,736,255 shares issued and outstanding, actual and as
adjusted(1).................................................... 127 127
Additional paid-in capital........................................ 77,453 77,453
Accumulated deficit............................................... (46,671) (46,671)
-------- ---------
Total stockholders' equity..................................... 30,909 30,909
-------- ---------
Total capitalization.............................................. $237,865 $ 246,916
======== ==========
</TABLE>
- ---------------
(1) Excludes (i) 1,351,158 shares of Common Stock issuable upon the exercise of
warrants exercisable at such date with a weighted average exercise price of
$3.19 per share, and (ii) 1,276,980 shares of Common Stock issuable upon
exercise of outstanding options and management performance warrants with a
weighted average exercise price of $5.79 per share, of which options and
performance warrants to purchase 504,940 shares of Common Stock were
exercisable at such date. See Note 10 of the Notes to Consolidated Financial
Statements.
S-15
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER DATA)
The selected consolidated financial data for the periods of October 1, 1990
to September 16, 1991 and September 17, 1991 to September 30, 1991, and for
fiscal 1992, 1993, 1994 and 1995 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 for the nine months ended June 30, 1995 and
1996 are derived from unaudited condensed consolidated financial statements and
the accounting records of the Company, and, in the opinion of the Company,
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial condition and results of
operations for interim periods. 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 related notes thereto included herein, or incorporated
by reference in POI's reports filed under the Exchange Act that are incorporated
by reference in the Prospectus. See "Incorporation of Certain Documents by
Reference."
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY NINE MONTHS ENDED
----------- YEAR ENDED SEPTEMBER 30, JUNE 30,
10/01/90- 9/17/91- ---------------------------------------- -------------------
9/16/91 9/30/91 1992 1993 1994 1995 1995 1996
----------- -------- ------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Monitoring and service............ $ 9,955 $ 469 $12,408 $ 14,850 $ 27,109 $ 46,308 $ 32,622 $ 46,377
Installation...................... 3,308 96 5,041 6,720 4,764 3,662 3,040 1,918
Other............................. -- -- 149 320 2,607 5,912 3,303 3,500
----------- -------- ------- -------- -------- -------- -------- --------
Total revenues.................. 13,263 565 17,598 21,890 34,480 55,882 38,965 51,795
----------- -------- ------- -------- -------- -------- -------- --------
Cost of revenues:
Monitoring and service............ 4,993 97 3,784 3,547 6,520 11,795 8,151 12,651
Installation...................... 1,995 79 2,906 3,597 2,950 2,892 2,311 1,431
Other............................. -- -- 107 317 2,854 4,532 3,423 3,254
----------- -------- ------- -------- -------- -------- -------- --------
Total cost of revenues.......... 6,988 176 6,797 7,461 12,324 19,219 13,885 17,336
----------- -------- ------- -------- -------- -------- -------- --------
Gross profit.................... 6,275 389 10,801 14,429 22,156 36,663 25,080 34,459
Selling, general and administrative
expenses.......................... 8,272 238 10,239 12,084 10,380 12,409 8,178 10,082
Loss on acquisition terminations.... -- -- -- -- 26 208 208 --
Performance warrants compensation
expense........................... -- -- -- -- 4,504 -- -- --
Adjustment of purchase accounting
accruals, net..................... -- -- -- (742) -- -- -- --
Acquisition and transition
expenses.......................... -- -- -- -- -- 3,090 2,380 3,048
Amortization of subscriber accounts
and goodwill...................... 1,385 106 2,525 3,864 8,772 15,460 10,858 16,108
----------- -------- ------- -------- -------- -------- -------- --------
Operating income (loss)......... (3,382) 45 (1,963) (777) (1,526) 5,496 3,456 5,221
Interest expense, net............... 71 90 1,941 1,564 6,932 7,626 6,850 3,052
Amortization of debt issuance cost
and OID........................... -- -- 49 185 891 6,797 2,687 13,159
Loss before income taxes,
extraordinary items and
cumulative effect of change in
accounting method -- net of
taxes......................... $(4,048) $ (45) $(3,953) $ (2,526) $ (9,349) $ (9,432) $ (6,514) $(11,009)
Extraordinary item -- loss on early
extinguishment of
debt -- net(1).................... -- -- -- (281) (1,174) (8,906) (8,898) --
Cumulative effect of change in
accounting method -- net(2)....... -- -- -- -- -- (1,955) (1,955) --
Net loss........................ $(4,048) $ (45) $(3,953) $ (2,807) $ (7,660) $(16,698) $(14,934) $(11,099)
Loss attributable to common
stock......................... $(4,048) $ (45) $(5,033) $ (4,635) $ (9,161) $(18,453) $(16,521) $(11,347)
Loss per common share:
Before extraordinary items and
cumulative effect of change in
accounting method -- net........ $ (0.43) $(48.40) $ (41.86) $ (27.11) $ (0.87) $ (0.66) $ (1.06)
Net loss per share................ $ (0.43) $(48.40) $ (44.57) $ (31.10) $ (2.12) $ (1.92) $ (1.06)
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
----------------------------------------------------- -----------
1991 1992 1993 1994 1995 1996
------- ------- ------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)............................... $ 1,011 $(3,112) $(1,632) $(11,505) $ (9,159) $ (11,042)
Subscriber accounts and intangibles, net................ 33,324 31,561 37,204 114,620 162,239 238,898
Total assets............................................ 42,193 39,071 44,472 126,085 178,669 274,429
Total debt.............................................. 23,010 20,923 23,591 86,842 146,024 207,050
Redeemable preferred stock.............................. 12,445 15,371 22,957 22,210 6,127 --
Total stockholders' equity (deficit).................... 818 (4,195) (8,796) (6,084) 6,347 30,909
</TABLE>
S-16
<PAGE> 19
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
9/17/91- ---------------------------------------- -------------------
9/30/91 1992 1993 1994 1995 1995 1996
-------- ------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(3).................................... $ 168 $ 1,043 $ 3,609 $ 12,294 $ 22,247 $ 15,267 $ 22,579
MRR(4)....................................... $ 811 $ 1,015 $ 1,208 $ 2,737 $ 3,924 $ 4,011 $ 5,769
Number of subscribers at end of period....... 32,202 35,538 39,527 85,269 129,420 131,166 188,132
Ratio of earnings to fixed charges(5)........ -- -- -- -- -- -- --
Ratio of EBITDA to as adjusted interest
expense and amortization of debt issuance
cost and OID(6)............................ -- -- -- -- -- -- 1.25x
</TABLE>
- ---------------
(1) In connection with the early extinguishment of the $50.0 million principal
amount of Monitoring's 12.0% 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.
(2) For information regarding this change, see "Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- Overview -- Change in Accounting Method."
(3) 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. 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 subscriber accounts,
(ii) amortization of debt issuance costs and OID, (iii) interest expense,
net, (iv) amortization of subscriber accounts and goodwill, (v) depreciation
expense, (vi) performance warrants compensation expense, and (vii) loss on
acquisition terminations.
The following table provides a calculation of EBITDA for each of the periods
presented above:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
9/17/91- ----------------------------------------- -------------------
9/30/91 1992 1993 1994 1995 1995 1996
-------- ------- ------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Loss before income taxes, extraordinary
items and cumulative effect of change in
accounting method -- net of taxes........ $(45) $(3,953) $(2,526)(a) $ (9,349) $ (9,432) $ (6,514) $(11,009)
Plus:
Loss on sales of subscriber accounts..... -- -- -- -- 505 433 19
Amortization of debt issuance costs and
OID.................................... -- 49 185 891 6,797 2,687 13,159
Interest expense, net.................... 90 1,941 1,564 6,932 7,626 6,850 3,052
Amortization of subscriber accounts and
goodwill............................... 106 2,525 3,864 8,772 15,460 10,858 16,108
Depreciation expense..................... 17 481 522 518 1,083 745 1,250
Performance warrants compensation
expense................................ -- -- -- 4,504 -- -- --
Loss on acquisition terminations......... -- -- -- 26 208 208 --
---- ------- ------- ------- ------- ------- -------
EBITDA............................ $168 $ 1,043 $ 3,609 $ 12,294 $ 22,247 $ 15,267 $ 22,579
==== ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Such amount reflects a reduction of $0.7 million for adjustment of
purchase accounting accruals, net.
(4) MRR is 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.
(5) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges. Fixed charges consist of
interest expense and the amortization of debt issuance cost and OID and the
component of rental expense believed by management to be representative of
the interest factor thereon. Earnings were insufficient to cover fixed
charges by $4.0 million, $2.5 million, $9.3 million, $9.4 million, $6.5
million and $11.0 million for the years ended September 30, 1992, 1993,
1994, 1995 and the nine months ended June 30, 1995 and 1996, respectively.
(6) Adjusted to give effect to the issuance of the Convertible Notes and the
application of the net proceeds therefrom as if such issuance had occurred
at the beginning of such nine-month period.
S-17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 such
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
installations 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 such activities occur. See "Risk Factors -- Impact of Accounting
Differences for Account Purchases and New Installations."
The Company's purchase activity increased significantly in fiscal 1994 and
1995. In addition, during that period 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 accounted for, the
combined effect of these two factors was to improve operating results during
fiscal 1994, fiscal 1995 and the first nine months of fiscal 1996. The Company
does not expect to further reduce sales of new systems by Company personnel and
related marketing expenditures in the remainder of fiscal 1996.
Change in Accounting Method. Effective October 1, 1994, the Company changed
its method of accounting for certain subscriber account acquisition and
transition costs. 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 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.
See "-- Accounting Differences for Account Purchases and New Installations."
In accordance with accounting rules applicable to changes in accounting
policies: (i) in the quarter ended December 31, 1994, the Company recorded a
non-cash, non-recurring charge of approximately $2.0 million, which
S-18
<PAGE> 21
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 statement of operations for fiscal 1995
includes (and subsequent statements of operations will include) a new expense
item captioned "acquisition and transition expenses" to reflect the application
of the new accounting method for fiscal 1995 and subsequent periods. The expense
was approximately $3.1 million for fiscal 1995 (before associated tax benefit).
The foregoing $2.0 million non-recurring charge and $3.1 million expense are
reflected in the financial information presented in this Prospectus Supplement
or the Prospectus or incorporated herein by reference. 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 Prospectus
Supplement, 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
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 (including assumed liabilities of
approximately $21.2 million). The MRR of the acquired accounts ranged from
approximately $10.00 to $80.00, with an average of $28.56. Of the acquisitions
completed during the nine months ended June 30, 1996 by the Company, the
substantial majority included purchase price holdbacks. These holdbacks averaged
12% of the initial purchase price with attrition guarantee periods that ranged
from four months to 12 months and averaged nine months. Approximately 80% of the
acquired subscriber accounts in the nine months ended June 30, 1996 were
residential.
Two of the Company's acquisitions during the nine months ended June 30,
1996 involved a portfolio representing MRR that exceeded 5% of the Company's MRR
at the time of the acquisition, as set forth below:
<TABLE>
<CAPTION>
ESTIMATED 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......................... 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. See "Risk Factors -- Attrition of Subscriber
Accounts." 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 MRR
generated during such period by the sale of additional services and increases in
rates to existing subscribers and from reconnects and conversions and MRR
associated with canceled accounts with respect to which the Company obtained an
attrition guarantee, and the denominator
S-19
<PAGE> 22
of which is the average month-end MRR in effect during such period. The
following table sets forth the Company's gross subscriber attrition and net MRR
attrition for the periods indicated:
<TABLE>
<CAPTION>
TWELVE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross subscriber
attrition................. 21.3% 19.6% 19.3% 18.6% 19.9%
Net MRR attrition........... 7.9% 5.3% 6.6% 6.2% 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 the 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 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 1995
Compared to Fiscal 1994 -- Amortization of subscriber accounts and goodwill"
below.
The table below sets forth the change in the Company's subscriber base for
the periods indicated:
<TABLE>
<CAPTION>
TWELVE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of subscribers:
Beginning of period.......... 35,538 39,527 85,269 76,112 131,166
Additions through portfolio
acquisitions and Dealer
Program, net of sales of
subscriber accounts....... 7,315 54,211 60,909 68,891 80,967
Installations by Company
personnel................. 2,951 1,646 1,502 1,644 984
Reconnects and conversions... 1,916 3,060 3,585 3,465 4,243
Gross subscriber attrition... (8,193) (13,175) (21,845) (18,946) (29,228)
------- ------- ------- ------- -------
End of period........ 39,527 85,269 129,420 131,166 188,132
======= ======= ======= ======= =======
</TABLE>
Impact of Statement of Financial Accounting Standards No. 121. In March of
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 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 June 30, 1996,
the undiscounted cash flows from the MRR stream were significantly in excess of
the carrying
S-20
<PAGE> 23
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. The Company has never paid any cash dividends
on the Common Stock and does not intend to pay any cash dividends in the
foreseeable future. The Credit Agreement and the Discount Notes Indenture
restrict the Company's ability to declare or pay any dividend on, or make any
other distribution in respect of, the Company's capital stock.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Monitoring and service................... 67.8% 78.6% 82.9% 83.7% 89.5%
Installation............................. 30.7 13.8 6.6 7.8 3.7
Other.................................... 1.5 7.6 10.5 8.5 6.8
----- ----- ----- ----- -----
Total revenues................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Cost of revenues:
Monitoring and service................... 16.2% 18.9% 21.1% 20.9% 24.4%
Installation............................. 16.4 8.6 5.2 5.9 2.8
Other.................................... 1.5 8.2 8.1 8.8 6.3
----- ----- ----- ----- -----
Total cost of revenues........... 34.1 35.7 34.4 35.6 33.5
----- ----- ----- ----- -----
Gross profit..................... 65.9 64.3 65.6 64.4 66.5
Selling, general and administrative
expenses................................. 55.2 30.1 22.2 21.0 19.5
Loss on acquisition terminations........... -- 0.1 0.4 0.5 --
Acquisition and transition expenses........ -- -- 5.5 6.1 5.9
Performance warrants compensation
expense.................................. -- 13.1 -- -- --
Adjustment of purchase accounting accruals,
net...................................... (3.4) -- -- -- --
Amortization of subscriber accounts and
goodwill................................. 17.7 25.4 27.7 27.9 31.1
----- ----- ----- ----- -----
Operating income (loss).......... (3.6)% (4.4)% 9.8% 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
$12.8 million, or 32.9%, to $51.8 million from $39.0 million in the comparable
period in fiscal 1995. Monitoring and service revenues increased by $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 through the Dealer Program. The Company's
subscriber base increased by 43.4% to 188,132 subscribers at June 30, 1996 as
compared to 131,166 subscribers at June 30, 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 decrease was caused
primarily by a decline in installation revenues of 36.9%, or $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 $3.5 million, or 24.9%, to $17.3 million. Cost of revenues as a
percentage of total revenues declined to 33.5% for the nine months ended June
30, 1996 from 35.6% for the comparable period in fiscal 1995. Monitoring and
service
S-21
<PAGE> 24
expenses increased by $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 $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
$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 66.5%
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 $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 $10.1 million in the first nine months of fiscal
1996, which represents an increase of $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 to 19.5% in the nine
months ended June 30, 1996 from 21.0% in the nine months ended June 30, 1995,
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 $1.5 million for the nine months
ended June 30, 1996 from $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 $5.3 million, or 48.4%,
to $16.1 million. This increase is the 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 $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
S-22
<PAGE> 25
May of 1995 with non-cash interest-paying subordinated debt (see "-- Liquidity
and Capital Resources"), amortization of debt issuance costs and 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 million. 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 $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
$23.1 million of net proceeds), the conversion of POI's Series H Redeemable
Preferred Stock to Common Stock in February 1996 ($6.1 million) and the issuance
of 417,885 shares of Common Stock as a portion of the purchase price payment for
the Metrol acquisition (resulting in an increase to stockholders' equity of $6.8
million), partially offset by $11.3 million of losses in the first nine months
of fiscal 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues. 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. Installation revenues declined by 23.1% to approximately $3.7 million in
fiscal 1995 from $4.8 million in fiscal 1994. 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. Other revenues, consisting primarily of revenues
generated by the Company's patrol and alarm response and lock businesses,
increased by $3.3 million, or 126.8%, to $5.9 million. Such increase was caused
by an increase in lock revenue of $1.4 million, as fiscal 1995 included twelve
months of lock revenues and fiscal 1994 included only two months of such
revenues and by an increase in patrol and alarm response revenues of 18.9%, or
$0.4 million. Additionally, the Company recognized $1.6 million of other revenue
arising from the sales of security alarm equipment received from a vendor.
Cost of revenues. 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 as well as a lower MRR per
subscriber 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 at that time. See "-- Overview -- Acquisition and Dealer
Program Activity." Installation expenses declined slightly to approximately $2.9
million in fiscal 1995 from $3.0 million in fiscal 1994. Other expenses
increased by $1.7 million, or 58.8%, from $2.9 million in fiscal 1994. The
increase primarily was caused by a 32.8% increase in patrol and alarm response
expenses, or $0.8 million, and an increase in lock expenses of approximately
$0.8 million.
Gross profit. Gross profit for fiscal 1995 was $36.7 million, which
represents an increase of $14.5 million, or 65.5%, over the $22.2 million of
gross profit recognized for 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. Gross profit from
S-23
<PAGE> 26
installation activities declined to $0.8 million (21.0% of installation
revenues) in fiscal 1995 from $1.8 million (38.1% of installation revenues) in
fiscal 1994 because of the reasons described above.
Selling, general and administrative expenses. 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 expenses 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 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. 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 -- Change in Accounting Method." Had the Company enacted the change
in accounting method on October 1, 1993, acquisition and transition expenses
would have been approximately $2.4 million for fiscal 1994.
Amortization of subscriber accounts and goodwill. Amortization expense for
fiscal 1995 increased by $6.7 million, or 76.2%, to $15.5 million. This increase
was 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.
Operating income. Operating income for fiscal 1995 was $5.7 million, as
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 10.2% 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. These amounts 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 and refinancing of its cash
interest-paying subordinated debt in May of 1995 with non-cash interest paying
subordinated debt as described above.
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 writeoff of the
remaining unamortized portions of 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
S-24
<PAGE> 27
$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 initial
public offering of the Common Stock completed in October 1994, offset by a loss
of $18.5 million for fiscal 1995.
FISCAL 1994 COMPARED TO FISCAL 1993
Revenues. Revenues for fiscal 1994 increased by $12.6 million, or 57.5%, to
$34.5 million from $21.9 million for the comparable period in 1993. Monitoring
and service revenues increased by $12.3 million, or 82.6%, primarily because of
a net increase in the number of subscribers to the Company's alarm services
resulting from acquisitions. The Company had 85,269 subscribers at September 30,
1994, as compared to 39,527 subscribers at September 30, 1993. Installation
revenues decreased by $2.0 million, or 29.1%, to $4.8 million in fiscal 1994.
The decline in installation revenue was caused by the Company's emphasis on
growth through the acquisition of portfolios of subscriber accounts rather than
through the sale of new alarm systems by Company personnel. Other revenues,
consisting primarily of revenues generated by the Company's patrol and alarm
response and lock businesses, increased in fiscal 1994 to $2.6 million from $0.3
million in fiscal 1993. Patrol and alarm response revenues increased by $2.0
million in fiscal 1994 primarily as a result of the Company's acquisition of the
patrol service subscriber accounts of two companies in the quarter ended
December 31, 1993.
Cost of revenues. Cost of revenues for fiscal 1994 increased by $4.9
million, or 65.2%, compared to the comparable period in 1993, and increased as a
percentage of revenues from 34.1% to 35.7%. Monitoring and service expenses
increased to $6.5 million in fiscal 1994 as compared to $3.5 million in fiscal
1993, an increase of $3.0 million, or 83.8%. Monitoring and service expenses as
a percentage of monitoring and service revenues increased to 24.1% in fiscal
1994 from 23.9% in fiscal 1993, primarily due to the establishment of a customer
service function and the acquisition of portfolios of subscriber accounts with a
lower average MRR per subscriber than the Company's average at that time.
Installation expenses declined to $3.0 million in fiscal 1994 from $3.6 million
in fiscal 1993. The decline of $0.6 million, or 18.0%, was caused by lower
installation activity. Other expenses increased by $2.5 million to $2.9 million
in fiscal 1994, primarily as a result of an increase of $2.3 million in patrol
and alarm response expenses. The increase in patrol and alarm response expenses
was due to the Company's acquisition of the patrol and alarm response service
subscriber accounts of two companies in the quarter ended December 31, 1993.
Gross profit. Gross profit for fiscal 1994 increased by $7.7 million, or
53.6%, to $22.2 million from $14.4 million in the comparable period in 1993.
Gross profit as a percentage of total revenues decreased to 64.3% from 65.9%.
Such decrease was caused by a substantial decline in gross profit generated by
installation activities to $1.8 million (38.1% of installation revenues) in
fiscal 1994 from $3.1 million (46.5% of installation revenues) in fiscal 1993,
offset by an increase in monitoring and service gross profit of $9.3 million.
The increase in monitoring and service gross profit of 82.2% in fiscal 1994
resulted from a 115.7% increase in the Company's subscriber base.
Selling, general and administrative expenses. Selling, general and
administrative expenses for fiscal 1994 decreased by $1.7 million, or 14.1%, to
$10.4 million. The decline was caused primarily by a decrease in selling
expenses of $1.4 million and a slight decrease in general and administrative
expenses of $0.3 million. As a percentage of total revenues, selling, general
and administrative expenses decreased to 30.1% during fiscal 1994 from 55.2%
during fiscal 1993. Such decline as a percentage of revenues was caused by less
growth in general and administrative expenses than in revenues due to
efficiencies achieved in the Company's branch and corporate offices. Advertising
and marketing expenses constituted 1% of revenues in fiscal 1994, as compared
with 6% of revenues in fiscal 1993, and were expensed as incurred. The provision
for doubtful accounts increased to $0.8 million in fiscal 1994 from $0.02
million in fiscal 1993, reflecting the increase in the Company's subscriber base
of approximately 66.2% and the Company's willingness to work with subscribers
experiencing credit difficulties to maintain long-term subscriber relationships.
S-25
<PAGE> 28
Amortization of subscriber accounts and goodwill. Amortization expense for
fiscal 1994 increased by $4.9 million, or 127.0%, above the comparable period in
1993, as a result of the acquisition of additional subscriber accounts in fiscal
1994.
Operating loss. Operating loss for fiscal 1994 was $1.5 million, compared
to an operating loss of $0.8 million in the comparable period in 1993, as a
result of the factors discussed above. Excluding the non-cash performance
warrants compensation expense item described above, operating income for fiscal
1994 was $3.0 million.
Interest expense, net and amortization of debt issuance costs and
OID. Interest expense, including amortization of debt issuance costs and OID,
increased by approximately 347.3%, or $6.1 million, for fiscal 1994, compared to
fiscal 1993. The expense increase primarily as a result of higher outstanding
principal balances during fiscal 1994 and the sale of $50.0 million principal
amount of 12% senior subordinated notes in November 1993. See "--Liquidity and
Capital Resources."
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables present certain unaudited statement of operations and
other data for each quarter of fiscal 1995 and the first three quarters of
fiscal 1996, as well as such data expressed as a percentage of the Company's
total revenues for the periods provided. The consolidated statement of
operations data has been derived from unaudited financial statements and has
been prepared on the same basis as the Company's audited financial statements
which appear elsewhere in this Prospectus Supplement. In the opinion of the
Company's management, this data includes all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such data.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
DEC. 31 MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31 JUNE 30
1994 1995 1995 1995 1995 1996 1996
------- ------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT ATTRITION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Monitoring and service........................... $9,720 $11,125 $ 11,776 $13,687 $13,828 $15,695 $16,854
Installation..................................... 1,187 1,053 800 622 652 650 616
Other............................................ 1,065 1,130 1,109 2,608 1,032 1,321 1,147
------- ------- ------- ------- ------- ------- -------
Total revenues............................. 11,972 13,308 13,685 16,917 15,512 17,666 18,617
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Monitoring and service........................... 2,459 2,820 2,872 3,644 3,845 4,346 4,460
Installation..................................... 843 798 671 580 479 476 475
Other............................................ 1,157 1,187 1,078 1,110 1,084 1,135 1,036
------- ------- ------- ------- ------- ------- -------
Total cost of revenues..................... 4,459 4,805 4,621 5,334 5,408 5,957 5,971
------- ------- ------- ------- ------- ------- -------
Gross profit............................... 7,513 8,503 9,064 11,583 10,104 11,709 12,646
Selling, general and administrative expenses....... 2,534 2,939 2,705 4,231 3,129 3,427 3,526
Loss on acquisition terminations................... -- -- 208 -- -- -- --
Acquisition and transition expenses................ 871 816 693 710 755 1,172 1,121
Amortization of subscriber accounts and goodwill... 3,154 3,683 4,020 4,603 4,777 5,284 6,046
------- ------- ------- ------- ------- ------- -------
Operating income........................... $ 954 $1,065 $ 1,438 $ 2,039 $1,443 $1,826 $1,953
======= ======= ======= ======= ======= ======= =======
Loss before extraordinary items and cumulative
effect of change in accounting method -- net of
taxes............................................ $(1,059) $(1,237) $ (1,786) $(1,755) $(3,739) $(3,500) $(3,860)
======= ======= ======= ======= ======= ======= =======
Loss attributable to common stock.................. $(4,240) $(1,421) $(10,861) $(1,931) $(3,908) $(3,579) $(3,860)
======= ======= ======= ======= ======= ======= =======
OTHER DATA:
Net MRR attrition for the twelve months ended.... 5.9% 5.6% 6.2% 6.6% 6.6% 7.9% 7.1%
</TABLE>
S-26
<PAGE> 29
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------
DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
1994 1995 1995 1995 1995 1996 1996
------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Monitoring and service............................. 81.2% 83.6% 86.1% 80.9% 89.1% 88.8% 90.5%
Installation....................................... 9.9 7.9 5.9 3.7 4.2 3.7 3.3
Other.............................................. 8.9 8.5 8.1 15.4 6.7 7.5 6.2
----- ----- ----- ----- ----- ----- -----
Total revenues............................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Monitoring and service............................. 20.5 21.2 21.0 21.5 24.8 24.6 24.0
Installation....................................... 7.0 6.0 4.9 3.4 3.1 2.7 2.6
Other.............................................. 9.7 8.9 7.9 6.6 7.0 6.4 5.6
----- ----- ----- ----- ----- ----- -----
Total cost of revenues....................... 37.2 36.1 33.8 31.5 34.9 33.7 32.1
----- ----- ----- ----- ----- ----- -----
Gross profit................................. 62.8 63.9 66.2 68.5 65.1 66.3 67.9
Selling, general and administrative expenses......... 21.2 22.1 19.8 25.0 20.2 19.4 18.9
Loss on acquisition terminations..................... -- -- 1.5 -- -- -- --
Acquisition and transition expenses.................. 7.3 6.1 5.1 4.2 4.9 6.6 6.0
Amortization of subscriber accounts and goodwill..... 26.3 27.7 29.3 27.2 30.8 29.9 32.5
----- ----- ----- ----- ----- ----- -----
Operating income............................. 8.0% 8.0% 10.5% 12.1% 9.3% 10.3% 10.5%
===== ===== ===== ===== ===== ===== =====
Loss before extraordinary items and cumulative effect
of change in accounting method -- net of taxes..... (8.9)% (9.3)% (13.1)% (10.4)% (24.1)% (19.8)% (20.7)%
===== ===== ===== ===== ===== ===== =====
Loss attributable to common stock.................... (35.4)% (10.7)% (79.4)% (11.4)% (25.2)% (20.3)% (20.7)%
===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company expects to experience fluctuations in quarterly operating
results in the future. Such fluctuations may be caused by many factors,
including, among others, the size and timing of acquisitions of portfolios of
subscriber accounts, the size and timing of subscriber additions through the
Dealer Program, new subscriber assimilation, attrition experience (which
fluctuates based, to some extent, on seasonal patterns in purchases of homes),
competitive pricing pressures, local and national crime activity and general
economic conditions. The Company's expense levels are based, to some extent, on
its expectations of future subscriber and revenue levels, which are dependent on
estimates of acquisition and dealer activity. The Company may be unable,
therefore, to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall due to a delay in the timing of acquisitions or
purchases from dealers. Based on the foregoing, the Company believes that
quarterly revenues and operating results are likely to vary significantly in the
future.
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 12.0% senior subordinated notes issued in November
1993 and the $166.0 million principal amount ($105.2 million net proceeds) of
the Discount Notes issued in May 1995, short-term borrowings under the Company's
revolving credit facilities, 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), resulting in net proceeds to the Company of $23.1 million. 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. At June
30, 1996, borrowings under the Revolving Credit Facility were approximately
$80.9 million. After giving effect to the offering of the Convertible Notes and
the application of the net proceeds thereof, there would have been no borrowings
outstanding under the Revolving Credit Facility (excluding $1.2 million of
contingent reimbursement obligations under outstanding letters of credit).
Borrowings under the Revolving Credit Facility could be as high as $100 million
through the period ended January 3, 2000, the present maturity date of such
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 indebtedness outstanding under such facility
prior to its maturity date, there can be no assurance that the Company will be
able to do so. The Convertible
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<PAGE> 30
Notes Indenture requires the Company to make semiannual interest payments on the
principal amount of the Convertible Notes beginning on March 15, 1997, and the
Discount Notes require the Company to make semiannual cash interest payments of
$11.3 million beginning on December 31, 1998. As a result, a substantial portion
of the Company's cash flows from operations 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 flows 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 $90.0 million principal amount of the Convertible
Notes matures on September 15, 2003, and the $166.0 million principal amount of
the Discount Notes matures on June 30, 2005. There can be no assurance that the
Company will have the cash necessary to repay 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 $1.2 million letter
of credit to a seller, scheduled payments under which are approximately $0.4
million during each of fiscal years 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 may be
required to continue the acquisition program, to finance the Dealer Program and
to fund other growth, including strategic allegiances, and there can be no
assurance that the Company will be able to obtain such financing on acceptable
terms or at all. See "Risk Factors -- Need for Additional Capital."
The Company has had, and expects to continue to have, a working capital
deficit. At September 30, 1994 and 1995 and June 30, 1996, the Company had a
working capital deficit of $11.5 million, $9.2 million and $11.0 million,
respectively. There are two principal categories of current liabilities that
cause the Company to have a working capital deficit: (i) purchase price
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 price holdbacks and
deferred revenues are recorded as a current liability on the Company's balance
sheet.
The Company generated approximately $16.6 million of net cash provided by
operating activities in the nine months ended June 30, 1996, compared to $2.6
million in the nine months ended June 30, 1995. For fiscal 1995, the Company's
net cash provided by operating activities was $8.5 million, compared to $7.4
million net cash provided by operating activities for fiscal 1994. During fiscal
1993, the Company's net cash provided by operating activities was $0.9 million.
Net cash used in investing activities was approximately $80.8 million and
$55.0 million in the nine months ended June 30, 1996 and 1995, respectively. The
primary uses of cash in the nine months ended June 30, 1996 were acquisitions of
portfolios of subscriber accounts and purchases through the Dealer Program. For
fiscal 1995, the Company's net cash used in investing activities was $63.5
million, compared to $66.8 million during fiscal 1994, primarily as a result of
the acquisition of subscriber accounts, including the purchases of subscriber
accounts from Alert Centre, Inc. and Knight Protective Services. During fiscal
1993, the Company's net cash used in investing activities was $10.1 million,
primarily as a result of acquisitions.
Net cash provided by financing activities in the nine months ended June 30,
1996 was $71.4 million, compared to $52.1 million for the same period in fiscal
1995. During fiscal 1995, the Company's net cash provided by financing
activities was $55.2 million, compared to $59.1 million in fiscal 1994. During
fiscal 1993, the Company's net cash used in financing activities was $7.1
million. Financing activities were primarily the issuance of 2.5 million shares
of Common Stock ($23.1 million net proceeds) in February 1996 and borrowings
under the Revolving Credit Facility in the nine months ended June 30, 1996, the
issuance of $166.0 million principal amount ($105.2 million net proceeds) of the
Discount Notes in May 1995 and borrowings under the Revolving Credit Facility in
fiscal 1995, the issuance of $50.0 million principal amount
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of 12.0% senior subordinated notes in fiscal 1994 (subsequently retired in
fiscal 1995) and the issuance and retirement of long-term debt in fiscal 1993.
The Credit Agreement and the Discount Notes Indenture contain certain
restrictions on transfer 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.
Capital Expenditures. During the nine months ended June 30, 1996, the
Company made $4.7 million of capital expenditures, of which $3.0 million were
made for the routine replacement and upgrading of vehicles, computers, phone
switches and other capital items, and the remainder were made for the upgrading
of the Company's monitoring and administrative hardware and software. The
Company believes the installation of the new computer software equipment will
create efficiencies in the Company's customer service, data entry and field
maintenance and repair functions. The implementation of the new software is
scheduled to be completed in fiscal 1997. In addition, the Company anticipates
making capital expenditures totalling approximately $0.5 million over fiscal
1997 and fiscal 1998 to expand the capacity of the central monitoring station to
approximately 500,000 subscribers. The Company believes cash flows from
operations together with borrowings 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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BUSINESS
Protection One provides security alarm monitoring services for residential
and small business subscribers. Based on its 188,132 subscribers as of June 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 six western states of Arizona, California, Nevada,
New Mexico, Oregon 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 nine months ended
June 30, 1996, monitoring and service revenues represented 89.5% 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 11
branch offices. Enhanced security services provided by the Company include,
among others, two-way voice communication, supervised monitoring services, pager
service, wireless backup service and extended service protection.
The Company grew rapidly in the twelve months ended June 30, 1996, as
illustrated by an increase of 43.4% in the number of subscriber accounts from
131,166 at June 30, 1995 to 188,132 at June 30, 1996 and a 43.8% increase in its
MRR from $4.0 million at June 30, 1995 to $5.8 million at June 30, 1996. (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.)
Total revenues increased by 38.4% from $49.7 million for the twelve months ended
June 30, 1995 to $68.7 million for the twelve months ended June 30, 1996.
Revenue growth and operating efficiencies led to a 49.4% increase in EBITDA,
from $19.8 million for the twelve months ended June 30, 1995 to $29.6 million
for the twelve months ended June 30, 1996. In addition, EBITDA as a percentage
of revenues increased from 39.8% for the twelve months ended June 30, 1995 to
43.0% for the twelve months ended June 30, 1996. (See footnote (3) to "Selected
Consolidated Financial Data" for a discussion of how EBITDA is derived. 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 long-term value of companies with recurring
cash flows from operations and net losses.) Operating income increased by 46.6%
from $5.0 million for the twelve months ended June 30, 1995 to $7.3 million for
the twelve months ended June 30, 1996. The Company's loss attributable to common
stock decreased from $17.5 million for the twelve months ended June 30, 1995 to
$13.3 million for the twelve months ended June 30, 1996.
From its inception, the Company has grown rapidly, primarily through the
acquisition of portfolios of subscriber accounts. Between September 30, 1991 and
June 30, 1996, the Company acquired 114 subscriber portfolios, representing an
aggregate of approximately 165,000 subscribers. Management believes that
numerous acquisition opportunities are available, and the Company is pursuing,
and intends to continue to pursue, acquisitions of portfolios of subscriber
accounts, some of which may be significant. (See "Recent Developments -- Metrol
Acquisition.") Since the beginning of fiscal 1995, the Company has increased its
emphasis on the Dealer Program, which became a more significant source of growth
than in prior years. The Company plans to continue this emphasis 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 11 branch offices, making it easier for the Company's branch
operations to successfully assimilate these accounts. See "-- The Dealer
Program."
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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 six states in which the Company operates.
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 the Freeman Data, there are approximately
12,700 security alarm companies nationally, and the Company estimates
that approximately 3,000 operate in the six 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.
- 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.
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 1995 (the "UCR"), between 1985
and 1994 the number of violent crimes reported in the United States
increased by more than 40.3% and the total number of reported criminal
offenses increased by 12.6%. The UCR also reported that although the
number of reported criminal offenses decreased on a nationwide basis from
1993 to 1994 by 1.1%, a property crime was committed in the United States
in 1994 once every three seconds. In the states in which the Company
operates, the property crime rate in 1994 was 24.0% higher than the
nation as a whole, averaging approximately 5,775 property crimes per
100,000 residents. In California, Protection One's largest market, the
1994 property crime and overall crimes rates were 10.8% and 14.9%,
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. A
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September 1994 poll conducted by a national news organization found that
the most important factor people considered in choosing a new home was
the level of neighborhood crime.
- 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 1994,
the most recent period for which a UCR has been published. According to
population and law enforcement employee data presented in the UCR, in
1994 Los Angeles had 3.0 law enforcement employees per 1,000 citizens,
while New York had 5.4 and Houston had 4.0. The number of law enforcement
employees per 1,000 citizens was 3.0 for Las Vegas, 2.6 for Phoenix, 2.7
for Portland, 2.3 for San Diego, 3.0 for San Francisco and 3.3 for
Seattle.
- 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
The Company's strategy is to enhance its position as the largest
residential security alarm monitoring company in the six western states in which
it operates by pursuing a balanced growth plan incorporating the Dealer Program,
acquisitions of portfolios of subscribers, the sale of enhanced services and new
alarm systems and possible joint ventures and other strategic alliances.
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, 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. 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. In order to capitalize on growth in the demand for
residential security alarm systems, the Company has developed the Dealer
Program. Under this program, the Company provides 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 security alarm systems. The
Company added 25,444 subscriber accounts through its Dealer Program in
the nine months ended June 30, 1996, an increase of 320.6% over the 6,050
subscribers added through the Dealer Program in the nine months ended
June 30, 1995. As of June 30, 1996, the Company had 36 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
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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; and (iii) the
Company's support services provided to dealers in the areas of
administration, marketing and employee training.
- ACQUISITIONS OF PORTFOLIOS OF SUBSCRIBER ACCOUNTS. The Company also grows
by acquiring subscriber accounts, primarily from smaller alarm companies.
These acquisitions represented approximately 51,000 subscribers in fiscal
1994, approximately 53,000 subscribers in fiscal 1995 and approximately
51,000 subscribers in the nine months ended June 30, 1996. 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.
- 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, remote
video verification and wireless back-up. The Company also offers patrol
and alarm response services, principally in southern California, Las
Vegas and Phoenix.
- 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.
- POSSIBLE 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, 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 Prospectus Supplement, the
Company has reached an agreement in principle with PacifiCorp to offer
co-branded security alarm systems and monitoring services (see
"Summary -- Recent Developments -- PacifiCorp Agreement"); in addition,
the Company is discussing with certain other 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 costs of generating new subscribers. Other than
the agreement in principle with PacifiCorp, the Company has not entered
into any agreement or arrangement for any such strategic alliance, and
does not believe that any such joint venture or other strategic alliance
is probable.
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. Historically, the
Company has realized an increase in EBITDA as a percentage of revenues. Such
measure increased from 39.8% for the twelve months ended June 30, 1995 to 43.0%
for the twelve months ended June 30, 1996. (See footnote (3) to "Selected
Consolidated Financial Data" for a description of how EBITDA is derived. 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
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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 long-term value of
companies with recurring cash flows from operations and net losses.) 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 patrol cars.
In the twelve months ended June 30, 1996, the Company's net cash provided
by operations grew to $22.4 million, an increase of 200.1% over the $7.5 million
generated in the twelve months ended June 30, 1995. Net cash used in investing
activities increased from $74.1 million during the twelve months ended June 30,
1995 to $89.4 million during the twelve months ended June 30, 1996. Net cash
provided by financing activities during the twelve months ended June 30, 1996
was $74.4 million, a 15.3% increase over the $64.6 million provided during the
twelve months ended June 30, 1995.
THE DEALER PROGRAM
The dealers that the Company selects for the Dealer Program are typically
small alarm companies that specialize in selling and installing alarm systems
for residential or small business subscribers in a specified geographic area.
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. 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 typically 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 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. 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. 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 security services.
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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 114
acquisitions made by the Company between September 30, 1991 and June 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. The Company offers sellers cash, Common
Stock or a combination thereof as determined by the requirements of both the
sellers and the Company. (See "Summary -- Recent Developments -- Metrol
Acquisition.") 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.
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: the identification and negotiation stage, the due
diligence stage and 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
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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 the seller or to independent monitoring
companies to provide for the orderly transition of the subscriber accounts or 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 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. The Company anticipates making capital expenditures totalling $0.5
million over fiscal 1997 and fiscal 1998 to expand the capacity of the central
monitoring station to approximately 500,000 subscribers. 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.
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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 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
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."
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 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.
Remote Video Verification, which allows video images to be sent to the
central monitoring station from small video cameras located within the
monitored premises. The Company has only recently begun offering this
service and expects that as a consequence of its cost, its primary market
will be the Company's business accounts.
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.
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<PAGE> 40
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.
PATROL AND ALARM RESPONSE SERVICES
The Company employs over 100 patrol officers operating in 29 regular patrol
"beats," or designated neighborhoods, in southern California, Las Vegas and
Phoenix. These armed officers supplement the Company's alarm monitoring service
by providing "patrol service" consisting of routine patrol of subscribers'
premises and neighborhoods, "alarm response service" to alarm system
activations, and "special watch" services, such as picking up mail and
newspapers and increased surveillance when the subscriber is travelling. 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.
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 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, the officer will report that 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 patrol and alarm response services may
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
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provision of patrol and alarm response 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 developed for patrol and alarm
response services, the Company believes its current presence would enable it to
increase its conversions of competitors' subscribers to the Company's services.
SALES AND MARKETING
Each of the Company's 11 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 (i.e., the increasing concentration of subscribers in certain
areas) 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.; Ameritech Corporation; Borg-Warner Security
Corporation (under the Wells Fargo, Bel Air Patrol and Pony Express names);
Honeywell, Inc.; The Pittston Brinks Group; Westinghouse Electric Corporation;
and Republic Industries. 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. See "Risk
Factors -- Competition."
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
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<PAGE> 42
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 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 FTC
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 and cellular frequencies are regulated by the Federal Communications
Commission and state public utilities commissions.
LEGAL PROCEEDINGS
The Company experiences routine litigation in the normal course of its
business. The Company does not believe that any of such pending litigation will
have a material adverse effect on the financial condition or results of
operations of the Company.
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 alarm response and patrol 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 June 30, 1996, the Company employed 1,094 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.
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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, Phoenix, Tempe and
Tucson, Arizona; Bakersfield, Irvine, Riverside, San Leandro, San Diego, Santa
Clara and Van Nuys, California; Las Vegas, Nevada; Albuquerque, New Mexico; and
Kent, Washington. The leases for these properties expire on various dates
through 2005, and in some cases are renewable at the option of the Company.
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<PAGE> 44
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age as of June 30, 1996 and current position(s) of each director
and executive officer of POI are as set forth below. Each of such individuals
other than Mr. Weinstock also serves in the same capacities for Monitoring.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- --------------------------------------------
<S> <C> <C>
James M. Mackenzie, Jr. 48 President and Chief Executive Officer and
Director
John W. Hesse 46 Executive Vice President, Chief Financial
Officer and Secretary
John E. Mack, III 37 Executive Vice President -- Business
Development and Assistant Secretary
Thomas K. Rankin 38 Executive Vice President -- Branch
Management and Assistant Secretary
George A. Weinstock 58 Executive Vice President and Assistant
Secretary
Robert M. Chefitz 36 Director
Dr. Ben Enis 53 Director
James Q. Wilson 65 Director
</TABLE>
James M. Mackenzie, Jr. has been President and Chief Executive Officer and
a director of POI since 1991. Mr. Mackenzie served as President of Westec
Security Inc. from 1988 to 1991, as President of Sonitrol Management Corporation
from 1986 to 1988, and as President of API Alarm Systems, Inc. from 1978 to
1986.
John W. Hesse has been Executive Vice President, Chief Financial Officer
and Secretary of POI since 1991. He served as President and Chief Financial
Officer of Network Security Corporation from 1981 to 1987, and was a private
investor from 1987 to 1991.
John E. Mack, III was Vice President -- Business Development of POI from
1991 until August 1996, and has been Executive Vice President -- Business
Development of POI since August 1996 and Assistant Secretary since October 1994.
Mr. Mack served as Director -- Southern Region for Westec Security Inc. from
1989 to 1991, as Vice President -- Sales and Marketing for AllGuard Alarm
Systems Inc. from 1987 to 1989 and as Vice President -- Sales and Marketing for
Knight Security of Northern California Inc. from 1985 to 1987.
Thomas K. Rankin was Vice President -- Branch Management of POI from 1991
until August 1996, and has been Executive Vice President -- Branch Management of
POI since August 1996 and Assistant Secretary since October 1994. Mr. Rankin
served as Director -- Northern Region of Westec Security Inc. from 1989 to 1991,
as Director -- Ohio Operations of Security Link Midwest Corporation from 1987 to
1989 and as Director -- Major Systems Division of API Alarm Systems, Inc. from
1979 to 1987.
George A. Weinstock was Executive Vice President of Monitoring from
November 1993 until May 1996, and has been Executive Vice President of POI since
June 1994 and Assistant Secretary since October 1994. He also served as a
director of POI from November 1993 to May 1994. For the 10 years prior to
November 1993, Mr. Weinstock served as President of American Home Security,
Inc., which was acquired by the Company in November 1993.
Robert M. Chefitz has been a director of POI since 1991 and was Assistant
Secretary from 1991 until October 1994. Mr. Chefitz joined Patricof & Co.
Ventures, Inc. in 1987, where he serves as a Vice President and General Partner
to various venture capital partnerships it manages. Prior to 1987, Mr. Chefitz
was a Senior Associate with Golder Thoma Cressey & Co., a leading private equity
investment firm. Mr. Chefitz currently serves on the Board of Directors of
Xpedite Systems, Inc., and is also a director of several private companies
(including Casi-Rusco, Inc., R.E. Harrington, Inc. and TME, Inc.) and of the New
York Venture Capital Forum.
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Dr. Ben Enis has been a director of POI since 1994. He has been a Professor
of Marketing at the University of Southern California since 1982. Dr. Enis
currently serves on the Board of Directors of Countywide Credit Industries, Inc.
James Q. Wilson has been a director of POI since June 1996. Mr. Wilson has
been a Professor of Management and Public Policy at the University of California
at Los Angeles since 1985; prior to that time, he was a Professor of Government
at Harvard University. Mr. Wilson is currently a director of the American
Enterprise Institute, New England Electric System, the RAND Corporation and
State Farm Mutual Life Insurance Company.
EXECUTIVE COMPENSATION
The following table summarizes the compensation for fiscal 1995 and 1994 of
the Chief Executive Officer and the other executive officers of POI during those
periods.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
NAME AND ------------------------ OPTIONS GRANTED
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (#)
- ----------------------------------------------- ---- ---------- --------- ---------------
<S> <C> <C> <C> <C>
James M. Mackenzie, Jr. ....................... 1995 $ 267,347 $ 100,000(1) --
President and Chief Executive Officer 1994 264,995 65,000 18,000
John W. Hesse.................................. 1995 226,600 100,000(1) --
Executive Vice President, Chief Financial 1994 202,834 65,000 30,000
Officer and Secretary
John E. Mack, III.............................. 1995 162,000 100,000(1) --
Vice President -- Business Development and 1994 144,881 65,000 36,000
Assistant Secretary
Thomas K. Rankin............................... 1995 162,000 100,000(1) --
Vice President -- Branch Management and 1994 144,881 65,000 36,000
Assistant Secretary
George A. Weinstock............................ 1995 157,500 25,000 --
Executive Vice President and Assistant 1994 136,750 50,000 12,000
Secretary
</TABLE>
- ---------------
(1) $20,000 of this amount was paid in the form of 2,500 shares of Common Stock.
Value was calculated based upon the $8.00 per share closing price of the
Common Stock as reported by the Nasdaq National Market on the date the award
was made (November 15, 1995).
Other compensation in the form of perquisites and other personal benefits
has been omitted from the above table as the aggregate amount of such
perquisites and other personal benefits constituted the lesser of $50,000 or 10%
of the total annual salary and bonus of the named executive officer for such
year.
In November 1995, the Board of Directors granted (i) an option for 6,000
shares to Dr. Enis, (ii) options for 100,000 shares to each of Messrs.
Mackenzie, Hesse, Mack and Rankin and (iii) options for an aggregate of 168,000
shares to approximately 35 other employees of the Company. Such grants were
subject to approval by the stockholders of the Company, which approval was
obtained on January 26, 1996. All of such options have a 10-year term, vest at a
rate of 20% per year commencing in November 1996 and (except for the options
granted to the Company's executive officers) are exercisable at a price of $8.00
per share. Each of the options granted to Messrs. Mackenzie, Hesse, Mack and
Rankin is exercisable at a price of (i) $8.00 per share as to 70,000 shares, and
(ii) $15.00 per share as to 30,000 shares.
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<PAGE> 46
DESCRIPTION OF CONVERTIBLE NOTES
The following description of the particular terms of the Convertible Notes
offered hereby (referred to in the Prospectus as the "Offered Debt Securities")
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of Debt Securities set forth in the
Prospectus, to which description reference is hereby made.
The Convertible Notes will be issued under a supplemental indenture to the
Subordinated Debt Indenture referred to in the Prospectus. Such Subordinated
Debt Indenture, as so supplemented, is referred to in this Prospectus Supplement
as the "Indenture."
A copy of the form of the Indenture will be available from the Trustee upon
request by a registered holder of Convertible Notes. The following summaries of
certain provisions of the Convertible Notes and the Indenture do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Convertible Notes and the Indenture, including
the definitions therein of certain terms which are not otherwise defined in this
Prospectus Supplement. Wherever particular provisions or defined terms of the
Indenture (or the form of Convertible Note which is a part thereof) are referred
to, such provisions or defined terms are incorporated herein by reference.
GENERAL
The Convertible Notes will represent unsecured general obligations of
Monitoring (a direct wholly owned subsidiary of POI) subordinate in right of
payment to certain other obligations of Monitoring as described under
"-- Subordination of Notes" and convertible into Common Stock of POI as
described under "-- Conversion of Notes." The Convertible Notes will be limited
to $90,000,000 aggregate principal amount ($103,500,000 if the Underwriters'
over-allotment option is exercised in full), will be issued only in
denominations of $1,000 or any multiple thereof and will mature on September 15,
2003, unless earlier redeemed at the option of Monitoring or at the option of
the holder upon a Fundamental Change (as defined below).
The Indenture does not contain any financial covenants or restrictions on
the payment of dividends, the incurrence of Senior Indebtedness (as defined
below) or the issuance or repurchase of securities of Monitoring, except to the
extent described under "-- Subordination of Notes." The Indenture contains no
covenants or other provisions to afford protection to holders of Convertible
Notes in the event of a highly leveraged transaction or a change in control of
Monitoring or POI except to the extent described under "-- Redemption at Option
of Holders."
The Convertible Notes will bear interest at the annual rate set forth on
the cover page hereof from September 20, 1996, payable semi-annually on March 15
and September 15, commencing on March 15, 1997, to holders of record at the
close of business on the preceding March 1 and September 1, respectively, except
(i) that the interest payable upon redemption (unless the date of redemption is
an interest payment date) will be payable to the person to whom principal is
payable and (ii) as set forth in the next succeeding sentence. In the case of
any Convertible Note (or portion thereof) which is converted into Common Stock
during the period from (but excluding) a record date to (but excluding) the next
succeeding interest payment date, either (i) if such Convertible Note (or
portion thereof) has been called for redemption on a redemption date which
occurs during such period, or is to be redeemed in connection with a Fundamental
Change on a Repurchase Date (as defined below) which occurs during such period,
the Company shall not be required to pay interest on such next succeeding
interest payment date in respect of any such Convertible Note (or portion
thereof) or (ii) if otherwise, any Convertible Note (or portion thereof)
submitted for conversion during such period shall be accompanied by funds equal
to the interest payable on such next succeeding interest payment date on the
principal amount so converted. See "-- Conversion of Notes." Interest may, at
Monitoring's option, be paid either (i) by check mailed to the address of the
person entitled thereto as it appears in the Convertible Note register or (ii)
by transfer to an account maintained by such person located in the United
States; provided, however, that payments to The Depository Trust Company, New
York, New York (the "Debt Depositary") will be made by wire transfer of
immediately available funds to the account of the Debt Depositary or its
nominee. Interest will be computed on the basis of a 360-day year composed of
twelve 30-day months.
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<PAGE> 47
The Convertible Notes have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, under the symbol "ALRM 03."
BOOK ENTRY; DELIVERY AND FORM
The Convertible Notes will be issued in fully registered form, without
coupons, in denominations of $1,000 and any multiple thereof.
The Convertible Notes will be evidenced by one or more global notes (each,
a "Global Note") which will be deposited with, or on behalf of, the Debt
Depository and registered in the name of Cede & Co. ("Cede") as the Debt
Depositary's nominee.
So long as Cede, as the nominee of the Debt Depositary, is the registered
owner of a Global Note, Cede for all purposes will be considered the sole holder
of such Global Note. Except as provided in the accompanying Prospectus under
"Description of Debt Securities -- Global Securities," owners of beneficial
interests in a Global Note will not be entitled to have certificates registered
in their names, will not receive or be entitled to receive physical delivery of
certificates in definitive form, and will not be considered the holders thereof.
Neither Monitoring nor any Guarantor nor the Trustee (or any registrar,
paying agent or conversion agent under the Indenture) will have any
responsibility for the performance of the Debt Depositary or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations. The Debt Depositary has advised
Monitoring and POI that it will take any action permitted to be taken by a
holder of Convertible Notes (including, without limitation, the presentation of
Convertible Notes for exchange as described below) only at the direction of one
or more participants to whose account with the Debt Depositary interests in a
Global Note are credited, and only in respect of the principal amount of the
Convertible Notes represented by a Global Note as to which such participant or
participants has or have given such direction.
The Debt Depositary has advised Monitoring and POI as follows: the Debt
Depositary is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Debt Depositary was created to hold securities for its participants and
to facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes to accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations.
Certain of such participants (or their representatives), together with other
entities, own the Debt Depositary. Indirect access to the Debt Depositary's
system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship, with a
participant, either directly or indirectly.
A further description of the Debt Depositary's procedures with respect to a
Global Note is set forth in the Prospectus under "Description of Debt
Securities -- Global Securities." The Debt Depositary has confirmed to
Monitoring, POI, the Underwriters and the Trustee that it intends to follow such
procedures with respect to the Convertible Notes.
CONVERSION OF NOTES
The holders of Convertible Notes will be entitled at any time after 90 days
following the latest date of original issuance thereof through the close of
business on the final maturity date of the Convertible Notes, subject to prior
redemption, to convert any Convertible Note or portion thereof (in denominations
of $1,000 or multiples thereof) into Common Stock of POI, at the conversion
price set forth on the cover page of this Prospectus Supplement, subject to
adjustment as described below. Except as described below, no payment or other
adjustment will be made on conversion of any Convertible Note for interest
accrued thereon or for dividends on any Common Stock issued. If any Convertible
Note not called for redemption is converted after a record date for the payment
of interest and prior to the next succeeding interest payment date, such
Convertible Note must be accompanied by funds equal to the interest payable on
such succeeding interest payment date on the principal amount so converted. POI
is not required to issue fractional shares of Common
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<PAGE> 48
Stock upon conversion of Convertible Notes and, in lieu thereof, will pay a cash
adjustment based upon the market price of the Common Stock on the last business
day prior to the date of conversion. In the case of Convertible Notes called for
redemption, conversion rights will expire at the close of business on the
business day preceding the day fixed for redemption unless Monitoring defaults
in payment of the redemption price. A Convertible Note in respect of which a
holder is exercising its option to require redemption upon a Fundamental Change
may be converted only if such holder withdraws its election to exercise its
option in accordance with the terms of the Indenture.
The initial conversion price of $17.95 per share of Common Stock is subject
to adjustment under formulae set forth in the Indenture upon the occurrence of
certain events, including:
(i) the issuance of Common Stock as a dividend or distribution on
Common Stock of POI;
(ii) certain subdivisions and combinations of the Common Stock;
(iii) the issuance to all holders of Common Stock of certain rights or
warrants to purchase Common Stock;
(iv) the distribution to all holders of Common Stock of capital stock
of POI (other than Common Stock) or evidences of indebtedness of
Monitoring, POI or any Subsidiary of POI or of assets (including
securities, but excluding those rights, warrants, dividends and
distributions referred to above or paid in cash);
(v) distributions consisting of cash, excluding any quarterly cash
dividend on the Common Stock to the extent that the aggregate cash dividend
per share of Common Stock in any quarter does not exceed the greater of (x)
the amount per share of Common Stock of the next preceding quarterly cash
dividend on the Common Stock to the extent that such preceding quarterly
dividend did not require an adjustment of the conversion price pursuant to
this clause (v) (as adjusted to reflect subdivisions or combinations of the
Common Stock), and (y) 3.75% of the average of the last reported sales
price of the Common Stock during the ten consecutive trading days
immediately prior to the date of declaration of such dividend, and
excluding any dividend or distribution in connection with the liquidation,
dissolution or winding up of POI. If an adjustment is required to be made
as set forth in this clause (v) as a result of a distribution that is a
quarterly dividend, such adjustment would be based upon the amount by which
such distribution exceeds the amount of the quarterly cash dividend
permitted to be excluded pursuant to this clause (v). If an adjustment is
required to be made as set forth in this clause (v) as a result of a
distribution that is not a quarterly dividend, such adjustment would be
based upon the full amount of the distribution;
(vi) payment in respect of a tender or exchange offer by POI,
Monitoring or any Subsidiary of POI for the Common Stock to the extent that
the cash and value of any other consideration included in such payment per
share of Common Stock exceeds the Current Market Price (as defined in the
Indenture) per share of Common Stock on the trading day next succeeding the
last date on which tenders or exchanges may be made pursuant to such tender
or exchange offer;
(vii) payment in respect of a tender offer or exchange offer by a
person other than POI, Monitoring or any Subsidiary of POI in which, as of
the closing date of the offer, the Board of Directors of POI is not
recommending rejection of the offer. The adjustment referred to in this
clause (vii) above will only be made if the tender offer or exchange offer
is for an amount which increases the offeror's ownership of Common Stock to
more than 25% of the total shares of Common Stock outstanding, and if the
cash and value of any other consideration included in such payment per
share of Common Stock exceeds the Current Market Price per share of Common
Stock on the business day next succeeding the last date on which tenders or
exchanges may be made pursuant to such tender or exchange offer. The
adjustment referred to in this clause (vii) will generally not be made,
however, if, as of the closing of the offer, the offering documents with
respect to such offer disclose a plan or an intention to cause POI to
engage in a consolidation or merger of POI or a sale of all or
substantially all of the assets of POI; and
(viii) the issuance of Common Stock or securities convertible into, or
exchangeable for, Common Stock at a price per share (or having a conversion
or exchange price per share) that is less than the then
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Current Market Price of the Common Stock (but excluding, among other
things, issuances: (a) pursuant to any bona fide plan for the benefit of
employees, directors or consultants of POI, Monitoring or any Subsidiary of
POI now or hereafter in effect; (b) to acquire all or any portion of a
business in an arm's-length transaction between the Company and an
unaffiliated third party including, if applicable, issuances upon exercise
of options or warrants assumed in connection with such an acquisition; (c)
in a bona fide public offering pursuant to a firm commitment underwriting
or sales at the market pursuant to a continuous offering stock program; (d)
pursuant to the exercise of warrants, rights (including, without
limitation, earnout rights) or options, or upon the conversion of
convertible securities, which are issued and outstanding on the date
hereof, or which may be issued in the future at fair value and with an
exercise price or conversion price at least equal to the Current Market
Price of the Common Stock at the time of issuance of such warrant, right,
option or convertible security; and (e) pursuant to a dividend reinvestment
plan or other plan hereafter adopted for the reinvestment of dividends or
interest provided that such Common Stock is issued at a price at least
equal to 95% of the market price of the Common Stock at the time of such
issuance).
In the case of (i) any reclassification or change of the Common Stock or
(ii) a consolidation, merger or combination involving POI or a sale or
conveyance to another person of the property and assets of POI as an entirety or
substantially as an entirety, in each case as a result of which holders of
Common Stock shall be entitled to receive stock, other securities, other
property or assets (including cash) with respect to or in exchange for such
Common Stock, the holders of the Convertible Notes then outstanding will be
entitled thereafter to convert such Convertible Notes into the kind and amount
of shares of stock, other securities or other property or assets which they
would have owned or been entitled to receive upon such reclassification, change,
consolidation, merger, combination, sale or conveyance had such Convertible
Notes been converted into Common Stock immediately prior to such
reclassification, change, consolidation, merger, combination, sale or conveyance
assuming that a holder of Convertible Notes would not have exercised any rights
of election as to the stock, other securities or other property or assets
receivable in connection therewith.
In the event of a taxable distribution to holders of Common Stock or in
certain other circumstances requiring conversion price adjustments, the holders
of Convertible Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States income tax as a dividend; in certain other
circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock. See "Certain Federal Income Tax
Considerations."
Monitoring and POI from time to time may to the extent permitted by law
reduce the conversion price by any amount for any period of at least 20 days, in
which case Monitoring shall give at least 15 days' notice of such reduction, if
the Boards of Directors of Monitoring and POI have made a determination that
such reduction would be in the best interests of the Company, which
determination shall be conclusive. Monitoring and POI together may, at their
option, make such reductions in the conversion price, in addition to those set
forth above, as the Boards of Directors of Monitoring and POI deem advisable to
avoid or diminish any income tax to holders of Common Stock resulting from any
dividend or distribution of stock (or rights to acquire stock) or from any event
treated as such for income tax purposes. See "Certain Federal Income Tax
Considerations."
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then in
effect; provided that any adjustment that would otherwise by required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the conversion price will not be adjusted for the
issuance of Common Stock or any securities convertible into or exchangeable for
Common Stock or carrying the right to purchase any of the foregoing.
OPTIONAL REDEMPTION BY MONITORING
The Convertible Notes are not entitled to any sinking fund. The Convertible
Notes are not redeemable at the option of Monitoring prior to September 19,
1999. At any time on or after such date, the Convertible Notes will be
redeemable at Monitoring's option on at least 30 days' notice as a whole or,
from time to time, in
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<PAGE> 50
part at the following prices (expressed as percentages of the principal amount),
together with accrued interest to, but excluding, the date fixed for redemption:
If redeemed during the 12-month period beginning September 15:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
------------------------------------------------------------- ----------------
<S> <C>
1999......................................................... 103.857%
2000......................................................... 102.893
2001......................................................... 101.929
2002......................................................... 100.964
</TABLE>
and 100% at September 15, 2003; provided that any semi-annual payment of
interest becoming due on the date fixed for redemption shall be payable to the
holders of record on the relevant record date of the Convertible Notes being
redeemed. Notwithstanding the foregoing, Monitoring may not redeem any
Convertible Notes unless all accrued and unpaid interest has been paid on all
outstanding Convertible Notes for all interest payment periods terminating on or
prior to the last interest payment date before the date of redemption.
If fewer than all the Convertible Notes are to be redeemed, the Trustee
shall select the Convertible Notes to be redeemed in principal amounts of $1,000
or multiples thereof in compliance with the requirements, as certified to the
Trustee by Monitoring, of the principal national securities exchange on which
the Convertible Notes are listed, or if the Convertible Notes are not so listed,
by lot or, in the Trustee's discretion, on a pro rata basis or by another method
the Trustee considers fair and appropriate. If any Convertible Note is to be
redeemed in part only, a new Convertible Note or Convertible Notes in principal
amount equal to the unredeemed principal portion thereof will be issued. If a
portion of a holder's Convertible Notes is selected for partial redemption and
such holder converts a portion of such Convertible Notes, such converted portion
shall be deemed to be taken from the portion selected for redemption. The Credit
Agreement (as defined herein) contains a provision prohibiting the optional
redemption of the Convertible Notes.
REDEMPTION AT OPTION OF HOLDERS
If, at any time prior to September 15, 2003, there occurs a Fundamental
Change (as defined below), each holder of Convertible Notes shall have the
right, at the holder's option, to require Monitoring to redeem all of such
holder's Convertible Notes or portions thereof (in denominations of $1,000 or
multiples thereof) on the date (the "Repurchase Date") that is 30 days after the
date of Monitoring's notice of such Fundamental Change referred to below.
Monitoring shall redeem such Convertible Notes at a price (expressed as a
percentage of the principal amount) equal to (i) 106.750% if the Repurchase Date
is during the 12-month period beginning September 15, 1996, (ii) 105.786% if the
Repurchase Date is during the 12-month period beginning September 15, 1997,
(iii) 104.821% if the Repurchase Date is during the 12-month period beginning
September 15, 1998 and (iv) thereafter at the redemption price set forth under
"Optional Redemption by Monitoring" which would be applicable to a redemption at
the option of Monitoring on the Repurchase Date; provided that, if the
Applicable Price (as defined below) is less than the Reference Market Price (as
defined below), Monitoring shall redeem such Convertible Notes at a price equal
to the foregoing redemption price multiplied by the fraction obtained by
dividing the Applicable Price by the Reference Market Price. In each case,
Monitoring shall also pay accrued interest on the redeemed Convertible Notes to,
but excluding, the Repurchase Date; provided that, if such Repurchase Date is an
interest payment date, then the interest payable on such date shall be paid to
the holder of record of the Convertible Note on the relevant record date.
On or before the 10th day after the occurrence of a Fundamental Change,
Monitoring is required to notify by mail all holders of record of the
Convertible Notes of the occurrence of such Fundamental Change and of the
redemption right arising as a result thereof. Monitoring is also required to
deliver a copy of such notice to the Trustee and to issue a press release
announcing the occurrence of such Fundamental Change and of the redemption right
arising as a result thereof. To exercise the redemption right, a holder of
Convertible Notes must deliver, on or before the 30th day after the date of
Monitoring's notice of a Fundamental Change
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(the "Fundamental Change Expiration Term"), written notice of the holder's
exercise of such right, together with the Convertible Notes to be so redeemed,
duly endorsed for transfer, to Monitoring (or an agent designated by Monitoring
for such purpose) and the Trustee. Payment for Convertible Notes surrendered for
redemption (and not withdrawn) prior to the Fundamental Change Expiration Time
will be made promptly following the Repurchase Date.
The term "Fundamental Change" means the occurrence of any transaction or
event in connection with which all or substantially all of the Common Stock
shall be exchanged for, converted into, acquired for or constitute the right to
receive consideration (whether by means of an exchange offer, liquidation,
tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) which is not all or substantially all common
stock which is (or, upon consummation of or immediately following such
transaction or event, will be) listed on a United States national securities
exchange or approved for quotation on the Nasdaq National Market or any similar
United States system of automated dissemination of quotations of securities
prices. The term "Applicable Price" means (i) in the event of a Fundamental
Change in which the holders of Common Stock receive only cash, the amount of
cash received by the holder of one share of Common Stock and (ii) in the event
of any other Fundamental Change, the average of the last reported sale price for
the Common Stock during the ten trading days prior to the record date for the
determination of the holders of Common Stock entitled to receive cash,
securities, property or other assets in connection with such Fundamental Change,
or, if there is no such record date, the date upon which the holders of the
Common Stock shall have the right to receive such cash, securities, property or
other assets in connection with the Fundamental Change. The term "Reference
Market Price" shall initially mean $9.67 (which is equal to 66 2/3% of the
reported last sale price for the Common Stock on September 16, 1996, as
reflected on the cover page of this Prospectus Supplement) and in the event of
any adjustment to the conversion price described above pursuant to the
provisions of the Indenture, the Reference Market Price shall also be adjusted
so that the ratio of the Reference Market Price to the conversion price after
giving effect to any such adjustment shall always be the same as the ratio of
$9.67 to the conversion price specified on the cover page of this Prospectus
Supplement (without regard to any adjustment thereto).
The Company will comply with the provisions of Rule 13e-4 and other tender
offer rules under the Exchange Act which may then be applicable in connection
with the redemption rights of holders of the Convertible Notes in the event of a
Fundamental Change. The redemption rights of the holders of Convertible Notes
could discourage a potential acquiror of the Company. The Fundamental Change
redemption feature, however, is not the result of management's knowledge of any
specific effort to obtain control of the Company by means of a merger, tender
offer, solicitation or otherwise, or part of a plan by management to adopt a
series of anti-takeover provisions.
The Company could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Fundamental Change, but that would substantially increase the amount of Senior
Indebtedness outstanding at such time. Further, the payment of the Fundamental
Change redemption price on the Convertible Notes is subordinated to the prior
payment of Senior Indebtedness as described under "-- Subordination of Notes"
below, and is prohibited by the Credit Agreement. There are no restrictions in
the Indenture on the creation of additional Senior Indebtedness or other
indebtedness. Under certain circumstances, the incurrence of additional
indebtedness could have a material adverse effect on Monitoring's ability to
service its indebtedness, including the Convertible Notes. If a Fundamental
Change were to occur, there can be no assurance that Monitoring would have
sufficient funds to pay the Fundamental Change redemption price for all
Convertible Notes tendered by the holders thereof. A default by Monitoring on
its obligations to pay the Fundamental Change redemption price would result in
acceleration of the payment of other indebtedness of the Company at the time
outstanding pursuant to cross-default provisions.
SUBORDINATION OF NOTES
The indebtedness evidenced by the Convertible Notes will be senior
subordinated indebtedness of Monitoring. The payment of the Senior Subordinated
Obligations (as defined herein) will, to the extent set forth in the Indenture,
be subordinated in right of payment to the prior payment in full, in cash or
cash equivalents, of all Senior Indebtedness, including, without limitation,
Monitoring's obligations under the
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Revolving Credit Facility. It is intended that the Convertible Notes will rank
pari passu with the Discount Notes. After giving effect to the offering of the
Convertible Notes and the application of the proceeds thereof, as of June 30,
1996, Monitoring would have had $216.1 million of Indebtedness (as defined
herein) outstanding, none of which would have been Senior Indebtedness. See
"Capitalization." Monitoring is the borrower under the Revolving Credit Facility
and its obligations thereunder are guaranteed by POI. In addition, POI's
obligations are secured by a pledge of all of the capital stock of Monitoring
and Monitoring's obligations are secured by a first priority lien on
substantially all of its assets. All liabilities of the Subsidiaries of
Monitoring will be effectively senior in right of payment to the Convertible
Notes, except to the extent any such Subsidiary is a Guarantor. At the Closing
Date, Monitoring will have no Subsidiary that is a Guarantor. As of June 30,
1996, Monitoring would not have had any indebtedness that would have ranked
subordinate to the Convertible Notes.
"Senior Subordinated Obligations" means all principal of, premium, if any,
or interest on the Convertible Notes payable pursuant to the terms of the
Convertible Notes or upon acceleration, including any amounts received upon the
exercise of rights of rescission or other rights of action (including claims for
damages) or otherwise, to the extent relating to the purchase price of the
Convertible Notes or amounts corresponding to such principal, premium, if any,
or interest on the Convertible Notes.
Upon any payment or distribution of assets or securities of Monitoring of
any kind or character, whether in cash, property or securities, in connection
with any dissolution or winding up or total or partial liquidation or
reorganization or Monitoring, whether voluntary or involuntary, or in
bankruptcy, insolvency, receivership or other proceedings, all amounts due or to
become due upon all Senior Indebtedness shall first be paid in full, in cash or
cash equivalents, before the holders of Convertible Notes or the Trustee on
their behalf shall be entitled to receive any payment by Monitoring on account
of Senior Subordinated Obligations, or any payment to acquire any of the
Convertible Notes for cash, property or securities, or any distribution with
respect to the Convertible Notes of any cash, property or securities. Before any
payment may be made by, or on behalf of, Monitoring on any Senior Subordinated
Obligations in connection with any such dissolution, winding up, liquidation or
reorganization, any payment or distribution of assets or securities of
Monitoring of any kind or character, whether in cash, property or securities, to
which the holders of Convertible Notes or the Trustee on their behalf would be
entitled, but for the subordination provisions of the Indenture, shall be made
by Monitoring or by any receiver, trustee in bankruptcy, liquidating trustee,
agent or other similar Person making such payment or distribution or by the
holders or the Trustee if received by them or it, directly to the holders of the
Senior Indebtedness (pro rata to such holders on the basis of the respective
amounts of Senior Indebtedness held by such holders) or their representatives or
to any trustee or trustees under any indenture pursuant to which any such Senior
Indebtedness may have been issued, as their respective interests appear, to the
extent necessary to pay all such Senior Indebtedness in full, in cash or cash
equivalents, after giving effect to any concurrent payment, distribution or
provision therefor to or for the holders of such Senior Indebtedness.
No direct or indirect payment by or on behalf of Monitoring of Senior
Subordinated Obligations, whether pursuant to the terms of the Convertible Notes
or upon acceleration or otherwise, shall be made if, at the time of such
payment, there exists a default in the payment of all or any portion of the
obligations on any Senior Indebtedness, and such default shall not have been
cured or waived or the benefits of this provision waived by or on behalf of the
holders of such Senior Indebtedness. In addition, during the continuance of any
other event of default with respect to (i) the Credit Agreement pursuant to
which the maturity thereof may be accelerated and (a) upon receipt by the
Trustee of written notice from the Credit Agreement Agent (as defined herein) or
(b) if such event of default under the Credit Agreement results from the
acceleration of the Convertible Notes, from and after the date of such
acceleration, no payment of Senior Subordinated Obligations may be made by or on
behalf of Monitoring upon or in respect of the Convertible Notes for a period (a
"Payment Blockage Period") commencing on the earlier of the date of receipt of
such notice or the date of such acceleration and ending 179 days thereafter
(unless such Payment Blockage Period shall be terminated by written notice to
the Trustee from the Credit Agreement Agent or by repayment in full in cash or
cash equivalents of such Senior Indebtedness or such event of default has been
cured or waived) or (ii) any other Designated Senior Indebtedness (as defined
herein) pursuant to which the maturity thereof may be accelerated, upon receipt
by the Trustee of written notice from the trustee or other representative for
the
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<PAGE> 53
holders of such other Designated Senior Indebtedness (or the holders of at least
a majority in principal amount of such other Designated Senior Indebtedness then
outstanding), no payment of Senior Subordinated Obligations may be made by or on
behalf of Monitoring upon or in respect of the Convertible Notes for a Payment
Blockage Period commencing on the date of receipt of such notice and ending 119
days thereafter (unless, in each case, such Payment Blockage Period shall be
terminated by written notice to the Trustee from such trustee of, or other
representative for, such holders or by repayment in full in cash or cash
equivalents of such Designated Senior Indebtedness or such event of default has
been cured or waived). Not more than one Payment Blockage Period may be
commenced with respect to the Convertible Notes during any period of 360
consecutive days; provided that, subject to the limitations set forth in the
next sentence, the commencement of a Payment Blockage Period by the
representatives for, or the holders of, Designated Senior Indebtedness, other
than under the Credit Agreement or under clause (i)(b) of this paragraph, shall
not bar the commencement of another Payment Blockage Period by the Credit
Agreement Agent within such period of 360 consecutive days. Notwithstanding
anything in the Indenture to the contrary, there must be 180 consecutive days in
any 360-day period in which no Payment Blockage Period is in effect. No event of
default that existed or was continuing (it being acknowledged that any
subsequent action that would give rise to an event of default pursuant to any
provision under which an event of default previously existed or was continuing
shall constitute a new event of default for this purpose) on the date of the
commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period shall be, or shall
be made, the basis for the commencement of a second Payment Blockage Period by
the representative for, or the holders of, such Designated Senior Indebtedness,
whether or not within a period of 360 consecutive days, unless such event of
default shall have been cured or waived for a period of not less than 90
consecutive days.
By reason of the subordination provisions described above, in the event of
bankruptcy, liquidation, insolvency or similar events, creditors of Monitoring
who are not holders of Senior Indebtedness may recover less, ratably, than
holders of Senior Indebtedness and may recover more, ratably, than holders of
the Convertible Notes.
Under the terms of the Indenture, POI will not, and will not permit any
Subsidiary Guarantor to, Incur any Indebtedness that is expressly made
subordinate in right of payment to any Senior Indebtedness or Guarantor Senior
Indebtedness (as defined herein), as the case may be, unless such Indebtedness,
by its terms or by the terms of any agreement or instrument pursuant to which
such Indebtedness is outstanding, is expressly made pari passu with, or
subordinate in right of payment to, the Convertible Notes or the Note Guarantee,
as the case may be, pursuant to provisions substantially similar to those
contained in the Indenture.
Under the terms of the Indenture, POI will not, and will not permit
Monitoring or any Subsidiary Guarantor to, Incur any Indebtedness that is senior
in right of payment to the Convertible Notes unless (i) in the case of such
Indebtedness that is secured, there is no outstanding unsecured Senior
Indebtedness or Guarantor Senior Indebtedness of Monitoring or any Guarantor,
and (ii) in the case of such Indebtedness that is unsecured Senior Indebtedness
or unsecured Guarantor Senior Indebtedness, there is no outstanding secured
Indebtedness of Monitoring or any Guarantor, other than Capital Lease
Obligations (as defined herein) outstanding at any time in an aggregate amount
not to exceed $2.0 million.
The limitation in the preceding paragraph will be of no further force and
effect if (a) a supplemental indenture which eliminates the subordination
provisions set forth in the Indenture, in form and substance satisfactory to the
Trustee, shall have been executed and delivered to the Trustee, (b) the Trustee
shall have received necessary consents with respect to all outstanding Senior
Indebtedness and Guarantor Senior Indebtedness from the holders thereof
approving such supplemental indenture, (c) the Trustee shall have received such
Opinions of Counsel as the Trustee may reasonably request, and (d) immediately
before and immediately after giving affect to such supplemental indenture, no
Default or Event of Default shall have occurred and be continuing.
"Senior Indebtedness" means the following obligations of Monitoring,
whether outstanding on the date of the Indenture or thereafter Incurred (as
defined herein): (i) all Indebtedness and all other monetary
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obligations (including expenses, fees and other monetary obligations) of
Monitoring under the Credit Agreement and (ii) all other Indebtedness of
Monitoring (other than the Convertible Notes and the Discount Notes), including
principal and interest on such Indebtedness, if, in the case of this clause
(ii), (A) in the event such Indebtedness is unsecured, a notice to the effect
that such Indebtedness constitutes "Senior Indebtedness" under the Indenture is
delivered by Monitoring to the Trustee, and (B) such Indebtedness, by its terms
or by the terms of any agreement or instrument pursuant to which such
Indebtedness is issued, does not expressly state that it is pari passu with, or
subordinated in right of payment to, the Convertible Notes; provided that the
term "Senior Indebtedness" shall not include (a) any Indebtedness of Monitoring
that, when Incurred and without respect to any election under Section 1111(b) of
the United States Bankruptcy Code, was without recourse to Monitoring, (b) any
Indebtedness of Monitoring to POI or any Subsidiary of POI or to a joint venture
in which Monitoring or any Affiliate has an interest, (c) any Indebtedness of
Monitoring not permitted by the Indenture; provided, however, that this clause
(c) shall not be applicable with respect to Indebtedness under clause (i) of
this definition that consists of up to $200 million of principal outstanding at
any time under the Credit Agreement, all interest accrued under the Credit
Agreement on up to $200 million of principal and all other monetary obligations
(other than principal and interest) under the Credit Agreement, (d) any
repurchase, redemption or other obligation in respect of Redeemable Stock (as
defined herein), (e) any Indebtedness of Monitoring to any employee, officer or
director of Monitoring or any of its Affiliates, (f) any liability for federal,
state, local or other taxes owed or owing by Monitoring, (g) Indebtedness under
the Discount Note Indenture, which shall be pari passu with the Convertible
Notes, and (h) any Trade Payables of Monitoring. Senior Indebtedness will also
include interest accruing subsequent to events of bankruptcy of Monitoring and
its Subsidiaries at the rate provided for in the document governing such Senior
Indebtedness, whether or not such interest is an allowed claim enforceable
against the debtor under the United States Bankruptcy Code or similar laws
relating to insolvency.
To the extent any payment of Senior Indebtedness (whether by or on behalf
of Monitoring, as proceeds of security or enforcement of any right of setoff or
otherwise) is declared to be fraudulent or preferential, set aside or required
to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or
other similar Person under any bankruptcy, insolvency, receivership, fraudulent
conveyance or similar law, then if such payment is recovered by, or paid over
to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other
similar Person, the Senior Indebtedness or part thereof originally intended to
be satisfied shall be deemed to be reinstated and outstanding as if such payment
had not occurred. To the extent the obligation to repay any Senior Indebtedness
is declared to be fraudulent, invalid or otherwise set aside under any
bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then
the obligations so declared fraudulent, invalid or otherwise set aside (and all
other amounts that would come due with respect thereto had such obligation not
been so affected) shall be deemed to be reinstated and outstanding as Senior
Indebtedness for all purposes of the Indenture as if such declaration,
invalidity or setting aside had not occurred.
"Designated Senior Indebtedness" means (i) Indebtedness and all other
monetary obligations (including expenses, fees and other monetary obligations)
under the Credit Agreement and (ii) any other Indebtedness constituting Senior
Indebtedness that, at any date of determination, has an aggregate principal
amount of at least $25 million and is specifically designated by Monitoring in
the instrument creating or evidencing such Senior Indebtedness as "Designated
Senior Indebtedness."
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
GUARANTEES
Monitoring's obligations under the Convertible Notes are fully and
unconditionally guaranteed on a senior subordinated basis by POI and, under
certain circumstances, may be guaranteed in the future by certain Subsidiaries
of Monitoring (so long as they remain Subsidiaries of Monitoring) (each, a
"Subsidiary Guarantor"). Accordingly, each Note Guarantee is subordinated to the
Guarantor Senior Indebtedness of the issuer of such Note Guarantee on the same
basis as provided above with respect to the subordination of Senior Subordinated
Obligations of Monitoring to Senior Indebtedness of Monitoring. POI has no
material assets
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other than all the outstanding capital stock of Monitoring, which has been
pledged to secure POI's Guarantee of the obligations of Monitoring under the
Revolving Credit Facility. After giving effect to the offering of the
Convertible Notes and the application of the proceeds thereof, as of June 30,
1996, POI would not have had any Indebtedness outstanding.
The Indenture provides that if either Metrol Security Services, Inc. (a
direct wholly owned subsidiary of Monitoring) or its subsidiary Sonitrol of
Arizona, Inc. has not been merged into Monitoring by the 30th day after the
Convertible Notes are issued, such Subsidiary will become a Guarantor on such
30th day. In addition, any new Subsidiary with assets in excess of $2 million
shall become a Guarantor not later than 30 days after becoming a Subsidiary.
"Guarantor Senior Indebtedness" means, with respect to each Guarantor, the
following obligations of such Guarantor, whether outstanding on the date of the
Indenture or thereafter Incurred: (i) all Indebtedness and all other monetary
obligations (including expenses, fees and other monetary obligations) of such
Guarantor under the Credit Agreement, including any Guarantee of Senior
Indebtedness of Monitoring under the Credit Agreement and (ii) all other
Indebtedness of such Guarantor (other than the Note Guarantee and the Guarantee
by such Guarantor of the obligations of Monitoring under the Discount Notes),
including principal and interest on such Indebtedness if, in the case of this
clause (ii), (A) in the event such Indebtedness is unsecured, a notice to the
effect that such Indebtedness constitutes "Guarantor Senior Indebtedness" under
the Indenture is delivered by Monitoring or such Guarantor to the Trustee, and
(B) such Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, does not expressly
state that it is pari passu with, or subordinated in right of payment to, the
Note Guarantee; provided that the term "Guarantor Senior Indebtedness" shall not
include (a) any Indebtedness of such Guarantor that, when Incurred and without
respect to any election under Section 1111(b) of the United States Bankruptcy
Code, was without recourse to such Guarantor, (b) any Indebtedness of such
Guarantor to POI or any Subsidiary of POI or to a joint venture in which such
Guarantor or any Affiliate has an interest (unless, in the case of such
Indebtedness of a Subsidiary Guarantor to Monitoring, (1) such Indebtedness is
evidenced by a note or other similar instrument that is pledged to secure Senior
Indebtedness, and (2) such note evidences an obligation by such Subsidiary
Guarantor to repay proceeds of such Senior Indebtedness which at the time of any
enforcement of the Convertible Notes were loaned to such Subsidiary Guarantor),
(c) any Indebtedness of such Guarantor not permitted by the Indenture; provided,
however, that this clause (c) shall not be applicable with respect to
Indebtedness under clause (i) of this definition that consists of up to $200
million of principal outstanding at any time under the Credit Agreement, all
interest accrued under the Credit Agreement on up to $200 million of principal
and all other monetary obligations (other than principal and interest) under the
Credit Agreement, (d) any repurchase, redemption or other obligation in respect
of Redeemable Stock, (e) any Indebtedness of such Guarantor to any employee,
officer or director of such Guarantor or any of its Affiliates, (f) any
liability for federal, state, local or other taxes owed or owing by such
Guarantor, (g) Indebtedness of such Guarantor pursuant to its Guarantee of any
Indebtedness under the Discount Note Indenture, which Indebtedness of such
Guarantor shall be pari passu with the Note Guarantee of such Guarantor, and (h)
any Trade Payables of such Guarantor. Guarantor Senior Indebtedness will also
include interest accruing subsequent to events of bankruptcy of such Guarantor
and its Subsidiaries at the rate provided for in the document governing such
Guarantor Senior Indebtedness, whether or not such interest is an allowed claim
enforceable against the debtor under the United States Bankruptcy Code or
similar laws relating to insolvency.
The Indenture provides that if all or substantially all of the assets of
any Subsidiary Guarantor or all of the Capital Stock of any Subsidiary Guarantor
is sold (including by issuance or otherwise) by Monitoring or any of its
Subsidiaries in a transaction constituting an Asset Sale that does not otherwise
violate the Indenture, then such Subsidiary Guarantor (in the event of a sale or
other disposition of all of the Capital Stock of such Subsidiary Guarantor) or
the corporation acquiring such assets (in the event of a sale or other
disposition of all or substantially all of the assets of such Subsidiary
Guarantor) shall be released and discharged of its obligations under the Note
Guarantee.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
terms as well as any other capitalized term used herein for which no definition
is provided.
"Accounts" means alarm monitoring accounts or alarm service accounts of
customers pursuant to which POI or any of its Subsidiaries provides alarm
monitoring or other security services or sell, install or service security
alarms or services ancillary thereto.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or lease-back transactions) in one transaction or a
series of related transactions by POI or any of its Subsidiaries to any Person
other than POI or any other Subsidiary of (i) all or any of the Capital Stock of
any Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of POI or any of its Subsidiaries or (iii) any other
property and assets of POI or any of its Subsidiaries outside the ordinary
course of business of POI or such Subsidiary; provided that sales or other
dispositions of inventory, receivables and other current assets shall not be
included within the meaning of "Asset Sale."
"Board of Directors" means the Board of Directors of POI or the Board of
Directors of Monitoring, as the case may be, or any committee of either such
Board of Directors, as the case may be, duly authorized to act under the
Indenture.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the date of the Indenture, including, without limitation, all
Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligation" is defined to mean the rental obligations, as aforesaid, under
such lease.
"Credit Agreement" means the Amended and Restated Credit Agreement dated as
of June 7, 1996, as amended, among Monitoring and Heller Financial, Inc., as
agent and as lender, and certain other lenders, together with all other
agreements, instruments and documents executed or delivered pursuant thereto or
in connection therewith, in each case as such Credit Agreement, agreements,
instruments or documents (or such agents or lenders) may be amended,
supplemented, extended, renewed, replaced, substituted or otherwise modified
from time to time, including, without limitation, replacement or substitution in
its entirety with one or more agreements, agents or syndicates of financial
institutions; provided, that with respect to any one or more loan agreements
providing for the refinancing of Indebtedness under the Credit Agreement, such
loan agreement or loan agreements shall be the Credit Agreement under the
Indenture only if a notice to that effect has been delivered by Monitoring to
the Trustee and there shall be at any time only one Credit Agreement Agent.
"Credit Agreement Agent" means (i) if one loan agreement constitutes the
Credit Agreement, the sole lender thereunder or the agent for the financial
institutions from time to time party to such Credit Agreement and any successor
or successors of such agent or (ii) if more than one loan agreement constitutes
the Credit Agreement, the representative of the financial institutions from time
to time parties to such agreements and any successor or successors of such
representative, which representative shall have been identified in a written
notice delivered by Monitoring to the Trustee.
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"Deferred Account Acquisition Price" means, in connection with (i) the
purchase of Accounts, or (ii) the acquisition of all of the outstanding Capital
Stock of a Person where the principal purpose of such acquisition is to acquire
Accounts, that portion of the purchase price of such Accounts or Capital Stock
that has been deferred to provide an offset for future purchase price
adjustments.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Discount Notes" means Monitoring's 13 5/8% Senior Subordinated Discount
Notes due 2005.
"Discount Note Indenture" means the Indenture dated as of May 17, 1995, as
amended, between Monitoring, as issuer, POI, as guarantor, and State Street Bank
and Trust Company, as successor trustee, relating to the Discount Notes.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations based on GAAP
contained in the Indenture shall be computed in conformity with GAAP applied on
a consistent basis.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an Incurrence of Indebtedness by reason of the acquisition of more
than 50% of the Capital Stock of any Person; provided that none of the accrual
of interest, the accrual of dividends payable on Redeemable Stock or the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (except, with respect to
Monitoring, the promissory notes issued by Monitoring in favor of Ion Leasing
(which obligations have been defeased by a cash deposit in a segregated trust
account)), (iii) all obligations of such Person in respect of letters of credit
or other similar instruments (including reimbursement obligations with respect
thereto), (iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more than
six months after the date of placing such property in service or taking delivery
and title thereto or the completion of such service, except (A) Trade Payables,
(B) all obligations to pay any Deferred Account Acquisition Price, provided that
the maximum amount excluded from the definition of "Indebtedness" under this
clause (B) shall not exceed $5 million in the aggregate at any date of
determination and (C) compensation payable to employees of such Person (or any
subsidiary thereof) under employee benefit plans of such Person, which
compensation is deferred in the ordinary course of business of such Person (or
such subsidiary) and in accordance with such plans, (v) all Capitalized Lease
Obligations of such Person, (vi) all Indebtedness of other Persons secured by a
Lien on any asset of such Person, whether or not such Indebtedness is assumed by
such Person; provided that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination and (B)
the amount of such Indebtedness, (vii) all Indebtedness of
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other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person, (viii) all outstanding Redeemable Stock issued by
such Person and (ix) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements. The amount
of Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and, with respect
to contingent obligations (other than those described in clause (vii)), the
maximum liability upon the occurrence of the contingency giving rise to the
obligations (including with respect to any premium which may be payable on the
redemption of Redeemable Stock), provided (i) that the amount outstanding at any
time of any Indebtedness issued with original issue discount is the face amount
of such Indebtedness less the remaining unamortized portion of the original
issue discount of such Indebtedness at such time as determined in conformity
with GAAP and (ii) that Indebtedness shall not include any liability for
federal, state, local or other taxes that are not delinquent.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Convertible Notes, (ii) redeemable at the option of the
holder of such class of series of Capital Stock at any time prior to the Stated
Maturity of the Convertible Notes or (iii) convertible into or exchangeable for
Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Convertible Notes
provided that any Capital Stock that would not constitute Redeemable Stock but
for provisions thereof giving holders thereof the right to require such Person
to repurchase or redeem such Capital Stock upon the occurrence of an "asset
sale" or "change of control" occurring prior to the Stated Maturity of the
Discount Notes shall not constitute Redeemable Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than certain corresponding
provisions contained in the Discount Note Indenture and such Capital Stock
specifically provides that such Person will not repurchase or redeem any such
stock pursuant to such provisions prior to Monitoring's repurchase of such
Discount Notes as are required to be repurchased pursuant to such corresponding
provisions of the Discount Note Indenture.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the outstanding
Voting Stock is owned, directly or indirectly, by such Person and one or more
other Subsidiaries of such Person.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax considerations relevant to holders of the Convertible Notes. This
discussion is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations, Internal Revenue Service ("IRS") rulings and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or different interpretations. This discussion does not
purport to deal with all aspects of federal income taxation that may be relevant
to a particular investor's decision to purchase the Convertible Notes, and it is
not intended to be wholly applicable to all categories of investors, some of
which, such as dealers in securities, banks, insurance companies, tax-exempt
organizations and non-United States persons, may be subject to special rules. In
addition, this discussion is limited to persons that will hold the Convertible
Notes represented thereby as a
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"capital asset" within the meaning of Section 1221 of the Code. Further, this
discussion does not address United States federal estate taxes that may be
applicable to holders of the Convertible Notes.
ALL PROSPECTIVE PURCHASERS OF THE CONVERTIBLE NOTES ARE ADVISED TO CONSULT
THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE CONVERTIBLE NOTES
AND THE COMMON STOCK.
As used herein the term "United States Holder" means a holder of
Convertible Notes or Common Stock that is for United States federal income tax
purposes (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, or (iii) an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source.
As used herein, the term "Foreign Holder" means a holder of Convertible
Notes or Common Stock that is, for United States federal income tax purposes,
(i) a nonresident alien individual, (ii) a foreign corporation, (iii) a
nonresident alien fiduciary of a foreign estate or trust or (iv) a foreign
partnership one or more of the members of which is, for United States federal
income tax purposes, a nonresident alien individual, a foreign corporation or a
nonresident alien fiduciary of a foreign estate or trust.
TAX CONSEQUENCES TO U.S. HOLDERS
STATED INTEREST
A United States Holder of a Convertible Note will be required to include
interest on a Convertible Note in gross income for Federal income tax purposes
in accordance with the holder's method of tax accounting.
CONVERSION OF CONVERTIBLE NOTES INTO COMMON STOCK
Under the position of the Internal Revenue Service, a United States Holder
of a Convertible Note will recognize gain or loss on conversion of the
Convertible Note into Common Stock of POI, although the issue is not free from
doubt. In such case, the United States Holder will recognize gain or loss in the
same manner as described in "Sale, Exchange or Redemption of a Convertible Note
or Common Stock" below. The holding period of the Common Stock received on
conversion of a Convertible Note generally will not include the period during
which the Convertible Note was held, and the United States Holder's aggregate
tax basis in the Common Stock received upon the conversion generally will be
equal to the amount of cash and the fair market value of the Common Stock used
in computing gain or loss on the conversion.
ADJUSTMENTS TO CONVERSION PRICE
The conversion price of the Convertible Notes is subject to adjustment
under certain circumstances. Section 305 of the Code and the Treasury
Regulations issued thereunder may treat the holders of the Convertible Notes as
having received a constructive distribution, resulting in ordinary income
(subject to a possible dividends-received deduction in the case of corporate
holders) to the extent of the Company's current and/or accumulated earnings and
profits, if, and to the extent that certain adjustments in the conversion price
that may occur in limited circumstances (particularly an adjustment to reflect a
taxable dividend to holders of Common Stock) increase the proportionate interest
of a holder of Convertible Notes in the fully diluted Common Stock, whether or
not such holder ever exercises its conversion privilege. Moreover, if there is
not a full adjustment to the conversion ratio of the Convertible Notes to
reflect a stock dividend or other event increasing the proportionate interest of
the holders of outstanding Common Stock in the assets or earnings and profits of
POI, then such increase in the proportionate interest of the holders of the
Common Stock generally will be treated as a distribution to such holders,
taxable as ordinary income (subject to a possible dividends-received deduction
in the case of corporate holders) to the extent of POI's current and/or
accumulated earnings and profits.
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DISTRIBUTIONS ON COMMON STOCK
A distribution on a share of Common Stock will be taxable as ordinary
dividend income to the extent it is paid from current or accumulated earnings
and profits of POI. To the extent a distribution is not paid out of POI's
earnings and profits, it is a tax-free return of the United States Holder's
basis in the share of Common Stock to the extent thereof, and any excess is
treated as gain from the sale or exchange of the share of Common Stock.
SALE, EXCHANGE OR REDEMPTION OF A CONVERTIBLE NOTE OR COMMON STOCK
Upon a taxable sale, exchange or redemption of a Convertible Note or upon a
taxable sale or exchange of Common Stock into which a Convertible Note is
converted, a United States Holder generally will recognize gain or loss equal to
the difference between (i) the amount of cash plus the fair market value of any
property received (other than any amount received attributable to accrued
interest on a Convertible Note that was not previously included in gross income,
which amount will be treated as interest income) and (ii) the holder's adjusted
tax basis in the Convertible Note or Common Stock. Provided on the date of sale,
exchange or redemption the Convertible Note or Common Stock is a capital asset
in the hands of the United States Holder and has been held for more than one
year, any gain or loss recognized by the holder generally will be long-term
capital gain or loss.
BACKUP WITHHOLDING
A United States Holder of Convertible Notes or Common Stock may be subject
to "backup withholding" at a rate of 31% with respect to certain "reportable
payments", including interest payments, dividend payments and, under certain
circumstances, principal payments on the Convertible Notes. These backup
withholding rules apply if the holder, among other things, (i) fails to furnish
a social security number or other taxpayer identification number ("TIN")
certified under penalties of perjury within a reasonable time after the request
therefor, (ii) furnishes an incorrect TIN, (iii) fails to report properly
interests or dividends, or (iv) under certain circumstances, fails to provide a
certified statement signed under penalties of perjury, that the TIN furnished is
the correct number and that such holder is not subject to backup withholding. A
United States Holder who does not provide the Company with its correct TIN also
may be subject to penalties imposed by the IRS. Any amount withheld from a
payment to a holder under the backup withholding rules is creditable against the
holder's federal income tax liability, provided the required information is
furnished to the IRS. Backup withholding will not apply, however, with respect
to payments made to certain holders, including corporations, tax exempt
organizations and certain foreign persons, provided their exemption from backup
withholding is properly established.
The Company will report to the holders of Notes and Common Stock and to the
IRS the amount of any "reportable payments" for each calendar year and the
amount of tax withheld, if any, with respect to such payments.
TAX CONSEQUENCES TO FOREIGN HOLDERS
Payments of principal and interest on the Convertible Notes to a Foreign
Holder will not be subject to United States Federal withholding tax provided
that (a) the holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of Monitoring entitled to
vote, (b) the holder is not a controlled foreign corporation that is related to
Monitoring through stock ownership and (c) either (1) the beneficial owner of
the Convertible Note, under penalties of perjury, provides the Company or its
agent with its name and address and certifies that it is not a United States
person or (2) a securities clearing organization, bank, or other financial
institution that holds customers' securities in the ordinary course of its trade
or business (a "financial institution") certifies to the Company or its agent,
under penalties of perjury, that such a statement has been received from the
beneficial owner by it or another financial institution and furnishes to the
Company or its agent a copy thereof.
Income received by a Foreign Holder in the form of interest on Convertible
Notes or dividends on Common Stock will be subject to a United States Federal
withholding tax at a 30% rate upon the actual
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payment of the dividends or interest except as described above and except where
an applicable tax treaty provides for the reduction or elimination of such
withholding tax. However, a Foreign Holder generally will be taxed in the same
manner as a United States corporation or resident with respect to such income if
it is effectively connected with the conduct of a trade or business in the
United States. Such effectively connected income received by a Foreign Holder
which is a corporation may in certain circumstances be subject to an additional
"branch profits tax" at a 30% rate or, if applicable, a lower treaty rate. To
determine the applicability of a tax treaty providing for a lower rate of
withholding, dividends paid to an address in a foreign country are presumed
under current Treasury Regulations to be paid to a resident of that country.
Treasury Regulations proposed in April 1996 would, if adopted in final form,
require Foreign Holders to file a "withholding certificate" with the Company's
withholding agent, or, under certain circumstances, a "qualified intermediary,"
to obtain the benefit of an applicable tax treaty providing for a lower rate of
withholding tax. Such certificate would have to contain the name and address of
the Foreign Holder and the basis for any reduced rate claimed. These withholding
certificates would be required for payments made after December 31, 1997.
Dividends paid to Foreign Holders that are subject to the withholding tax
described above will generally be exempt from United States backup withholding
tax and United States information reporting requirements, other than reporting
of dividend payments for purposes of the withholding tax noted above. Backup
withholding and information reporting generally will not apply to payments of
interest if the certification described above is received, provided the payor
does not have actual knowledge that the holder is a United States person.
Payment of the proceeds of the sale of Convertible Notes or Common Stock to or
through a United States office of a broker will be subject to information
reporting and possible backup withholding at a rate of 31% unless the owner
certifies its non-United States status under penalties of perjury or otherwise
establishes an exemption. Payment of the proceeds of the sale of Convertible
Notes or Common Stock to or through a foreign office of a broker generally will
not be subject to backup withholding tax. However, in the case of the payment of
proceeds from the disposition of Convertible Notes or Common Stock through a
foreign office of a broker that is (i) a United States person, (ii) a
"controlled foreign corporation" for United States Federal income tax purposes,
or (iii) a foreign person 50% or more of whose gross income from all sources for
a specified period is derived from activities that are effectively connected
with the conduct of a United States trade or business, information reporting is
required on the payment unless the broker has documentary evidence in its files
that the owner is a non-United States person and the broker has no actual
knowledge to the contrary. Any amounts withheld under the backup withholding
rules from a payment to a Foreign Holder will be allowed as a refund or a credit
against such Foreign Holder's United States Federal income tax, provided that
the required information is furnished to the IRS.
A Foreign Holder generally will not be subject to United States Federal
income or withholding tax on gain realized on the sale or exchange of
Convertible Notes or Common Stock unless (i) the holder is an individual who was
present in the United States for 183 days or more during the taxable year and
(a) such holder has a "tax home" in the United States or (b) the gain is
attributable to an office or other fixed place of business maintained in the
United States by such holder or (ii) the gain is effectively connected with the
conduct of a trade or business of the holder in the United States.
The foregoing discussion for Foreign Holders assumes that POI is not
considered a "United States real property holding corporation" ("USRPHC") within
the meaning of Section 897(c) of the Code. In general, if POI is determined to
be a USRPHC then certain Foreign Holders may be subject to (i) United States
federal income tax on the sale, exchange, retirement or other disposition of a
Convertible Note (possibly including the conversion of a Convertible Note into
Common Stock) and to withholding at a rate of 10% on such disposition and (ii)
United States federal income tax (but not withholding tax) on the sale,
exchange, or other disposition of the Common Stock received upon conversion of a
Convertible Note. However, a Foreign Holder will not be subject to these special
rates even if POI is determined to be a USRPHC provided that such Holder did not
during a specified five-year period actually or constructively own more than 5%
of the Common Stock of POI (including any Common Stock that may be received in
exchange for a Convertible Note). POI does not believe it is a USRPHC.
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UNDERWRITERS
Under the terms of and subject to the conditions set forth in the
Underwriting Agreement between Monitoring and POI and Morgan Stanley & Co.
Incorporated, Bear, Stearns & Co. Inc. and Montgomery Securities (the
"Underwriters") dated September 16, 1996 (the "Underwriting Agreement"), each of
the Underwriters named below has severally agreed to purchase, and Monitoring
has agreed to sell to each of the Underwriters severally, the respective
principal amounts of the Convertible Notes set forth after their names below at
a purchase price of 97.0% of the principal amount thereof, plus accrued
interest, if any, from September 20, 1996 to the date of payment and delivery:
<TABLE>
<CAPTION>
UNDERWRITING PRINCIPAL AMOUNT
------------------------------------------------------------- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated............................ $ 63,000,000
Bear, Stearns & Co. Inc...................................... 13,500,000
Montgomery Securities........................................ 13,500,000
------------
Total.............................................. $ 90,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the Convertible Notes is subject
to approval of certain legal matters by their counsel and to certain other
conditions. Each Underwriter is obligated to take and pay for its allocation of
the Convertible Notes offered hereby (other than those covered by the
over-allotment described below) if any are taken.
Monitoring has granted to the Underwriters an option, exercisable within 30
days of the date of this Prospectus Supplement, to purchase up to an additional
$13,500,000 principal amount of Convertible Notes solely for the purpose of
covering over-allotments, if any. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriter's name in the preceding table bears to the total
number of shares of Common Stock offered hereby.
The Underwriters initially propose to offer the Convertible Notes to the
public at the public offering price set forth on the cover page hereof, plus
accrued interest, if any, from September 20, 1996, and to certain dealers at
such price less a concession of 1.8% of the principal amount of the Convertible
Notes. After the initial offering of the Convertible Notes, the public offering
price and other selling terms may be changed.
Monitoring, POI and the directors, executive officers and certain
stockholders of POI have agreed with Morgan Stanley & Co. Incorporated that, for
a period of 90 days after the date of this Prospectus Supplement, they will not
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, make any short sale, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or enter into any swap or similar
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of the Common Stock or such other securities, without the prior
written consent of Morgan Stanley & Co. Incorporated, subject to certain limited
exceptions, including the exception set forth in the following sentence. POI may
issue Common Stock having an aggregate market value at the time of issuance not
exceeding $11,250,000 (the "Acquisition Stock") as compensation in connection
with acquisitions by Monitoring of portfolios of subscriber accounts, subject to
the condition that POI obtain and deliver to Morgan Stanley written agreements
from each of the proposed recipients of such Acquisition Stock that such
recipients collectively will not (i) for a period of 90 days after the date of
this Prospectus Supplement make any sale or transfer in the nature provided in
the preceding sentence of Acquisition Stock having an aggregate market value of
$10,000,000 (determined at the time of the issuance of such Acquisition Stock),
and (ii) for a period of 30 days after the date of the Prospectus Supplement
make any sale or transfer in the nature provided in the preceding sentence of
any Acquisition Stock.
The Underwriting Agreement provides that Monitoring and POI will indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Convertible Notes have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, under the symbol "ALRM 03."
The Underwriters have advised Monitoring that
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they presently intend to make a market in the Convertible Notes as permitted by
applicable laws and regulations. The Underwriters are not obligated, however, to
make a market in the Convertible Notes and any such market making may be
discontinued at any time at the sole discretion of the Underwriters.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Convertible Notes.
The Underwriters have engaged in transactions with and performed various
investment banking and other services for the Company in the past, and may do so
from time to time in the future.
LEGAL OPINIONS
The validity of the Convertible Notes being offered hereby and the Common
Stock issuable upon conversion of the Convertible Notes will be passed upon for
the Company by Mitchell, Silberberg & Knupp LLP, Los Angeles, California. The
validity of the Convertible Notes being offered hereby will be passed upon for
the Underwriters by Shearman & Sterling, San Francisco, California.
S-61
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<PAGE> 65
PROSPECTUS
$150,000,000
PROTECTION ONE ALARM MONITORING, INC.
DEBT SECURITIES
PROTECTION ONE, INC.
GUARANTOR
Protection One Alarm Monitoring, Inc., a Delaware corporation
("Monitoring"), may from time to time offer its unsecured debt securities ("Debt
Securities"), consisting of debentures, notes or other unsecured evidences of
indebtedness, including indebtedness convertible into shares of Common Stock,
par value $.01 per share ("Common Stock"), of Protection One, Inc., a Delaware
corporation ("POI") and Monitoring's direct parent, and indebtedness guaranteed
by POI, in each case separately or as units and in any combination. The Debt
Securities will have an aggregate initial offering price not to exceed
$150,000,000 and will be offered on terms determined at the time of offering.
Monitoring may offer and issue from time to time Debt Securities in one or
more series. Debt Securities may be issuable in registered form without coupons
or in bearer form with or without coupons attached. Monitoring will offer Debt
Securities to the public on terms determined by market conditions. Debt
Securities may be sold for U.S. dollars, foreign denominated currency or
currency units; principal of and any interest on Debt Securities may likewise be
payable in U.S. dollars, foreign denominated currency or currency units -- in
each case, as Monitoring specifically designates.
Specific terms of the Debt Securities and Common Stock (collectively, the
"Securities") in respect of which this Prospectus is being delivered will be set
forth in an accompanying Prospectus Supplement ("Prospectus Supplement"),
together with the terms of the offering of the offered Securities and the
initial price and net proceeds to POI and its consolidated subsidiaries
(collectively the "Company") from the sale thereof. The Prospectus Supplement
will set forth with regard to the particular offered Securities, without
limitation, the following: (i) in the case of Debt Securities, the specific
designation, aggregate principal amount, ranking as senior or subordinated debt,
authorized denomination, maturity, rate or rates of interest (or method of
calculation thereof) and dates for payment thereof, any exchangeability,
conversion, redemption, prepayment or sinking fund provisions, and any listing
on a national securities exchange or designation for trading on any automated
quotation system; and (ii) in the case of Common Stock, the number of shares of
Common Stock and the terms of the offering and sale thereof and any listing on a
national securities exchange or designation for trading on any automated
quotation system. The accompanying Prospectus Supplement will also contain
information, where applicable, about certain federal income tax considerations
relating to the Securities covered by the Prospectus Supplement. In addition,
the accompanying Prospectus Supplement will set forth the name of and
compensation to each dealer, underwriter or agent (if any) involved in the sale
of the Securities being offered and the managing underwriters with respect to
any Securities sold to or through underwriters.
SEE "RISK FACTORS" ON PAGE 4 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Prior to issuance there will have been no market for the Debt Securities,
and there can be no assurance that a secondary market for the Debt Securities
will develop. This Prospectus may not be used to consummate sales of Securities
unless accompanied by a Prospectus Supplement. Securities may be offered through
dealers, underwriters or agents designated from time to time, as set forth in
the accompanying Prospectus Supplement. Net proceeds to the Company will be the
purchase price in the case of sales to a dealer, the public offering price less
discount in the case of sales to an underwriter or the purchase price less
commission in the case of sales through an agent -- in each case, less other
expenses attributable to issuance and distribution. See "Plan of Distribution"
for possible indemnification arrangements for dealers, underwriters and agents.
------------------------
THE DATE OF THIS PROSPECTUS IS AUGUST 29, 1996.
<PAGE> 66
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER, DEALER OR AGENT. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (together with all amendments
and exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Securities. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
portions of which have been omitted in accordance with the Rules and Regulations
of the Commission. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete, and in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company, reference is made to the Registration Statement.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the offices of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, as well as at the
following regional offices of the Commission: Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such reports, proxy statements and
other information concerning the Company may be inspected at the office of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006. In addition, the Commission maintains a World Wide Web
site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed with the Commission and are
incorporated herein by reference:
(a) The Annual Report on Form 10-K of POI, Monitoring and Protection
One Alarm Services, Inc. ("Services") for the fiscal year ended September
30, 1995, as amended;
(b) The Quarterly Reports on Form 10-Q of POI, Monitoring and Services
for the quarters ended December 31, 1995, March 31, 1996 and June 30, 1996;
(c) The Current Reports on Form 8-K of POI and Monitoring reporting
events dated December 18, 1995, May 23, 1996 and June 7, 1996, as amended;
and
(d) The description of the Common Stock contained in POI's
Registration Statement on Form 8-A dated September 8, 1994.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the initial filing with the Commission of the
Registration Statement of which this Prospectus is a part and prior to the
termination of the offering of the Securities shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of filing
such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus. Subject to the
foregoing, all information appearing in this Prospectus is qualified in its
entirety by the information appearing in the documents incorporated by
reference.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the request of such person, a copy of any or all
documents incorporated herein by reference, other than exhibits to such
documents (unless such exhibits are specifically incorporated by reference into
such documents). Requests for such documents should be directed to Montgomery W.
Cornell, Director of Investor Relations, Protection One, Inc., 3900 S.W. Murray
Blvd., Beaverton, Oregon 97005.
---------------------
"Protection One" is a registered trademark of the Company. All rights are
fully reserved. This Prospectus also contains other trademarks of the Company
and refers to trademarks of other companies.
---------------------
IN CONNECTION WITH THE OFFERING OF CERTAIN SECURITIES, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES
OF SUCH SECURITIES, OTHER SECURITIES OF THE COMPANY OR ANY SECURITIES THE PRICES
OF WHICH MAY BE USED TO DETERMINE PAYMENTS OF SUCH SECURITIES AT LEVELS ABOVE
THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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<PAGE> 68
THE COMPANY
The Company provides security alarm monitoring services for residential and
small business subscribers. 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 central monitoring station located in Portland, Oregon. The Company
also sells enhanced security services, patrol and alarm response services and
alarm systems and provides local field repair services through 11 branch
offices. Enhanced security services provided by the Company include two-way
voice communication, supervised monitoring services, pager service, wireless
backup service and extended service protection.
Protection One, Inc. ("POI") and Protection One Alarm Monitoring, Inc.
("Monitoring") were incorporated under the laws of the State of Delaware in
September 1991. The Company's executive offices are located at 6011 Bristol
Parkway, Culver City, California 90230 and its telephone number is (310)
338-6930. Unless the context otherwise requires, the term "Company" means POI
and its consolidated subsidiaries.
RISK FACTORS
Prior to making an investment decision with respect to the Securities
offered hereby, prospective investors should carefully consider the specific
factors set forth under the caption "Risk Factors" in the applicable Prospectus
Supplement pertaining thereto, together with all of the other information
appearing herein or therein, in light of their particular investment objectives
and financial circumstances.
USE OF PROCEEDS
Unless otherwise set forth in the accompanying Prospectus Supplement, the
net proceeds from the sale of the Debt Securities will be used to repay
indebtedness outstanding under the Company's revolving credit facility (the
"Revolving Credit Facility"). All borrowings under the Revolving Credit Facility
are due in full on January 3, 2000. The interest rate on borrowings under the
Revolving Credit Facility is, at the option of Monitoring, either (a) 1.0% plus
the higher of (i) the Bank Prime Loan Rate announced by the Board of Governors
of the Federal Reserve System or (ii) the Federal Funds Effective Rate, or (b)
LIBOR plus 2.5%. Monitoring used substantially all of the currently outstanding
borrowings under the Revolving Credit Facility to purchase subscriber accounts,
and intends to use future borrowings under the Revolving Credit Facility to add
subscriber accounts, to fund potential joint ventures, co-marketing arrangements
and other strategic alliances and for working capital and general corporate
purposes.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's earnings were insufficient to cover fixed charges by
approximately $4.0 million, $2.5 million, $9.3 million, $9.4 million, $3.7
million and $7.2 million for the years ended September 30, 1992, 1993, 1994 and
1995, and the six months ended March 31, 1995 and 1996, respectively. For the
purpose of calculating the ratio of earnings to fixed charges, earnings consist
of income before income taxes plus fixed charges. Fixed charges consist of
interest expense, amortization of debt issuance costs and original issue
discount, and the component of rental expense believed by management to be
representative of the interest factor thereon.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will constitute either senior or subordinated debt of
Monitoring and will be issued, in the case of Debt Securities that will be
senior debt securities ("Senior Debt Securities"), under an Indenture (as it may
be supplemented from time to time, the "Senior Debt Indenture") to be entered
into between Monitoring and the party to be named as trustee in a Prospectus
Supplement, as trustee under the Senior Indenture (the "Senior Trustee"). In the
case of Debt Securities that will be subordinated debt securities ("Subordinated
Debt Securities"), the Debt Securities will be issued under an Indenture (as it
may be supplemented from time to time, the "Subordinated Debt Indenture")
between Monitoring and State Street
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<PAGE> 69
Bank and Trust Company, as trustee (the "Subordinated Trustee"). The Senior Debt
Indenture and Subordinated Debt Indenture are sometimes hereinafter referred to
individually as an "Indenture" and collectively as the "Indentures." The Debt
Securities offered by this Prospectus and the accompanying Prospectus Supplement
are referred to herein as the "Offered Debt Securities." The Senior Trustee and
the Subordinated Trustee, respectively, are hereinafter referred to individually
as a "Trustee" and collectively as the "Trustees." The forms of the Senior Debt
Indenture and the Subordinated Debt Indenture are filed as exhibits to the
registration statement of which this Prospectus is a part. See "Available
Information."
The particular terms of each series of Debt Securities, as well as any
modifications or additions to the general terms of the Indenture which may
applicable in the case of such Debt Securities, will be described in the
Prospectus Supplement relating to such Debt Securities. Accordingly, for a
description of the terms of a particular issue of Debt Securities reference must
be made to the Prospectus Supplement relating thereto and to the following
description.
The following summaries of certain provisions of the Indentures and the
Debt Securities do not purport to be complete and such summaries are subject to
the detailed provisions of the applicable Indenture to which reference is hereby
made for a full description of such provisions, including the definition of
certain terms used herein, and for other information regarding the Debt
Securities. Numerical references in parentheses below are to sections in the
applicable Indenture. Wherever particular sections or defined terms of the
applicable Indenture are referred to, such sections or defined terms are
incorporated herein by reference as part of the statement made, and the
statement is qualified in its entirety by such reference. The Indentures are
substantially identical, except for the provisions relating to subordination and
Monitoring's negative pledge. See "Subordinated Debt" and "Certain Covenants."
GENERAL
Neither of the Indentures limits the amount of additional indebtedness that
Monitoring or any of its subsidiaries may incur. The Debt Securities will be
unsecured senior or subordinated obligations of Monitoring. Certain of the
assets of Monitoring are owned by its subsidiaries. Therefore, Monitoring's
rights and the rights of its creditors, including holders of Debt Securities, to
participate in the assets of any subsidiary upon such subsidiary's liquidation
or recapitalization will be subject to the prior claims of such subsidiary's
creditors, except to the extent that Monitoring may itself be a creditor with
recognized claims against the subsidiary.
The Indentures provide that Debt Securities may be issued from time to time
in one or more series and may be denominated and payable in foreign currencies
or units based on or relating to foreign currencies, including European Currency
Units. Special United States federal income tax considerations applicable to any
Debt Securities so denominated are described in the relevant Prospectus
Supplement.
Reference is made to the Prospectus Supplement for the following terms of
and information relating to the Offered Debt Securities (to the extent such
terms are applicable to such Debt Securities): (i) classification as senior or
subordinated Debt Securities, the specific designation, aggregate principal
amount, purchase price and denomination; (ii) currency or units based on or
relating to currencies in which such Debt Securities are denominated and/or in
which principal (and premium, if any) and/or interest will or may be payable;
(iii) any date of maturity; (iv) interest rate or rates (or the method by which
such rate or rates will be determined), if any; (v) the dates on which any such
interest will be payable; (vi) the place or places where the principal of,
premium, if any, and interest, if any, on the Offered Debt Securities will be
payable; (vii) any repayment, redemption, prepayment or sinking fund provisions;
(viii) whether the Offered Debt Securities will be issuable in registered form
or bearer form ("Bearer Securities") or both and, if Bearer Securities are
issuable, any restrictions applicable to the exchange of one form for another
and to the offer, sale and delivery of Bearer Securities; (ix) the terms, if
any, on which such Debt Securities may be converted into or exchanged for stock
or other securities of POI or other entities, any specific terms relating to the
adjustment thereof and the period during which such Debt Securities may be so
converted or exchanged; (x) any applicable United States federal income tax
consequences, including whether and under what circumstances Monitoring will pay
additional amounts on Offered Debt Securities held by a person who is not
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<PAGE> 70
a United States person (as defined herein) in respect of any tax, assessment or
governmental charge withheld or deducted and, if so, whether Monitoring will
have the option to redeem such Debt Securities rather than pay such additional
amounts; and (xi) any other specific terms of the Offered Debt Securities,
including any additional events of default or covenants provided for with
respect to such Debt Securities, and any terms which may be required by or
advisable under applicable laws or regulations.
Debt Securities may be presented for exchange and registered Debt
Securities may be presented for transfer in the manner, at the places and
subject to the restrictions set forth in the Debt Securities and the Prospectus
Supplement. Such services will be provided without charge, other than any tax or
other governmental charge payable in connection therewith, but subject to the
limitations provided in the applicable Indenture. Debt Securities in bearer form
and the coupons, if any, appertaining thereto will be transferable by delivery.
Debt Securities will bear interest at a fixed rate or a floating rate. Debt
Securities bearing no interest or interest at a rate that at the time of
issuance is below the prevailing market rate will be sold at a discount below
their stated principal amount. Special United States federal income tax
considerations applicable to any such discounted Debt Securities or to certain
Debt Securities issued at par which are treated as having been issued at a
discount for United States federal income tax purposes will be described in the
relevant Prospectus Supplement.
Debt Securities may be issued, from time to time, with the principal amount
payable on any principal payment date, or the amount of interest payable on any
interest payment date, to be determined by reference to one or more currency
exchange rates, securities or baskets of securities, commodity prices or
indices. Holders of such Debt Securities may receive a payment of principal on
any principal payment date, or a payment of interest on any interest payment
date, that is greater than or less than the amount of principal or interest
otherwise payable on such dates, depending upon the value on such dates of the
applicable currency, security or basket of securities, commodity or index.
Information as to the methods for determining the amount of principal or
interest payable on any date, the currencies, securities or baskets of
securities, commodities or indices to which the amount payable on such date is
linked and certain additional tax considerations will be set forth in the
applicable Prospectus Supplement.
GLOBAL SECURITIES
The registered Debt Securities of a series may be issued in the form of one
or more fully registered global Securities (a "Registered Global Security") that
will be deposited with a depositary (a "Debt Depositary") or with a nominee for
a Debt Depositary identified in the Prospectus Supplement relating to such
series and registered in the name of such Debt Depositary or nominee thereof. In
such case, one or more Registered Global Securities will be issued in a
denomination or aggregate denominations equal to the portion of the aggregate
principal amount of outstanding registered Debt Securities of the series to be
represented by such Registered Global Securities. Unless and until it is
exchanged in whole for Debt Securities in definitive registered form, a
Registered Global Security may not be transferred except as a whole by the Debt
Depositary for such Registered Global Security to a nominee of such Debt
Depositary or by a nominee of such Debt Depositary to such Debt Depositary or
another nominee of such Debt Depositary or by such Debt Depositary or any such
nominee to a successor of such Debt Depositary or a nominee of such successor.
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Registered Global
Security will be described in the Prospectus Supplement relating to such series.
Monitoring anticipates that the following provisions will apply to all
depositary arrangements.
Ownership of beneficial interests in a Registered Global Security will be
limited to persons that have accounts with the Debt Depositary for such
Registered Global Security ("participants") or persons that may hold interests
through participants. Upon the issuance of a Registered Global Security, the
Debt Depositary for such Registered Global Security will credit, on its
book-entry registration and transfer system, the participants' accounts with the
respective principal amounts of the Debt Securities represented by such
Registered Global Security beneficially owned by such participants. The accounts
to be credited will be designated by any dealers, underwriters or agents
participating in the distribution of such Debt Securities.
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<PAGE> 71
Ownership of beneficial interests in such Registered Global Security will be
shown on, and the transfer of such ownership interests will be effected only
through, records maintained by the Debt Depositary for such Registered Global
Security (with respect to interests of participants) and on the records of
participants (with respect to interests of persons holding through
participants). The laws of some states may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to own, transfer or pledge
beneficial interests in Registered Global Securities.
So long as the Debt Depositary for a Registered Global Security, or its
nominee, is the registered owner of such Registered Global Security, such Debt
Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Debt Securities represented by such Registered Global
Security for all purposes under the applicable Indenture. Except as set forth
below, owners of beneficial interests in a Registered Global Security will not
be entitled to have the Debt Securities represented by such Registered Global
Security registered in their names, will not receive or be entitled to receive
physical delivery of such Debt Securities in definitive form and will not be
considered the owners or holders thereof under the applicable Indenture.
Accordingly, each person owning a beneficial interest in a Registered Global
Security must rely on the procedures of the Debt Depositary for such Registered
Global Security and, if such person is not a participant, on the procedures of
the participant through which such person owns its interest, to exercise any
rights of a holder under the applicable Indenture. Monitoring understands that
under existing industry practices, if it requests any action of holders or if an
owner of a beneficial interest in a Registered Global Security desires to give
or take any action which a holder is entitled to give or take under the
applicable Indenture, the Debt Depositary for such Registered Global Security
would authorize the participants holding the relevant beneficial interests to
give or take such action, and such participants would authorize beneficial
owners owning through such participants to give or take such action or would
otherwise act upon the instructions of beneficial owners holding through them.
Principal, premium, if any, and interest payments on Debt Securities
represented by a Registered Global Security registered in the name of a Debt
Depositary or its nominee will be made to such Debt Depositary or its nominee,
as the case may be, as the registered owner of such Registered Global Security.
None of Monitoring, the Trustees or any other agent of Monitoring or agent of
the Trustees will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in such Registered Global Security or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Monitoring expects that the Debt Depositary for any Debt Securities
represented by a Registered Global Security, upon receipt of any payment of
principal, premium or interest in respect of such Registered Global Security,
will immediately credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in such Registered Global
Security as shown on the records of such Debt Depositary. Monitoring also
expects that payments by participants to owners of beneficial interests in such
Registered Global Security held through such participants will be governed by
standing customer instructions and customary practices, as is now the case with
the securities held for the accounts of customers in bearer form or registered
in "street name," and will be the responsibility of such participants.
If the Debt Depositary for any Debt Securities represented by a Registered
Global Security is at any time unwilling or unable to continue as Debt
Depositary or ceases to be a clearing agency registered under the Exchange Act,
and a successor Debt Depositary registered as a clearing agency under the
Exchange Act is not appointed by Monitoring within 90 days, Monitoring will
issue such Debt Securities in definitive form in exchange for such Registered
Global Security. In addition, Monitoring may at any time and in its sole
discretion determine not to have any of the Debt Securities of a series
represented by one or more Registered Global Securities and, in such event, will
issue Debt Securities of such series in definitive form in exchange for all of
the Registered Global Security or Securities representing such Debt Securities.
Any Debt Securities issued in definitive form in exchange for a Registered
Global Security will be registered in such name or names as the Debt Depositary
shall instruct the relevant Trustee. It is expected that such instructions will
be based upon directions received by the Debt Depositary from participants with
respect to ownership of beneficial interests in such Registered Global Security.
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The Debt Securities of a series may also be issued in the form of one or
more bearer global Securities (a "Bearer Global Security") that will be
deposited with a common depositary for the Euroclear System currently operated
by Morgan Guaranty Trust Company of New York, Brussels Office, or its successor
as operator of the Euroclear System ("Euroclear") and Cedel Bank, societe
anonyme or its successor ("Cedel"), or with a nominee for such depositary
identified in the Prospectus Supplement relating to such series. The specific
terms and procedures, including the specific terms of the depositary
arrangement, with respect to any portion of a series of Debt Securities to be
represented by a Bearer Global Security will be described in the Prospectus
Supplement relating to such series.
SENIOR DEBT
The Debt Securities and, in the case of Bearer Securities, any coupons
appertaining thereto (the "Coupons"), that will be Senior Debt Securities will
be issued under the Senior Debt Indenture and will rank pari passu with all
other unsecured and unsubordinated debt of Monitoring.
SUBORDINATED DEBT
Each Series of Debt Securities and Coupons that will be Subordinated Debt
Securities will be issued under the Subordinated Debt Indenture and will be
subordinate and junior in right of payment, to the extent and in the manner
provided in an indenture supplemental to the Subordinated Debt Indenture and as
described in the Prospectus Supplement relating to such series, to all "Senior
Indebtedness" (as defined in such supplemental indenture and as described in
such Prospectus Supplement) of Monitoring.
If this Prospectus is being delivered in connection with a series of
Subordinated Debt Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Indebtedness outstanding as of the end of the most recent
fiscal quarter.
GUARANTEES
Monitoring's obligations under the Debt Securities will be fully and
unconditionally guaranteed by POI and, under certain circumstances, by certain
Subsidiaries (as defined in the Indentures) of POI that are Restricted
Subsidiaries (as defined herein) (so long as they remain Subsidiaries of POI;
each, a "Subsidiary Guarantor", and together with POI, the "Guarantors"). Each
guarantee ("Note Guarantee") of Monitoring's obligations under Senior Debt
Securities will constitute part of the senior debt of each of the Guarantors and
will rank pari passu with all other unsecured and unsubordinated debt of each
such Guarantor. Each Note Guarantee with respect to Subordinated Debt Securities
will be subordinated to the "Guarantor Senior Indebtedness" (as defined in the
supplemental indenture to the Subordinated Debt Indenture and described in the
Prospectus Supplement applicable to the series of Subordinated Debt Securities
to which such Note Guarantee relates) of the issuer of such Note Guarantee on
the same basis as provided above with respect to the subordination of
Subordinated Debt Securities to Senior Indebtedness of Monitoring. (Subordinated
Debt Indenture, 14.01) POI has no material assets other than all the outstanding
capital stock of Monitoring, which has been pledged to secure POI's guarantee of
the obligations of Monitoring under the Revolving Credit Facility. As of June
30, 1996, POI did not have any Indebtedness outstanding.
The Indentures provide that any new Subsidiary of Monitoring with assets in
excess of $2.0 million that becomes a Restricted Subsidiary after the Indenture
is executed shall become a Guarantor (i) not later than 30 days after becoming a
Restricted Subsidiary if such Subsidiary is a Significant Subsidiary and (ii)
not later than 180 days after such Subsidiary becomes a Restricted Subsidiary if
such Restricted Subsidiary is not a Significant Subsidiary. (Senior Debt
Indenture, Section 3.08; Subordinated Debt Indenture, Section 3.07)
"Significant Subsidiary" means, at any date of determination, any
Subsidiary of POI or Monitoring that, together with its Subsidiaries, (i) for
the most recent fiscal year of POI, accounted (or, on a pro forma basis, would
have accounted) for more than 10% of the consolidated revenues of POI and its
Restricted Subsidiaries or (ii) as of the end of such fiscal year, was the owner
(or, on a pro forma basis, would have been the owner) of more than 10% of the
consolidated assets of POI and its Restricted Subsidiaries, all as set forth on
the most recently available consolidated financial statements of POI for such
fiscal year. (Indentures, Section 1.01)
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The Indentures define "Restricted Subsidiary" to mean Monitoring and any
Subsidiary of Monitoring that is not designated an "Unrestricted Subsidiary" by
POI. "Unrestricted Subsidiary" is defined by the Indentures to mean (i) any
Subsidiary of POI (other than Monitoring) that is not also a Subsidiary of
Monitoring, (ii) any Subsidiary of Monitoring that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors of POI
in the manner provided below and (iii) any Subsidiary of an Unrestricted
Subsidiary. The Board of Directors of POI may designate any Subsidiary of
Monitoring (including any newly acquired or newly formed Subsidiary of
Monitoring) to be an Unrestricted Subsidiary unless such Subsidiary owns any
capital stock of, or owns or holds any pledge, lien or other encumbrance on any
property or assets of, POI or any Restricted Subsidiary; provided that either
(A) the Subsidiary to be so designated has total assets of $1,000 or less or (B)
if such Subsidiary has assets greater than $1,000, such designation would be
permitted under the Indenture dated as of May 17, 1995 (the "Discount Notes
Indenture") between Monitoring, POI, as Guarantor, and State Street Bank and
Trust Company, as Trustee, as then in effect. If at the time in question the
notes issued pursuant to the Discount Notes Indenture (the "Discount Notes")
have been paid in full or the Discount Notes Indenture shall have been otherwise
discharged, no Subsidiary with total assets of more than $1,000 may be
designated an Unrestricted Subsidiary unless such Subsidiary could have been
designated an Unrestricted Subsidiary under the Discount Notes Indenture as in
effect at the time the Discount Notes were repaid in full or the Discount Notes
Indenture was otherwise discharged. The Board of Directors of POI may designate
any Unrestricted Subsidiary (other than a Subsidiary of POI that is not a
Subsidiary of Monitoring) to be a Restricted Subsidiary; provided that
immediately after giving effect to such designation no Default or Event of
Default shall have occurred and be continuing. (Indentures, Section 1.01)
The Indentures also provide that if all or substantially all of the assets
of any Subsidiary Guarantor or all of the capital stock of any Subsidiary
Guarantor is sold (including by issuance or otherwise) by Monitoring or any of
its Subsidiaries in a transaction constituting an Asset Sale (as defined in the
Indentures) that does not otherwise violate the particular Indenture, then such
Subsidiary Guarantor (in the event of a sale or other disposition of all of the
capital stock of such Subsidiary Guarantor) or the corporation acquiring such
assets (in the event of a sale or other disposition of all or substantially all
of the assets of such Subsidiary Guarantor) shall be released and discharged of
its obligations under the Note Guarantee. (Senior Debt Indenture, Section 12.03;
Subordinated Debt Indenture, Section 13.03)
POI is a holding company with no operations of its own and no significant
assets other than its ownership of the capital stock of Monitoring. POI will,
therefore, be dependent upon the receipt of dividends or other distributions
from Monitoring to fund any obligations that it incurs, including obligations
under the Note Guarantee. The Indentures and the Revolving Credit Facility do
not, however, permit distributions from Monitoring to POI, other than for
certain specified purposes. Accordingly, if Monitoring should at any time be
unable to pay interest on or principal of the Debt Securities, it is unlikely
that it will be permitted to distribute to POI the funds necessary to enable POI
to meet its obligations under the Note Guarantee.
CERTAIN COVENANTS
Negative Pledge. The Senior Debt Indenture provides that POI will not, and
will not permit Monitoring or any Subsidiary to, create, assume, incur or
guarantee any indebtedness for borrowed money secured by a pledge, lien or other
encumbrance (except for certain liens specifically permitted by the Senior Debt
Indenture) on the shares of Capital Stock (as defined in the Senior Debt
Indenture) or Indebtedness of any Subsidiary or on any of its assets or
properties, without making effective provision whereby the Debt Securities
issued under such Indenture will be secured equally and ratably with such
secured indebtedness. (Senior Debt Indenture, Section 3.07)
Merger, Consolidation, Sale, Lease or Conveyance. Each Indenture provides
that neither Monitoring nor any Guarantor will merge or consolidate with any
other corporation or sell, lease or convey all or substantially all its assets
to any person, unless Monitoring or such Guarantor, as the case may be, shall be
the continuing corporation, or the successor corporation or person that acquires
all or substantially all the assets of Monitoring or such Guarantor shall be a
corporation organized under the laws of the United States or a state thereof or
the District of Columbia and shall expressly assume all obligations of
Monitoring or such
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Guarantor, as the case may be, under such Indenture and the Debt Securities and
Note Guarantee issued thereunder, and immediately after such merger,
consolidation, sale, lease or conveyance, Monitoring or such Guarantor, as the
case may be, such person or such successor corporation shall not be in default
in the performance of the covenants and conditions of such Indenture to be
performed or observed by Monitoring or such Guarantor, as the case may be.
(Indentures, Section 9.01) This covenant would not apply to a recapitalization
transaction, a change of control of Monitoring or POI or a highly leveraged
transaction unless such transactions or change of control were structured to
include a merger or consolidation or sale, lease or conveyance of all or
substantially all of the assets of Monitoring or POI, as the case may be. In
addition, Monitoring or any other Restricted Subsidiary may enter into any of
the transactions described in this paragraph with a wholly owned Restricted
Subsidiary that is a Guarantor and that (in the case of any wholly owned
Restricted Subsidiary other than Monitoring) has a positive net worth; provided
that in connection with any such merger or consolidation, no consideration
(other than common stock of the surviving entity, Monitoring or the Guarantor)
shall be issued or distributed to the stockholders of Monitoring or the
Guarantor.
Except as may be described in a Prospectus Supplement applicable to a
particular series of Debt Securities, there are no covenants or other provisions
in the Indentures providing for a put or increased interest or otherwise that
would afford holders of Debt Securities additional protection in the event of a
recapitalization transaction, a change of control of Monitoring or a highly
leveraged transaction.
EVENTS OF DEFAULT
An Event of Default is defined under each Indenture with respect to Debt
Securities of any series issued under such Indenture as being: (a) default in
payment of any principal of the Debt Securities of such series, either at
maturity (or upon any redemption), by declaration or otherwise; (b) default for
30 days in payment of any interest on any Debt Securities of such series; (c)
default for 60 days after written notice in the observance or performance of any
other covenant or agreement in the Debt Securities of such series or such
Indenture other than a covenant included in such Indenture solely for the
benefit of a series of Debt Securities other than such series; (d) certain
events of bankruptcy, insolvency or reorganization; (e) failure by Monitoring or
any Guarantor to make any payment at maturity, including any applicable grace
period, in respect of Indebtedness (as defined below) in an outstanding
principal amount in excess of $5.0 million in the aggregate for all such issues
of all such Persons and continuance of such failure for a period of 30 days
after written notice thereof to Monitoring by the Trustee, or to Monitoring and
the Trustee by the holders of not less than 25% in principal amount of such
outstanding Debt Securities (treated as one class) issued under such Indenture;
or (f) default with respect to any Indebtedness of Monitoring, any Guarantor or
any Subsidiary, which default results in the acceleration of Indebtedness in an
amount in excess of $5.0 million in the aggregate for all such issues of all
such Persons without such Indebtedness having been discharged or such
acceleration having been cured, waived, rescinded or annulled for a period of 30
days after written notice thereof to Monitoring by the Trustee, or to Monitoring
and the Trustee by the holders of not less than 25% in principal amount of such
outstanding Debt Securities (treated as one class) issued under such Indenture;
provided, however, that if any such failure, default or acceleration referred to
in clause (e) or clause (f) above shall cease or be cured, waived, rescinded or
annulled, then the Event of Default by reason thereof shall be deemed likewise
to have been thereupon cured. Unless otherwise defined in a supplemental
indenture with respect to a particular series of Securities and Coupons, if any,
and described in the applicable Prospectus Supplement, the term "Indebtedness"
means obligations (other than nonrecourse obligations or the Debt Securities of
such series issued under the applicable Indenture) of, or guaranteed or assumed
by, Monitoring, any Guarantor or any Subsidiary for borrowed money or evidenced
by bonds, debentures, notes or other similar instruments. (Indentures, Sections
1.01 and 5.01)
Each Indenture provides that (a) if an Event of Default due to the default
in payment of principal of, premium, if any, or interest on, any series of Debt
Securities issued under such Indenture or due to the default in the performance
or breach of any other covenant or warranty of Monitoring or any Guarantor
applicable to the Debt Securities of such series but not applicable to all
outstanding Debt Securities issued under such Indenture shall have occurred and
be continuing, either the Trustee or the holders of not less than 25% in
principal amount of such Debt Securities of each such affected series (treated
as one class) issued under such
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Indenture and then outstanding may then declare the principal of all Debt
Securities of each such affected series and interest accrued thereon to be due
and payable immediately; and (b) if an Event of Default due to a default in the
performance of any other of the covenants or agreements in such Indenture
applicable to all outstanding Debt Securities issued under such Indenture and
then outstanding (other than those with respect to certain events of bankruptcy,
insolvency or reorganization of Monitoring or any Guarantor) shall have occurred
and be continuing, either the Trustee or the holders of not less than 25% in
principal amount of all Debt Securities issued under such Indenture and then
outstanding (treated as one class) may declare the principal of all such Debt
Securities and interest accrued thereon to be due and payable immediately, but
upon certain conditions such declarations may be annulled and past defaults may
be waived (except a continuing default in payment of principal of (or premium,
if any) or interest on such Debt Securities) by the holders of a majority in
principal amount of the Debt Securities of all such affected series then
outstanding. In the case of certain events of bankruptcy, insolvency or
reorganization of Monitoring or any Guarantor, the principal of, premium, if
any, and accrued interest on all Debt Securities then outstanding shall
automatically become and be immediately due and payable. (Indentures, Sections
5.01 and 5.10)
Each Indenture contains a provision entitling the Trustee, subject to the
duty of the Trustee during a default to act with the required standard of care,
to be indemnified by the holders of Debt Securities (treated as one class)
issued under such Indenture before proceeding to exercise any right or power
under such Indenture at the request of such holders. (Indentures, Section 6.02)
Subject to such provisions in each Indenture for the indemnification of the
Trustee and certain other limitations, the holders of a majority in principal
amount of the outstanding Debt Securities (treated as one class) issued under
such Indenture may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee. (Indentures, Section 5.09)
Each Indenture provides that no holder of Debt Securities issued under such
Indenture may institute any action against Monitoring under such Indenture
(except actions for payment of overdue principal or interest) unless such holder
previously shall have given to the Trustee written notice of default and
continuance thereof and unless the holders of not less than 25% in principal
amount of the Debt Securities of each affected series (treated as one class)
issued under such Indenture and then outstanding shall have requested the
Trustee to institute such action and shall have offered the Trustee reasonable
indemnity, the Trustee shall not have instituted such action within 60 days of
such request and the Trustee shall not have received direction inconsistent with
such written request by the holders of a majority in principal amount of the
Debt Securities of each affected series (treated as one class) issued under such
Indenture and then outstanding. (Indentures, Sections 5.06 and 5.09)
Each Indenture contains a covenant that Monitoring will file annually with
the Trustee a certificate of no default or a certificate specifying any default
that exists. (Indentures, Section 3.05)
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise provided in the applicable Prospectus Supplement,
Monitoring can discharge or defease its obligations under an Indenture as set
forth below. (Indentures, Section 10.01)
Under terms satisfactory to the Trustee, Monitoring may discharge certain
obligations to holders of any series of Debt Securities issued under such
Indenture which have not already been delivered to the Trustee for cancellation
and which have either become due and payable or are by their terms due and
payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the Trustee cash or, in the case of Debt Securities
payable only in U.S. dollars, U.S. Government Obligations (as defined in such
Indenture), as trust funds in an amount certified to be sufficient to pay at
maturity (or upon redemption) the principal of and interest on such Debt
Securities.
Monitoring may also discharge any and all of the obligations to holders of
any series of Debt Securities issued under an Indenture at any time
("defeasance"), but may not thereby avoid any duty to register the transfer or
exchange of such series of Debt Securities, to replace any mutilated, destroyed,
lost, or stolen Debt Securities of such series or to maintain an office or
agency in respect of such series of Debt Securities. Under terms satisfactory to
the relevant Trustee, Monitoring may instead be released with respect to any
outstanding
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series of Debt Securities issued under the relevant Indenture from the
obligations imposed by Sections 3.07 (in the case of the Senior Debt Indenture)
and 9.01 (which Sections contain the covenants described above limiting liens
and consolidations, mergers, asset sales and leases), and elect not to comply
with such Sections without creating an Event of Default ("covenant defeasance").
Defeasance or covenant defeasance may be effected only if, among other things:
(i) Monitoring irrevocably deposits with the relevant Trustee cash or, in the
case of Debt Securities payable only in U.S. dollars, U.S. Government
Obligations, as trust funds in an amount certified to be sufficient to pay at
maturity (or upon redemption) the principal of and interest on all outstanding
Debt Securities of such series issued under such Indenture; (ii) Monitoring
delivers to the relevant Trustee an opinion of counsel to the effect that the
holders of such series of Debt Securities will not recognize income, gain or
loss for United States federal income tax purposes as a result of such
defeasance or covenant defeasance and that defeasance or covenant defeasance
will not otherwise alter such holders' United States federal income tax
treatment of principal and interest payments on such series of Debt Securities
(in the case of a defeasance, such opinion must be based on a ruling of the
Internal Revenue Service or a change in United States federal income tax law
occurring after the date of such Indenture, since such a result would not occur
under current tax law); and (iii) in the case of a series of Subordinated Debt
Securities, any requirements set forth in the Prospectus Supplement applicable
to such series of Subordinated Debt Securities are satisfied.
MODIFICATION OF THE INDENTURES
Each Indenture provides that Monitoring and the Trustee may enter into
supplemental indentures without the consent of the holders of Debt Securities
to: (a) secure any Debt Securities, (b) evidence the assumption by a successor
corporation of the obligations of Monitoring or any Guarantor, (c) add covenants
for the protection of the holders of Debt Securities, (d) cure any ambiguity or
correct any inconsistency in such Indenture or in any supplemental indenture,
provided that no such action adversely affects the interests of any holder of
Debt Securities in any material respect, (e) establish the forms or terms of
Debt Securities of any series, (f) make any change that does not adversely
affect the rights under such Indenture of any holder of Debt Securities
thereunder, (g) add any Note Guarantee or release any Note Guarantee pursuant to
the provisions thereof, (h) release any Note Guarantee from a Subsidiary
Guarantor that has ceased to be a Subsidiary of Monitoring, (i) evidence the
acceptance of appointment by a successor trustee and (j) to comply with any
requirements of the Commission in connection with the qualification of the
Indenture under the Trust Indenture Act of 1939, as amended. (Indentures,
Section 8.01)
Each Indenture also contains provisions permitting Monitoring and the
Trustee, with the consent of the holders of not less than a majority in
principal amount of Debt Securities of all series issued under such Indenture
then outstanding and affected (voting as one class), to add any provisions to,
or change in any manner or eliminate any of the provisions of, such Indenture or
modify in any manner the rights of the holders of the Debt Securities of each
series so affected; provided that Monitoring and the Trustee may not, without
the consent of the holder of each outstanding Debt Security affected thereby,
(a) extend the final maturity of the principal of any Debt Security, or reduce
the principal amount thereof or reduce the rate or extend the time of payment of
interest thereon, or reduce any amount payable on redemption thereof or change
the currency in which the principal thereof (including any amount in respect of
original issue discount), premium, if any, or interest thereon is payable or
reduce the amount of any original issue discount security payable upon
acceleration or provable in bankruptcy or alter certain provisions of such
Indenture relating to the Debt Securities issued thereunder not denominated in
U.S. dollars or impair the right to institute suit for the enforcement of any
payment on any Debt Security when due or (b) reduce the aforesaid percentage in
principal amount of Debt Securities of any series issued under such Indenture,
the consent of the holders of which is required for any such modification.
(Indentures, Section 8.02)
LIMITATIONS ON ISSUANCE OF BEARER DEBT SECURITIES
In compliance with United States federal income tax laws and regulations,
Bearer Securities (including Bearer Securities in global form) will not be
offered, sold, resold or delivered, directly or indirectly, in the United States
or its possessions or to United States persons (as defined below), except as
otherwise permitted
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by United States Treasury Regulations Section 1.163-5(c)(2)(i)(D). Any
underwriters, agents or dealers participating in the offerings of Bearer
Securities, directly or indirectly, must agree that they will not, in connection
with the original issuance of any Bearer Securities or during the restricted
period (as defined in United States Treasury Regulations Section
1.163-5(c)(2)(i)(D)(7)) (the "restricted period"), offer, sell, resell or
deliver, directly or indirectly, any Bearer Securities in the United States or
its possessions or to United States persons (other than as permitted by the
applicable Treasury Regulations described above). In addition, any such
underwriters, agents or dealers must have procedures reasonably designed to
ensure that its employees or agents who are directly engaged in selling Bearer
Securities are aware of the above restrictions on the offering, sale, resale or
delivery of Bearer Securities. Moreover, Bearer Securities (other than temporary
global Debt Securities and Bearer Securities that satisfy the requirements of
United States Treasury Regulations Section 1.163-5(c)(2)(i)(D)(3)(iii)) and any
Coupons appertaining thereto will not be delivered in definitive form unless
Monitoring has received a signed certificate in writing (or an electronic
certificate described in United States Treasury Regulations Section
1.163-5(c)(2)(i)(D)(3)(ii)) stating that on such date such Bearer Security (i)
is owned by a person that is not a United States person, (ii) is owned by a
United States person that (a) is a foreign branch of a United States financial
institution (as defined in United States Treasury Regulations Section
1.165-12(c)(1)(v)) (a "financial institution") purchasing for its own account or
for resale, or (b) is acquiring such Bearer Security through a foreign branch of
a United States financial institution and who holds the Bearer Security through
such financial institution through such date (and in either case (a) or (b)
above, each such United States financial institution agrees, on its own behalf
or through its agent, that Monitoring may be advised that it will comply with
the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder) or (iii) is owned by a
United States or foreign financial institution for the purposes of resale during
the restricted period and, in addition, if the owner of such Bearer Security is
a United States or foreign financial institution described in clause (iii) above
(whether or not also described in clause (i) or clause (ii) above), such
financial institution certifies that it has not acquired the Bearer Security for
purposes of resale directly or indirectly to a United States person or to a
person within the United States or its possessions.
Bearer Securities (other than temporary global Debt Securities) and any
Coupons appertaining thereto will bear a legend substantially to the following
effect: "Any United States person who holds this obligation will be subject to
limitations under the United States federal income tax laws, including the
limitations provided in Sections 165(j) and 1287(a) of the United States
Internal Revenue Code." The sections referred to in such legend provide that,
with certain exceptions, a United States person will not be permitted to deduct
any loss and will not be eligible for capital gain treatment with respect to any
gain, realized on the sale, exchange or redemption of such Bearer Security or
Coupon.
As used herein, "United States person" means a citizen, national or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, or an estate or trust the income of which is subject to
United States federal income taxation regardless of its source.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Protection One, Inc. consists of 24,000,000
shares of Common Stock, $.01 par value per share, and 5,000,000 shares of
Preferred Stock, $.10 par value per share. As of July 31, 1996, there were
12,738,175 shares of Common Stock and no shares of Preferred Stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders. The holders of Common
Stock do not possess cumulative voting rights, and members of the Board of
Directors of POI are elected by a plurality. The holders of Common Stock are
entitled to receive ratably such dividends as may be declared from time to time
by the Board of Directors out of funds legally available therefor, subject to
the rights of the holders of any series of Preferred Stock then outstanding. In
the event of the liquidation, dissolution or winding up of POI, the holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities to creditors, subject to prior liquidation rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive rights,
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conversion rights or other subscription rights. There are no redemption or
sinking funds provisions applicable to the Common Stock. All outstanding shares
of Common Stock are, and the shares of Common Stock issued upon conversion of
any Debt Securities will be, fully paid and non-assessable.
The Transfer Agent and Registrar for the Common Stock is, as of the date of
this Prospectus, Wells Fargo Bank. Effective as of September 8, 1996, the
Transfer Agent and Registrar for the Common Stock will be ChaseMellon
Shareholder Services.
PREFERRED STOCK
The Amended and Restated Certificate of Incorporation of POI authorizes
5,000,000 shares of Preferred Stock. The Board of Directors has the authority to
issue the Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock, including the loss of voting control to
others.
DELAWARE ANTI-TAKEOVER LAW
Each of POI and Monitoring is a Delaware corporation and as such is subject
to Section 203 of the Delaware General Corporation Law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" (as defined below) with an "interested stockholder" (as defined
below) for a period of three years following the date such stockholder became an
"interested stockholder," unless: (i) prior to such date, the board of directors
of the corporation approves either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding voting stock owned by directors who are also officers of
the corporation or held in employee benefit plans that do not provide employees
a confidential right to determine whether to tender (or how to vote) stock held
by the plan; or (iii) on or subsequent to such date the business combination is
approved by the board of directors of the corporation and by the holders of
two-thirds of the outstanding voting stock of the corporation not owned by the
interested stockholder. A "business combination" includes certain mergers, stock
or asset sales and other transactions resulting in a financial benefit to the
interested stockholder. An "interested stockholder" is generally a person who,
together with affiliates and associates, owns (or within three years did own)
15% or more of the corporation's voting stock.
AMENDED STOCKHOLDERS' AGREEMENT
POI, the original holders of the 5,760,839 shares of Common Stock
outstanding prior to the initial public offering of the Common Stock (the
"Initial Public Offering"), the holders of warrants issued to two prior lenders
to the Company (the "Bank Warrants") and four executive officers of POI are
party to an Amended and Restated Stockholders' Agreement dated as of August 15,
1994 (the "Amended Stockholders' Agreement"). Pursuant to the Amended
Stockholders' Agreement, the holders of a majority of the shares of Common Stock
that were issued to six original investors in connection with the Initial Public
Offering have the right to demand on two occasions that POI register such shares
of Common Stock under the Securities Act for resales by those stockholders. The
Amended Stockholders' Agreement further provides that, subject to certain
limitations and exclusions, in the event that POI proposes to register under the
Securities Act shares of Common Stock in connection with an underwritten public
offering of those shares, upon the request of the other parties to the Amended
Stockholders' Agreement POI will include in the applicable registration
statement the shares of Common Stock owned by those securityholders (or that
those securityholders had the right to acquire) at the time of the Initial
Public Offering. Those parties to the Amended Stockholders' Agreement who hold
the Bank Warrants or who are affiliates of POI also are entitled under the
Amended Stockholders' Agreement to certain piggyback registration rights with
respect to those securities (or, in the case of affiliates, the shares of Common
Stock owned by them at the time of the Initial Public Offering) in the
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event of certain non-underwritten offerings of Common Stock registered by POI.
The Amended Stockholders' Agreement will terminate on September 16, 2001 unless
otherwise extended or earlier terminated by a written instrument signed by each
party thereto.
PLAN OF DISTRIBUTION
Monitoring may sell the Debt Securities being offered hereby through
agents, underwriters, dealers or remarketing firms.
Offers to purchase Debt Securities may be solicited by agents designated by
Monitoring from time to time. Any such agent, who may be deemed to be an
underwriter as that term is defined in the Securities Act, involved in the offer
or sale of the Debt Securities in respect of which this Prospectus is delivered
will be named, and any commissions payable by Monitoring to such agent set
forth, in the Prospectus Supplement. Any such agent will be acting on a
reasonable efforts basis for the period of its appointment or, if indicated in
the applicable Prospectus Supplement, on a firm commitment basis. Agents may be
entitled under agreements which may be entered into with Monitoring to
indemnification by Monitoring against certain civil liabilities, including
liabilities under the Securities Act, and may be customers of, engage in
transactions with or perform services for Monitoring or POI in the ordinary
course of business.
If any underwriters are utilized in the sale of the Debt Securities in
respect of which this Prospectus is delivered, Monitoring will enter into an
underwriting agreement with such underwriters at the time of sale to them and
the names of the underwriters and the terms of the transaction will be set forth
in the Prospectus Supplement, which will be used by the underwriters to make
resales of the Debt Securities in respect of which this Prospectus is delivered
to the public. The underwriters may be entitled, under the relevant underwriting
agreement, to indemnification by Monitoring against certain liabilities,
including liabilities under the Securities Act, and may be customers of, engage
in transactions with or perform services for Monitoring or POI in the ordinary
course of business.
If a dealer is utilized in the sale of the Debt Securities in respect of
which the Prospectus is delivered, Monitoring will sell such Debt Securities to
the dealer, as principal. The dealer may then resell such Debt Securities to the
public at varying prices to be determined by such dealer at the time of resale.
Dealers may be entitled to indemnification by Monitoring against certain
liabilities, including liabilities under the Securities Act, and may be
customers of, engage in transactions with or perform services for Monitoring or
POI in the ordinary course of business.
Debt Securities may also be offered and sold, if so indicated in the
Prospectus Supplement, in connection with a remarketing upon their purchase, in
accordance with their terms, by one or more firms ("remarketing firms"), acting
as principals for their own accounts or as agents for Monitoring. Any
remarketing firm will be identified and the terms of its agreement, if any, with
Monitoring and its compensation will be described in the Prospectus Supplement.
Remarketing firms may be entitled under agreements which may be entered into
with Monitoring to indemnification by Monitoring against certain civil
liabilities, including liabilities under the Securities Act, and may be
customers of, engage in transactions with or perform services for Monitoring or
POI in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, Monitoring will
authorize agents, underwriters or dealers to solicit offers by certain
purchasers to purchase Offered Debt Securities from Monitoring at the public
offering price set forth in the Prospectus Supplement pursuant to delayed
delivery contracts providing for payment and delivery on a specified date in the
future. Such contracts will be subject to only those conditions set forth in the
Prospectus Supplement, and the Prospectus Supplement will set forth the
commission payable for solicitation of such offers.
15
<PAGE> 80
LEGAL MATTERS
Mitchell, Silberberg & Knupp LLP has rendered an opinion with respect to
the validity of the issuance of the Securities offered pursuant to this
Prospectus. Certain legal matters in connection with offerings made by this
Prospectus may be passed upon for any underwriters, dealers or agents by counsel
named in the Prospectus Supplement.
EXPERTS
The consolidated balance sheets of Protection One, Inc. and subsidiaries as
of September 30, 1995 and 1994 and the related consolidated statements of
operations, cash flows and changes in stockholders' equity (deficit) for each of
the three years in the period ended September 30, 1995 incorporated by reference
in this Prospectus, have been incorporated herein in reliance on the report,
which includes an explanatory paragraph with respect to a change in method of
accounting for certain subscriber account acquisition and transition costs, of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The consolidated balance sheets of Metrol Security Services, Inc. and
subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholders' deficiencies and cash flows for each of
the three years in the period ended December 31, 1995, incorporated by reference
in this Prospectus have been incorporated herein in reliance on the report of
KPMG Peat Marwick LLP, independent accountants, given on the authority of that
firm as experts in accounting and auditing.
16
<PAGE> 81
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, 1994 and 1995 and (unaudited) June 30,
1996................................................................................ F-3
Consolidated Statements of Operations for the years ended September 30, 1993, 1994 and
1995 and (unaudited) the nine months ended June 30, 1995 and 1996................... F-4
Consolidated Statements of Cash Flows for the years ended September 30, 1993, 1994 and
1995 and (unaudited) the nine months ended June 30, 1995 and 1996................... F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years
ended September 30, 1993, 1994 and 1995 and (unaudited) the nine months ended June
30, 1996............................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 82
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Protection One, Inc.
Culver City, California
We have audited the accompanying consolidated balance sheets of Protection
One, Inc. and Subsidiaries as of September 30, 1995 and 1994, and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity (deficit) for each of the three years in the period ended September 30,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Protection One,
Inc. and Subsidiaries as of September 30, 1995 and 1994, and their consolidated
results of operations and cash flows for each of the three years in the period
ended September 30, 1995, in conformity with generally accepted accounting
principles.
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 12, 1995
F-2
<PAGE> 83
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------- AT JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash equivalents.............................................. $ 1,057 $ 1,256 $ 8,347
Restricted cash............................................... 456 -- --
Receivables, net.............................................. 4,724 5,806 11,146
Inventories................................................... 1,589 3,125 3,461
Prepaid expenses.............................................. 316 547 1,172
-------- -------- ---------
Total current assets....................................... 8,142 10,734 24,126
Property and equipment, net..................................... 3,118 5,307 10,956
Subscriber accounts and intangibles, net........................ 114,620 162,239 238,898
Deposits........................................................ 205 389 449
-------- -------- ---------
$126,085 $178,669 $ 274,429
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt............................. $ 334 $ 1 $ 94
Accounts payable.............................................. 2,200 2,078 2,462
Accrued salaries, wages and benefits.......................... 1,036 1,401 1,208
Accrued interest.............................................. 2,689 318 216
Other accruals................................................ 450 210 412
Purchase holdbacks............................................ 4,250 4,949 12,588
Acquisition transition costs.................................. 1,269 970 3,779
Other current liabilities..................................... 634 800 646
Deferred revenue.............................................. 6,785 9,166 13,763
-------- -------- ---------
Total current liabilities.................................. 19,647 19,893 35,168
Long-term debt, net of current portion.......................... 86,508 146,023 206,956
Deferred income taxes........................................... 3,504 -- 792
Other liabilities............................................... 300 279 604
-------- -------- ---------
Total liabilities.......................................... 109,959 166,195 243,520
-------- -------- ---------
Commitments and contingencies (Note 16)
Redeemable preferred stock, redemption value $22,992 and $6,127
at September 30, 1994 and 1995, respectively.................. 22,210 6,127 --
-------- -------- ---------
Stockholders' equity (deficit):
Common Stock, $.01 par value ($.10 at September 30, 1994),
24,000,000 shares authorized, 203,836, 9,047,638 and
12,736,255 shares issued and outstanding at September 30,
1994 and 1995 and June 30, 1996, respectively.............. 2 90 127
Class B Common Stock, $.10 par value, 181,269 shares
authorized, issued and outstanding at September 30, 1994... 18 -- --
Series A cumulative convertible Preferred Stock, $.10 par
value, 672,485 shares authorized, 670,550 shares issued and
outstanding at September 30, 1994.......................... 67 -- --
Series G cumulative convertible Preferred Stock, $.10 par
value, 4,000 shares authorized, 2,236 shares issued and
outstanding at September 30, 1994
Additional paid-in capital.................................... 12,750 41,829 77,453
Stockholders' notes receivable................................ (47) -- --
Accumulated deficit........................................... (18,874) (35,572) (46,671)
-------- -------- ----------
Total stockholders' equity (deficit)....................... (6,084) 6,347 30,909
-------- -------- ---------
$126,085 $178,669 $ 274,429
======== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 84
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
-------------------------------- ---------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Monitoring and service.............. $14,850 $27,109 $ 46,308 $ 32,622 $ 46,377
Installation........................ 6,720 4,764 3,662 3,040 1,918
Other............................... 320 2,607 5,912 3,303 3,500
------- ------- -------- ------- -------
Total revenues................... 21,890 34,480 55,882 38,965 51,795
------- ------- -------- ------- -------
Cost of revenues:
Monitoring and service.............. 3,547 6,520 11,795 8,151 12,651
Installation........................ 3,597 2,950 2,892 2,311 1,431
Other............................... 317 2,854 4,532 3,422 3,254
------- ------- -------- ------- -------
Total cost of revenues........... 7,461 12,324 19,219 13,885 17,336
------- ------- -------- ------- -------
Gross profit..................... 14,429 22,156 36,663 25,080 34,459
Selling, general and administrative
expenses............................ 12,084 10,380 12,409 8,178 10,082
Loss on acquisition terminations...... -- 26 208 208 --
Performance warrants compensation
expense............................. -- 4,504 -- -- --
Adjustment of purchase accounting
accruals, net....................... (742) -- -- -- --
Acquisition and transition expenses... -- -- 3,090 2,380 3,048
Amortization of subscriber accounts
and goodwill........................ 3,864 8,772 15,460 10,858 16,108
------- ------- -------- ------- -------
Operating income (loss).......... (777) (1,526) 5,496 3,456 5,221
Other expenses:
Interest expense, net............... 1,564 6,932 7,626 6,850 3,052
Amortization of debt issuance costs
and OID.......................... 185 891 6,797 2,687 13,159
Loss on sales of subscriber
accounts......................... -- -- 505 433 19
------- ------- -------- ------- -------
Loss before income taxes,
extraordinary items and
cumulative effect of change in
accounting method.............. (2,526) (9,349) (9,432) (6,514) (11,009)
Income tax benefit (expense).......... -- 2,863 3,595 2,432 (90)
------- ------- -------- ------- -------
Loss before extraordinary items
and cumulative effect of change
in accounting method........... (2,526) (6,486) (5,837) (4,082) (11,099)
Extraordinary items -- losses on early
extinguishment of debt -- net....... (281) (1,174) (8,906) (8,898) --
Cumulative effect of change in
accounting method -- net............ -- -- (1,955) (1,955) --
------- ------- -------- ------- -------
Net loss......................... (2,807) (7,660) (16,698) (14,934) (11,099)
Preferred stock dividends............. 653 748 958 791 248
Accretion of redeemable preferred
stock............................... 1,175 753 797 796 --
------- ------- -------- ------- -------
Loss attributable to common
stock.......................... $(4,635) $(9,161) $(18,453) $(16,521) $(11,347)
======= ======= ======== ======= =======
Loss per common share:
Before extraordinary items and
cumulative effect of change in
accounting method................ $(41.86) $(27.11) $ (0.87) $ (0.66) $ (1.06)
Net loss per common share........... $(44.57) $(31.10) $ (2.12) $ (1.92) $ (1.06)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 85
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (2,807) $ (7,660) $(16,698) $(14,934) $(11,099)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation.......................................... 522 518 1,083 745 1,250
Amortization of subscriber accounts and goodwill...... 3,864 8,772 15,460 10,858 16,108
Amortization of debt issuance costs and OID........... 185 891 6,797 2,687 13,159
Performance warrants earned........................... -- 4,504 -- -- --
Cumulative effect of change in accounting method...... -- -- 1,955 1,955 --
Loss on sales and abandonments........................ -- -- 713 433 --
Inventory received in settlement of claim............. -- -- (1,562) -- --
Adjustment of purchase accounting accruals............ (1,203) -- -- -- --
Deferred income tax benefit........................... -- (2,863) (3,595) (2,432) --
Extraordinary items................................... 281 1,174 8,906 8,898 --
Provision for doubtful accounts....................... 21 789 1,751 1,238 1,518
Other................................................. (61) -- -- -- --
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables........................................... (1,217) (1,362) (2,795) (2,292) (5,359)
Inventories........................................... (108) (355) 89 (3) 528
Prepaid expenses and deposits......................... (485) 383 (408) (831) (505)
Accounts payable...................................... 614 621 (121) (904) 681
Accrued liabilities................................... 217 2,662 (2,247) (2,546) (389)
Deferred revenue...................................... 1,082 (675) (832) (239) 663
-------- -------- -------- -------- --------
Net cash provided by operating activities............. 905 7,399 8,496 2,633 16,555
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment...................... (321) (1,417) (3,268) (1,946) (4,706)
Acquisitions, net of cash received....................... (7,972) (60,069) (52,249) (46,136) (72,275)
Acquisition payments held in escrow...................... -- (456) 456 -- --
Payments on purchase holdbacks........................... (201) (941) (3,626) (3,059) (133)
Deferred acquisition payments............................ (131) (469) (2,167) (1,996) (1,438)
Acquisition transition costs............................. (987) (3,136) (2,558) (1,777) (2,272)
Payment of other liabilities............................. (484) (322) (109) (72) --
-------- -------- -------- -------- --------
Net cash used in investing activities............ (10,096) (66,810) (63,521) (54,986) (80,824)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Payments on long-term debt............................... (19,536) (25,805) (118,699) (118,678) (23,828)
Proceeds from long-term debt............................. 28,853 88,328 168,005 164,428 72,619
Debt and equity issuance costs........................... (1,807) (6,444) (6,780) (6,420) (666)
Payments on stockholders' notes receivable............... 34 15 47 47 --
Issuance of preferred and common stock and warrants...... -- 5,494 20,219 20,164 23,483
Redemption of preferred stock............................ -- (1,500) (2,125) (2,125) --
Note redemption and premium costs........................ -- -- (2,627) (2,627) --
Cash dividends paid on preferred stock................... (435) (965) (2,816) (2,648) (248)
-------- -------- -------- -------- --------
Net cash provided by financing activities........ 7,109 59,123 55,224 52,141 71,360
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (2,082) (288) 199 (212) 7,091
Cash and cash equivalents:
Beginning of period...................................... 3,427 1,345 1,057 1,057 1,256
-------- -------- -------- -------- --------
End of period............................................ $ 1,345 $ 1,057 $ 1,256 $ 845 $ 8,347
======== ======== ======== ======== ========
Interest paid during the period............................ $ 1,270 $ 4,563 $ 9,968 $ 9,266 $ 3,181
======== ======== ======== ======== ========
Supplemental disclosure (see Note 14)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 86
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS
B PREFERRED STOCK ADDITIONAL STOCKHOLDERS'
COMMON COMMON ------------------- PAID-IN NOTES ACCUMULATED
STOCK STOCK SERIES A SERIES G CAPITAL RECEIVABLE DEFICIT TOTAL
------ ------ -------- -------- ---------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
September 30, 1992............... $ 10 $962 $ 7 $ (96) $ (5,078) $ (4,195)
Net loss......................... (2,807) (2,807)
Accretion of Series C, D and E
Redeemable Preferred Stock..... (1,175) (1,175)
Payments on stockholders' notes
receivable..................... 34 34
Dividends on Series F Redeemable
Preferred Stock................ (653) (653)
---- ---- ---- ---- ------- ---- -------- --------
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 Class B 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
Common 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 of preferred shares 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......................... (11,099) (11,099)
Exercise of stock options........ 36 36
Exercise of Performance
Warrants....................... 1 10 11
Issuance of Common Stock for
cash........................... 25 23,658 23,683
Conversion of Redeemable
Preferred Shares to Common
Stock.......................... 7 6,120 6,127
Issuance of Common Stock for
Metrol Security Services,
Inc............................ 4 6,841 6,845
Common Stock issuance costs...... (793) (793)
Dividends on Series H Redeemable
Preferred Stock................ (248) (248)
---- ---- ---- ---- ------- ---- -------- --------
June 30, 1996 (unaudited)........ $127 $ -- $ -- $ -- $ 77,453 $ -- $ (46,671) $ 30,909
==== ==== ==== ==== ======= ==== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 87
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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), Monitoring's
wholly owned subsidiary, Metrol Security Services, Inc. (see Note 20), and
Monitoring's former wholly-owned subsidiary, Protection One Alarm Services, Inc.
(Services). 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. POI's principal assets and sole
operations are in and through its investment in Monitoring. Results of
operations of acquired companies are included in the Company's consolidated
financial statements from date of acquisitions. All significant intercompany
balances and transactions have been eliminated in consolidation. See Note 19 for
separate consolidated financial information of Monitoring.
The accompanying interim consolidated financial statements as of June 30,
1995 and for the nine months ended June 30, 1995 and 1996 and the related notes
to consolidated financial statements are unaudited. 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 period ended June 30, 1996 are
not necessarily indicative of the results to be expected for the full fiscal
year.
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 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.
F-7
<PAGE> 88
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives. Costs of property and
equipment of purchased businesses are based on estimated replacement costs at
the date of acquisition. When property and equipment are retired or sold, the
cost and the related allowance for depreciation are 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.
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 duplicate 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.
F-8
<PAGE> 89
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
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.
New Accounting Pronouncements
In March of 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 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. Based
on estimates made as of September 30, 1995, the Company does not anticipate that
a material impact on its financial statements or those of the registrant will
result from the adoption of the standard.
In October of 1995, the FASB 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.
Reclassifications
Certain prior period amounts were reclassified to conform to the September
30, 1995 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.
The new method is consistent with the guidelines adopted by the Emerging
Issues Task Force of the FASB 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 $2.0 million or $0.23 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.
F-9
<PAGE> 90
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
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,
---------------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Pro forma:
Loss before extraordinary items................... $(3,544) $ (7,333) $ (5,837)
Net loss.......................................... $(3,825) $ (8,508) $(14,743)
Net loss attributable to common stock............. $(5,653) $(10,008) $(16,498)
Loss per common share:
Before extraordinary item...................... $(51.65) $ (29.99) $ (.87)
Net loss per common share...................... $(54.36) $ (33.97) $ (1.90)
Actual:
Net loss per common share......................... $(44.57) $ (31.10) $ (2.12)
</TABLE>
3. INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK:
Initial Public Offering and Borrowing Under Revolving Credit Facility
On October 6, 1994, the Company issued 2,700,000 shares of 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 its 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 the Company's Series
A, C, E and G Preferred Stock and Class B Common Stock were converted into a
total of 5,557,003 shares of the Company's Common Stock. At the time of
conversion, the Company paid accumulated unpaid dividends totaling $2,104 to the
holders of the Company's Series A, C and E Preferred Stock and payments totaling
$82 to the holders of the Company's 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 Company's Series C
and E Redeemable Preferred Stock totaling $782, (iii) payment of dividends to
the holders of the Company's Series A Preferred Stock totaling $164 and (iv)
payments of conversion inducements to the holders of the Series A Preferred
Stock totaling $82.
F-10
<PAGE> 91
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
4. EXTRAORDINARY ITEMS:
The extraordinary items are losses on early extinguishment of debt and
include the following components:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1993 1994 1995
---- ------ ------
<S> <C> <C> <C>
Unamortized debt issuance costs.................... $281 $1,174 $3,044
Unamortized OID.................................... -- -- 4,138
Conversion and tender fees and expenses............ -- -- 2,635
---- ------ ------
281 1,174 9,817
Deferred tax benefit............................... -- -- (911)
---- ------ ------
$281 $1,174 $8,906
==== ====== ======
</TABLE>
5. 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, 1995 are
July 1996 and October 1995 invoices billed in advance of the periods in which
the services are provided totaling $6,321 and $4,667, respectively. The
provisions for doubtful accounts for the years ended September 30, 1993, 1994,
and 1995 and the nine months ended June 30, 1995 and 1996 were $21, $789,
$1,751, $1,238 and $1,518 respectively.
6. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------
1994 1995
------- -------
<S> <C> <C>
Furniture and fixtures................................... $ 1,808 $ 2,004
Data processing.......................................... 1,499 2,563
Vehicles................................................. 1,106 2,568
Leasehold improvements................................... 194 634
------- -------
4,607 7,769
Less accumulated amortization............................ (1,489) (2,462)
------- -------
$ 3,118 $ 5,307
======= =======
</TABLE>
F-11
<PAGE> 92
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>
AT SEPTEMBER 30,
--------------------- AT JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Acquired subscriber accounts.............. $122,330 $184,463 $ 276,058
Debt issuance costs....................... 5,204 7,405 8,645
Initial Public Offering Costs............. 1,305 -- --
Goodwill and other........................ 1,641 1,641 2,495
-------- -------- --------
130,480 193,509 287,198
Less accumulated amortization............. (15,860) (31,270) (48,300)
-------- -------- --------
$114,620 $162,239 $ 238,898
======== ======== ========
</TABLE>
Reconciliation of acquired subscriber accounts:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, NINE MONTHS
----------------------- ENDED JUNE 30,
1994 1995 1996
-------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Balance, beginning of period........ $ 41,986 $122,330 $184,463
Cumulative effect of change in
accounting method................. -- (3,802) --
Acquisition of subscriber
accounts.......................... 81,525 70,105 95,506
Charges against acquisition
holdbacks......................... (1,059) (2,025) (3,911)
Cancellation of Series G preferred
stock............................. (122) -- --
Sale of subscriber accounts......... -- (2,145) --
-------- -------- --------
Balance, end of period.............. $122,330 $184,463 $276,058
======== ======== ========
Number of subscriber accounts
acquired during the period........ 54,211 63,611 76,848
======== ======== ========
</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,
1994, purchase holdbacks as a percentage of total purchase price ranged from 0%
to 20% and extended for periods of up to 12 months. 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
nine months ended June 30, 1996, purchase holdbacks as a percentage of total
purchase price ranged from 0% to 30% and extended for periods up to 12 months.
F-12
<PAGE> 93
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Reconciliation of purchase holdbacks:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED
--------------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Balance, beginning of period............ $ 846 $ 4,250 $ 4,949
Purchase holdbacks additions............ 5,404 6,349 11,682
Charges against subscriber accounts..... (1,059) (2,025) (3,911)
Cash payments to sellers................ (941) (3,625) (132)
------- ------- -------
Balance, end of period.................. $ 4,250 $ 4,949 $12,588
======= ======= =======
</TABLE>
Included in subscriber account acquisitions for the year ended September
30, 1995 is the acquisition of Custom House, Inc. This acquisition has been
reflected as asset purchase because (i) substantially all of the costs were
allocable on the basis of fair values to the subscriber accounts acquired, which
will be serviced through the Company's central monitoring station, and (ii) the
business acquired is not representative of the Company's operations and
therefore will be discontinued and the Company intends to abandon the trade
names, dispose of most of the other assets and liquidate the corporate entity,
provisions for which are reflected in the allocation of the purchase price and
the accrual of transition costs. Unaudited pro forma results are not presented
for the Custom House, Inc. acquisition as it is not material to the consolidated
results of operations. The purchase of Metrol Security Services, Inc. (see Note
20) and its subscriber accounts was the major source of such additions for the
nine months ended June 30, 1996.
8. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------- AT JUNE 30,
1994 1995 1996
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable under credit agreements:
Senior Subordinated Notes................. $50,000 $ -- $ --
Senior Subordinated Discount Notes........ -- 166,000 166,000
Unamortized original issue discount....... (4,292) (52,229) (39,993)
Revolving credit facility................. 40,800 32,252 80,949
Other..................................... 334 1 94
------- -------- ---------
86,842 146,024 207,050
Less current portion........................ (334) (1) (94)
------- -------- ---------
$86,508 $146,023 $ 206,956
======= ======== =========
</TABLE>
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) and 28 detachable Warrants to purchase shares of the Company's
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 were assigned as the
value attributable to the warrants resulting in a $4,494 original issue discount
F-13
<PAGE> 94
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
(OID) which is being amortized over the maturity period of the Notes using the
effective interest method. The Company recorded discount amortization of $202
and $155 which is included in the consolidated statement of operations as a
component of interest expense for the years ended September 30, 1994 and 1995,
respectively.
The Units were issued in a private placement to qualified institutional
buyers as defined under Rule 144A under the Securities Act of 1933. In December
1993, the Company filed a registration statement with respect to the issuance of
Series B Senior Subordinated Notes (Series B Notes) which were identical in all
material respects to those issued. This registration statement became effective
on May 16, 1994 and the holders of the Notes subsequently exchanged the Notes
for the Series B Notes.
On November 3, 1993, the Company entered into a $30 million revolving
credit facility with a financial institution which was originally scheduled to
mature in 1996. Borrowings under the Revolving Credit Facility bear interest at
the lesser of the bank's prime rate plus 1.25% (10% at September 30, 1995) or
LIBOR plus 3% (9.125% at September 30, 1995). On June 30, 1995, the Revolving
Credit Facility was amended to increase the maximum amount available thereunder
to $75 million, to add two banks as lenders and to modify certain financial
covenants and availability tests. On June 7, 1996, the Revolving Credit Facility
was further amended to increase the maximum amount available thereunder 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 further modify
certain financial covenants and availability tests. The notes payable under the
credit agreement are collateralized by substantially all of the Company's assets
and the Company's rights and interests in subscriber contracts and agreements.
Availability of funds under the credit agreement is subject to certain financial
covenants and ratios 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 June 30, 1996, borrowings under the agreement
amounted to $80,949 of which $28,432 bears interest at LIBOR plus 2.5% and
$52,517 bears interest at prime plus 1.0%.
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 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 its 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 Series H Cumulative Convertible Preferred
Stock.
F-14
<PAGE> 95
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
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 by
Services. As of September 30, 1995, Services is the only subsidiary of
Monitoring.
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.
Scheduled maturities of long-term debt as of June 30, 1996 are as follows:
<TABLE>
<S> <C>
Fiscal Year Ending September 30,
1996.................................................... $ 94
1997.................................................... --
1998.................................................... --
1999.................................................... --
2000.................................................... 80,949
Thereafter.............................................. 166,000
--------
247,043
Less unamortized OID...................................... (39,993)
--------
$207,050
========
</TABLE>
9. OTHER LIABILITIES:
Other liabilities are comprised of the following:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
----------------- -------------------
1994 1995 1995 1996
---- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred acquisition payments...... $820 $1,057 $ 850 $1,088
Other.............................. 114 22 365 162
---- ------ ------ ------
$934 $1,079 $1,215 $1,250
==== ====== ====== ======
Classified as follows:
Other current liabilities........ $634 $ 800 $ 843 $ 646
Other liabilities................ 300 279 372 604
---- ------ ------ ------
$934 $1,079 $1,215 $1,250
==== ====== ====== ======
</TABLE>
F-15
<PAGE> 96
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
At September 30, 1995 deferred acquisition payments are due as follows:
<TABLE>
<S> <C>
Fiscal Year Ending September 30:
1996...................................................... $ 782
1997...................................................... 220
1998...................................................... 45
1999...................................................... 10
-------
$1,057
=======
</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. 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. 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 outstanding warrants are exercisable and
expire in September of 2002.
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 one share of the Company's Common Stock at an
exercise price of $.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 are reserved for issuance
under the Plan, subject to such adjustment as may be necessary to reflect
changes in the number or kind of share of Common Stock or other securities of
the Parent Company. The 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 options for
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
later of (i) the commencement of the participant's employment with the Company
or (ii) September 16, 1991. The purchase price of the shares issuable pursuant
to these options is equal to fair market value of the Common Stock at the date
of grant.
During the nine months ended June 30, 1996, the Plan was amended to
increase the total number of shares of Common Stock for which options may be
issued to 944,000, and the Company granted options to purchase an aggregate of
609,200 shares of Common Stock, including options for 400,000 shares granted to
F-16
<PAGE> 97
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
officers of the Company. Each option has a term of 10 years and vests in equal
annual installments over a five-year period that generally begins on the first
anniversary of the grant date. The purchase prices of the shares issuable
pursuant to these options is equal to the fair market value of the Common Stock
at the date of grant.
In connection with the issuance of the Senior Subordinated Discount Notes
in May of 1995, the Company issued warrants to purchase of 531,200 shares of
Common Stock at an exercise price of $6.60 per share. The outstanding warrants
are immediately exercisable and expire in May of 2005.
A summary of warrant and option activity is as follows:
<TABLE>
<CAPTION>
WARRANTS
AND OPTIONS PRICE RANGE
----------- ----------------
<S> <C> <C>
Outstanding September 30, 1992.................. 705,274 $0.167 - 3.663
Granted......................................... 128,260 2.533
Exercised....................................... --
---------
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......................................... 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 June 30, 1996 2,628,138
=========
Exercisable at:
September 30, 1995............................ 1,907,310 0.167 - 6.50
June 30, 1996................................. 1,856,098 0.167 - 15.00
</TABLE>
11. CAPITAL STOCK:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------
1994 1995
------- ------
<S> <C> <C>
REDEEMABLE PREFERRED STOCK:
Series C Cumulative Convertible Preferred Stock, $.10 par value;
10,900 shares authorized, 10,897 issued and outstanding at
September 30, 1994........................................... $11,882 $ --
Series E Cumulative Convertible Preferred Stock, $.10 par value;
2,000 shares authorized, 2,000 issued and outstanding at
September 30, 1994........................................... 2,158 --
Series F Cumulative Preferred Stock, $.10 par value; 9,670
shares authorized, 8,170 shares issued and outstanding at
September 30, 1994........................................... 8,170 --
Series H Cumulative Convertible Preferred Stock, $.10 par value;
6,127 shares authorized, issued and outstanding at September
30, 1995..................................................... -- 6,127
-------- -------
$22,210 $6,127
======== =======
</TABLE>
F-17
<PAGE> 98
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
On November 3, 1993, the Company: issued 2,358 shares of Series G
Cumulative Convertible Preferred Stock in conjunction with the acquisition of
Home Security Specialists (HSS); issued its Class B Common Stock and redeemed
1,500 shares of its Series F Cumulative Preferred Stock. 122 Shares of Series G
Cumulative Convertible Preferred Stock were subsequently cancelled in
conjunction with the final determination of the purchase price of HSS.
In May 1995, the Company repurchased all of the outstanding shares of
Series F Cumulative Preferred Stock from the holder thereof for a consideration
consisting of approximately $2.0 million in cash and 6,127 newly issued shares
of Series H Cumulative Convertible Preferred Stock.
Conversion Rights
The Series H Cumulative Convertible Preferred Stock is convertible into
Common Stock at the option of the stockholder. The initial conversion price,
which is subject to antidilution adjustments is $9.00 per share.
Voting Rights
The holder of Series H Cumulative Convertible Preferred Stock generally has
no voting rights except under certain circumstances such as failure of the
Company to pay dividends. The holders of the Common Stock have voting rights
equal to the number of shares held.
Liquidation Preferences and Dividends
The Series H Cumulative Convertible Preferred Stock has a liquidation
preference to the Common Stock and receives annual cash dividends at the rate of
$110 per share, payable quarterly.
Dividends for Series H Cumulative Convertible Preferred stock are subject
to increase if the Company fails to redeem shares under mandatory redemption
provisions. As described in Note 3, all accumulated unpaid dividends were paid
on October 6, 1994 in conjunction with the conversion of preferred shares into
common stock.
Loss Per Common Share
The computation of fully diluted net loss per share for the years ended
September 30, 1993, 1994 and 1995 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>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
--------------------------------- -------------------------
1993 1994 1995 1995 1996
------- ------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Common Stock........................ 103,995 129,705 8,695,395 8,604,864 10,749,983
Class B Common Stock................ 164,880 2,792 -- --
------- ------- --------- --------- ----------
103,995 294,585 8,698,187 8,604,864 10,749,983
======= ======= ========= ========= ==========
</TABLE>
Mandatory Redemption
Generally, any holder of the Series H Cumulative Preferred Stock may
require the Company to redeem all of the holder's outstanding shares of such
stock on December 31, 2005. In addition, the preferred
F-18
<PAGE> 99
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
stockholders may accelerate their redemption rights upon the occurrence of
certain events, such as merger or disposition of substantially all of the
Company's assets. The redemption price for all redemptions is 100% of the
applicable issue price for such series plus accumulated dividends, whether or
not declared.
The redeemable preferred stock was recorded at fair value on the date of
issuance less issue costs. The excess of redemption value over the carrying
value is being accreted by periodic charges over the maturity of the issue. For
the year ended September 30, 1995, the accretion was charged to additional paid
in capital. Previously such accretions were charged to accumulated deficit.
During the years ended September 30, 1993, 1994 and 1995, the accretion charges
were comprised of:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1993 1994 1995
------ ---- ----
<S> <C> <C> <C>
Amortization of stock issuance costs................ $ 460 $ 91 $782
Accrual of Series C, D, and E Preferred Stock
Dividends......................................... 715 662 15
------ ----- -----
$1,175 $753 $797
====== ===== =====
</TABLE>
The difference between the carrying value and redemption value of these
shares consists of the unamortized portion of stock issuance costs which
aggregated $782 at September 30, 1994.
Optional Redemption
The Company, at the option of the Board of Directors, may redeem all of the
outstanding shares or any portion, thereof, of the Series H Cumulative Preferred
Stock at the minimum amount of $500 per share. The redemption price of the
shares is equal to 100% of the issue price plus accumulated dividends whether or
not earned or declared. All of the Series H Cumulative Preferred Stock was
converted to shares of POI common stock in February, 1996.
12. RELATED PARTIES:
Two directors each received consulting fees of $50 during the years ended
September 30, 1993 and 1994. During the year ended September 30, 1993 the
Company paid interest to a related party totaling $287 relating to notes payable
which were repaid in December 1992 with the issuance of Series F Preferred
Stock.
The Company paid approximately $168 to an affiliate of a preferred
stockholder during the year ended September 30, 1994 as consideration for the
services rendered under a Finder's Agreement, and the Finder's Agreement was
terminated.
13. INCOME TAXES:
For the years ended September 30, 1994 and 1995, the Company recognized
continuing operations' federal and state deferred tax benefits of $2,863 and
$3,595, respectively. Such benefits were recognized because valuation allowances
were reduced as a result of utilization of net operating losses to offset
temporary differences that generate deferred tax liabilities during the
carryforward period. At June 30, 1996, the Company had $33.4 million in NOL
carryforwards for regular federal tax purposes and $26.7 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 warrants to purchase common stock issued in
conjunction with the Company's refinancing plan, as well as various prior
issuances of preferred and common stock and stock warrants, or if there are
future substantial changes in the Company's ownership, there may be annual
limitations on the
F-19
<PAGE> 100
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
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
taxes payable.
The components of deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------- AT JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowances
for doubtful accounts................ $ 383 $ 1,000 $ 1,772
Acquisition reserves and holdbacks...... 2,158 2,365 5,465
Performance warrants.................... 1,761 1,800 1,800
Net operating loss carryforwards........ 10,854 15,688 13,340
OID amortization........................ -- 2,174 6,936
Other................................... 151 37 56
Less valuation allowance................ (620) (3,573) (506)
-------- -------- --------
Total deferred tax assets....... 14,687 19,491 28,863
Deferred tax liabilities:
Differences in depreciation and
amortization......................... (18,191) (19,491) (29,655)
-------- -------- --------
Net deferred tax liabilities.... $ (3,504) $ -- $ (792)
======== ======== ========
</TABLE>
During the year ended September 30, 1994, the Company acquired American
Home Security, Home Security Specialists, Statewide Security, Alarmtek, Inc.,
Nevada Central, Inc. and A-Able Lock & Alarm, Inc. During the year ended
September 30, 1995, the Company acquired Custom House, Inc. For financial
reporting purposes, the assets acquired and liabilities assumed were valued at
fair market value as of the date of purchase. For income tax purposes, the
acquisitions were treated as stock purchases with the acquired assets and
liabilities retaining their historical tax basis. The net basis increase for
financial reporting purposes of approximately $43 million has no federal and
state income tax basis and is not deductible for tax purposes. The deferred tax
liability resulting from the acquisition basis difference, together with the
Company's deferred tax liability, exceeded the Company's deferred tax assets at
the dates of purchases. The temporary differences creating the deferred tax
liabilities are expected to reverse within the carryforward period of the
Company's NOL and AMT NOL. The valuation allowances at September 30, 1994 and
September 30, 1995 reflect current estimates of limitations on utilization of
NOL carryforwards for federal and state income tax purposes.
The income tax benefit (expense) is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------- ----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Current
Federal.............................. $ -- $ -- $ -- $ -- $ (90)
State................................ -- -- -- -- --
--- ------ ------ ------ -----
Total current................ -- -- -- -- (90)
--- ------ ------ ------ -----
Deferred
Federal.............................. -- 2,663 4,594 3,854 --
State................................ -- 200 1,120 704 --
--- ------ ------ ------ -----
Total deferred............... -- 2,863 5,714 4,559 --
--- ------ ------ ------ -----
Total income tax benefit (expense)... $ -- $2,863 $5,714 $4,559 $ (90)
=== ====== ====== ====== =====
</TABLE>
F-20
<PAGE> 101
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
The differences between the income tax benefit at the Company's effective
tax rate differed from the benefit at the statutory rate as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
--------------------------- -------------------
1993 1994 1995 1995 1996
----- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Computed "expected" tax benefit......... $ 859 $3,178 $7,620 $ 6,626 $ 3,774
State income tax benefit, net........... 121 537 1,336 1,162 666
Other................................... (15) (8) (289) 14 (136)
Loss for which no tax benefits were
provided.............................. (965) (844) (2,953) (3,243) (4,304)
----- ------ ------ ------ ------
Total income tax benefit................ $ -- $2,863 $5,714 $ 4,559 $ --
===== ====== ====== ====== ======
Income tax benefits included in the statement
of operations are as follows:
Continuing operations................... $ -- $2,863 $3,595 $ 2,432 $ --
Extraordinary item -- loss on early
extinguishment of debt................ -- -- 911 919 --
Cumulative effect of change in
accounting method..................... -- -- 1,208 1,208 --
----- ------ ------ ------ ------
$ -- $2,863 $5,714 $ 4,559 $ --
===== ====== ====== ====== ======
</TABLE>
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 recognition of the benefit of the extraordinary item to $911. A
valuation allowance was required equal to the benefit of the unused federal and
state NOL carryforwards at September 30, 1995. At June 30, 1996, a valuation
allowance was required equal to the benefit of the unused state NOL
carryforward.
14. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------ -----------------------
1993 1994 1995 1995 1996
------ ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Subscriber accounts
acquired.............. $8,758 $81,525 $70,105 $63,161 $ 95,506
Goodwill................ -- 1,641 -- -- --
Cash acquired........... -- 240 -- -- --
Other assets acquired... 254 2,584 113 81 5,932
------ ------- ------- ------- ---------
Total assets
acquired......... 9,012 85,990 70,218 63,242 101,438
====== ======= ======= ======= =========
Cash paid to seller..... 6,216 58,404 49,361 44,992 72,757
Stock issued to
seller................ -- 2,358 -- -- 6,843
Acquisition expenses.... 615 1,905 1,451 500 646
Deferred revenue
assumed............... 389 4,567 3,213 3,117 3,934
Other assumed
liabilities........... 1,792 18,756 16,193 14,633 17,258
------ ------- ------- ------- ---------
Purchase price and
assumed liabilities... $9,012 $85,990 $70,218 $63,242 $ 101,438
====== ======= ======= ======= =========
</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
F-21
<PAGE> 102
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
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, 1993:
<TABLE>
<CAPTION>
PROPERTY REDEEMABLE
SUBSCRIBER AND OTHER PURCHASE LONG-TERM PREFERRED ACCUMULATED
ACCOUNTS EQUIPMENT LIABILITIES HOLDBACKS DEBT STOCK DEFICIT
---------- --------- ----------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustment to acquisition
transition costs............... $ (203) $ 203
Charge-off of purchase
holdbacks...................... (131) $ 131
MRR guarantee.................... (259) $ 259
Debt exchanged for Series F
Preferred Stock................ $ 6,670 (6,670)
Dividends declared............... $(218) $ 218
Accretion to redemption value of
preferred stock................ (1,175) 1,175
----- ----- ---- ---- ------ ------- ------
$ (593) $(218) $ 203 $ 131 $ 6,670 $ (7,586) $ 1,393
===== ===== ==== ==== ====== ======= ======
</TABLE>
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>
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>
F-22
<PAGE> 103
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 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 (unaudited) (dollar amounts in thousands):
<TABLE>
<CAPTION>
PURCHASE COMMON ADDITIONAL PAID SERIES H
INTANGIBLES HOLDBACKS STOCK IN CAPITAL PREFERRED STOCK
----------- --------- ------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Charge off of purchase holdbacks....... $(3,911) $ 3,911 -- -- --
Conversion of Series H preferred
stock................................ -- -- $ (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>
In fiscal 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.
15. EMPLOYEE BENEFIT PLANS:
401(k) Plan
The Company maintains a tax-qualified, defined contribution plan that meets
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 will be 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. There were
no contributions made to the plan by the Company during the three year period
ended September 30, 1995.
Employee Stock Purchase Plan
In August 1995, the Board of Directors of the Company voted to adopt the
Protection One, Inc. Employee Stock Purchase Plan, subject to approval of the
Employee Stock Purchase Plan by the affirmative vote of a majority of the shares
of Common Stock outstanding and present in person or by proxy at the next annual
meeting of the Company's stockholders.
The 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 will allow 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 will be 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
F-23
<PAGE> 104
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
purchase rights are exercised in connection with an acquisition of the Company
or all or substantially all of its assets.
16. COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities for lease terms maturing through 2005.
At September 30, 1995 future minimum lease payments under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
Year ending September 30,
<S> <C>
1996........................................... $1,355
1997........................................... 1,227
1998........................................... 1,107
1999........................................... 889
2000........................................... 719
Thereafter..................................... 3,010
-------
$8,307
=======
</TABLE>
Total rent expense for the years ended September 30, 1993, 1994 and 1995
was $581, $787 and $1,261, 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.
17. PURCHASE ACCOUNTING ACCRUAL ADJUSTMENTS:
In connection with the acquisition of the Company from its previous owners
on September 16, 1991, the Company accrued liabilities associated with
reprogramming installed systems due to planned telephone area code changes in
Southern California and Washington and anticipated costs of extended service
commitments made to certain customers by independent alarm dealers from whom the
Predecessor Company purchased the customer accounts. These anticipated future
costs were included in the original purchase price allocation.
Due primarily to customer moves, the resigning of customers under new
contracts and account attrition, the anticipated future cost associated with
extended service commitments was reduced by $1,203. This reduction, and $461 in
additional costs incurred related to the area code change have been reflected in
the consolidated statement of operations for the year ended September 30, 1993
as follows:
<TABLE>
<S> <C>
Additional cost of system reprogramming............................ $ 461
Extended service adjustment........................................ (1,203)
-----
Adjustment of purchase accounting accruals......................... $ (742)
=====
</TABLE>
18. 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 value due to their short
maturities. The Company's Revolving Credit Facility, which bears a floating
market rate of interest, and the Series H Redeemable Preferred Stock are carried
at amounts which approximate fair value.
F-24
<PAGE> 105
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
At September 30, 1995, the Senior Subordinated Discount Notes have an
estimated fair value of approximately $131,389 based on their quoted market
price as compared to their carrying value of $113,771.
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.
19. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION:
Protection One, Inc. has fully and unconditionally guaranteed the Senior
Subordinated Discount Notes of Monitoring on a joint and several basis. POI has
no independent operations and the consolidated revenues and costs of operations
are substantially reflected in the accounts of Monitoring. The operations of
Monitoring are significantly interconnected and share common management,
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 subsidiary Services is presented below.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------- AT JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Summarized Balance Sheet
Assets
Current assets............................. $ 8,141 $ 10,733 $24,126
Subscriber accounts and intangibles, net... 114,620 162,239 238,898
Other non-current assets................... 3,323 5,696 11,405
Liabilities and Stockholder's Equity
Deferred revenue........................... $ 6,785 $ 9,166 $13,763
Other current liabilities.................. 12,862 10,727 21,405
Long-term debt, net of current portion..... 86,508 146,023 206,956
Other long-term liabilities................ 3,804 279 604
Stockholder's equity....................... 16,125 12,473 30,909
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
----------------------------- ---------------------
1993 1994 1995 1995 1996
-------- ------- -------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Summarized Statements of Operations
Revenues................................... $ 21,890 $34,480 $ 55,882 $38,965 $51,795
Gross profit............................... 14,429 22,156 36,663 25,080 34,459
Loss before extraordinary items and
cumulative effect of change in
accounting method -- net................ (2,531) (6,492) (5,839) (4,082) (11,099)
Net loss................................... (2,812) (7,666) (16,700) (14,934) (11,099)
</TABLE>
20. ACQUISITION (UNAUDITED)
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.
F-25
<PAGE> 106
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
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 and 1996. 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 1996
------- -------
<S> <C> <C>
Revenues............................................... $46,139 $60,651
Net loss before extraordinary item and cumulative
effect of change in accounting method................ (6,255) (9,877)
Net loss............................................... (14,281) (9,877)
Net loss before extraordinary item and cumulative
effect of change in accounting method, per share..... (0.87) (0.91)
Net loss per common share.............................. (1.76) (0.91)
</TABLE>
F-26
<PAGE> 107
LOGO
