<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
PROTECTION ONE, INC.( COMMISSION FILE NO. 0-24780)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER AND ITS COMMISSION
FILE NUMBER)
DELAWARE 93-1063818
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6011 BRISTOL PARKWAY, CULVER CITY, CALIFORNIA 90230
(310) 338-6930
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PROTECTION ONE ALARM MONITORING, INC.(COMMISSION FILE NO. 33-73002-01)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER AND ITS COMMISSION
FILE NUMBER)
DELAWARE 93-1064579
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6011 BRISTOL PARKWAY, CULVER CITY, CALIFORNIA 90230
(310) 338-6930
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) have been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
As of May 8, 1996, Protection One, Inc. had outstanding 12,306,450 shares
of Common Stock, par value $.01 per share. At such date, Protection One Alarm
Monitoring, Inc. had outstanding 100 shares of Common Stock, par value $.10.
Protection One Alarm Monitoring, Inc. meets the conditions set forth in
General Instruction H(1)(a) and (b) of Form 10-Q and therefore is filing this
form with the reduced disclosure format provided for therein.
<PAGE> 2
PART I
FINANCIAL INFORMATION
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, March 31,
1995 1996
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,256 $ 4,833
Receivables, net 5,806 7,770
Inventories 3,125 2,932
Prepaid expenses 547 955
--------- ---------
Total current assets 10,734 16,490
Property and equipment, net 5,307 7,223
Subscriber accounts, intangibles and goodwill, net 162,239 202,178
Deposits 389 419
--------- ---------
$ 178,669 $ 226,310
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1 $ 1
Accounts payable 2,078 2,494
Accrued salaries, wages and benefits 1,401 1,227
Accrued interest 318 367
Other accruals 210 58
Purchase holdbacks 4,949 10,670
Acquisition transition costs 970 2,068
Other current liabilities 800 627
Deferred revenue 9,166 11,592
--------- ---------
Total current liabilities 19,893 29,104
Long-term debt, net of current portion 146,023 168,290
Other liabilities 279 787
--------- ---------
Total liabilities 166,195 198,181
--------- ---------
Commitments and contingencies (Note 12)
Redeemable preferred stock, redemption value $6,127 at
September 30, 1995 6,127
Stockholders' equity:
Common Stock, $.01 par value, 24,000,000 shares
authorized, 9,115,410 and 12,297,147 shares issued
and outstanding at September 30,1995 and
March 31, 1996, respectively 90 123
Additional paid-in capital 41,829 70,817
Accumulated deficit (35,572) (42,811)
--------- ---------
Total stockholders' equity 6,347 28,129
--------- ---------
$ 178,669 $ 226,310
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
1
<PAGE> 3
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Six months ended March 31,
-----------------------------
1995 1996
---- ----
<S> <C> <C>
Revenues:
Monitoring and service $ 20,846 $ 29,523
Other 4,434 3,655
-------- --------
Total revenues 25,280 33,178
Cost of revenues:
Monitoring and service 5,279 8,191
Other 3,985 3,174
-------- --------
Total cost of revenues 9,264 11,365
-------- --------
Gross profit 16,016 21,813
Selling, general and administrative expenses 5,473 6,556
Acquisition and transition expenses 1,687 1,927
Amortization of subscriber accounts and goodwill 6,837 10,061
-------- --------
Operating income 2,019 3,269
Other expenses:
Interest expense, net 5,072 1,856
Amortization of debt issuance costs 500 615
Amortization of OID 122 8,018
Loss on sales of assets 19
-------- --------
Loss before income taxes and cumulative effect
of change in accounting method, net of taxes (3,675) (7,239)
Income tax benefit 1,380 --
-------- --------
Loss before cumulative effect of change in
accounting method, net of taxes (2,295) (7,239)
Cumulative effect of change in accounting method, net of taxes (1,955) --
-------- --------
Net loss (4,250) (7,239)
Preferred stock dividends 614 248
Accretion of redeemable preferred stock 796 --
-------- --------
Loss attributable to common stock $ (5,660) $ (7,487)
======== ========
Loss per common share:
Before cumulative effect of change in accounting method $ (0.44) $ (0.75)
Net loss per share $ (0.67) $ (0.75)
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
2
<PAGE> 4
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues:
Monitoring and service $ 11,125 $ 15,695
Other 2,183 1,971
-------- --------
Total revenues 13,308 17,666
Cost of revenues:
Monitoring and service 2,820 4,346
Other 1,985 1,611
-------- --------
Total cost of revenues 4,805 5,957
-------- --------
Gross profit 8,503 11,709
Selling, general and administrative expenses 2,939 3,427
Acquisition and transition expenses 816 1,172
Amortization of subscriber accounts and goodwill 3,683 5,284
-------- --------
Operating income 1,065 1,826
Other expenses:
Interest expense, net 2,712 921
Amortization of debt issuance costs 257 309
Amortization of OID 61 4,077
Loss on sales of assets 19
-------- --------
Loss before income tax (1,965) (3,500)
Income tax benefit 728 --
-------- --------
Net loss (1,237) (3,500)
Preferred stock dividends 184 79
-------- --------
Loss attributable to common stock $ (1,421) $ (3,579)
======== ========
Net loss per share $ (0.16) $ (0.33)
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE> 5
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended March 31,
----------------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,250) $ (7,239)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 471 780
Amortization of subscriber accounts and goodwill 6,837 10,061
Amortization of debt issuance costs 500 615
Amortization of OID 122 8,018
Cumulative effect of change in accounting method 1,955 --
Deferred tax benefit (1,380) --
Provision for doubtful accounts 896 1,039
Changes in assets and liabilities, net of effects of acquisitions:
Receivables 361 (3,005)
Inventories (343) 271
Prepaid expenses and deposits (898) (438)
Accounts payable (758) 416
Accrued liabilities (170) (355)
Deferred revenue (475) 352
-------- --------
Net cash provided by operating activities 2,868 10,515
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,222) (2,387)
Acquisitions, net of cash received (24,147) (38,776)
Payments on purchase holdbacks (934) (50)
Deferred acquisition payments (1,463) (1,295)
Acquisition transition costs (1,077) (1,525)
Payment of other liabilities (52) --
-------- --------
Net cash used in investing activities (28,895) (44,033)
-------- --------
Cash flows from financing activities:
Payments on long-term debt (16,355) (23,828)
Proceeds from long-term debt 31,043 38,077
Debt and equity issuance costs (582) (634)
Payments on shareholders' notes receivable 47 --
Issuance of preferred and common stock and warrants 18,301 23,648
Redemption of preferred stock (82) --
Cash dividends paid (2,471) (168)
-------- --------
Net cash provided by financing activities 29,901 37,095
-------- --------
Net increase in cash and cash equivalents 3,874 3,577
Cash and cash equivalents:
Beginning of period 1,057 1,256
-------- --------
End of period $ 4,931 $ 4,833
======== ========
Interest paid during the period $ 5,075 $ 1,500
======== ========
</TABLE>
Supplemental disclosure (see Note 9)
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE> 6
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY; INTERIM FINANCIAL INFORMATION:
The accompanying financial statements of Protection One, Inc. ("POI") and
its subsidiaries (the "Company") include the accounts of POI, POI's wholly owned
subsidiary, Protection One Alarm Monitoring, Inc. ("Monitoring"), and
Monitoring's former wholly owned subsidiary, Protection One Alarm Services, Inc.
("Services"). On May 13, 1996, Services was merged into Monitoring. The assets,
results of operations and stockholder's equity of Monitoring comprise
substantially all of the assets, results of operations and stockholders' equity
of the Company on a consolidated basis. See Note 13 for separate consolidated
financial information of Monitoring.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q which mandates
adherence to Rule 10-01 of Regulation S-X. Accordingly, these statements do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management of
the Company, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the audited financial statements and notes thereto for the year
ended September 30, 1995 included in the Company's Annual Report on Form 10-K/A
filed with the Securities and Exchange Commission on December 28, 1995.
The results of operations for the six month and three month periods ended
March 31, 1996 are not necessarily indicative of the results to be expected for
the full fiscal year.
2. CHANGE IN ACCOUNTING METHOD:
In the third quarter of fiscal 1995, the Company changed its method of
accounting for certain subscriber account acquisition and transition costs,
effective as of October 1, 1994. Under the new method, the Company's personnel
and related support costs and duplicative costs incurred solely in support of
acquiring and transitioning subscriber accounts are expensed as incurred.
The new method is consistent with the guidelines adopted by the Emerging
Issues Task Force of the Financial Accounting Standards Board in Issue 95-3,
Recognition of Liabilities in Conjunction with Purchase Business Combinations.
The consolidated financial statements for the year ended September 30, 1995
reflect the change in accounting method as of October 1, 1994. The effect of the
change on such year was to increase the loss before cumulative effect of the
accounting change, net loss and loss attributable to Common Stock by
approximately $1.5 million or $0.17 per share. The cumulative effect of the
change as of October 1, 1994 was approximately $1.95 million or $0.23 per share,
net of income taxes of approximately $1.2 million, and is reported separately in
the consolidated statement of operations for the year ended September 30, 1995.
3. RECEIVABLES:
Receivables, which consist primarily of trade accounts receivable of
$10,731 at March 31, 1996 and $8,309 at September 30, 1995, have been reduced by
allowances for doubtful accounts of $2,961 and $2,503, respectively. Included in
receivables and deferred revenue at March 31, 1996 and September 30, 1995 are
April 1996 and October 1995 invoices billed in advance of the periods in which
services are
5
<PAGE> 7
provided totaling $5,334 and $4,667, respectively. The provisions
for doubtful accounts for the three months ended March 31, 1996 and March 31,
1995 were $632 and $264, respectively. The provisions for doubtful accounts for
the six months ended March 31, 1996 and March 31, 1995 were $1,039 and $896,
respectively.
4. SUBSCRIBER ACCOUNTS, INTANGIBLES AND GOODWILL:
Subscriber accounts, intangibles and goodwill (at cost) consist of the
following (dollar amounts in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1995 1996
---- ----
<S> <C> <C>
Acquired subscriber accounts $ 184,463 $ 234,952
Debt issuance costs 7,405 7,531
Goodwill and other 1,641 1,641
--------- ---------
193,509 244,124
Less accumulated amortization (31,270) (41,946)
--------- ---------
$ 162,239 $ 202,178
========= =========
</TABLE>
Reconciliation of acquired subscriber accounts (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
March 31, March 31,
1995 1996
---- ----
<S> <C> <C>
Balance, beginning of period $ 122,330 $ 184,463
Cumulative effect of change in accounting method (3,802) --
Acquisition of subscriber accounts 34,370 51,925
Charges against acquisition holdbacks (1,069) (1,436)
Sale of subscriber accounts (222) --
--------- ---------
Balance, end of period $ 151,607 $ 234,952
========= =========
</TABLE>
5. PURCHASE HOLDBACKS:
In conjunction with certain purchases of subscriber accounts, the Company
withholds a portion of the purchase price as a reserve to offset qualifying
attrition of the acquired subscriber accounts for a specified period as provided
for in the purchase agreements, and as a reserve for purchase price settlements
of assets acquired and liabilities assumed.
Reconciliation of purchase holdbacks (dollar amounts in thousands):
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
March 31, March 31,
1995 1996
---- ----
<S> <C> <C>
Balance, beginning of period $ 4,250 $ 4,949
Purchase holdback additions 2,826 7,207
Charges against subscriber accounts (1,069) (1,436)
Cash paid to sellers (934) (50)
-------- --------
Balance, end of period $ 5,073 $ 10,670
======== ========
</TABLE>
6
<PAGE> 8
6. LOSS PER COMMON SHARE:
The computation of fully diluted net loss per common share for each of the
periods presented was antidilutive; as such, no presentation of fully diluted
loss per share has been included in the consolidated statements of operations.
The weighted average shares outstanding used in the computation of the net loss
attributable to common shares are as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
March 31, March 31,
----------------------------- ----------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common Stock 8,507,330 9,959,926 8,790,839 10,828,400
</TABLE>
7. CHANGES IN STOCKHOLDERS' EQUITY:
During the six month period ended March 31, 1996, the Company issued 2.5
million shares of common stock with proceeds of $23,625,000. Concurrently with
the issuance of common stock, the Company converted 6,127 shares of Series H
Preferred Stock to 680,777 shares of common stock at $9 per share. Additionally,
warrants and options for 68,732 shares of common stock were exercised for $.02
million.
Also during the period, additional paid in capital was reduced by $.5
million and $.2 million for expenses related to the secondary offering and
accrued preferred stock dividends, respectively.
8. DIVIDEND RESTRICTIONS:
The Company's Credit Agreement governing its Revolving Credit Facility and
Indenture governing its Discount Notes place certain restrictions on POI and
Monitoring's ability to make dividend payments, distributions and other asset
transfers in respect of such company's capital stock and assets. At March 31,
1996, under provisions of the Credit Agreement (the most restrictive agreement),
no amounts were available for such dividend payments, distributions or other
transfers by either POI or Monitoring.
9. STOCK WARRANTS AND OPTIONS:
Performance Warrants to purchase 500,472 shares of Common Stock at an
exercise price of $0.167 per share were issued to certain officers of the
Company on September 16, 1991 and were to be earned upon attainment of 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
7
<PAGE> 9
exercised, will entitle the holder to receive six-tenths of a share of the
Company's Common Stock at an exercise price of $0.167 per share, subject to
adjustment. The outstanding warrants are exercisable and will automatically
expire on November 1, 2003.
In June 1994, the Board of Directors adopted, and the stockholders of the
Company approved, the 1994 Stock Option Plan (the "Plan"). The Plan provides for
the award of incentive stock options to directors, officers and key employees.
Three hundred fifty four thousand (354,000) share were 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. In November 1995, the Board of Directors adopted, and
in January 1996, the shareholders of the Company approved, amending the Option
Plan to increase the number of shares for which options may be granted
reserved from 354,000 shares to 944,000 shares. The Option Plan provides for
the granting of options that qualify as incentive stock options under the
Internal Revenue Code and options that do not so qualify.
During the year ended September 30, 1995, the Company granted options to
purchase an aggregate of 273,600 shares of common stock including 132,000
shares to officers of the Company. Each option has a term of 10 years and
vests 20% on each of the third through seventh anniversaries of the
commencement of the participant's employment with the Company. During the six
months ended March 31, 1996, the Company granted options to purchase 572,000
shares of common stock including options for 400,000 shares granted to
officers of the Company. Each option has a term of 10 years and vests 20% on
each of the first through fifth anniversaries of the grant of the option.
The purchase price of the shares issuable pursuant to the options is equal to
or greater than the fair market value of the shares at the date of issue.
In connection with the issuance of the Senior Subordinated Discount
Notes in May of 1995, the Company issued warrants to purchase 531,200 shares of
common stock at an exercise price of $6.60 per share. The outstanding warrants
are exercisable and 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, 1994 1,572,429 $0.167 - 3.633
Granted 804,800 5.875 - 9.125
Exercised (256,799) 0.167 - 6.50
Surrendered (14,400) 6.50
Outstanding September 30, 1995 2,106,030 0.167 - 9.125
Granted 572,000 8.00 - 15.00
Exercised (68,732) 0.167 - 6.50
Surrendered (2,880) 6.50
---------
Outstanding at March 31, 1996 2,606,418 0.167 - 15.00
=========
Exercisable:
September 30, 1995 1,907,310 0.167 - 6.50
March 31, 1996 1,709,077 0.167 - 6.50
</TABLE>
10. INCOME TAXES:
For the six months ended March 31, 1996, the Company experienced a net
increase in its deferred tax asset of $3.0 million. However, such additional
deferred tax asset amount was offset in its entirety by a valuation allowance
increase due to the uncertainty that the deferred tax benefits will be
recognized in the future. Such benefits are recognized when valuation allowances
are reduced as a result of utilization of
8
<PAGE> 10
net operating loss ("NOL") carryforwards to offset deferred tax liabilities
during the carryforward period. At March 31, 1996, the Company had $34.7 million
in NOL carryforwards for regular tax purposes and $28.4 million for alternative
minimum tax ("AMT NOL") purposes which expire in the years 2006-2010. The
Company also has certain general and job credit carryforwards. These
carryforwards are available, subject to certain restrictions, to reduce taxable
income, alternative minimum taxable income and income tax payable in future
periods. As a result of various prior issuances of preferred and common stock,
or if there are future substantial changes in the Company's ownership, there may
be annual limitations on the amounts of NOL and AMT NOL, as well as credits,
that can be used to reduce the Company's taxable income, alternative minimum
taxable income and income tax liability.
<TABLE>
<CAPTION>
September 30, March 31,
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance
for doubtful accounts $ 1,000 $ 1,183
Acquisition reserves and holdbacks 2,365 4,755
Performance warrants 1,800 1,800
Net operating loss carryforwards 15,688 13,881
Original issue discount amortization 2,174 5,293
Other 37 47
Less valuation allowance (3,573) (6,539)
-------- --------
Total deferred tax assets 19,491 20,420
Deferred tax liabilities:
Differences in depreciation and amortization (19,491) (20,420)
-------- --------
Net deferred tax liabilities $ 0 $ 0
======== ========
</TABLE>
The valuation allowance at March 31, 1996 reflects limitations on the
utilization of NOL carryforwards for federal and state income tax purposes of
$5.6 million and $0.9 million, respectively. These valuation allowances reflect
uncertainties regarding the utilization of such NOL carryforwards on the
Company's tax returns prior to their dates of expiration.
11. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions:
<TABLE>
<CAPTION>
Six months ended March 31,
1995 1996
------- -------
<S> <C> <C>
Subscriber accounts acquired $34,370 $51,925
Other assets acquired 81 391
------- -------
Total assets acquired 34,451 52,316
------- -------
Cash paid to seller 21,737 38,382
Acquisition expenses 405 391
Deferred revenue acquired 2,720 2,074
Other liabilities assumed 9,589 11,469
------- -------
Total purchase price $34,451 $52,316
======= =======
</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 billings to subscribers, is recognized as revenue in the period in which
the related service is provided. Such amounts are considered a non-cash
component of operations and are reflected as a reduction in cash provided by
operating activities.
9
<PAGE> 11
The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and stockholders' equity
accounts resulting from non-cash investing and financing activities which
occurred in the six months ended March 31, 1995 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Class B
Redeemable Common Additional
Purchase Preferred Common & Preferred Paid-in Accumulated
Intangibles Holdbacks Stock Stock Stock Capital Deficit
----------- --------- ---------- ------ ------------ ---------- -----------
Accretion to redemption
<S> <C> <C> <C> <C> <C> <C> <C>
value of preferred stock $ $ $ (14) $ $ $ $ 14
Charge-off of purchase
holdbacks (1,070) 1,070
Accelerated accretion upon
conversion of preferred stock (782) $ 782
Reclassification of IPO costs (1,305) 1,305
Conversion of Class B
Common and preferred 12,897 (55) 85 (12,927)
-------- ------- -------- -------- ----- -------- --------
$ (2,375) $ 1,070 $ 12,101 $ (55) $ 85 $(11,622) $ 796
======== ======= ======== ======== ===== ======== ========
</TABLE>
The following reflects increases (decreases) in assets, and decreases
(increases) in liabilities and additional paid-in capital resulting from
non-cash investing and financing activities which occurred in the six months
ended March 31, 1996 (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 $ (1,436) $ 1,436 -- -- --
Conversion of Series H preferred stock -- -- $(7) $ (6,120) $ 6,127
Reclassification of stock
offering costs ( 507) -- -- 507 --
--------- ------- --- -------- --------
$ (1,943) $ 1,436 $(7) $(5,613) $ 6,127
======== ======= === ======== ========
</TABLE>
12. COMMITMENT AND CONTINGENCIES:
The Company is a party to claims and matters of litigation incidental to
the normal course of business. The ultimate outcome of these matters cannot
presently be determined; however, in the opinion of management of the Company,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations and cash flows.
13. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION:
POI and Services have fully and unconditionally guaranteed the 13 5/8%
Senior Subordinated Discount Notes of Monitoring due 2005 ("Discount Notes") on
a joint and several basis. POI has no independent operations and the
consolidated revenues and costs of operations of POI are substantially reflected
in the accounts of Monitoring. Prior to the merger of Services into Monitoring,
the operations of Monitoring and Services were significantly interconnected and
Monitoring and Services shares common management,
10
<PAGE> 12
13. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION
(CONTINUED):
employees and facilities and serve a common customer base. Separate summarized
financial information of Services is not presented because management believes
that such separate summarized financial information is not material to
investors. The summarized consolidated financial information of Monitoring and
its former subsidiary Services (see Note 1 above) is presented below (dollar
amounts in thousands).
<TABLE>
<CAPTION>
September 30, March 31,
1995 1996
---- ----
<S> <C> <C>
Summarized Balance Sheet
Assets
Current assets $ 10,734 $ 16,490
Subscriber accounts and intangibles, net 162,239 202,178
Other non-current assets 5,695 7,642
Liabilities and Stockholders' Equity
Deferred revenue $ 9,166 $ 11,592
Other current liabilities 10,727 17,512
Long-term debt, net of current portion 146,023 168,290
Other long-term liabilities 279 787
Stockholders' equity 12,473 28,129
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Summarized Statements of Operations
Revenues $ 13,308 $ 17,666 $ 25,280 $ 33,178
Gross Profit 8,503 11,709 16,061 21,813
Loss before extraordinary item
and cumulative effect of change in
accounting method, net of taxes (1,237) (3,500) (2,295) (7,239)
Net loss (1,237) (3,500) (4,250) (7,239)
</TABLE>
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
For an overview of the Company's accounting policies and specific
discussions of, among other things, a change in the method of accounting for
certain acquisition and transition expenses, a change in statement of operations
presentation format and the impact of SFAS 121 on the Company's financial
statements, see the Company's Form 10-K/A for the fiscal year ended September
30, 1995.
Acquisition and Dealer Program Activity. As described in this Form 10-Q, a
significant portion of the Company's growth has been generated by the
acquisition of portfolios of subscriber accounts from other alarm companies.
Because the Company typically acquires only the subscriber accounts (and not the
accounts receivable or other assets) of the sellers, the Company focuses its
pre-acquisition review and analysis on the quality and stability of the
subscriber accounts to verify the monthly recurring revenue ("MRR") represented
by such accounts. If the subscriber accounts to be purchased pass such due
diligence scrutiny, the Company then applies its monitoring costs to such MRR as
a basis for determining the purchase price to be paid by the Company. To protect
the Company against the loss of acquired accounts, the Company typically seeks
to obtain from the seller a guarantee against the subscriber account
cancellation for a period following the acquisition and the right to retain a
portion of the acquisition price (a "purchase price holdback") against the MRR
lost due to subscriber account cancellations during the specified period.
During the six months ended March 31, 1996 the Company added (through
acquisitions of 18 portfolios of subscriber accounts and through its Dealer
Program) an aggregate of approximately 46,000 subscriber accounts for a total
purchase price of approximately $51.9 million. The MRR of the acquired accounts
ranged from approximately $10.00 to $60.00, with an average of $28.56, and the
average purchase price holdback was approximately 12% of the initial purchase
price. Approximately 83% of the acquired subscriber accounts were residential.
Subscriber Attrition. Subscriber attrition has a direct impact on the
Company's results of operations, since it affects both the Company's revenues
and its amortization expense. Attrition can be measured in terms of canceled
subscriber accounts and in terms of decreased MRR resulting from canceled
subscriber accounts. Gross subscriber attrition is defined by the Company for a
particular period as a quotient, the numerator of which is equal to the number
of subscribers who disconnect service during such period and the denominator of
which is the average of the number of subscribers at each month end during such
period. Net MRR attrition is defined by the Company for a particular period as a
quotient, the numerator of which is an amount equal to gross MRR lost as the
result of canceled subscriber accounts or services during such period, net of
(i) MRR generated during such period by the sale of additional services and
increases in rates to existing subscribers, (ii) MRR generated during such
period from the connection of subscribers who move into premises previously
occupied by subscribers and in which existing systems are installed and from
conversion of accounts that were previously monitored by other companies to the
Company's monitoring service (i.e., "reconnects" and "conversions"); and (iii)
MRR attributable to canceled accounts that, by virtue of a purchase holdback are
"put" back to the seller of such accounts during such period (i.e., "guaranteed
accounts"); and the denominator of which is the average month-end MRR in effect
during such period. While the Company reduces the gross MRR lost during a period
by the amount of guaranteed accounts provided for in purchase agreements with
sellers, in some cases the Company may not collect all or any of the
reimbursement due it from the seller.
12
<PAGE> 14
The following table sets forth the Company's gross subscriber attrition and
net MRR attrition for the periods indicated:
<TABLE>
<CAPTION>
Twelve Months Ended
-------------------
3/31/95 6/30/95 9/30/95 12/31/95 3/31/96
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Gross subscriber attrition......... 18.8% 18.6% 19.3% 20.3% 20.5%
Net MRR attrition.................. 5.6 6.2 6.6 6.6 7.9
</TABLE>
Because the Company determines payments to sellers under purchase price
holdbacks subsequent to the periods to which such holdbacks apply, and because
holdbacks are not allocated to specific guaranteed accounts or specific fiscal
periods, the Company reduces gross MRR lost during a period by the amount of
guaranteed accounts provided for in purchase agreements with sellers. However,
in some cases, the Company has not retained the full amount of such holdback to
which the Company is contractually entitled. If guaranteed accounts for which
the Company was not compensated by the seller were taken into account in
calculating net MRR attrition, net MRR attrition would have been higher in each
period presented in the table above.
Generally, net MRR attrition is less than actual "net account attrition,"
which the Company defines as canceled subscriber accounts net of reconnects,
conversions and guaranteed accounts. Estimated net account attrition is the
basis upon which the Company determines the period over which it amortizes its
investment in subscriber accounts. The Company amortizes such investment over 10
years based on current estimates. If actual subscriber account attrition were to
exceed such estimated attrition, the Company could be required to amortize its
investment in subscriber accounts over a shorter period, thus increasing
amortization expense in the period in which such adjustment is made and in
future periods. Since a significant portion of the subscriber accounts acquired
by the Company since its formation were purchased recently, there can be no
assurance that the actual attrition rates for such accounts will not be greater
than the rate assumed by the Company.
The table below sets forth the change in the Company's subscriber base over
the periods indicated:
<TABLE>
<CAPTION>
Twelve Months Ended
Mar. 31, Mar. 31,
1995 1996
---- ----
<S> <C> <C>
Number of subscribers:
Beginning of period ............................... 67,654 107,401
Additions through portfolio acquisitions and Dealer
Program, net of sales of subscriber accounts ...... 51,374 80,449
Installations by Company personnel ................ 1,735 1,179
Reconnects and conversions ........................ 3,390 4,023
Gross subscriber attrition ........................ (16,752) (27,810)
-------- --------
End of period ................................ 107,401 165,242
======== ========
</TABLE>
Joint Ventures and Alliances. To evaluate other potential sources of
subscriber growth, the Company has initiated an analysis of companies that may
have an interest in entering the residential security alarm market. In addition,
certain companies in industries facing deregulation (such as the
telecommunications and electric utility industries) have expressed to the
Company an interest in offering security alarm services to develop more
comprehensive relationships with their customers. The Company has from time to
time discussed with such companies, and intends to continue to explore, possible
joint ventures, co-marketing arrangements and other strategic alliances as a
method of enhancing its subscriber growth and reducing its cost of generating
new subscribers. As of the filing date of this Form 10-Q, the Company has not
entered into any agreement or arrangement for any such joint venture or other
alliance.
Recent Developments. The Company has reached preliminary agreement with
its lenders to amend the Credit Agreement governing its Revolving Credit
Facility (the "Proposed Amendment"). The Proposed Amendment includes, among
other things, increasing the principal amount of the Revolving Credit Facility
to $100 million and extending the term of the Credit Agreement to January 3,
2000. The Company anticipates that final documentation and approval of the
Proposed Amendment will occur no later than May 31, 1996, although there can be
no assurance that the Proposed Amendment will be implemented by such date or at
all.
13
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
------------------- --------------------
1995 1996 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Monitoring and Service 83.6% 88.8% 82.5% 89.0%
Other 16.4 11.2 17.5 11.0
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of revenues:
Monitoring and Service 21.2% 24.6% 20.9% 24.7%
Other 14.9 9.1 15.7 9.6
----- ----- ----- -----
Total cost of revenues 36.1 33.7 36.6 34.3
----- ----- ----- -----
Gross profit 63.9 66.3 63.4 65.7
Selling, general and administrative expenses 22.1 19.4 21.7 19.8
Acquisition and transition expenses 6.1 6.6 6.7 5.8
Amortization of subscriber accounts
and goodwill 27.7 29.9 27.0 30.3
----- ----- ----- -----
Operating income 8.0% 10.4% 8.0% 9.8%
===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995
Revenues. Revenues for the six months ended March 31, 1996 (the "first half
of fiscal 1996") increased by approximately $7.9 million, or 31.2%, to $33.2
million from $25.3 million in the comparable period in 1995. Monitoring and
service revenues increased by approximately $8.7 million, or 41.6%, a
substantial majority of which resulted from the addition of subscribers through
the acquisition of portfolios of subscriber accounts and purchases of subscriber
accounts from independent alarm dealers with whom the Company has exclusive
purchase agreements (the "Dealer Program"). The Company's subscriber base
increased by 53.9% to approximately 165,200 subscribers at the end of the second
quarter of fiscal 1996 as compared to 107,400 subscribers at the end of the
second quarter of fiscal 1995. The sale of enhanced services and new subscribers
generated by Company personnel comprised the remainder of revenue growth. Other
revenues, consisting primarily of revenues generated by the Company's patrol and
alarm response, installation and lock businesses, decreased by $0.8 million, or
17.6%, to $3.7 million. Such decrease was caused primarily by a decline in
installation revenues of 41.9%, or approximately $0.9 million. The decline in
installation revenues (and the decline in installation expense described below)
resulted from the Company's increased 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 first half of fiscal 1996
increased by approximately $2.1 million, or 22.7%, to $11.4 million. Cost of
revenues as a percentage of total revenues declined to 34.3% for the first half
of fiscal 1996 from 36.6% for the comparable period in fiscal 1995. Monitoring
and service expenses increased by approximately $2.9 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 27.7% for the first half of fiscal 1996 from 25.3% 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 first half of fiscal 1996, due primarily to the acquisition of
portfolios of subscriber accounts that had a lower average MRR per subscriber
than the Company's average at that time. Other expenses decreased by
approximately $0.8 million, or 20.3%, to approximately $3.2 million for the
first half of fiscal 1996 from $4.0 million for the first six months of fiscal
1995. The decrease primarily was caused by a 41.8% decrease ($0.7 million) in
installation expense. In addition, both patrol and alarm response and lock
expenses declined slightly in the quarter.
14
<PAGE> 16
Gross profit. Gross profit for the first half of fiscal 1996 was
approximately $21.8 million, which represents an increase of approximately $5.8
million, or 36.2%, over the $16.0 million of gross profit recognized in the
comparable period in fiscal 1995. Such increase was caused primarily by an
increase in monitoring and service activities, which paralleled the increase in
the Company's subscriber base noted above. Gross profit as a percentage of total
revenues was 65.7% for the first half of fiscal 1996 compared to 63.4% 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
89.0% in the first half of fiscal 1996. Gross profit from other revenues
increased slightly to approximately $0.5 million for the first six months of
fiscal 1996 from $0.4 million for the comparable period in fiscal 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses rose to approximately $6.6 million in the first half of
fiscal 1996, which represents an increase of approximately $1.1 million, or
19.8%, over selling, general and administrative expenses in the comparable
period in fiscal 1995. Such figure as a percentage of total revenues declined
from 21.7% in the first half of fiscal 1995 to 19.8% in the first half of fiscal
1996, due primarily to a decline in sales and marketing expense of 34.3% (or
$0.5 million) offset by an increase of 39.2% (or $1.6 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 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 six month periods ending March 31, 1995 and 1996. The
provision for doubtful accounts increased to approximately $1.0 million for the
first half of fiscal 1996 from approximately $0.9 million for the comparable
period in fiscal 1995.
Acquisition and transition expenses. Acquisition and transition expenses
for the first six months of fiscal 1996 totaled approximately $1.9 million
compared to $1.7 million for the comparable period in fiscal 1995. Such increase
reflects the Company's increased acquisition activity during the first half of
fiscal 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 for
the first half of fiscal 1996 increased by approximately $3.2 million, or 47.2%,
to $10.1 million. This increase is the result of the addition of subscriber
accounts through the acquisition of portfolios of subscriber accounts and the
Dealer Program.
Operating income. Operating income for the first six months of fiscal 1996
was approximately $3.3 million, compared to approximately $2.0 million in the
comparable period in fiscal 1995. Operating income as a percentage of total
revenues was 9.8% in the first half of fiscal 1996, compared to 8.0% 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 economies of scale evidenced by the favorable
disparity between period-to-period growth rates in revenues (31.2%) and selling,
general and administrative expenses (19.8%).
Interest expense, net and amortization of debt issuance costs and OID.
These amounts increased by $4.8 million, or 84.2%, to $10.5 million in the first
half of fiscal 1996, reflecting the Company's use of debt to finance a
substantial portion of its subscriber account growth. Because the Company
refinanced its cash interest-paying subordinated debt in May of 1995 with
non-cash interest paying subordinated debt (see"- Liquidity and Capital
Resources"), amortization of debt issuance costs and original issue discount
("OID") increased during the first half of fiscal 1996 to approximately $8.6
million and the Company estimates that such expense will be at least $17.8
million in fiscal 1996. Such amount could be higher if the Company pursues
additional financing activities.
15
<PAGE> 17
Balance sheet data. At March 31, 1996, the Company's working capital
deficit was $12.6 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 $9.2 million offset by increases in cash and
accounts receivable of $5.5 million. Subscriber accounts and intangibles, net
increased to $202.2 million at March 31, 1996 from $162.2 million at September
30, 1995. This increase of $40.0 million, or 24.6%, was caused by the addition
of new subscribers, net of amortization expense. Total stockholders' equity
increased to approximately $28.1 million at March 31, 1996 from $6.3 million at
September 30, 1995. The increase in such figure reflects the Company's public
offering of 2.5 million shares of Common Stock (resulting in approximately $23.1
million of net proceeds) and the conversion of the Company's Series H Redeemable
Preferred Stock to Common Stock in February 1996, partially offset by
approximately $7.5 million of losses in the first half of fiscal 1996.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Revenues. Revenues for the three months ended March 31, 1996 (the "second
quarter of fiscal 1996") increased by approximately $4.4 million, or 32.8%, to
$17.7 million from $13.3 million in the comparable period in 1995. Monitoring
and service revenues increased by approximately $4.6 million, or 41.1%, a
substantial majority of which resulted from the addition of subscribers through
the acquisition of portfolios of subscriber accounts and the Dealer Program. The
Company's subscriber base increased by 55.9% to approximately 165,200
subscribers at the end of the second quarter of fiscal 1996 as compared to
107,400 subscribers at the end of the second quarter of fiscal 1995. The sale of
enhanced services and new subscribers generated by Company personnel comprised
the remainder of revenue growth. Other revenues, consisting primarily of
revenues generated by the Company's patrol and alarm response, installation and
lock businesses, decreased by $0.2 million, or 9.7%, to $2.0 million. Such
decrease was caused primarily by a decline in installation revenues of 38.3%, or
approximately $0.4 million offset by a slight increase in patrol and alarm
response revenues. The decline in installation revenues resulted from the
Company's increased 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 second quarter of fiscal 1996
increased by approximately $1.2 million, or 24.0%, to $6.0 million. Cost of
revenues as a percentage of total revenues declined to 33.7% for the second
quarter of fiscal 1996 from 36.1% for the comparable period in fiscal 1995.
Monitoring and service expenses increased by approximately $1.5 million, or
54.1%, 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 27.7% for the second quarter of fiscal 1996 from 25.3%
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 second quarter of fiscal 1996, due primarily to the
acquisition of portfolios of subscriber accounts that had a lower average MRR
per subscriber than the Company's average. Other expenses decreased by
approximately $0.4 million, or 18.8%, to approximately $1.6 million for the
second quarter in fiscal 1996 from $2.0 million for the second quarter of fiscal
1995. The decrease primarily was caused by a 40.4% decrease ($0.3 million) in
installation expense. In addition, both lock and patrol and alarm response
expenses declined slightly in the quarter.
Gross profit. Gross profit for the second quarter of fiscal 1996 was
approximately $11.7 million, which represents an increase of approximately $3.2
million, or 37.7%, over the $8.5 million of gross profit recognized in the
comparable period in fiscal 1995. Such increase was caused primarily by an
increase in monitoring and service activities which paralleled the increase in
the Company's subscriber base noted above. Gross profit as a percentage of total
revenues was 66.3% for the second quarter of fiscal 1996 compared to 63.9% 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
88.8% in the second
16
<PAGE> 18
quarter of fiscal 1996. Gross profit from other revenues increased to
approximately $0.4 million for the second quarter of fiscal 1996 from
$0.2 million for the comparable period in fiscal 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses rose to approximately $3.4 million in the second quarter
of fiscal 1996, which represents an increase of approximately $0.5 million, or
16.6%, over selling, general and administrative expenses in the comparable
period in fiscal 1995. Such figure as a percentage of total revenues declined
from 22.1% in the second quarter of fiscal 1995 to 19.4% in the second quarter
of fiscal 1996, due primarily to a decline in sales and marketing expense of
36.2% (or $0.3 million) offset by an increase of 34.3% (or $0.8 million) in
general and administrative expenses. 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 comprised less than 1% of
revenues in each of the quarters ending March 31, 1995 and 1996. The provision
for doubtful accounts increased to approximately $0.6 million for the second
quarter of fiscal 1996 from $0.3 million for the comparable period in fiscal
1995.
Acquisition and transition expenses. Acquisition and transition expenses
for the second quarter of fiscal 1996 totaled approximately $1.2 million
compared to $0.8 million for the comparable period in fiscal 1995. Such increase
was caused by significant acquisition activity in the second quarter of fiscal
1996, during which period the Company added approximately 46,000 subscriber
accounts.
Amortization of subscriber accounts and goodwill. Amortization expense for
the second quarter of fiscal 1996 increased by approximately $1.6 million, or
43.5% to $5.3 million. This increase is the result of the addition of subscriber
accounts through the acquisition of portfolios of subscriber accounts and the
Dealer Program.
Operating income. Operating income for the second quarter of fiscal 1996
was approximately $1.8 million, compared to approximately $1.1 million in the
comparable period in fiscal 1995. Operating income as a percentage of total
revenues was 10.4% in the second quarter of fiscal 1996, compared to 8.0% 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 economies of scale evidenced by the favorable
disparity between quarter-to-quarter growth rates in revenues (32.8%) and
selling, general and administrative expenses (16.6%).
Interest expense, net, and amortization of debt issuance costs and OID.
These amounts increased by $2.3 million, or 75.1%, to $5.3 million in the second
quarter of fiscal 1996, reflecting the Company's use of debt to finance a
substantial portion of its subscriber account growth. See "Interest expense, net
and amortization of debt issuance costs and OID" above and "Liquidity and
Capital Resources" below.
LIQUIDITY AND CAPITAL RESOURCES
General. Since September 1991, the Company has financed its operations and
growth from a combination of long-term debt, including the proceeds of the $50.0
million principal amount of Senior Subordinated Notes issued in November 1993
and the $166.0 million principal amount ($105.2 million net proceeds) of
Discount Notes issued in May 1995, short-term borrowings under its Revolving
Credit Facility, sales of stock and, to a lesser extent, cash flows from
operations. In February 1996, the Company completed a public offering of 4.0
million shares of Common Stock (2.5 million shares of which were sold by the
Company and 1.5 million shares of which were sold by two selling stockholders).
Net proceeds from such offering were approximately $23.1 million, all of which
were used to reduce borrowings under the Revolving Credit Facility. The Company
believes that, based on the amount of net cash provided by operating activities
in fiscal 1994 and 1995 and the first half of fiscal 1996, cash flows from
operations will be sufficient to fund the Company's interest payments on its
debt and capital
17
<PAGE> 19
expenditures, which are the Company's principal uses of cash other than the
purchases of subscriber accounts from the Company's dealers and acquisitions of
portfolios of subscriber accounts.
On a long-term basis, the Company has several material commitments.
Borrowings under the Revolving Credit Facility were approximately $46.5 million
at March 31, 1996 and could be as high as $75.0 million through the period ended
November 3, 1997, the current maturity date of the Revolving Credit Facility.
Although the Company believes that it will be able to obtain further extensions
of the maturity date of the Revolving Credit Facility from time to time, or will
be able to refinance the Revolving Credit Facility prior to its maturity date,
there can be no assurance that the Company will be able to do so. The Discount
Notes require the Company to begin to make interest payments on such obligations
on December 31, 1998. Based on an interest rate of 13 5/8%, such payment will be
approximately $11.3 million semiannually, or $22.6 million on an annual basis.
As a result, a substantial portion of the Company's cash flows from operations
will be required to make interest payments on the Discount Notes, and there can
be no assurance that the Company's cash flow from operations will be sufficient
to meet such obligation, or that there will be sufficient funds available to the
Company after such interest payments to meet other debt, capital expenditure and
operational obligations. The $166.0 million principal amount of Discount Notes
matures on June 30, 2005. There can be no assurance that the Company will have
the cash necessary to repay the Discount Notes at maturity or will be able to
refinance such obligations. The Company maintains a $2.0 million letter of
credit sub-facility under its Revolving Credit Facility, and has extended an
approximately $1.2 million letter of credit to a seller, scheduled payments
under which are approximately $0.4 million during each of fiscal 1997, 1998 and
1999.
The Company intends to use the remaining cash flows from operations,
together with borrowings under the Revolving Credit Facility, to finance the
addition of subscriber accounts. Although the Company anticipates that it will
continue to acquire portfolios of subscriber accounts, the Company cannot
estimate the number, size or timing of such acquisitions. Depending on such
factors, additional funds beyond those currently available to the Company may be
required to continue the acquisition program and to finance the Dealer Program,
and there can be no assurance that the Company will be able to obtain such
financing on acceptable terms or at all.
As noted above, the Company has had, and expects to continue to have, a
working capital deficit. There are two principal categories of current
liabilities that cause the Company to have a working capital deficit: (i)
"purchase holdbacks," which represent the portion of the aggregate acquisition
cost of subscriber accounts retained by the Company to offset lost MRR arising
from the cancellation of acquired accounts; and (ii) "deferred revenue," which
represents billings and cash collections received by the Company from its
subscriber base in advance of performance of services. Both purchase holdbacks
and deferred revenues are recorded as a current liability on the Company's
balance sheet.
For the first half of fiscal 1996, the Company's net cash provided by
operating activities was $10.5 million, compared to $2.9 million for the
comparable period in fiscal 1995. The increase in net cash provided by
operations of approximately $7.6 million was a result of higher earnings before
interest, taxes, depreciation and amortization (approximately $4.8 million) and
lower cash interest payments (approximately $3.2 million) offset by slightly
higher investment in working capital (approximately $0.5 million). The decline
in cash interest payments was due to the refinancing of cash interest paying
debt with the Discount Notes as described above.
For the first half of fiscal 1996, the Company's net cash used in investing
activities was $44.0 million, compared to $28.9 million during the first six
months of fiscal 1995, primarily as a result of the acquisition of portfolios of
subscriber accounts.
During the first half of fiscal 1996, the Company's net cash provided by
financing activities was $37.1 million, compared to $29.9 million in the
comparable period in fiscal 1995. Financing activities reflect the Company's
borrowings under its Revolving Credit Facility and proceeds from the Company's
secondary stock offering in February 1996.
18
<PAGE> 20
Restrictions on Dividends. POI has never paid any cash dividends on the
Common Stock and does not intend to pay cash dividends in the foreseeable
future. Both the Revolving Credit Facility and the Indenture governing the
Discount Notes restrict POI's ability to declare or pay any dividend on, or make
any other distribution in respect of, POI's capital stock.
Capital Expenditures. The Company has expended approximately $2.4 million, and
anticipates making additional capital expenditures of approximately $1.6 million
in fiscal 1996 for routine replacement and upgrading of vehicles, computers,
phone switches and other capital items. In addition, the Company anticipates
making capital expenditures of approximately $1.0 million for the upgrading of
its monitoring and administrative hardware and software. The Company believes
the installation of the new computer software will create efficiencies
Company-wide, and particularly in the customer service, data entry and field
service functions. The Company believes the complete implementation of the new
software will not occur until fiscal 1997. In addition, the Company anticipates
making capital expenditures of approximately $500,000 in fiscal 1997 and 1998 to
expand the capacity of the central monitoring station to approximately 500,000
subscribers. The Company believes cash flows from operations, together with
borrowing under the Revolving Credit Facility, will be sufficient to fund the
Company's capital expenditures in fiscal 1996.
19
<PAGE> 21
PART II
OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The following matters were submitted to and approved by the
shareholders of POI at an annual meeting of the shareholders held on January 26,
1996;
1. The following nominees for election as directors, to hold office for
a one year term and until their successors are duly elected and qualified, were
elected as directors and received the number of votes set opposite their
respective names:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
------- --- --------
<S> <C> <C>
James M. Mackenzie, Jr 7,239,086 100
Robert M. Chefitz 7,239,086 100
Dr. Ben Enis 7,239,086 100
Craig Longfield 6,127 0
</TABLE>
Messrs. Mackenzie and Chefitz and Dr. Enis were elected by the holders of
the Common Stock; Mr. Longfield was elected by PacifiCorp Financial Services as
the holder of all then outstanding shares of POI's 11% Series H Cumulative
Redeemable Convertible Preferred Stock. Following the conversion of such
preferred stock into Common Stock and the sale of such Common Stock in the
February 1996 public offering, Mr. Longfield resigned as a director of POI.
2. The selection of Coopers & Lybrand L.L.P. as auditors of the Company
was ratified by the Company's shareholders by a count of 7,224,796 share votes
(representing 79.26% of the outstanding shares) for the proposal, 4,100 against,
and 10,110 abstaining.
3. The amendment to the Company's 1994 Stock Option Plan increasing the
number of shares of Common Stock available for issuance under such plan from
354,000 shares to 944,000 shares was approved by the shareholders by a count of
5,561,803 share votes (representing 61.02% of the outstanding shares) for the
proposal, 800,813 against, and 1,100 abstaining, with 875,470 broker non-votes.
4. The Protection One, Inc. Employee Stock Purchase Plan was approved
by the shareholders by a count of 6,360,616 share votes (representing 69.79% of
the outstanding shares) for the proposal, 3,100 against and 0 abstaining, with
875,470 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K.
<TABLE>
<CAPTION>
Exhibit Exhibit Description
Number -------------------
------
<S> <C>
3.1 Bylaws of Protection One, Inc.
10.1 1994 Stock Option Plan as amended through January 26, 1996
27 Financial Data Schedule as required by Article 5 of Regulation S-X
</TABLE>
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
have duly caused this report to be signed on their behalf by the undersigned
thereunto duly authorized.
May 14, 1996 PROTECTION ONE, INC.
PROTECTION ONE ALARM MONITORING, INC.
By: /s/ John W. Hesse
--------------------
John W. Hesse
Executive Vice President
and Chief Financial Officer
21
<PAGE> 1
EXHIBIT 3.1
BYLAWS
OF
PROTECTION ONE, INC.
<PAGE> 2
BYLAWS
OF
PROTECTION ONE, INC.
(A Delaware Corporation)
------------------------------------
I.
Offices
1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office
for the transaction of the business of the Corporation shall be located at such
place within or without the State of Delaware as shall be fixed from time to
time by the board of directors, and if no place is fixed by the board of
directors, such place as the president maintains his or her office or as may
otherwise be fixed by the president.
2. OTHER OFFICES. Branch offices may at any time be established
by the board of directors at any place or places where the Corporation is
qualified to do business.
II.
Number of Directors
The board of directors shall consist of one or more members.
Unless the number of directors shall be fixed in the Certificate of
Incorporation, the number of directors shall be fixed from time to time by the
board of directors or the stockholders of the Corporation, and unless and until
so fixed the number shall be six. Directors need not be stockholders of the
Corporation. As used in these Bylaws, the term "authorized number of directors"
means the total number of directors which the Corporation would have if there
were no vacancies.
III.
Meetings of Stockholders
1. PLACE OF MEETINGS. All annual meetings of stockholders and
all other meetings of stockholders shall be held at any place within or without
the State of Delaware which may be designated by the board of directors, or by
the written consent of all persons entitled to vote thereat, given either before
or after the meeting and filed with the secretary of the Corporation. Absent
such designation or written consent, meetings shall be held at the registered
office of the Corporation.
2. ANNUAL MEETINGS. The annual meeting of stockholders of the
Corporation shall be held in each year on such date and at such time as may be
designated from time to time by the board of directors. Directors shall be
elected at the annual meeting, and any other business may be transacted which is
within the power of the stockholders and allowed by law; provided, however, that
unless the notice of meeting, or the waiver of notice of such meeting, sets
forth the general nature of any proposal to (i) approve or ratify a contract or
transaction with a director or with a corporation, firm or association in which
a director has an interest; (ii) amend the Certificate of
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<PAGE> 3
Incorporation of the Corporation; (iii) approve a reorganization or merger
involving the Corporation; (iv) elect to wind up and dissolve the Corporation;
or (v) effect a plan of distribution upon liquidation otherwise than in
accordance with liquidation preferences of outstanding shares with liquidation
preferences, no such proposal may be approved at an annual meeting.
3. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose whatsoever, unless otherwise prescribed by law, may be called at any
time by the chairman of the board (if any), by the president, by the board of
directors, by any two (2) directors, or by one or more stockholders holding not
less than one-tenth (1/10) of the voting power of the Corporation. Upon request
in writing specifying the general purpose of such meeting to the chairman of the
board (if any), president, vice president or secretary, by any person entitled
to call a special meeting of stockholders (other than the board of directors),
the officer receiving such notice forthwith shall cause notice to be given to
the stockholders entitled to vote at such meeting, in the manner provided in
Section 4 of this Article, that a meeting will be held at the time requested by
the person or persons requesting a meeting, which date shall be not less than
thirty-five (35) nor more than sixty (60) days after the receipt by such officer
of the request. No business shall be transacted at a special meeting unless its
general purpose shall have been specified in the notice of such meeting;
provided, however, that any business may be validly transacted if a quorum is
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote not present in person or by proxy
signs a written waiver of notice, a consent to the holding of such meeting, or
an approval of the minutes thereof. All such waivers, consents, or approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
4. NOTICE OF MEETINGS, ANNUAL OR SPECIAL. Except as otherwise
provided by law, notice of all meetings of stockholders shall be given in
writing to stockholders entitled to vote at the meetings by the secretary, or
assistant secretary, or transfer agent (if so authorized by the board of
directors) or in the case of the neglect or refusal or other failure so to do by
such persons, by any director. A notice may be given to any stockholder either
personally or by mail, or by other means of written communication, charges
prepaid, addressed to the stockholder at the address of such stockholder
appearing on the books of the Corporation or given by the stockholder to the
Corporation for the purpose of notice. Notice of any meeting of stockholders
shall be sent to each stockholder entitled thereto not less than ten (10) nor
more than sixty (60) days before the meeting. The notice shall be deemed given
at the time when delivered personally or when deposited in the mail or
dispatched by other means of written communication. Such notice shall specify
the place, the date and the hour of the meeting and (i) in the case of a special
meeting, the purpose or purposes for which the meeting is called; (ii) in the
case of an annual meeting, those matters which the Corporation's board of
directors intends, at the time of the giving of the first of such notices, to
present to the stockholders for action; and (iii) in the case of a meeting at
which directors are to be elected, the names of nominees which the board of
directors, at the time of the giving of the first of such notices, intends to
present to the stockholders for election. Proof that notice was given shall be
made by affidavit of the secretary, assistant secretary, transfer agent or other
person who gives such notice, and such proof of notice shall be made a part of
the minutes of the meeting. To extent provided by applicable law, such affidavit
shall be prima facie evidence of the giving of such notice. A written waiver,
signed by the person entitled to notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a stockholder at
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<PAGE> 4
a meeting shall constitute a waiver of notice of such meeting except when the
person objects at the beginning of such meeting to the transaction of any
business because the meeting is not lawfully called or convened and except that
attendance at a meeting is not a waiver of any right to object to the
consideration of matters not included in the notice if such objection is
especially made at the meeting. If any stockholder shall in person, by attorney
thereunto duly authorized, or by a written communication waive notice of any
meeting of stockholders, notice of such meeting need not be given such
stockholder. It shall not be necessary to state in a notice of any meeting of
stockholders as a purpose thereof any matter relating to the procedural aspects
of the conduct of such meeting.
5. PERSONS ENTITLED TO VOTE. If no record date is fixed by the
board of directors pursuant to Section 6 of this Article, the record date for
the determination of stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held; the record date for determining stockholders for any
other purpose shall be at the close of business on the date on which the board
of directors adopts the resolution relating thereto.
6. RECORD DATE.
(a) In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the board of directors may fix
a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the board of
directors, and which record date shall not be more than sixty (60) nor
less than ten (10) days before the date of such meeting. A
determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new
record date for the adjourned meeting.
(b) In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without
a meeting, the board of directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors. If no record date has
been fixed by the board of directors, the record date for determining
stockholders entitled to consent to corporate action in writing without
a meeting, when no prior action by the board of directors is required
by the Certificate of Incorporation, these Bylaws, or the General
Corporation Law of the State of Delaware, shall be the first date on
which a signed consent setting forth the action taken or proposed to be
taken is delivered to the Corporation by delivery to its registered
office in the State of Delaware, its principal place of business, or an
officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to
the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been
fixed by the board of directors and prior action by the board of
directors is required by the Certificate of Incorporation, these
Bylaws, or the General Corporation Law of the State of Delaware, the
record date for determining stockholders entitled to consent to
4
<PAGE> 5
corporate action in writing without a meeting shall be at the close of
business on the day on which the board of directors adopts the
resolution taking such prior action.
(c) In order that the Corporation may determine the
stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled to
exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the board of
directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty (60) days prior to
such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of
business on the day on which the board of directors adopts the
resolution relating thereto.
7. PRESIDING OFFICER. Unless the board of directors shall
otherwise provide in advance of any meeting of stockholders, at each meeting of
the stockholders the chairman of the board shall preside; or if none, or if
absent or unable to act, the president shall preside; or in the case of the
absence or inability to act of the chairman of the board and of the president, a
vice president shall preside; or in the case of the absence of inability to act
of the chairman of the board, president and a vice president, a director or
stockholder, appointed by the stockholders at the meeting, shall preside.
8. QUORUM. The presence at a meeting, in person or by proxy, of
the holders of a majority of the shares entitled to vote constitutes a quorum
for the transaction of business. The stockholders present at a duly called or
held meeting at which a quorum is present may continue to do business until
adjournment of such meeting, notwithstanding the withdrawal of such number of
stockholders so as to leave less than a quorum, if any action taken, other than
adjournment, is approved by at least a majority of the shares required to
constitute a quorum. Except as otherwise required by the Certificate of
Incorporation of the Corporation or applicable law, directors of the Corporation
shall be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors and in all matters other than the election of directors, the
affirmative vote of the majority of shares present in person or represented by
proxy at the meeting and entitled to vote on the subject matter shall be the act
of the stockholders.
9. ADJOURNED MEETINGS AND NOTICE THEREOF. Any annual or special
meeting of the stockholders, whether or not a quorum is present, may be
adjourned from time to time by a vote of the majority of the shares present in
person or by proxy. When a meeting is adjourned for thirty (30) days or more, or
if a new record date for the adjourned meeting is fixed by the board of
directors, notice of the adjourned meeting shall be given to such stockholders
of record entitled to vote at the adjourned meeting as in the case of any
original meeting. When a meeting is adjourned for less than thirty (30) days,
and a new record date is not fixed by the board of directors, it shall not be
necessary to give any notice of the time and place of the adjourned meeting or
of the business to be transacted thereat other than by announcement at the
meeting at which the adjournment is taken, provided that only business which
might have been transacted at the original meeting may be conducted at such
adjourned meeting.
5
<PAGE> 6
10. VOTING. Unless otherwise provided by law or in the
Certificate of Incorporation, each stockholder entitled to vote is entitled to
one vote for each share. Any holder of shares entitled to vote on any matter may
vote part of such shares in favor of the proposal and refrain from voting the
remaining shares or vote them against the proposal. If a stockholder fails to
specify the number of shares such stockholder is voting affirmatively, it will
be conclusively presumed that the stockholder's approving vote is with respect
to all shares which such stockholder is entitled to vote.
11. ACTION WITHOUT MEETING. Any action which, under any
provision of the General Corporation Law of the State of Delaware, may be taken
at a meeting of the stockholders may be taken without a meeting and without
prior notice and without a vote if a consent or consents in writing, setting
forth the action so taken, (i) shall be signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted; and (ii) shall be delivered to the
Corporation by delivery to its registered office by hand or by certified or
registered mail, return receipt requested, its principal place of business, or
an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded; provided, however, that
unless the consents of all stockholders entitled to vote have been solicited in
writing, if any action is approved by written consent of less than all
stockholders entitled to vote, prompt notice shall be given (in the same manner
as notice of meetings is to be given) of such action to all stockholders
entitled to vote who did not consent in writing to such action; and provided,
further, that directors may be elected by written consent only if such consent
is unanimously given by all stockholders entitled to vote, except that action
taken by stockholders to fill one or more vacancies on the board may be taken by
written consent of a majority of the shares entitled to vote in such election.
12. PROXIES. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy; provided, however, that no such proxy shall be voted or acted upon after
3 years from its date, unless the proxy expressly provides for a longer period.
Without limiting the manner in which a stockholder may authorize another person
or persons to act for him as a proxy pursuant to this section, the following
shall constitute a valid means by which a stockholder may grant such authority:
(a) A stockholder may execute a writing authorizing
another person or persons to act for him as proxy. Execution may be
accomplished by the stockholder or his authorized officer, director,
employee or agent signing such writing or causing his or her signature
to be affixed to such writing by any reasonable means including, but
not limited to, by facsimile signature.
(b) A stockholder may authorize another person or
persons to act for him as proxy by transmitting or authorizing the
transmission of a telegram, cablegram, or other means of electronic
transmission to the person who will be the holder of the proxy or to a
proxy solicitation firm, proxy support service organization or like
agent duly authorized by the person who will be the holder of
6
<PAGE> 7
the proxy to receive such transmission, provided that any such
telegram, cablegram or other means of electronic transmission must
either set forth or be submitted with information from which it can be
determined that the telegram, cablegram or other electronic
transmission was authorized by the stockholder. If it is determined
that such telegrams, cablegrams or other electronic transmissions are
valid, the inspectors or, if there are no inspectors, such other
persons making that determination shall specify the information upon
which they relied.
Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission created pursuant to this section may be substituted or
used in lieu of the original writing or transmission for any and all purposes
for which the original writing or transmission could be used, provided that such
copy, facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission. A duly executed
proxy shall be irrevocable if it states that it is irrevocable and if, and only
as long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally.
13. LIST OF STOCKHOLDERS. It shall be the duty of the Secretary
or other officer of the Corporation who shall have charge of its stock ledger,
either directly or through another officer of the Corporation designated by him
or through a transfer agent or transfer clerk appointed by the board of
directors, to prepare, at least ten (10) days before every meeting of the
stockholders at which directors of the Corporation are to be elected, a complete
list of the stockholders entitled to vote thereat, arranged in alphabetical
order and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at the place where the meeting is to be held or at another place
within the city where the meeting is to be held if such other place is specified
in the notice of the meeting. The list shall be produced at and for the duration
of the meeting for inspection by any stockholder who shall be present thereat.
The original or duplicate stock ledger shall be exclusive evidence of the
stockholders entitled to examine such list or the books of the Corporation, or
to vote in person or by proxy at such election.
IV.
Directors and Management
1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of the board of directors, which may
exercise all such authority and powers of the Corporation to do all such lawful
acts and things as are not by law, the Certificate of Incorporation of the
Corporation or these Bylaws directed or required to be exercised or done by the
stockholders. Without limiting the generality of the foregoing, it is hereby
expressly declared that the directors shall have the power and, to the extent
required by law, the duty:
(a) To appoint and remove at pleasure all officers,
managers, man agement companies, agents and employees of the
Corporation, prescribe their duties in
7
<PAGE> 8
addition to those prescribed in these Bylaws, supervise them, fix their
compensation and require from them security for faithful service. Such
compensation may be increased or diminished at the pleasure of the
directors.
(b) To conduct, manage and control the affairs and
business of the Corporation; to make rules and regulations not
inconsistent with the Certificate of Incorporation or Delaware law or
these Bylaws; and to make all lawful orders on behalf of the
Corporation and to prescribe the manner of executing the same.
(c) To appoint by resolution passed by a majority of
the authorized number of directors an executive and other committees,
each committee to consist of one (1) or more of the directors of the
Corporation. The board may designate one or more directors as alternate
members of any committee who may replace any absent or disqualified
member at any meeting of the committee. The directors may designate by
resolution to any such committee any of the powers and authority of the
board of directors in the management of the business and affairs of the
Corporation; provided, however, that no such committee shall have the
power or authority in reference to amending the Certificate of
Incorporation of the Corporation (except that a committee may, to the
extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors in
accordance with the provisions of the General Corporation Law of the
State of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution,
any distribution of assets of the Corporation or the conversion into,
or the exchange of such shares for, shares of any other class or
classes or any other series of the same or any other class or classes
of stock of the Corporation or fix the number of shares of any series
of stock or authorize the increase or decrease of the shares of any
series); adopting an agreement of merger or consolidation; recommending
to the stockholders the sale, lease or exchange of all or substantially
all of the Corporation's property and assets; recommending to the
stockholders a dissolution of the Corporation or a revocation of a
dissolution; or amending these Bylaws; and, unless the resolution
expressly so provides, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock or
to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of the State of Delaware. The executive
committee, if any, shall be composed of two (2) or more directors. The
provisions of these Bylaws regarding notice and meetings of directors
shall apply to all committees.
(d) To designate from time to time the person or
persons who may sign or endorse checks, drafts, or other orders for
payment of money, notes, or other evidences of indebtedness, issued in
the name of, or payable to, the Corporation, and to prescribe the
manner of collecting and depositing funds of the Corporation, and the
manner of drawing of checks thereon.
(e) To authorize the issuance of stock of the
Corporation, from time to time, upon such terms as may be lawful.
8
<PAGE> 9
(f) To prepare an annual report to be sent to the
stockholders after the close of the fiscal or calendar year of the
Corporation, which report shall comply with the requirements of law. To
the extent permitted by law, the requirements that an annual report be
sent to stockholders and the time limits for sending such reports are
hereby waived, the directors, nevertheless, having the authority to
cause such report to be prepared and sent to stockholders.
2. TERM OF OFFICE. Each director shall hold office until the
annual meeting of the stockholders next following his election and until his
successor is elected and qualified, or until his earlier death, or resignation
or removal in the manner hereinafter provided.
3. QUORUM AND MANNER OF ACTING. A majority of the directors in
office (but in no event less than one-third of the authorized number of
directors) shall constitute a quorum for the transaction of business at any
meeting, and the act of a majority of the directors present at any meeting at
which a quorum is present shall be the act of the board of directors. A majority
of the directors present may adjourn any meeting from time to time. Notice of
any adjourned meeting shall be given in the manner provided in Section 5 of this
Article.
4. VACANCIES. A vacancy in the board of directors exists in
case of the happening of any of the following events:
(a) The death, resignation, or removal of any
director.
(b) The authorized number of directors is increased.
(c) At any annual, regular, or special meeting of
stockholders at which any director is elected, the stockholders fail to
elect the full authorized number of directors to be elected at that
meeting.
(d) The board of directors declares vacant the office
of a director who has been declared of unsound mind by an order of the
court or convicted of a felony, or otherwise in a manner provided by
law.
All vacancies (other than vacancies created by removal of a director) may be
filled by the majority of the remaining directors, though less than a quorum, or
by a sole remaining director. Each director so elected shall hold office until
his successor is elected at an annual, regular, or special meeting of the
stockholders. The stockholders may, by vote or written consent of a majority of
the outstanding shares entitled to vote in election of directors, elect a
director at any time to fill any vacancy not filled by the directors. If the
board of directors accepts the resignation of a director tendered to take effect
at a future time, the board of directors or the stockholders may elect a
successor to take office when the resignation becomes effective. A reduction of
the authorized number of directors does not remove any director prior to the
expiration of his term of office.
5. MEETINGS OF DIRECTORS.
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<PAGE> 10
(a) There shall be no regular meetings of the board of
directors unless the board of directors shall establish such regular
meetings by duly adopted resolution, and each meeting of the board of
directors shall be a special meeting.
(b) All meetings of the board of directors shall be
called by the chairman of the board (if any), or the president, or, if
both are absent or unable or refuse to act, by any vice president, the
secretary or by any two (2) directors.
(c) Written or oral notice of the time and place of
special meetings of the board of directors shall be given or delivered
personally to each director, or sent to each director by mail or by
other form of written or telephonic communication, at least forty-eight
(48) hours before the meeting if personal delivery is made or if the
telephone, telegraph, cable or telex is used, and at least four (4)
days before the meeting if mail is used. If the address of a director
is not shown on the records and is not readily ascertainable, notice
shall be addressed to such director at the place and city in which the
meetings of the directors are regularly held. Proof that notice was
given shall be by affidavit of the chairman of the board, president,
vice president, secretary or two (2) directors, or of the person acting
under the direction of any of the foregoing, who gives such notice and
such proof of notice shall be made a part of the minutes of the
meeting. Notice of the time and place of holding an adjourned meeting
shall be given to absent directors if the time fixed at the meeting
which was adjourned for the adjourned meeting is more than twenty-four
(24) hours after adjournment. Notwithstanding the foregoing, sufficient
notice of a meeting of the board of directors to be held immediately
following a stockholders meeting at which one or more directors is
elected, may be given by announcement thereof at such stockholders'
meeting.
(d) At the meeting of the board of directors next
following each annual meeting of the stockholders, the board shall
elect officers.
(e) Notice of a meeting need not be given to any
director who signs a waiver of notice or a consent to holding the
meeting or an approval of the minutes thereof, whether before or after
the meeting, or who attends the meeting without protesting, prior
thereto or at its commencement, the lack of notice to such director.
All such waivers, consents, or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
(f) Meetings of the directors may be held at any place
within or with out the State of Delaware designated in the notice of
the meeting or, if not stated in the notice or if there is no notice,
designated by resolution of the board of directors.
(g) The members of the board of directors or of any
committee thereof may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and
participation in a meeting by such means shall constitute presence in
person at such a meeting.
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<PAGE> 11
6. CONSENT OF DIRECTORS IN LIEU OF MEETING. Any action required
or permitted to be taken by the board of directors of the Corporation under the
General Corporation Law of the State of Delaware may be taken without a meeting
if all members of the board, individually or collectively, consent thereto in
writing and the writing or writings evidencing such consent are filed with the
minutes of proceedings of the board. Such action by written consent shall have
the same force and effect as a unanimous vote of such directors.
7. FEES AND COMPENSATION. One or more of the directors may, by
resolution of the board of directors, receive a stated salary for services as
director and may be allowed a fixed fee, with or without expenses, for
attendance at each meeting. Nothing herein contained shall be construed to
preclude any director from serving the Corporation in any capacity as an
officer, agent, employee or otherwise, and receiving compensation therefor.
8. RESIGNATIONS. Any director of the Corporation may resign at
any time by giving written notice to the board of directors. The resignation of
any director shall take effect at the date of receipt of such notice or at any
later date specified therein and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
9. REMOVAL OF DIRECTORS. Any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
the shares of the Corporation then entitled to vote at an election of directors.
10. ELECTION OF OFFICERS; TERM OF OFFICE; QUALIFICATIONS;
DUTIES. The officers of the Corporation shall be chosen by the board of
directors. Each officer shall hold office until his or her successor is chosen
and shall have qualified or until his or her death, or until he or she shall
have resigned or shall have been removed in the manner hereinafter provided.
Officers may be, but need not necessarily be, selected from the members of the
board of directors or from the stockholders. The officers shall each have such
powers and duties as are set forth in these Bylaws and as generally pertain to
their respective offices, and as from time to time may be conferred upon them by
the board of directors. Any number of offices may be held by the same person.
11. REMOVAL OF OFFICERS. Any officer may be removed, either with
or without cause, at any time, by the board of directors.
12. RESIGNATION OF OFFICERS. Any officer may resign at any time
by giving written notice to the board of directors. Any such resignation shall
take effect at the date of receipt of such notice or at any later date specified
therein and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
13. VACANCIES OF OFFICERS. A vacancy in any office because of
death, resignation, removal or any other cause shall be filled in the manner
prescribed in these Bylaws for election to such office.
11
<PAGE> 12
14. CHAIRMAN OF THE BOARD. Should the board of directors elect a
chairman of the board, he shall, subject to the control of the board of
directors, have such supervision, direction and control of the business and
other officers of the Corporation as the board of directors may delegate to such
officer from time to time. Absent such specific delegation, and unless provided
otherwise by resolution of the board of directors, the chairman of the board
shall have the duties and authority of a chief executive officer. The chairman
of the board shall preside at all meetings of the stockholders, and, if a
director, at all meetings of the board of directors.
15. PRESIDENT. Should the board of directors elect a president,
he shall, subject to the control of the board of directors, have such
supervision, direction and control of the business and officers of the
Corporation as the board of directors may delegate to such officer from time to
time. Absent such specific delegation, and in the absence of the existence of
the office of chairman of the board, the president shall have the duties and
authority of a chief executive officer, and shall preside at all meetings of the
stockholders and, if a director, at all meetings of the board of directors.
Should the office of chairman of the board exist, the president shall have such
duties and authority as may be granted to such officer by the board of directors
or as may be delegated to such officer by the chairman of the board.
16. SECRETARY. Should the board of directors elect a secretary,
he shall be the custodian of the seal of the Corporation and of the books and
records and files thereof, and shall affix the seal of the Corporation to all
stock certificates, papers and instruments requiring the same. The secretary
shall, in the manner provided by law, keep, or cause to be kept, at the
principal executive office, or such other place as the board of directors may
order, a minute book of all meetings of directors and stockholders. The
secretary shall keep, or cause to be kept, at the principal executive office or
at the office of the Corporation's transfer agent, a share register, or a
duplicate share register, showing the names of the stockholders and their
addresses, the number and classes of shares held by each, the number and date of
cancellation of every certificate surrendered for cancellation.
17. CHIEF FINANCIAL OFFICER. Should the board of directors elect
a chief financial officer, he shall keep and maintain, or cause to be kept and
maintained, adequate and correct accounts of the properties and business
transactions of the Corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, surplus and shares. The chief
financial officer shall render to the president or the board of directors,
whenever such officer or board so requests, an account of the financial
condition of the Corporation.
12
<PAGE> 13
V.
Stock
1. CERTIFICATE OF SHARES. Every owner of shares in the
Corporation shall be entitled to have a certificate in such form, not
inconsistent with the Certificate of Incorporation or any law, as shall be
prescribed by the board of directors, certifying the number of shares and class
or series owned by such stockholder in the Corporation. Every certificate for
shares shall be signed by, or in the name of the Corporation signed by, the
chairman or the vice chairman of the board, if any, the president or a vice
president, and the chief financial officer or an assistant chief financial
officer or treasurer or the secretary or an assistant secretary. Subject to the
restrictions provided by law, signatures may be a facsimile and shall be
effective irrespective of whether any person whose signature appears on the
certificate shall have ceased to be such officer before the certificate is
delivered by the Corporation. Each certificate issued shall bear all statements
or legends required by law to be affixed thereto.
2. TRANSFER OF SHARES. Transfer of shares of the Corporation
shall be made only on the books of the Corporation by the registered holder
thereof or by such other person as may under law be authorized to endorse such
shares for transfer, or by such stockholder's attorney thereunto authorized by
power of attorney duly executed and filed with the secretary or with the
transfer agent or transfer clerk. Except as otherwise provided by law, upon
surrender to the Corporation or its transfer agent or transfer clerk of a
certificate for shares duly endorsed and accompanied by all applicable taxes
thereon, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate, and record the
transaction upon its books. The secretary or transfer agent may require that all
signatures shall be guaranteed. Whenever any transfer of shares shall be made
for collateral security and not absolutely, such facts shall be so expressed in
the entry of transfer if, when the certificate or certificate shall be presented
to the Corporation for transfer, both the transferor and transferee request the
Corporation so to do.
3. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. The
holder of any shares of the Corporation shall immediately notify the Corporation
of any loss, theft, destruction or mutilation of the certificate therefor. The
board of directors shall direct a new certificate or certificates to be issued
in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, or upon the
surrender of any mutilated certificate, if the Corporation shall not theretofore
have received notice that the certificate alleged to have been lost, destroyed
or stolen has been acquired by a bona fide purchaser thereof, and the board of
directors may, at its discretion, require the owner of the lost, stolen, or
destroyed certificate or such owner's legal representatives to give the
Corporation a bond in such sum, limited or unlimited, in such form and with such
surety or sureties as the board of directors shall, in its uncontrolled
discretion, determine, to indemnify the Corporation against any claim that may
be made against it on account of alleged loss, theft, or destruction of any such
certificate or the issuance of such new certificate.
4. REGISTERED STOCKHOLDERS. Except as otherwise provided by
law, the Corporation shall be entitled to recognize as the exclusive owner of
shares or other securities of the
13
<PAGE> 14
Corporation, for all purposes as regards the Corporation, the person in
whose name the shares or other securities stand registered on its books as the
owner, and such person exclusively shall be entitled to receive dividends and to
vote as such owner. To the extent permissible under law, the Corporation shall
be entitled to hold liable for calls and assessments a person registered on its
books as the owner of the shares or other securities, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares or
other securities on the part of any person, whether or not it shall have express
or other notice thereof.
5. REGULATIONS. The board of directors shall have power and
authority to make all such rules and regulations not inconsistent with law or
with the Certificate of Incorporation as may be deemed expedient concerning the
issue, transfer and registration of certificates for shares of the capital stock
of the Corporation, and may appoint transfer agents, transfer clerks and
registrars thereof.
VI.
Corporate Records--Inspection
1. RECORDS. The Corporation shall maintain adequate and correct
accounts, books and records of its business and properties. All of such books,
records and accounts shall be kept at the Corporation's principal executive
office, as fixed by the board of directors from time to time.
2. INSPECTION OF BOOKS AND RECORDS. All books and records of
the Corporation shall, to the extent required by law, be open to inspection of
directors, stockholders, and voting trust certificate holders, in the manner
provided by law.
3. INSPECTION OF BYLAWS. The Corporation shall keep in its
principal execu tive office the original or a copy of these Bylaws as amended or
otherwise altered to date, which shall be open to inspection by the stockholders
at all reasonable times during office hours. The Corporation shall upon the
written request of any stockholder furnish to such stockholder a copy of these
bylaws as amended to date.
VII.
Seal
The board of directors may adopt a corporate seal, which shall be
circular in form, and shall have inscribed thereon the name of the Corporation,
the date of its incorporation, the word "Delaware," and such other words or
figures as the board of directors may approve and adopt. The board of directors
may alter the corporate seal at any time and from time to time, provided the
seal, as altered, conforms with the requirements of this Article.
VIII.
Fiscal Year
The fiscal year of the Corporation shall be as determined by the board
of directors from time to time.
14
<PAGE> 15
IX.
Indemnification
1. RIGHT TO INDEMNIFICATION. The Corporation shall indemnify
and hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person who was or is made or
is threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, or a person for whom he is the
legal representative, is or was a director or officer of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust, enterprise or nonprofit entity, including service with respect to
employee benefit plans (an "indemnitee"), against all liability and loss
suffered and expenses (including attorneys' fees) reasonably incurred by such
indemnitee. Subject to Section 3 of this Article, the Corporation shall be
required to indemnify an indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if the initiation of such proceeding
(or part thereof) by the indemnitee was authorized by the board of directors.
2. PREPAYMENT OF EXPENSES. The Corporation shall pay the
expenses (including attorneys fees) incurred by an indemnitee in defending any
proceeding in advance of its final disposition; provided, however, that the
payment of expenses incurred by a director or officer in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the director or officer to repay all amounts advanced if it should be
ultimately determined that the director or officer is not entitled to be
indemnified under this Article or otherwise.
3. CLAIMS. If a claim for indemnification or payment of
expenses under this Article is not paid in full within sixty (60) days after a
written claim therefor by the indemnitee has been received by the Corporation,
the indemnitee may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have the burden
of proving that the indemnitee was not entitled to the requested indemnification
or payment of expenses under applicable law.
4. NONEXCLUSIVITY OF RIGHTS. The rights conferred on any person
by this Article shall not be exclusive of any other rights which such person may
have or hereafter acquire under any statute, provision of the certificate of
incorporation, these Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise.
5. OTHER INDEMNIFICATION. The Corporation's obligation, if any,
to indem nify or advance expenses to any person who was or is serving at its
request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such person may collect as indemnification or advancement
from such other corporation, partnership, joint venture, trust, enterprise or
nonprofit entity.
15
<PAGE> 16
6. AMENDMENT OR REPEAL. Any repeal or modification of the
foregoing provisions of this Article shall not adversely affect any right or
protection hereunder of any person in respect of any act or omission occurring
prior to the time of such repeal or modification.
X.
Amendments
1. AMENDMENTS. These Bylaws, or any of them, may be altered,
amended or repealed, and new Bylaws may be made, upon the affirmative vote given
at a meeting, or the written consent without a meeting, of the holders of record
of a majority of the total number of shares of the Corporation voting thereon
or, if permitted by the Certificate of Incorporation, by the board of directors.
2. RECORDATION. If any Bylaw is adopted, amended or repealed,
such action shall be recorded in the Bylaw section of the minute book in the
appropriate place.
THIS IS TO CERTIFY: That I am the duly elected, qualified and acting
Secretary of Protection One, Inc. and that the foregoing Bylaws are the Bylaws
of said corporation as amended on March 21, 1996.
/s/ John W. Hesse
------------------------
John W. Hesse, Secretary
16
<PAGE> 1
1994 STOCK OPTION PLAN
(As amended through January 26, 1996)
EXHIBIT 10.1
<PAGE> 2
PROTECTION ONE, INC.
1994 STOCK OPTION PLAN
(AS AMENDED THROUGH JANUARY 26, 1996)
1. PURPOSE.
The purposes of this 1994 Stock Option Plan (THIS "PLAN") are
to provide long- term incentives and rewards to directors, officers and key
employees of Protection One, Inc., a Delaware corporation (THE "COMPANY"), to
assist the Company in attracting and retaining such individuals on a basis
competitive with industry practices, to align their interests with those of the
Company's stockholders, and to provide additional compensation to them.
2. EFFECTIVE DATE.
This Plan shall be effective as of the date of its adoption by
the Board of Directors of the Company (THE "ADOPTION DATE"), subject to the
approval of this Plan by the holders of a majority of the issued and outstanding
shares of the Class A Common Stock of the Company (THE "COMMON STOCK") and the
voting preferred stock of the Company, voting together as a single class and
with each share of such preferred stock entitled to the number of votes
determined in accordance with Section 9(a) of Article IV of the Company's
Restated Certificate of Incorporation (THE DATE ON WHICH THE HOLDERS SO APPROVE
THE PLAN TO BE REFERRED TO HEREIN AS THE "APPROVAL DATE"). Grants of "Options"
(as hereinafter defined) may be made under this Plan on and after the Adoption
Date, but all rights of the participants shall be subject to such stockholder
approval of this Plan. In the event such stockholder approval is not obtained,
all Options under this Plan shall be null and void ab initio.
3. ADMINISTRATION OF THIS PLAN.
3.1 This Plan shall be administered by the Compensation Committee of
the Board of Directors of the Company, or such other committee of the Board of
Directors as shall be designated by the Board of Directors (THE "COMMITTEE").
Each member of the Committee shall be a "disinterested person," as such term is
defined in Rule 16b-3 promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934 (THE "1934 ACT") and that became
effective on May 1, 1991, as such rule may be amended from time to time ("RULE
16B-3"), and no member of the Committee shall be eligible to participate in this
Plan or in any other plan of the Company if such participation would cause such
member to cease to be a disinterested person.
3.2 The Committee shall have full power and authority in its
discretion, subject to and not inconsistent with the express provisions of this
Plan, to take any and all actions required or permitted to be taken under this
Plan. Such full power and authority shall include, without limitation, the
selection of participants to whom Options shall be granted; the determination of
the number of shares of Common Stock purchasable upon the exercise of each
Option granted to each participant and the amount payable by the participant
upon the exercise thereof (THE "EXERCISE PRICE"); the terms and conditions of
each grant of Options, including without limitation establishing the objectives
and conditions, if any, for the earning or vesting of Options; the right to
interpret and construe each provision of this Plan and of all agreements and
instruments reflecting the terms and conditions of all grants hereunder (THE
"AGREEMENTS"); the making of all required or appropriate determinations under
this Plan and the Agreements; and the adoption, amendment and recision of such
rules and regulations relating to this Plan as the Committee shall determine in
its discretion (THE "RULES"); in each case subject to the express provisions of
this Plan.
3.3 The interpretation or construction by the Committee of this Plan,
any Agreement or any Rule and all determinations by the Committee shall in each
case be final, binding and conclusive with respect to all interested parties,
unless otherwise determined by the Board of Directors. No member of
<PAGE> 3
the Committee shall be personally liable for any action,
failure to act, determination, interpretation or construction made in good
faith.
3.4 The Committee shall determine the "fair market value" of the Common
Stock from time to time for purposes of this Plan in accordance with such
procedures for the determination thereof as the Committee shall determine.
4. PARTICIPANTS.
Participants in this Plan shall be directors, officers and key
employees of the Company or its subsidiaries selected by the Committee. Nothing
set forth in this Plan or in any Agreement shall confer upon any director,
officer or employee any right to continue in the employ of the Company or its
subsidiaries or as an officer of the Company, nor limit in any manner the right
of the Company to terminate such office or employment for any reason whatsoever,
with or without good cause. No employee or other person shall have any right to
be granted an Option.
5. SHARES OF STOCK SUBJECT TO THIS PLAN.
The shares of Common Stock available for issuance under this
Plan pursuant to the exercise of "ISOs" or "NQSOs" (as each such term is
hereinafter defined), shall consist of 944,000 shares of Common Stock in the
aggregate, subject to adjustment as provided in Section 13. Such number of
shares shall be set aside out of the authorized but unissued shares of Common
Stock not reserved for any other purpose or out of Common Stock held in or
acquired for the treasury of the Company. Should an Option be terminated for any
reason without being exercised, or be cancelled in whole or in part, the shares
of Common Stock subject to such Option shall again be available for issuance
under this Plan.
6. GRANT OF OPTIONS.
The Committee may from time to time, in its sole discretion,
award to such directors, officers and key employees as it designates options to
purchase shares of the Common Stock (THE "OPTIONS"). In connection therewith,
the Committee shall have full and final authority in its discretion, subject to
the express provisions of this Plan, (i) in the case of each Option, to
determine whether the Option shall be an incentive stock option (AN "ISO")
pursuant to Section 422 of the Internal Revenue Code of 1986 (THE "IRC"), as
such section may from time to time be amended or supplemented, or an Option that
does not qualify under such Section 422 (AN "NQSO"), (ii) to determine the time
or times at which Options will be awarded, (iii) to determine the number of
shares that may be purchased upon the exercise of each Option, (iv) to determine
the Exercise Price for the shares purchasable upon the exercise of each Option,
which price shall not be less than the minimum specified in Section 7.1, (v) to
determine the time or times when each Option shall become exercisable and the
duration of the exercise period, and (vi) to prescribe the form or forms of the
Agreements reflecting the terms and conditions of each Option.
7. EXERCISE PRICE AND CONSIDERATION.
7.1 The Exercise Price shall be determined by the Committee at the time
of each grant of Options; provided, however, that the Exercise Price for an ISO
shall not be less than 100% of the fair market value of the Common Stock on the
date on which the ISO is granted.
7.2 The Exercise Price shall be paid in cash, by check payable to the
order of the Company, by the surrender of shares of the Common Stock having a
fair market value (determined in accordance with Section 3.4 above) equal to the
Exercise Price on the date on which the Option is exercised, or any combination
of the foregoing. Notwithstanding the foregoing, the Exercise Price may also be
paid by delivery to the Company of (I) cash in the amount that is not less than
the aggregate par value of the shares being purchased, and (II) a binding, joint
and several obligation of the participant and a financial
<PAGE> 4
institution or broker approved by the Company to pay the balance of the Exercise
Price on such terms as may be specified from time to time by the Committee;
provided, however, that a participant may pay the Exercise Price pursuant to
this sentence if and only if either (x) the Option being exercised is an NQSO,
or (y) the Option being exercised is an ISO and the Company is satisfied that
the participant understands that the effect of such arrangement will be to cause
a "disqualifying disposition" of the participant's shares and a loss to the
participant of the favorable tax treatment of such ISO provided by the IRC. The
Committee may determine to cause the Company to lend directly to a participant
some or all of the funds required to pay the Exercise Price, on such terms and
subject to such conditions as the Committee may establish.
8. MANNER OF EXERCISE.
Unless and to the extent otherwise provided in the applicable
Agreement, and subject to the limitations set forth in this Plan, each Option
may be exercised from time to time in whole or in part by the participant
delivering to the Company at its main office (to the attention of the President
and the Chief Financial Officer) written notice of the number of shares with
respect to which the Option is being exercised accompanied by full payment to
the Company of the Exercise Price of the shares being purchased; provided,
however, that in the event the consideration is other than cash, such written
notice shall include the participant's election to pay some or all of the
Exercise Price as otherwise permitted by Section 7.2, in which case the
participant shall have a reasonable time (as determined by the Committee) to
arrange for the delivery to the Company of the balance of the Exercise Price or
the agreement that will reflect the terms of such payment; and provided,
further, that if payment of the Exercise Price is to be made in shares of Common
Stock, the participant shall deliver to the Company stock certificates
evidencing such shares properly endorsed for transfer in negotiable form. If
someone other than the participant is exercising an Option, the person or
persons so exercising the Option shall be required to furnish to the Company
appropriate documentation that such person or persons have the full legal right
and power to exercise the Option on behalf of and for the participant.
9. DURATION AND PERIOD FOR EXERCISE OF OPTIONS.
9.1 Each Option shall be exercisable on such date or dates and during
such period as shall be determined by the Committee at the time of grant,
provided that (i) no ISO shall be exercisable after the expiration of 10 years
after the grant date, (ii) no Option shall be exercisable unless and until
either a registration statement under the Securities Act of 1933, as amended, is
in effect registering the shares of Common Stock to be issued upon exercise of
the Options or, in the opinion of counsel for the Company, an exemption from
registration is available, and (iii) with respect to each grant of Options to a
participant that is required to file reports pursuant to Section 16(a) of the
1934 Act, no Option shall be exercisable prior to six months after the earlier
of (I) the date it is granted, and (II) the Approval Date. Subject to the
foregoing, the Committee shall specify at the time each Option is granted, and
shall set forth in the corresponding Agreement, the time or times at which, and
in what amounts, the Option may be exercised.
9.2 Upon the termination of the employment by the Company or its
subsidiaries of a participant, such participant's rights to exercise an Option
then held shall be as follows, subject to the authority of the Committee to
shorten or extend the exercisability of an Option in its sole discretion (with
the consent of the participant or the participant's legal representative in the
case of an ISO):
(a) Death or Permanent and Total Disability. If the
employment is terminated by reason of the death or "permanent and total
disability" (as defined in Section 22(e)(3) of the IRC) of the
participant, each Option held by the participant on the date of
termination shall terminate on the fixed expiration date of such
Option; provided, however, that in the case of ISOs the date of
termination shall be the date that is 12 months after the date of
termination of employment if such date is earlier than the fixed
expiration date of the Option.
(b) Other Disability. If the employment is terminated
by reason of the disability of the participant that is not permanent
and total disability (as defined in Section 22(e)(3)
<PAGE> 5
of the IRC), each Option held by the participant on the date of
termination shall terminate on the fixed expiration date of such
Option; provided, however, that in the case of ISOs the date of
termination shall be the date that is three months after the date of
termination of employment if such date is earlier than the fixed
expiration date of the Option.
(c) Other Termination. If the employment is
terminated by any reason other than death or disability, each Option
held by the participant on the date of termination shall terminate on
the earlier of (i) the date that is three months after the date of
termination of employment, or (ii) the fixed expiration date of such
Option.
9.3 If the employment of a participant is terminated by reason of the
death or permanent and total disability of the participant, all Options held by
such participant shall become immediately vested, notwithstanding any conditions
to the vesting of such Options set forth herein or in the Agreement reflecting
such Options. If the employment of a participant is terminated by any reason
other than the death or permanent and total disability of the participant, all
Options not vested as of the time of termination shall be forfeited, subject to
the authority of the Committee to authorize, in the applicable Agreement, at the
time of termination or otherwise, the immediate vesting of all or such portion
of such Options as it may determine. The Committee shall have the authority to
accelerate the vesting of all or some portion of the Options notwithstanding any
conditions to vesting of such Options set forth herein or in the Agreement
reflecting such Options.
9.4 The Options of a participant who dies shall be exercisable by a
legatee or legatees of such Options under the participant's last will, or by
such participant's executor, personal representative or distributees. However,
in the event of a participant's death after the date of termination of
employment (which termination was for a reason other than the death of the
participant), such deceased's participant's Options shall expire in accordance
with their terms as if such participant were still living.
9.5 The Committee shall have the authority to determine the reason for
and date of termination of employment of each participant (including but not
limited to determining whether a termination is by reason of disability), which
determination shall be final, binding and conclusive on all interested parties.
10. LIMITATION ON GRANT OF ISO'S.
10.1 The aggregate fair market value (determined as of the time the
Option is granted) of the shares of Common Stock for which ISO's may first be
exercisable by an participant during any calendar year shall not exceed
$100,000.
10.2 No ISO may be granted under this Plan after the 10th anniversary
of the Adoption Date.
10.3 No ISO may be granted to any employee who owns stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Company.
11. ACCELERATION OF OPTIONS.
11.1 In the event that the Company enters into one or more agreements
to dispose of all or substantially all of its assets or the Company's
stockholders dispose of or become obligated to dispose of 50% or more of the
outstanding shares of Common Stock, other than to the Company or a subsidiary of
the Company, in either case by means of a tender offer, sale, merger,
reorganization or liquidation, in one or a series of related transactions (AN
"ACCELERATION EVENT"), then each outstanding Option shall become exercisable
during the 30 days immediately prior to the scheduled consummation of the
Acceleration Event with respect to the full number of shares for which such
Option has been granted: provided, however, that no Acceleration Event shall be
deemed to occur for purposes of this section (unless otherwise provided in the
applicable Agreement) in the event that (i) the term of the agreements pursuant
to which such transaction is occurring require as a condition to the
consummation thereof that each Option
<PAGE> 6
shall either be assumed by a successor corporation or parent thereof or be
replaced with a comparable option to purchase shares of capital stock of the
successor corporation or parent thereof, and (ii) the transaction is approved by
a majority of the directors who have been in office for more than 12 months
prior to the scheduled consummation of the transaction. Any exercise of Options
during such 30-day period shall be conditioned upon the consummation of the
Acceleration Event and shall be effective only concurrently with the
consummation of the Acceleration Event, and in the event the Acceleration Event
is not consummated all exercises of Options made pursuant to this section shall
be of no further force or effect; unless, with respect to any such Option, such
Option was otherwise exercisable in accordance with its terms without regard to
this section and the participant exercising such Option indicates in writing
that such exercise is not conditioned on the consummation of the Acceleration
Event. Upon consummation of the Acceleration Event, all outstanding Options,
whether or not accelerated pursuant to this section, shall terminate and cease
to be exercisable, unless assumed by the successor corporation or a parent
thereof.
11.2 In the event of the occurrence of an Acceleration Event in which
the Company will not be the surviving entity or in which all of the shares of
Common Stock of the Company are being acquired, any participant who is then
subject to the filing requirements imposed under Section 16(a) of the 1934 Act
with respect to the Company shall receive a payment of cash equal to the
difference between the aggregate fair market value of the shares of Common Stock
subject to such accelerated Option and the aggregate Exercise Price of such
shares. Payment shall be made within 10 days after the consummation of the
Acceleration Event. The foregoing payments under this section shall be made in
lieu of and in full discharge of any and all obligations of the Company with
respect to all subject Options of the participant.
11.3 The grant of Options under this Plan shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
12. CANCELLATION AND REPRICING OF OPTIONS.
12.1 The Committee shall have the authority to effect, at any time and
from time to time, with the consent of the affected participant, the
cancellation of any or all outstanding Options and the grant in substitution
therefor of new Options under this Plan (subject to the limitations hereof)
providing for the purchase of the same or a different number of shares of Common
Stock and, in the case of ISO's, the grant is at an Exercise Price not less than
100% of the fair market value of the Common Stock on the new grant date. The
Agreement reflecting the terms of the new Options may, in the discretion of the
Committee, include the same terms and conditions as the Agreement reflecting the
terms of the old Options including, without limitation, the same vesting
schedule.
12.2 The Committee may, in its discretion, amend the terms of any
Agreement, with the consent of the affected participant, to provide that the
Exercise Price of the shares remaining subject to the original Option shall be
reestablished at a price not less than 100% of the fair market value of the
Common Stock on the effective date of such amendment.
13. ADJUSTMENTS AND CHANGES IN THE COMMON STOCK.
13.1 In the event that the shares of Common Stock as presently
constituted shall be changed into or exchanged for a different number or kind of
shares of stock or other securities of the Company, or if the number of such
shares of Common Stock shall be increased through the payment of a stock
dividend, then unless such change results in the termination of all outstanding
Options pursuant to the provisions of Section 11, there shall be substituted for
or added to each share of Common Stock theretofore appropriated or thereafter
subject or which may become subject to an Option, the number and kind of shares
of stock or other securities into which each outstanding share of Common Stock
shall be so changed, or for which each share shall be exchanged, or to which
each such share shall be entitled, as the case may be. Each Agreement shall be
deemed amended appropriately as to price and other terms as may be necessary in
the determination of the Committee to reflect the foregoing events. In the event
there shall be any other change in the number or kind of the outstanding Common
Stock, or of any stock
<PAGE> 7
or securities into which such shares have been changed, or for which it shall
have been exchanged, then if the Committee shall, in its sole discretion,
determine that such change requires an adjustment in the terms of any Option
granted or that may be granted, such adjustment shall be made in accordance with
such determination and each Agreement reflecting such terms shall be deemed
amended. Fractional shares resulting from any adjustment in Options pursuant to
this section shall be rounded down to the nearest whole number of shares.
13.2 Notwithstanding the foregoing, any and all adjustments in the
terms of ISO's shall comply in all respects with applicable sections of the IRC
and the regulations thereunder.
13.3 Notice of any adjustment in the terms of Options shall be given by
the Company to each holder of an Option that has been so adjusted. However, such
adjustment shall be effective and binding for all purposes whether or not such
notice is given or received.
14. APPLICATION OF RULE 16B-3.
This Plan shall be governed by Rule 16b-3.
15. NO RIGHTS AS STOCKHOLDER.
No participant shall have rights as a holder of Common Stock
with respect to Options unless and until certificates for shares of such stock
are issued to the participant or the participant's legal representative.
16. WITHHOLDING TAXES.
The Company shall have the right to withhold from the
participant, at the time of the issuance by the Company of any shares, any
federal, state or other taxes required by law to be withheld with respect to
such issuance or to require, through withholding from the participant's salary
or otherwise, the payment by the participant of any such taxes.
17. NON-TRANSFERABILITY.
No Option may be in any way transferred, assigned, pledged or
hypothecated by the participant to which it was granted or awarded, other than
by will or the laws of descent and distribution, and an Option may be exercised
during the participant's lifetime only by the participant or the participant's
legal representative; provided, however, that the Committee may upon request
consent to such transfers of NQSO's as it may determine in its sole discretion
subject to such conditions as the Committee may require and provided such
transfer will not cause the Plan to no longer comply with Rule 16b-3 or any
other regulatory requirements.
18. AMENDMENTS AND TERMINATION.
18.1 In addition to such amendments as are provided for in Section 12,
with the consent of the affected participant the Committee may amend any
outstanding Agreement in a manner not inconsistent with this Plan.
18.2 Unless the holders of at least a majority of the issued
outstanding shares of Common Stock shall have approved thereof, no amendment of
this Plan shall be effective which would cause the Plan to no longer comply with
Rule 16b-3 or other regulatory requirements. In the event that the Committee or
the Board of Directors determines at any time or from time to time that Rule
16b-3 requires that the terms of any outstanding Option be modified, the
Committee or the Board of Directors shall have
<PAGE> 8
the right and power to amend any outstanding Agreement, or otherwise modify the
terms of any outstanding Option, without the consent of the affected
participant(s) and irrespective of whether such modification is (i) consistent
with the terms of this Plan, or (ii) adverse to such participant(s). For the
purposes of this section, any (I) cancellation and reissuance, or (II) repricing
of any Options granted at a new Exercise Price as provided in Section 12 shall
not constitute an amendment of this Plan.
18.3 The Board of Directors may at any time terminate or from time to
time amend this Plan in whole or in part, but no such amendment shall adversely
affect any rights or obligations with respect to any Options theretofore granted
under this Plan (except as contemplated by Section 18.2).
19. GOVERNING LAW.
The validity and construction of this Plan and the Agreements
shall be governed by the laws of the State of Delaware.
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