<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 2)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 7, 1996
Commission File Number: 0-24780 Commission File Number: 33-73002-01
PROTECTION ONE, INC. PROTECTION ONE ALARM MONITORING, INC.
6011 Bristol Parkway 6011 Bristol Parkway
Culver City, California 90230 Culver City, California 90230
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
Delaware Delaware
(State or other jurisdiction (State or other jurisdiction
of incorporation or organization) of incorporation or organization)
93-1063818 93-0164579
(I.R.S. employer identification no.) (I.R.S. employer identification no.)
6011 Bristol Parkway 6011 Bristol Parkway
Culver City, California 90230 Culver City, California 90230
(Address of principal executive (Address of principal executive
offices, including zip code) offices, including zip code)
(310) 338-6930 (310) 338-6930
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
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<PAGE> 2
The information provided in this Current Report on Form 8-K/A
supplements the information provided in the Current Report on Form 8-K of
Protection One, Inc. and Protection One Alarm Monitoring, Inc. (together the
"Company") dated June 7, 1996 as filed with the Securities and Exchange
Commission (the "Commission") on July 2, 1996, as amended by a Current Report
on Form 8-K/A also filed by the Company with the Commission on that date.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
The following financial statements, pro forma financial
information and exhibits are filed as part of this Report:
(a) Financial Statements of Business Acquired
The consolidated financial statements of Metrol
Security Services, Inc. and its subsidiaries listed on page F-1 hereof.
(b) Pro Forma Financial Information
The pro forma financial statements of Protection
One, Inc. and its subsidiaries listed on page PFF-1 hereof.
(c) Exhibits
5.1 Consent of KPMG Peat Marwick dated August 1, 1996.
(Registration Statement on Form S-3 (Commission
File No. 333-09401)).
5.2 Consent of KPMG Peat Marwick dated August 1, 1996
(Registration Statement on Form S-3 (Commission
File No. 333-5849)).
5.3 Consent of KPMG Peat Marwick dated August 1, 1996
(Registration Statement on Form S-8 (Commission
File No. 333-2828)).
5.4 Consent of KPMG Peat Marwick dated August 1, 1996
(Registration Statement on Form S-8 (Commission
File No. 333-2892)).
5.5 Consent of KPMG Peat Marwick dated August 1, 1996
(Registration Statement on Form S-3 (Commission
File No. 33-99220)).
5.6 Consent of KPMG Peat Marwick dated August 1, 1996
(Registration Statement on Form S-8 (Commission
File No. 33-97542)).
5.7 Consent of KPMG Peat Marwick dated August 1, 1996
(Registration Statement on Form S-8 (Commission
File No. 33-95702)).
5.8 Consent of KPMG Peat Marwick dated August 1, 1996
(Post-Effective Amendment No. 1 on Form S-3 to
Registration Statement on Form S-1 (Commission
File No. 33-83494)).
2
<PAGE> 3
INDEX TO FINANCIAL STATEMENTS
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES
Page No.
--------
Consolidated Balance Sheet as of March 31, 1996 (unaudited) F-2
Consolidated Statement of Operations for the three months F-3
ended March 31, 1996 (unaudited)
Consolidated Statement of Cash Flows for the three months F-4
ended March 31, 1996 (unaudited)
Independent Auditors' Report dated March 29, 1996 F-5
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-6
Consolidated Statements of Operations for the years ended F-7
December 31, 1995 and 1994
Consolidated Statements of Stockholders' Deficiency for F-8
the years ended December 31, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended F-9
December 31, 1995 and 1994
Notes to Consolidated Financial Statements F-11
Independent Auditors' Report dated February 10, 1995 F-22
Consolidated and Combined Balance Sheets as of F-23
December 31, 1994 and 1993
Consolidated and Combined Statements of Operations for the F-24
years ended December 31, 1994 and 1993
Consolidated and Combined Statements of Stockholders' Deficiency F-25
for the years ended December 31, 1994 and 1993
Consolidated and Combined Statements of Cash Flows for the F-26
years ended December 31, 1994 and 1993
Notes to Consolidated and Combined Financial Statements F-28
F-1
<PAGE> 4
METROL SECURITY SERVICES, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
ASSETS
(UNAUDITED)
Current assets
Cash & cash equivalents $ 315,321
Short-term investments 52,500
Accounts receivable, net of allowance
for doubtful accounts of $364,000 2,232,871
Advances and other receivables 192,817
Inventories 761,131
Prepaids & deposits 259,999
-----------
Total current assets 3,814,639
Property & equipment 1,945,805
Intangible assets 11,191,533
-----------
Total assets $16,951,977
===========
LIABILITIES & EQUITY
Current liabilities
Accounts payable $ 676,859
Dividends payable 112,500
Accrued interest 165,690
Accrued liabilities 353,021
Deferred revenues 1,843,798
Current portion capital leases 107,853
Current portion notes payable 973,203
-----------
Total current liabilities 4,232,924
Capital leases 7,461
Notes payable 14,344,377
Deferred tax liability 1,124,746
-----------
Total liabilities 19,709,508
-----------
Stockholders' equity
Common stock 2,876
Preferred stock 500
Add'l paid in capital 4,821,100
Retained earnings (deficit) (7,582,007)
-----------
Total equity (deficit) (2,757,531)
-----------
Total liabilities & equity $16,951,977
===========
F-2
<PAGE> 5
METROL SECURITY SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Revenues:
Monitoring and service $1,865,072
Installation 805,361
Guard and patrol 1,075,896
----------
Total revenues 3,746,329
----------
Cost of revenues:
Monitoring and service 679,487
Installation 555,089
Guard and patrol 876,569
----------
Total costs of revenues 2,111,145
----------
Gross margin 1,635,184
----------
Selling and marketing expenses 283,908
General and administrative expenses 574,746
Other (income) expense, net (17,453)
Depreciation and amortization 718,620
----------
Earnings from operations 75,363
----------
Interest expense, net 363,114
----------
Net loss before income tax benefit (287,751)
Deferred income tax benefit 66,150
----------
Net loss $ (221,601)
==========
</TABLE>
F-3
<PAGE> 6
METROL SECURITY SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Cash flow from operating activities:
Net loss $(221,601)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 718,620
Provision for uncollectible accounts 49,598
Gain on sale of assets (242)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 482,482
(Increase) decrease in employee advances (24,460)
(Increase) decrease in inventories (69,043)
(Increase) decrease in prepaids and deposits 58,058
Increase (decrease) in accounts payable (275,136)
Increase (decrease) in accrued liabilities (132,798)
Increase (decrease) in deferred revenues 83,877
Increase (decrease) in deferred tax liabilities (66,150)
---------
Net cash provided by operating activities 603,205
---------
Cash flow from investing activities:
Acquisition assets acquired (8,596)
Proceeds from sale of assets 995
Purchase of equipment (115,935)
---------
Net cash used in investing activities (123,536)
---------
Cash flow from financing activities:
Payments on notes payable (38,419)
Payments on capital leases (25,269)
Additional debt acquired with acquisition 8,499
Dividends paid (112,500)
---------
Net cash used in financing activities (167,689)
---------
Net increase in cash and equivalents 311,980
Cash and equivalents, beginning of year 3,341
---------
Cash and equivalents, end of period $ 315,321
=========
</TABLE>
F-4
<PAGE> 7
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Metrol Security Services, Inc.:
We have audited the accompanying consolidated balance sheets of Metrol Security
Services, Inc. and subsidiaries (Company) as of December 31, 1995 and 1994 and
the related consolidated statements of operations, stockholders' deficiency and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metrol Security
Services, Inc. and subsidiaries as of December 31, 1995 and 1994 and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
March 29, 1996
F-5
<PAGE> 8
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------ ------------ ------------
<S> <C> <C>
Current assets (note 5):
Cash and cash equivalents (note 6) $ 3,341 613,493
Short-term investments (note 6) 52,500 52,500
Trade accounts receivable, net of allowance for uncollectible
accounts of $330,000 in 1995 and $108,000 in 1994 2,764,951 1,192,890
Employee advances and other receivables (note 13) 168,357 12,003
Inventories 692,088 416,232
Prepaid expenses and deposits 318,057 234,021
------------ ------------
Total current assets 3,999,294 2,521,139
Property and equipment, net of accumulated depreciation and
amortization (notes 2 and 5) 2,016,013 2,087,325
Intangible assets, net of accumulated amortization (note 3) 11,716,167 2,583,256
------------ ------------
Total assets $ 17,731,474 7,191,720
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current liabilities:
Trade accounts payable $ 951,995 415,957
Dividends payable 112,500 24,456
Accrued interest 204,938 34,658
Accrued liabilities 446,571 397,916
Deferred revenues 1,759,921 980,257
Current portion of capital lease obligations (note 4) 107,853 109,294
Current portion of notes payable and notes payable to affiliates
(notes 5 and 6) 973,203 651,393
------------ ------------
Total current liabilities 4,556,981 2,613,931
Capital lease obligations, excluding current portion (note 4) 32,730 140,583
Notes payable, excluding current portion (notes 5 and 6) 14,374,297 5,754,336
Deferred tax liability 1,190,896 --
------------ ------------
Total liabilities 20,154,904 8,508,850
------------ ------------
Commitments and subsequent events (notes 4, 5, 9, 11, 12 and 13)
Stockholders' deficiency (note 8):
Common stock - 2,000,000 shares authorized, 287,634 shares issued
and outstanding 2,876 2,876
Preferred stock - 100,000 shares authorized, 50,000 shares issued
and outstanding 500 500
Additional paid-in capital 4,821,100 4,821,100
Accumulated deficit (7,247,906) (6,141,606)
------------ ------------
Net stockholders' deficiency (2,423,430) (1,317,130)
------------ ------------
Total liabilities and stockholders' deficiency $ 17,731,474 7,191,720
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 9
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Revenue:
Monitoring and service $ 6,995,051 5,046,496
Installation 3,756,653 2,612,661
Guard and patrol 4,935,724 2,961,481
------------ ------------
15,687,428 10,620,638
------------ ------------
Cost of revenue:
Monitoring and service 2,215,126 1,597,758
Installation 2,631,244 1,970,533
Guard and patrol 4,287,567 2,408,028
------------ ------------
9,133,937 5,976,319
------------ ------------
Gross margin 6,553,491 4,644,319
------------ ------------
Selling and marketing expenses 1,143,711 773,848
General and administrative expenses 2,371,780 1,615,576
Professional fees 218,567 208,239
Other expense, net (13,119) 111,625
Depreciation and amortization 2,692,316 1,402,559
------------ ------------
Earnings from operations 140,236 532,472
Interest income (4,140) (6,188)
Interest expense 1,249,126 926,609
------------ ------------
Net loss before
income tax benefit (1,104,750) (387,949)
Deferred income tax benefit 448,450 --
------------ ------------
Net loss $ (656,300) (387,949)
============ ============
Loss per share common stock (note 8) $ (3.85) (3.26)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 10
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficiency
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
--------------------------------------- ---------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1993 116,451 $ 116,451 -- $ --
Purchase 1,545 treasury shares -- -- -- --
Retire treasury shares (51,545) (51,545) -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balances at December 1, 1994 64,906 $ 64,906 -- $ --
========== ========== ========== ==========
Issuance of Company's common shares
(note 8) 287,634 $ 2,876 -- $ --
Issuance of preferred shares -- -- 50,000 500
Dividends declared ($.4891 per
preferred share) -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balances at December 31, 1994 287,634 2,876 50,000 500
Dividends declared ($9.00 per
preferred share) -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balances at December 31, 1995 287,634 $ 2,876 50,000 $ 500
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL NET
PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
CAPITAL DEFICIT STOCK DEFICIENCY
------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1993 262,116 (5,674,295) (285,754) (5,581,482)
Purchase 1,545 treasury shares -- -- (144,843) (144,843)
Retire treasury shares (262,116) (116,936) 430,597 --
Net loss -- (138,591) -- (138,591)
---------- ---------- ---------- ----------
Balances at December 1, 1994 -- (5,929,822) -- (5,864,916)
========== ========== ========== ==========
Issuance of Company's common shares
(note 8) -- (5,867,792) -- (5,864,916)
Issuance of preferred shares 4,821,100 -- -- 4,821,600
Dividends declared ($.4891 per
preferred share) -- (24,456) -- (24,456)
Net loss -- (249,358) -- (249,358)
---------- ---------- ---------- ----------
Balances at December 31, 1994 4,821,100 (6,141,606) -- (1,317,130)
Dividends declared ($9.00 per
preferred share) -- (450,000) -- (450,000)
Net loss
-- (656,300) -- (656,300)
---------- ---------- ---------- ----------
Balances at December 31, 1995 4,821,100 (7,247,906) -- (2,423,430)
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 11
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (656,300) (387,949)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,692,316 1,402,559
Provision for uncollectible accounts 250,372 102,498
Gain on sale of equipment (1,604) (13,088)
Write-off of loan fees -- 144,288
Change in assets and liabilities:
(Increase) decrease in trade accounts receivable (1,822,433) 119,185
Increase in employee advances and other receivables (156,354) (1,481)
Increase in inventories (275,856) (41,912)
Increase in prepaid expenses and deposits (84,036) (58,275)
Increase (decrease) in trade accounts payable 536,038 (202,119)
Increase (decrease) in accrued interest and liabilities 218,935 (85,157)
Increase (decrease) in deferred revenues 779,664 (83,756)
Decrease in deferred tax liabilities (448,450) --
----------- ----------
Net cash provided by operating activities 1,032,292 894,793
----------- ----------
Cash flows from investing activities:
Purchase of equipment (426,441) (320,730)
Proceeds from sale of equipment 24,664 31,651
Purchases of assets from other companies (8,383,145) (286,450)
Acquisition costs (539,883) --
----------- ----------
Net cash used in investing activities (9,324,805) (575,529)
----------- ----------
Cash flows from financing activities:
Payments on capital lease obligations (109,294) (99,233)
Payments on notes payable (580,225) (9,383,228)
Payments on notes payable to affiliates -- (515,000)
Proceeds from issuance of long-term debt 8,795,500 6,000,000
Purchase of treasury stock -- (144,843)
Proceeds from issuance of preferred stock -- 5,000,000
Debt issuance costs (61,664) (576,685)
Stock issuance costs -- (178,400)
Dividends paid (361,956) --
----------- ----------
Net cash provided by financing activities 7,682,361 102,611
----------- ----------
Net (decrease) increase in cash and cash equivalents (610,152) 421,875
Cash and cash equivalents, beginning of year 613,493 191,618
----------- ----------
Cash and cash equivalents, end of year $ 3,341 613,493
=========== ==========
</TABLE>
(Continued)
F-9
<PAGE> 12
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,078,846 1,093,850
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
Equipment acquired under capital lease arrangements $ -- 165,935
=========== ===========
Accrued preferred stock dividends $ 112,500 24,456
=========== ===========
The Company acquired selected assets from other companies. In conjunction
with these acquisitions, assets were acquired and liabilities incurred as
follows:
Estimated fair value of assets acquired $ 8,586,961 669,222
Cash payments for assets acquired (8,082,899) (286,450)
----------- -----------
Liabilities incurred $ 504,062 382,772
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 13
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Metrol Security Services, Inc. was formed on December 1, 1994 and has two
wholly-owned subsidiaries (Sonitrol of Arizona, Inc. and Electronic
Security Services, Inc.) (the Company). The Company is the successor of
Sonitrol of Arizona, Inc. and Electronic Security Services, Inc.
(collectively, the Predecessor). Effective December 1, 1994, the stock of
the Predecessor was contributed to the Company. This contribution of
stock has been accounted for in a manner similar to a pooling of
interests as combinations of entities under common control.
On April 1, 1995, Sonitrol of Arizona, Inc. (SOA) acquired the corporate
entities of GTMP Holding Co. (GTMP), and GTMT Holding Co. (GTMT). The
subsidiaries of GTMP and GTMT were merged into their respective holding
companies with the exception of Dictoguard/Dictograph, Inc., GTMT's New
Mexico subsidiary. SOA is now comprised of three wholly-owned
subsidiaries (GTMP, GTMT and Dictoguard/Dictograph, Inc.) of which GTMP
and GTMT are inactive. SOA has accounted for the acquisition as a
purchase of stock.
NATURE OF OPERATIONS
SOA and its subsidiary Dictoguard/Dictograph, Inc. (NM) provide
installation, service and monitoring of electronic alarm systems to
commercial and residential customers. SOA is a franchised Arizona dealer
for Sonitrol products (audio) and SOA and NM are franchise dealers for
Dictograph products (digital) in Arizona and New Mexico. SOA also markets
digital electronic alarm systems under the Metrol name and, to a lesser
extent, installs and services close circuit television and access control
systems. Electronic Security Services, Inc. (ESS) provides guard and
patrol services in Arizona and NM provides guard and patrol services in
New Mexico.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements present the financial
condition of the Company as of December 31, 1995 and 1994 and the results
of their operations for the years then ended. All significant
intercompany balances and transactions have been eliminated in
consolidation of the Company.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market funds and
certificates of deposit with original maturities at the date of purchase
of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments include certificates of deposit with original
maturities of one year or less and are stated at cost which approximates
market.
F-11
<PAGE> 14
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market (net realizable value). Work-in-process inventories of $220,215
at December 31, 1995 are comprised of costs incurred on uncompleted
installations which are stated at actual cost of equipment, labor and
other direct costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost or for capital leases at the
present value of minimum lease payments at the inception of the lease.
All assets are depreciated or amortized using the straight-line method
over the shorter of the lease term, if applicable, or estimated useful
lives of the assets.
REVENUE
Revenue from the installation of electronic alarm systems is recognized
upon equipment installation and acceptance by the customer or for large
projects, on the percentage-of-completion method based on costs incurred
to date to total estimated costs which are included in trade accounts
receivable due to its immateriality. Revenue from monitoring service is
recognized on a straight-line basis over the term of the service
contract. Revenue from guard and patrol services is recognized when the
services are rendered. Deferred revenues represent amounts billed in
advance to customers for monitoring service and system installation.
INTANGIBLE ASSETS
Intangible assets represent an allocation of the costs in excess of the
estimated fair market value of tangible assets acquired as of the
acquisition date and deferred financing fees related to the acquisition,
and are amortized using the straight-line method over the estimated
economic lives of the respective assets.
INCOME TAXES
The Predecessor was an S Corporation for federal income tax purposes
prior to December 1, 1994. As an S Corporation, the taxable income or
loss was included in the individual tax returns of the stockholders.
Therefore, no provision or benefit was made for income taxes for the
period from January 1, 1994 through November 30, 1994.
On December 1, 1994, the Predecessor terminated its S Corporation
election concurrent with the contribution of the stock to the Company and
the Company became subject to federal and state income taxes.
Accordingly, the Company adopted the asset and liability method of
accounting for income taxes as prescribed by Statement of Financial
Accounting Standards No. 109.
F-12
<PAGE> 15
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Under the asset and liability method of Statement No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases, and to operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under Statement No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
IMPAIRMENT OF ASSETS
The Company accounts for long-lived assets under the Statement of
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets." Effective January 1, 1995, the Company adopted the
provision of this Statement, under which impairment of goodwill and other
long-lived assets would be recognized if the expected future net cash
flows (undiscounted and without interest charges) of the related
businesses are less than the carrying amounts of the assets. No
impairment existed in 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
RECEIVABLES, PAYABLES AND ACCRUED EXPENSES
Fair value is considered to be equal to the carrying value of the
accounts receivable, accounts payable and accrued expenses as they
are generally short-term in nature and the related amounts
approximate fair value or are receivable or payable on demand.
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The fair value of the Company's long-term debt and capital lease
obligations are estimated based on the current rates offered to the
Company for debt of the same remaining maturities.
INTEREST RATE CAP AGREEMENTS
Interest rate cap agreements used to establish a maximum rate for
certain long-term debt are carried at amortized costs which
approximate market. The agreements are in effect for three years and
expire in 1997 and 1998. The Company is exposed to credit losses in
the event of nonperformance by the counterparties to its agreements
but has no off-balance sheet credit risk of accounting loss. The
Company anticipates, however, that the counterparties will be able to
fully satisfy their obligations under the agreements.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
F-13
<PAGE> 16
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
ADVERTISING COSTS
The Company expenses all advertising costs as incurred to selling and
marketing expense.
LOSS PER SHARE OF COMMON STOCK
Loss per share of common stock is computed using the weighted average
number of common shares of stock outstanding during the years presented
and does not include the effect of common share equivalents (convertible
preferred stock) because their effect would be anti-dilutive. The
weighted average number of common shares used in the computation were
287,634 and 126,421 in 1995 and 1994, respectively. In 1995 and 1994, the
net loss for purposes of the loss per share calculation has been
increased by $450,000 and $24,456, respectively, for dividends on the
Company's preferred stock to arrive at the loss per share of common
stock. Accordingly, the net loss applicable to common shareholders was
$1,106,300 and $412,405 in 1995 and 1994, respectively.
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(IN YEARS) 1995 1994
----------------- ------------------ ------------------
<S> <C> <C> <C>
Alarm system equipment 5-10 $ 3,043,580 2,870,348
Central station monitoring equipment 5-10 1,040,332 1,015,657
Office furniture, fixtures and
equipment 2-5 841,884 676,102
Vehicles 3-5 601,884 446,878
Leasehold improvements 10 602,814 576,223
Repair parts 3 118,448 118,448
Building 55,052 --
Land 10,000 --
------------------ ------------------
6,313,994 5,703,656
Less: accumulated depreciation and
amortization (4,297,981) (3,616,331)
------------------ ------------------
$ 2,016,013 2,087,325
================== ==================
</TABLE>
Included in central station monitoring equipment and vehicles in 1995 is
approximately $384,139 and $234,209 in cost and accumulated amortization,
respectively, related to capital leases.
F-14
<PAGE> 17
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(IN YEARS) 1995 1994
----------------- ------------------ ------------------
<S> <C> <C> <C>
Monitored alarm accounts 8-10 $ 13,063,541 6,370,957
Guard and patrol accounts 5-8 321,531 321,531
Covenants not to compete 2-5 3,178,532 459,282
Franchise fee 40 66,000 25,000
Deferred financing fees 7 638,519 576,855
Goodwill 8 1,639,346 --
------------------ ------------------
18,907,469 7,753,625
Less: accumulated amortization (7,191,302) (5,170,369)
------------------ ------------------
$ 11,716,167 2,583,256
================== ==================
</TABLE>
(4) LEASES
The Company is obligated under various capital leases for equipment and
vehicles that expire at various dates through 1998. Additionally, the
Company leases its principal operating facilities from related parties
under operating leases with terms expiring in 2002 with renewal options.
Rent expense under these operating leases was approximately $140,400 in
1995 and 1994. Future minimum lease payments under noncancelable
operating leases and the present value of future minimum capital lease
payments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------------ ------------------
<S> <C> <C>
1996 $ 117,142 179,245
1997 29,564 171,900
1998 4,684 144,855
1999 -- 140,400
2000 -- 140,400
Thereafter -- 152,100
------------------ ------------------
Total minimum lease payments 151,390 $ 928,900
==================
Less amount representing interest (at rates ranging from
9% to 14.8%) 10,807
------------------
Present value of future minimum lease payments 140,583
Less current portion of capital lease obligations 107,853
------------------
Capital lease obligations, excluding current portion $ 32,730
==================
</TABLE>
F-15
<PAGE> 18
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) NOTES PAYABLE AND NOTES PAYABLE TO AFFILIATES
Notes payable and notes payable to affiliates consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Credit facility with bank, $2,495,500, bearing interest at the prime
rate plus 1.75% (8.5% at December 31, 1995), and $12,000,000
bearing interest at the applicable LIBOR rate plus 3.75% (5.81% -
5.94%) matures January 2002, secured by the assets and capital
stock of the Company $14,495,500 6,000,000
Notes payable to an individual in connection with an
acquisition, principal payments of $5,000 due monthly
through October 1996, unsecured 50,000 110,000
Note payable in connection with an acquisition, bearing interest at
8%, principal payments of $2,677 including interest due monthly
through January 2002, unsecured 154,336 189,494
Note payable in connection with an acquisition,
non-interest bearing, unsecured, paid in June 1995 -- 106,235
Note payable in connection with an acquisition, bearing interest at
7%, due September 1, 1996 upon final
settlement 500,000 --
Vehicle loans payable to bank assumed from an acquisition, bearing
interest at 8.6%, maturing August 1997 104,841 --
Mortgage payable assumed from an acquisition, bearing interest at 9%,
principal balance paid March 1996 38,761 --
Note payable in connection with an acquisition,
non-interest bearing, due May 1996, unsecured 4,062 --
----------- -----------
15,347,500 6,405,729
Less current portion of notes payable 973,203 651,393
----------- -----------
Notes payable excluding current portion $14,374,297 5,754,336
=========== ===========
</TABLE>
F-16
<PAGE> 19
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The aggregate maturities of the notes payable subsequent to December 31,
1995 are as follows:
<TABLE>
<S> <C>
1996 $ 973,203
1997 1,628,709
1998 1,798,506
1999 2,084,413
2000 2,370,487
Thereafter 6,492,182
-----------------
$ 15,347,500
=================
</TABLE>
The credit facility with the bank allows SOA to borrow up to $15,000,000
and SOA or ESS to borrow up to $500,000. The aggregate principal amount
outstanding at any time is limited based on factors that include
permitted acquisition expenditures, loss prevention program advances and
recurring monthly revenue, as defined. The interest rate for any portion
of the outstanding principal balance of a note which is not a LIBOR
portion is at the prime rate plus 1.75% or 1.00% depending upon the ratio
of bank debt to net operating income, as defined. The rate of interest
for any LIBOR portion is at the LIBOR rate plus 3.75% or 2.5%, depending
upon the ratio of bank debt to net operating income, as defined. However,
the interest rate is decreased by 25 basis points when cash advances
reach $10,000,000. The credit facility required an initial $170,000
facility fee and also requires a .5% commitment fee on the unused portion
of the facility. All borrowings outstanding as of December 31, 1996 and
June 30, 1997 will be converted into 5 year and 4.5 year term loans,
respectively. The credit facility contains various covenants including
the requirement that the Company maintain specific interest, debt, and
current asset ratios. The credit facility also limits capital
expenditures and the payment of dividends. The Company was not in
compliance with all covenants at December 31, 1995, however, the lender
waived all instances of noncompliance.
On December 16, 1994 and May 8, 1995, the Company executed interest rate
protection agreements with the bank that caps the interest rate to be
paid on $4,500,000 and $2,500,000, respectively, of the indebtedness. The
Company paid $54,000 and $10,250 for these agreements, which expire
December 19, 1997 and May 10, 1998, respectively.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
CARRYING FAIR VALUE
AMOUNT (UNAUDITED)
------------------ ------------------
<S> <C> <C>
Cash, cash equivalents and short-term investments $ 55,841 55,841
Long-term debt and capital lease obligations 15,488,083 15,488,083
Interest rate caps 44,150 44,150
</TABLE>
F-17
<PAGE> 20
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) INCOME TAXES
The Predecessor was an S Corporation for federal income tax purposes and
was not subject to federal and state income taxes. At December 1, 1994,
the S Corporation election was terminated and the Company became subject
to federal and state income taxes. No income tax expense or benefit was
recorded for the cumulative temporary differences as of the date of
termination.
No current income tax expense was recorded for the period December 1,
1994 through December 31, 1995 due to net operating losses. For the year
ended December 31, 1995, the Company recognized federal and state
deferred tax benefits of $448,450. Such benefits were recognized because
valuation allowances were reduced as a result of utilization of such net
operating losses to offset temporary differences that generate deferred
tax liabilities during the carryforward period.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforward $ 500,244 458,664
Allowance for bad debts 132,000 43,200
Accrued expenses 26,728 25,095
Differences in amortization for book and tax intangibles
187,410 1,291
---------- ---------
Gross deferred tax assets 846,382 528,250
Less valuation allowance -- (454,563)
---------- ---------
Net deferred tax assets $ 846,382 73,687
========== =========
Deferred tax liabilities:
Property and equipment depreciation $ 67,460 73,687
Change in tax reporting method of a subsidiary 51,468 --
Difference in book and tax basis of acquired intangibles 1,918,350 --
---------- ---------
Total deferred tax liabilities 2,037,278 73,687
---------- ---------
Net deferred tax liabilities $1,190,896 --
========== =========
</TABLE>
A valuation allowance has not been provided because of the significant
offsetting of deferred tax liabilities. The net change in the total
valuation allowance for the year ended December 31, 1995 was a decrease
of $454,563.
During the year ended December 31, 1995, the Company acquired G.T.M.T.,
Inc., G.T.M.P. Holding Company Inc. and Dictoguard Inc. For financial
reporting purposes, the assets acquired and liabilities assumed were
valued at fair market value as of the date of purchase. For income tax
purposes, the acquisitions were treated as stock purchases with the
acquired assets and liabilities retaining their historical tax basis. The
net basis increase for financial reporting purposes of approximately $5.3
million has no federal and state income tax basis and is not deductible
for tax purposes. The deferred tax liability resulting from the
acquisition basis difference, together with the Company's deferred tax
liability, exceeded the Company's deferred tax assets at the date of
purchase.
At December 31, 1995, the Company has federal net operating loss
carryforwards of approximately $1,500,000 which begin to expire in 1999.
(8) STOCKHOLDERS' DEFICIENCY
At December 31, 1995, the capital of the Company consisted of 2,000,000
shares of authorized $.01 par value common stock and 100,000 shares of
authorized $.01 par value preferred stock. 287,634 shares of common stock
and 50,000 shares of preferred stock were issued and outstanding.
F-18
<PAGE> 21
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company's preferred stock is convertible into common stock at the
option of the stockholder. The conversion rate is equal to the original
purchase price of the stock, as defined, divided by $20 per share. The
preferred stock has voting rights equal to the number of common shares
they are convertible into and is entitled to per annum cumulative
dividends of nine percent of the original purchase price per share. The
liquidation preference for the preferred stock is the greater of the
original purchase price plus accrued dividends or the calculated value to
be paid per share assuming conversion of the preferred stock into common
stock.
During 1994, the shareholder of the Predecessor exchanged all of the
outstanding stock of the Predecessor for 287,634 shares of the Company's
common stock.
(9) PROFIT SHARING PLAN
The Company has a qualified 401(k) profit sharing plan (the Plan)
covering certain employees twenty years of age and over who have
completed one year of service. Company matching and profit sharing
contributions to the Plan are at the discretion of the Board of
Directors, but are limited to amounts deductible under the Internal
Revenue Code. The Company presently matches 25% of employee contributions
up to 8% of the employee's salary. For the years ended December 31, 1995
and 1994, Company or Predecessor matching contributions to the Plan
totaled $15,168 and $15,430, respectively. No profit sharing contribution
was made during 1995 or 1994.
(10) ACQUISITIONS
During 1995 and 1994, the Company acquired certain operating assets from
various alarm companies as follows:
<TABLE>
<CAPTION>
PURCHASE
ACQUISITION DATE COMPANY PRICE
----------------------------------- -------------------------------------------- ------------------
<S> <C> <C>
August 29, 1994 Affiliated Security Systems, Inc. $ 269,494
October 14, 1994 Ahwatukee Security, Inc. 292,254
March 31, 1995 G.T.M.T., Inc., G.T.M.P. Holding 8,309,002
Company Inc. and Dictoguard Inc.
April 1, 1995 ABS Security Systems 55,132
September 8, 1995 P.M.S. International Corporation 222,827
</TABLE>
F-19
<PAGE> 22
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The acquisitions were accounted for by the purchase method of accounting
and, accordingly, the purchase price was allocated to tangible and
intangible assets based on their fair values as determined by management.
The results of operations of the alarm accounts acquired are included in
the Company's results of operations since the date of each acquisition.
The total purchase price was allocated as follows:
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
<S> <C> <C>
Assets acquired $ 1,376,376 6,550
Liabilities assumed (1,056,415) --
Monitored alarm accounts 5,554,500 515,198
Covenants not to compete 2,712,500 40,000
----------------- -----------------
$ 8,586,961 561,748
================= =================
</TABLE>
The Company capitalized an additional $601,549 of intangible assets
related to the acquisitions that occurred in 1995. The Company recorded
goodwill and a deferred tax liability of $2,116,800 for the difference
in the book and tax basis of the alarm accounts at the time of
acquisition.
The results of operations of the acquired companies have been combined
with the results of the Company as of their respective dates of
acquisition. Had the 1995 business combinations occurred prior to January
1, 1995, the Company's net sales, net loss and net loss per share of
common stock for the year ended December 31, 1995 would have been $17.2
million, $1.3 million and $6.32, respectively.
Had the 1994 business combinations occurred prior to January 1, 1994, the
Company's net sales, net loss and net loss per share of common stock for
the year ended December 31, 1994 would have been $11.5 million, $230,248
and $2.01, respectively.
(11) COMMITMENTS
The Company operates under long-term franchise agreements with Sonitrol
through the year 2019. The agreements allow the Company to market and
sell Sonitrol products and services under the Sonitrol name in exchange
for royalty fees of $3.30 per customer per month of service. Royalty fee
expense, a component of cost of sales, was $68,958 and $69,570 for the
years ended December 31, 1995 and 1994, respectively.
F-20
<PAGE> 23
METROL SECURITY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) LITIGATION
In April of 1993, a minority shareholder objected to the merger of the
Predecessor and made a claim for the fair value of his stock and other
allegations. The claim was settled through arbitration in November of
1994 resulting in the minority shareholder being awarded $53,200 as the
value of his stock in the Predecessor. In December of 1994, the minority
shareholder filed a claim which restates the prior allegations. In March
1996, a judge granted the Company's motion to dismiss the restated
allegations.
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. Management believes that such
litigation and claims will be resolved without a material effect on the
Company's financial position or results of operations.
(13) SUBSEQUENT EVENTS
On February 9, 1996, the Company's president and majority shareholder and
his wife were involved in a fatal automobile accident in Mexico. The
Company is the beneficiary of a $1,000,000 key man life insurance policy.
Included in employee receivables at December 31, 1995 is $132,000 due
from the Company's president, which has been paid from the proceeds of
the sale of the Company to Protection One.
In April 1996, the Company purchased additional alarm accounts relating
to the G.T.M.T., Inc., G.T.M.P. Holding Company Inc. and Dictoguard Inc.
acquisition. The Company paid $343,300 for the purchased accounts.
On June 27, 1996, the Company sold its stock to Protection One Alarm
Monitoring, Inc. for approximately $26 million. The purchase price will
be paid 80% in cash and 20% in common stock of Protection One.
F-21
<PAGE> 24
Independent Auditors' Report
The Board of Directors
Metrol Security Services, Inc.:
We have audited the accompanying consolidated balance sheet of Metrol Security
Services, Inc. and subsidiaries (Company) as of December 31, 1994 and the
related consolidated statements of operations, stockholders' deficiency and cash
flows for the year ended December 31, 1994, and the combined balance sheet of
Sonitrol of Arizona, Inc. and Electronic Security Services, Inc. (Predecessor)
as of December 31, 1993, and the related combined statements of operations,
stockholders' deficiency and cash flows for the year then ended. These
consolidated and combined financial statements are the responsibility of the
Company's and the Predecessor's management. Our responsibility is to express an
opinion on these consolidated and combined financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metrol Security
Services, Inc. and subsidiaries as of December 31, 1994 and the results of their
operations and their cash flows for the year ended December 31, 1994, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned combined Predecessor financial statements present
fairly, in all material respects, the financial position of Sonitrol of Arizona,
Inc., and Electronic Security Services, Inc. as of December 31, 1993 and the
results of their operations and their cash flows for the year ended December 31,
1993 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
February 10, 1995, except
as to note 12 which is as
of April 4, 1995
F-22
<PAGE> 25
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Consolidated and Combined Balance Sheets
December 31, 1994 and 1993
<TABLE>
<CAPTION>
ASSETS 1994 1993
---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 613,493 191,618
Short-term investments 52,500 52,500
Trade accounts receivable, net of allowance for uncollectible
accounts of $108,000 in 1994 and $81,000 in 1993 1,192,890 1,414,573
Employee advances 12,003 10,520
Inventories 416,232 374,320
Prepaid expenses and deposits 234,021 175,746
----------- -----------
Total current assets 2,521,139 2,219,277
Property and equipment, net of accumulated depreciation and
amortization (note 2) 2,087,325 2,214,781
Intangible assets, net of accumulated amortization (note 3) 2,583,256 2,288,643
----------- -----------
Total assets $ 7,191,720 6,722,701
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Trade accounts payable $ 415,957 618,078
Dividends payable 24,456 --
Accrued interest 34,658 201,899
Accrued liabilities 397,916 315,832
Deferred revenues 980,257 1,064,013
Current portion of capital lease obligations (note 4) 109,294 67,510
Current portion of notes payable and notes payable to
affiliates (note 5) 651,393 373,200
----------- -----------
Total current liabilities 2,613,931 2,640,532
Capital lease obligations, excluding current portion (note 4) 140,583 115,666
Notes payable, excluding current portion (note 5) 5,754,336 9,047,985
Notes payable to affiliates, excluding current portion (note 5) -- 500,000
----------- -----------
Total liabilities 8,508,850 12,304,183
----------- -----------
Commitments and subsequent events (notes 5, 10, 11 and 12)
Stockholders' deficiency (note 7):
Common stock 2,876 116,451
Preferred stock 500 --
Additional paid-in capital 4,821,100 262,116
Accumulated deficit (6,141,606) (5,674,295)
----------- -----------
(1,317,130) (5,295,728)
Less treasury stock, at cost, 50,000 shares -- (285,754)
----------- -----------
Net stockholders' deficiency (1,317,130) (5,581,482)
----------- -----------
Total liabilities and stockholders' deficiency $ 7,191,720 6,722,701
=========== ===========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-23
<PAGE> 26
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Consolidated and Combined Statements of Operations
Years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
Revenue:
<S> <C> <C>
Monitoring and service $ 5,046,496 4,730,621
Installation 2,612,661 2,693,864
Guard and patrol 2,961,481 2,331,780
------------ ------------
10,620,638 9,756,265
------------ ------------
Cost of revenue:
Monitoring and service 1,597,758 1,651,654
Installation 1,970,533 1,955,756
Guard and patrol 2,408,028 1,941,700
------------ ------------
5,976,319 5,549,110
------------ ------------
Gross margin 4,644,319 4,207,155
------------ ------------
Selling and marketing expenses 773,848 820,436
General and administrative expenses 1,615,576 1,452,700
Professional fees 208,239 221,658
Other expense, net 111,625 31,762
Depreciation and amortization 1,402,559 1,308,688
------------ ------------
Earnings from operations 532,472 371,911
Interest income (6,188) (11,052)
Interest expense 926,609 885,316
------------ ------------
Net loss $ (387,949) (502,353)
============ ============
Loss per share common stock (note 7) $ (3.26) (4.24)
============ ============
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-24
<PAGE> 27
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Consolidated and Combined Statements of Stockholders' Deficiency
Years ended December 31 ,1994 and 1993
<TABLE>
<CAPTION>
Common stock Preferred stock Additional
------------ --------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992 120,495 $ 120,495 -- $ -- $ 267,819 $(5,171,942)
Merger of SOT into SAZ
(note 7) (4,044) (4,044) -- -- (5,703) --
Net loss -- -- -- -- -- (502,353)
------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1993 116,451 116,451 -- -- 262,116 (5,674,295)
Purchase 1,545 common shares -- -- -- -- -- --
Retire treasury shares (51,545) (51,545) -- -- (262,116) (116,936)
Net loss -- -- -- -- -- (138,591)
------- ----------- ----------- ----------- ----------- -----------
Balances at December 1, 1994 64,906 $ 64,906 -- $ -- $ -- $(5,929,822)
======= =========== =========== =========== =========== ===========
Issuance of Company's
common shares (note 7) 287,634 $ 2,876 -- $ -- $ -- $ (5,867,792)
Issuance of preferred shares -- -- 50,000 500 4,821,100 --
Dividends declared ($48.91
per preferred share) -- -- -- -- -- (24,456)
Net loss -- -- -- -- -- (249,358)
------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1994 287,634 $ 2,876 50,000 $ 500 $ 4,821,100 $(6,141,606)
======= =========== =========== =========== =========== ===========
<CAPTION>
Net
Treasury stockholders'
stock deficiency
----- ----------
<S> <C> <C>
Balances at December 31, 1992 $ (295,501) $(5,079,129)
Merger of SOT into SAZ
(note 7) 9,747 --
Net loss -- (502,353)
----------- -----------
Balances at December 31, 1993 (285,754) (5,581,482)
Purchase 1,545 common shares (144,843) (144,843)
Retire treasury shares 430,597 --
Net loss -- (138,591)
----------- -----------
Balances at December 1, 1994 $ -- $(5,864,916)
=========== ===========
Issuance of Company's
common shares (note 7) $ -- $(5,864,916)
Issuance of preferred shares -- 4,821,600
Dividends declared ($48.91
per preferred share) -- (24,456)
Net loss -- (249,358)
----------- -----------
Balances at December 31, 1994 $ -- $(1,317,130)
=========== ===========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-25
<PAGE> 28
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Consolidated and Combined Statements of Cash Flows
Years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (387,949) (502,353)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 1,402,559 1,308,688
Provision for uncollectible accounts 102,498 93,410
Gain on sale of equipment (13,088) --
Write-off of loan fees 144,288 --
Change in assets and liabilities:
Decrease in short-term investments -- 250,000
(Increase) decrease in trade accounts receivable 119,185 (89,181)
Increase in employee advances (1,481) (163)
(Increase) decrease in inventories (41,912) 128,592
(Increase) decrease in prepaid expenses and deposits (58,275) 102,052
Increase (decrease) in trade accounts payable (202,119) 140,405
Increase (decrease) in accrued liabilities (85,157) 126,986
Decrease in deferred revenues (83,756) (197,643)
----------- -----------
Net cash provided by operating activities 894,793 1,360,793
----------- -----------
Cash flows from investing activities:
Purchase of equipment (320,730) (856,761)
Proceeds from sale of equipment 31,651 --
Purchases of assets from other companies (286,450) --
----------- -----------
Net cash used in investing activities (575,529) (856,761)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (9,383,228) (397,805)
Payments on notes payable to affiliates (515,000) (15,000)
Payments on capital lease obligations (99,233) (68,829)
Proceeds from issuance of long-term debt 6,000,000 --
Purchase of treasury stock (144,843) --
Proceeds from issuance of preferred stock 5,000,000 --
Debt issuance costs (576,685) --
Stock issuance costs (178,400) --
----------- -----------
Net cash provided by (used in) financing activities 102,611 (481,634)
----------- -----------
Net increase in cash and cash equivalents 421,875 22,398
Cash and cash equivalents, beginning of year 191,618 169,220
----------- -----------
Cash and cash equivalents, end of year $ 613,493 191,618
=========== ===========
</TABLE>
(Continued)
F-26
<PAGE> 29
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Consolidated and Combined Statements of Cash Flows, Continued
Years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,093,850 879,768
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
Equipment acquired under capital lease arrangements $ 165,935 115,922
=========== ===========
Accrued preferred stock dividends $ 24,456 --
=========== ===========
In 1994, the Company acquired selected assets from other companies. In
conjunction with these acquisitions, assets were acquired and
liabilities incurred as follows:
Estimated fair value of assets acquired $ 669,222 --
Cash payments for assets acquired (286,450) --
----------- -----------
Liabilities incurred $ 382,772 --
=========== ===========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-27
<PAGE> 30
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Notes to Consolidated and Combined Financial Statements
December 31, 1994 and 1993
(1) Nature of Operations and Summary of Significant Accounting Policies
(a) Organization
Metrol Security Services, Inc. was formed on December 1, 1994,
and has two wholly-owned subsidiaries (Sonitrol of Arizona,
Inc. and Electronic Security Services, Inc.) (the Company).
The Company is the successor to Sonitrol of Arizona, Inc.
and Electronic Security Services, Inc. (collectively, the
Predecessor). Effective December 1, 1994, the stock of the
Predecessor was contributed to the Company. This
contribution of stock has been accounted for in a manner
similar to a pooling of interests as combinations of
entities under common control.
(b) Nature of Operations
Sonitrol of Arizona, Inc. (SOA) provides installation,
service, and monitoring of electronic alarm systems to
commercial and residential customers and is a franchised
Arizona dealer for Sonitrol products. SOA also installs,
services and monitors digital alarm systems under the
Metrol name and, to a lesser extent, distributes closed
circuit television and access control systems. Electronic
Security Services, Inc. (ESS) provides patrol and guard
services.
(c) Principles of Consolidation and Presentation
The accompanying consolidated financial statements present the
financial condition of the Company as of December 31, 1994
and the results of their operations for the year ended
December 31, 1994. The accompanying combined financial
statements present the financial condition of the
Predecessor as of December 31, 1993 and the results of
their operations for the year ended December 31, 1993. All
significant intercompany balances and transactions have
been eliminated in consolidation of the Company and in the
combination of the Predecessor.
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market
funds and certificates of deposit with original maturities
at the date of purchase of three months or less.
(e) Short-term Investments
Short-term investments include certificates of deposit with
original maturities of one year or less and are stated at
cost.
(f) Inventories
Inventories are stated at the lower of cost (first-in,
first-out method) or market (net realizable value).
Work-in-process inventories of $99,456 at December 31, 1994
are comprised of costs incurred on uncompleted
installations which are stated at actual cost of equipment,
labor and other direct costs.
(Continued)
F-28
<PAGE> 31
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Notes to Consolidated and Combined Financial Statements
(g) Property and Equipment
Property and equipment are stated at cost or for capital
leases at the present value of minimum lease payments at
the inception of the lease and are depreciated or amortized
using the straight-line method over the shorter of the
lease term or estimated useful lives of the assets.
(h) Revenue
Revenue from the installation of electronic alarm systems is
recognized upon equipment installation and acceptance by
the customer or for large projects, on the
percentage-of-completion method based on costs incurred to
date to total estimated costs. Revenue from monitoring
service is recognized on a straight-line basis over the
term of the service contract. Revenue from guard and patrol
services is recognized when the services are rendered.
Deferred revenues represent amounts billed in advance to
customers for monitoring service and system installation.
(i) Intangible Assets
Intangible assets represent an allocation of the costs in
excess of the estimated fair market value of tangible
assets acquired as of the acquisition date and deferred
financing fees related to the acquisition, and are
amortized using the straight-line method over the estimated
economic lives of the respective assets.
(j) Income Taxes
The Predecessor was an S Corporation for federal income tax
purposes prior to December 1, 1994. As an S Corporation,
the taxable income or loss was included in the individual
tax returns of the stockholders. Therefore, no provision or
benefit was made for income taxes for the year ended
December 31, 1993 and the period from January 1, 1994
through November 30, 1994.
On December 1, 1994, the Predecessor terminated its S
Corporation election concurrent with the contribution of
the stock to the Company and the Company became subject to
federal and state income taxes. Accordingly, the Company
adopted the asset and liability method of accounting for
income taxes as prescribed by Statement of Financial
Accounting Standards No. 109.
Under the asset and liability method of Statement No. 109,
deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and to
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. Under Statement No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the
enactment date.
(Continued)
F-29
<PAGE> 32
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Notes to Consolidated and Combined Financial Statements
(k) Loss Per Share of Common Stock
Loss per share of common stock is computed using the weighted
average number of common shares of stock outstanding during
the years presented and does not include the effect of
common share equivalents (convertible preferred stock)
because their effect would be anti-dilutive. The weighted
average number of common shares used in the computation
were 126,421 and 118,473 in 1994 and 1993, respectively. In
1994, the net loss for purposes of the loss per share
calculation has been increased by $24,456 for dividends on
the Company's preferred stock to arrive at the loss per
share of common stock. Accordingly, the net loss applicable
to common shareholders was $412,405 and $502,353 in 1994
and 1993, respectively.
(l) Reclassifications
Certain 1993 amounts have been reclassified to conform to the
1994 presentation.
(2) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated useful
lives (in years) 1994 1993
---------------- ---- ----
<S> <C> <C> <C>
Alarm system equipment 5-10 $ 2,870,348 2,682,536
Central station monitoring equipment 5-10 1,015,657 997,307
Office furniture, fixtures and equipment 2-5 676,102 590,104
Vehicles 3-5 446,878 368,367
Leasehold improvements 10 576,223 569,123
Repair parts 3 118,448 118,448
------------ -----------
5,703,656 5,325,885
Less: accumulated depreciation and
amortization (3,616,331) (3,111,104)
---------- ----------
$ 2,087,325 2,214,781
========== ==========
</TABLE>
Included in central station monitoring equipment and vehicles in 1994
is approximately $404,000 and $153,000 in cost and accumulated
amortization, respectively, related to capital leases.
(Continued)
F-30
<PAGE> 33
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Notes to Consolidated and Combined Financial Statements
(3) Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Estimated useful
lives (in years) 1994 1993
---------------- ---- ----
<S> <C> <C> <C>
Monitored alarm accounts 8-10 $ 6,370,957 5,983,231
Guard and patrol accounts 5-8 321,531 86,586
Covenants not to compete 2-5 459,282 419,282
Franchise fee 40 25,000 25,000
Deferred financing fees 7 576,855 374,738
------------ ----------
7,753,625 6,888,837
Less: accumulated amortization (5,170,369) (4,600,194)
------------ ----------
$ 2,583,256 2,288,643
============ ==========
</TABLE>
(4) Leases
The Company is obligated under various capital leases for equipment and
vehicles that expire at various dates through 1998. Additionally,
the Company leases its principal operating facilities from related
parties under operating leases with terms expiring in 2002 with
renewal options. Rent expense under these operating leases was
approximately $140,400 in 1994 and 1993. Future minimum lease
payments under noncancelable operating leases and the present value
of future minimum capital lease payments as of December 31, 1994 are
as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------ ------
<S> <C> <C>
1995 $ 130,484 140,400
1996 117,142 140,400
1997 29,564 140,400
1998 4,685 140,400
1999 - 140,400
Thereafter - 292,500
--------- ---------
Total minimum lease payments 281,875 $ 994,500
=========
Less amount representing interest
(at rates ranging from 9% to 14.8%) 31,998
---------
Present value of future minimum lease payments 249,877
Less current portion of capital lease obligations 109,294
---------
Capital lease obligations, excluding current portion $ 140,583
=========
</TABLE>
(Continued)
F-31
<PAGE> 34
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Notes to Consolidated and Combined Financial Statements
(5) Notes Payable and Notes Payable to Affiliates
Notes payable and notes payable to affiliates consist of the following:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Note payable to bank, bearing interest at bank's base rate plus 1%,
secured by the assets and capital stock of the Predecessor $ -- 9,358,136
Credit facility with bank, bearing interest at the prime rate plus
1% (8.5% at December 31, 1994), matures January 2002, secured by
the assets and capital stock of the Company 6,000,000 --
Notes payable to an individual in connection with an acquisition,
principal payments of $5,000 due monthly through October 1996,
unsecured (note 11) 110,000 48,049
Note payable in connection with an acquisition, bearing interest at
8%, principal payments of $2,677 including interest due monthly
through January 2002, unsecured 189,494 --
Note payable in connection with an acquisition, non-interest bearing,
principal due June 1995, unsecured 106,235 --
---------- ----------
Notes payable 6,405,729 9,406,185
---------- ----------
Note payable to a majority stockholder, bearing interest at bank's
base rate plus 1%, with interest payable quarterly, unsecured,
subordinated -- 500,000
Note payable to a majority stockholder, bearing interest at 6%,
interest payable quarterly, matured April 1994, unsecured -- 15,000
---------- ----------
Notes payable to affiliates -- 515,000
---------- ----------
Less current portion of notes payable and notes payable to
affiliates 651,393 373,200
---------- ----------
Notes payable and notes payable to affiliates excluding current
portion $5,754,336 9,547,985
========== ==========
</TABLE>
(Continued)
F-32
<PAGE> 35
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Notes to Consolidated and Combined Financial Statements
The aggregate maturates of the notes payable subsequent to December 31,
1994 are as follows:
<TABLE>
<S> <C>
1995 $ 651,393
1996 1,220,520
1997 462,223
1998 499,268
1999 513,937
Thereafter 3,058,388
-----------
$ 6,405,729
===========
</TABLE>
The credit facility with the bank allows SOA to borrow up to
$15,000,000 and SOA or ESS to borrow up to $500,000. The aggregate
principal amount outstanding at any time is limited based on factors
that include permitted acquisition expenditures, loss prevention
program advances and recurring monthly revenue, as defined. Cash
advances bear interest at the prime rate plus 1.25% or 1.00%
depending upon the ratio of bank debt to net operating income, as
defined. However, the interest rate is decreased by 25 basis points
when cash advances reach $10,000,000. The credit facility required a
$170,000 facility fee and also requires a .5% commitment fee on the
unused portion of the facility. All borrowings outstanding as of
December 31, 1996 and June 30, 1997 will be converted into 5 year
and 4.5 year term loans, respectively. The credit facility contains
various covenants including the requirement that the Company
maintain specific interest, debt, and current asset ratios. The
credit facility also limits capital expenditures and the payment of
dividends. The Company was in compliance with all covenants at
December 31, 1994.
On December 16, 1994, the Company executed an interest rate protection
agreement with the bank that caps the interest rate to be paid on
$4,500,000 of the indebtedness. The Company paid $54,000 for this
agreement, which expires December 19, 1997.
The Company paid interest of approximately $51,239 and $37,300 to a
majority stockholder in 1994 and 1993, respectively.
(6) Income Taxes
The Predecessor was an S Corporation for federal income tax purposes
and was not subject to federal and state income taxes. At December
1, 1994, the S Corporation election was terminated and the Company
became subject to federal and state income taxes. No income tax
expense or benefit was recorded for the cumulative temporary
differences as of the date of termination.
No income tax expense was recorded for the period December 1, 1994
through December 31, 1994 due to net operating losses.
(Continued)
F-33
<PAGE> 36
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Notes to Consolidated and Combined Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 458,664
Allowance for bad debts 43,200
Accrued expenses 26,386
---------
Gross deferred tax assets 528,250
Less valuation allowance (454,563)
Net deferred tax assets $ 73,687
=========
Deferred tax liabilities:
Property and equipment depreciation $ 73,687
=========
</TABLE>
A valuation allowance has been provided because management has not
determined that it is more likely than not that the deferred tax
asset will be realized. The net change in the total valuation
allowance for the year ended December 31, 1994 was an increase of
$454,563.
At December 31, 1994, the Company has federal net operating loss
carryforwards of approximately $1,300,000 which begin to expire in
1999.
(7) Stockholders' Deficiency
At December 31, 1994, the capital of the Company consisted of 2,000,000
shares of authorized $.01 par value common stock and 100,000 shares
of authorized $.01 par value preferred stock. 287,634 shares of
common stock and 50,000 shares of preferred stock were issued and
outstanding.
The Company's preferred stock is convertible into common stock at the
option of the stockholder. The conversion rate is equal to the
original purchase price of the stock, as defined, divided by $20 per
share. The preferred stock has voting rights equal to the number of
common shares they are convertible into and is entitled to per annum
cumulative dividends of nine percent of the original purchase price
per share. The liquidation preference for the preferred stock is the
greater of the original purchase price plus accrued dividends or the
calculated value to be paid per share assuming conversion of the
preferred stock into common stock.
At December 31, 1993, the capital of SOA consisted of 1,000,000 shares
of authorized $1 par value common stock and 250,000 shares of
authorized 7.5%, cumulative, redeemable preferred stock with a $1
par value. 115,451 shares of common stock were issued and
outstanding at December 31, 1993. No preferred stock was
outstanding.
(Continued)
F-34
<PAGE> 37
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Notes to Consolidated and Combined Financial Statements
At December 31, 1993, the capital of ESS consisted of 100,000 shares of
authorized $1 par value common stock with 1,000 shares issued and
outstanding.
During 1993, a merger of the Predecessor resulted in a decrease in
combined stock of $4,044, a decrease in combined additional paid-in
capital of $5,703 and a decrease in combined treasury stock of
$9,747.
During 1994, the shareholder of the Predecessor exchanged all of the
outstanding stock of the Predecessor for 287,634 shares of the
Company's common stock.
(8) Profit Sharing Plan
The Company has a qualified 401(k) profit sharing plan (the Plan)
covering certain employees twenty years of age and over who have
completed one year of service. Company matching and profit sharing
contributions to the Plan are at the discretion of the Board of
Directors, but are limited to amounts deductible under the Internal
Revenue Code. The Company presently matches 25% of employee
contributions up to 8% of the employee's salary. For the years ended
December 31, 1994 and 1993, Company or Predecessor matching
contributions to the Plan totaled $15,430 and $15,976, respectively.
No profit sharing contribution was made during 1994 or 1993.
(9) Acquisitions
During 1994, the Company acquired certain operating assets from various
alarm companies as follows:
<TABLE>
<CAPTION>
Acquisition Date Company Purchase Price
---------------- ------- --------------
<S> <C> <C>
August 29, 1994 Affiliated Security Systems, Inc. $ 269,494
October 14, 1994 Ahwatukee Security, Inc. 292,254
</TABLE>
The acquisitions were accounted for by the purchase method of
accounting and, accordingly, the purchase price was allocated to
tangible and intangible assets based on their fair values as
determined by management. The results of operations of the alarm
accounts acquired are included in the Company's results of
operations since the date of each acquisition. The total purchase
price was allocated as follows:
<TABLE>
<S> <C>
Property and equipment $ 6,550
Monitored alarm accounts 515,198
Covenants not to compete 40,000
--------
$561,748
========
</TABLE>
(Continued)
F-35
<PAGE> 38
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Notes to Consolidated and Combined Financial Statements
In addition, the Company capitalized an additional $107,474 of
intangible assets related to an acquisition that occurred in 1990.
The assets arose from an adjustment to the original purchase price.
The results of operations of the acquired companies have been combined
with the results of the Company as of their respective dates of
acquisition. Had the 1994 business combinations occurred prior to
January 1, 1994, the Company's net sales, net loss and net loss per
share of common stock for the year ended December 31, 1994 would
have been $11.5 million, $230,248 and $2.01, respectively.
(10) Commitments
The Company operates under long-term franchise agreements with Sonitrol
through the year 2019. The agreements allow it to market and sell
Sonitrol products and services under the Sonitrol name in exchange
for royalty fees of $3.30 per customer per month of service.
Royalty fee expense, a component of cost of sales, was $69,570 and
$64,731 for the years ended December 31, 1994 and 1993,
respectively.
(11) Litigation
In September 1992, an action was filed against the Predecessor claiming
breach of contract and other allegations relating to the
Predecessor's acquisition of certain alarm accounts. The action was
settled in December 1994 through arbitration. The Company paid
$50,000 at the settlement date and has recorded the remaining amount
due of $110,000 in notes payable (note 5). The additional amount
payable as a result of the settlement of this claim was recorded as
an increase in intangible assets recorded in connection with the
acquisition.
In April of 1993, a minority shareholder objected to the merger of the
Predecessor and made a claim for the fair value of his stock and
other allegations. The claim was settled through arbitration in
November of 1994 resulting in the minority shareholder being awarded
$53,200 as the value of his stock in the Predecessor. In December of
1994, the minority shareholder filed a claim which restates the
prior allegations. Management believes that the litigation and
claims will be resolved in the Company's favor.
The Company is involved in certain other legal actions and claims
arising in the ordinary course of business. Management believes that
such litigation and claims will be resolved without a material
effect on the Company's financial position or results of operations.
(12) Subsequent Events
On March 31, 1995, the Company purchased the stock of G.T.M.T., Inc.,
G.T.M.P. Holding Company, Inc., and Dictoguard, Inc. for $6,000,000.
The purchase price is subject to certain adjustments for decreases
in recurring monthly revenues and changes in guard and patrol
revenue. The Company also paid $2,700,000 to certain individuals for
non-compete covenants. The stock purchase and non-compete covenants
were financed with the Company's credit facility.
(Continued)
F-36
<PAGE> 39
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company)
SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor)
Notes to Consolidated and Combined Financial Statements
On April 4, 1995, the Company and the bank entered into a Credit
Modification Agreement (agreement) due to the acquisitions which
occurred March 31, 1995. The agreement increases the principal
amount that may be outstanding at any one time and increases the
amount of quarterly installments on the first term loan. Cash
advances bear interest at the prime rate plus 1.75%, 1.25% or 1.00%
depending on the ratio of bank debt to net operating income, as
defined. The agreement also modified various covenants by increasing
the amount of capital expenditures that may be incurred each year
and adjusting various debt and operating income ratios.
F-37
<PAGE> 40
PROTECTION ONE, INC. AND SUBSIDIARIES,
METROL SECURITY SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
Explanatory Note
Protection One Alarm Monitoring, Inc., a wholly owned subsidiary of
Protection One, Inc. (the Company), acquired all the issued and outstanding
common and preferred stock of Metrol Security Services, Inc. and Subsidiaries on
June 28, 1996 (the Acquisition). The Acquisition was financed with borrowing's
from the Company's revolving credit facility and through issuance of 417,885
shares of the Company's common stock. The acquisition was accounted for using
the purchase method of accounting. The accompanying unaudited pro forma
combined statements of operations for the year ended September 30, 1995 and the
nine months ended June 30, 1996 were prepared as if the Acquisition had occurred
at October 1, 1994. The pro forma combined statement of operations for the year
ended September 30, 1995 includes the statement of operations for Metrol
Security Services, Inc. and Subsidiaries for the year ended December 31, 1995.
The Company intends to dispose of the Guard Operations of Metrol
Security Services, Inc. and Subsidiaries on or about September 30, 1996, and
therefore revenues and expenses related to the Guard Operations have been
excluded from the pro forma combined statements of operations for the year ended
September 30, 1995 and the nine months ended June 30, 1996.
In the opinion of management of Protection One, Inc. all adjustments
necessary to present fairly the accompanying unaudited pro forma combined
financial statements have been prepared based upon the terms and structure of
the Acquisition. These unaudited pro forma combined financial statements are
not necessarily indicative of what results of operations would have been had the
Acquisition occurred at the beginning of the respective periods nor do they
purport to indicate the results of operations of future periods for the Company.
These pro forma combined financial statements should be read in
conjunction with the accompanying notes and the historical consolidated
financial statements and notes thereto of Protection One, Inc. and Subsidiaries
and Metrol Security Services, Inc. and Subsidiaries.
F-37
<PAGE> 41
PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended September 30, 1995 (Unaudited)
(Dollar amounts in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Historical
------------------------------
Protection Metrol Security Pro Forma Pro Forma
One, Inc. Services, Inc. Adjustment (a) Combined
----------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Monitoring and service $ 46,308 $ 6,995 $ $ 53,303
Other 9,574 8,693 (4,477)(b) 13,790
----------- -------- --------- ----------
Total revenues 55,882 15,688 (4,477) 67,093
Cost of Revenues:
Monitoring and Service 11,795 2,215 14,010
Other 7,424 6,919 (4,027)(b) 10,316
----------- -------- --------- ----------
Total cost of revenues 19,219 9,134 (4,027) 24,326
----------- -------- --------- ----------
Gross profit 36,663 6,554 (450) 42,767
Selling, general and administrative expenses 12,409 3,721 (385)(b) 16,427
682 (c)
Loss on acquisition terminations 208 208
Acquisition and transition expense 3,090 3,090
Amortization of subscriber accounts and goodwill 15,460 2,692 1,794 (d) 19,264
(682)(c)
----------- -------- --------- ----------
Operating income (loss) 5,496 141 (1,859) 3,778
Other (income) expenses:
Interest expense, net 7,626 1,245 1,059 (e) 9,930
Amortization of debt issuance cost and OID 6,797 6,797
Loss on sales of subscriber accounts 505 505
----------- -------- --------- ----------
Loss before income taxes, extraordinary items and
cumulative effect of change in accounting method -
net of taxes (9,432) (1,104) (2,918) (13,454)
Income tax benefit 3,595 448 1,085 (f) 5,126
----------- -------- --------- ----------
Loss before extraordinary items and cumulative effect of
change in accounting method - net of taxes $ (5,837) $ (656) $ (1,835) $ (8,328)
=========== ======== ========= ==========
Loss per common share:
Before extraordinary items and cumulative effect of
change in accounting method $ (0.87) $ (1.11)(g)
Net loss per share $ (2.12) $ (1.99)(h)
Weighted average common shares outstanding 8,698,187 417,885 9,116,072
</TABLE>
The accompanying notes are an integral part of the
pro forma combined statement of operations.
F-38
<PAGE> 42
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
For the Year Ended September 30, 1995
(a) See Explanatory Note at the beginning of the Pro Forma Combined
Financial Statements.
(b) To exclude Guard Operations from revenues, cost of revenues and selling,
general and administrative expenses as the Company intends to dispose of
the Guard Operations within 90 days of the closing date.
(c) To reclassify depreciation from amortization of subscriber accounts and
goodwill for Metrol to selling, general and administrative expenses.
(d) To reflect amortization, on a straight line basis over 10 years, of the
cost of allocated purchase price cost of acquired subscriber accounts,
including adjustment for deferred income taxes.
(e) To reflect an increase in interest expense, at the rate of 9.5%, on
borrowings used to complete the Acquisition.
(f) To recognize income tax benefit based upon the Pro Forma Combined tax
rate.
(g) Loss per common share before extraordinary item and cumulative effect of
change in accounting method include the effects of preferred stock
dividends and accretion of redeemable preferred stock as noted below.
<TABLE>
<CAPTION>
Metrol
Security
Protection Services, Pro Forma Pro Forma
One, Inc. Inc. Adjustments Combined
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Loss from continuing
operations $ (5,837) $(951) $(1,540) $ (8,328)
Extraordinary items - losses
on early extinguishment of
debt, net (8,906) 2,834(f) (6,072)
Cumulative effect of change
in accounting method, net (1,955) (1,955)
-------- ----- ------- --------
Net loss (16,698) (951) 1,294 (16,355)
Preferred stock dividends (958) (958)
Accretion of redeemable
preferred stock (797) (797)
-------- ----- ------- --------
Loss attributable to
common stock $(18,453) $(951) $ 1,294 $(18,110)
======== ===== ======= ========
</TABLE>
F-39
<PAGE> 43
PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Nine Month Period Ended June 30, 1996 (Unaudited)
(Dollar amounts in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Historical
------------------------------
Protection Metrol Security Pro Forma Pro Forma
One, Inc. Services, Inc. Adjustment (a) Combined
----------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Monitoring and service $ 46,377 $ 5,621 $ $ 51,996
Other 5,418 6,172 (2,937)(b) 8,653
---------- -------- --------- -----------
Total revenues 51,795 11,793 (2,937) 60,651
Cost of Revenues:
Monitoring and Service 12,651 2,000 14,651
Other 4,685 4,754 (2,241)(b) 7,198
---------- -------- --------- -----------
Total cost of revenues 17,336 6,754 (2,241) 21,849
---------- -------- --------- -----------
Gross profit 34,459 5,039 (696) 38,802
Selling, general and administrative expenses 10,082 3,090 (361)(b) 13,322
511 (c)
Loss on acquisition terminations 238 (348)(g) (110)
Acquisition and transition expense 3,048 3,048
Amortization of subscriber accounts and goodwill 16,108 2,902 243 (d) 18,742
(511)(c)
----------- -------- --------- -----------
Operating income (loss) 5,221 (1,171) (230) 3,800
Other (income) expenses:
Interest expense, net 3,052 1,199 376 (e) 4,627
Amortization of debt issuance cost and OID 13,159 13,159
Loss on sales of subscriber accounts 19 19
----------- -------- --------- -----------
Loss before income taxes, extraordinary items and
cumulative effect of change in accounting method -
net of taxes (11,009) (2,390) (760) (14,005)
Income tax benefit (90) 873 578 (f) 1,381
----------- -------- --------- -----------
Loss before extraordinary items and cumulative effect of
change in accounting method - net of taxes $ (11,099) $ (1,497) $ (28) $ (12,624)
=========== ======== ========= ===========
Loss per common share:
Before extraordinary items and cumulative effect of
change in accounting method $ (1.06) $ (1.20)(h)
Net loss per share $ (1.06) $ (1.20)(h)
Weighted average common shares outstanding 10,749,983 10,749,983
</TABLE>
The accompanying notes are an integral part of the
pro forma combined statement of operations.
F-40
<PAGE> 44
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
For the Nine Month Period Ended June 30, 1996
(a) See Explanatory Note at the beginning of the Pro Forma Combined
Financial Statements.
(b) To exclude Guard Operations from revenues, cost of revenues and selling,
general and administrative expenses as the Company intends to dispose of
the Guard Operations within 90 days of the closing date.
(c) To reclassify depreciation from amortization of subscriber accounts and
goodwill for Metrol to general and administrative expenses.
(d) To reflect amortization, on a straight line basis over 10 years, of the
cost of allocated purchase price cost of acquired subscriber accounts,
including adjustment for deferred income taxes.
(e) To reflect an increase in interest expense, at the rate of 8.6%, on
borrowings used to complete the Acquisition.
(f) To recognize income tax benefit based upon the Pro Forma Combined tax
rate.
(g) To include proceeds received in key man life insurance settlement in
other income.
(h) Loss per common share before extraordinary item and cumulative effect of
change in accounting method include the effects of preferred stock
dividends and accretion of redeemable preferred stock as noted below.
<TABLE>
<CAPTION>
Metrol
Security
Protection Services, Pro Forma Pro Forma
One, Inc. Inc. Adjustments Combined
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Loss from continuing
operations $(11,099) $(2,237) $712 $(12,624)
Preferred stock dividends (248) (248)
-------- ------- ---- --------
Loss attributable to
common stock $(11,347) $(2,237) $712 $(12,872)
======== ======= ==== ========
</TABLE>
F-41
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
each of the Registrants has duly caused the Report to be signed on its behalf
by the undersigned thereunto duly authorized.
PROTECTION ONE, INC.
PROTECTION ONE ALARM MONITORING, INC.
Date: August 27, 1996 By: /s/ JOHN W. HESSE
--------------------------------
John W. Hesse
Executive Vice President
and Chief Financial Officer
3
<PAGE> 1
EXHIBIT 5.1
[KPMG Peat Marwick LLP letterhead]
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to incorporation by reference in the registration statement filed on
Form S-3 of Protection One, Inc. of our reports dated March 29, 1996 and
February 10, 1995, except as to note 12 which is as of April 4, 1995, relating
to the consolidated balance sheets of Metrol Security Services, Inc. as of
December 31, 1995 and 1994 and December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' deficiency and cash flows
for the years ended December 31, 1995, 1994 and 1993, which reports appear in
Protection One, Inc.'s Form 8-K/A dated June 28, 1996.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 1, 1996
<PAGE> 1
EXHIBIT 5.2
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to incorporation by reference in the registration statement filed on
the Amendment No. 1 to Form S-3 (File No. 333-5849) of Protection One, Inc. of
our reports dated March 29, 1996 and February 10, 1995, except as to note 12
which is as of April 4, 1995, relating to the consolidated balance sheets of
Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December
31, 1994 and 1993, and the related consolidated statements of operations,
stockholders' deficiency and cash flows for the years ended December 31, 1995,
1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated
June 28, 1996.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 1, 1996
<PAGE> 1
EXHIBIT 5.3
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to incorporation by reference in the registration statement filed on
Form S-8 (File No. 333-2828) of Protection One, Inc.'s Protection One Employees
Savings Plan of our reports dated March 29, 1996 and February 10, 1995, except
as to note 12 which is as of April 4, 1995, relating to the consolidated
balance sheets of Metrol Security Services, Inc. as of December 31, 1995 and
1994 and December 31, 1994 and 1993, and the related consolidated statements of
operations, stockholders' deficiency and cash flows for the years ended
December 31, 1995, 1994 and 1993, which reports appear in Protection One,
Inc.'s Form 8-K/A dated June 28, 1996.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 1, 1996
<PAGE> 1
EXHIBIT 5.4
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to incorporation by reference in the registration statement filed on
Form S-8 (File No. 333-2892) of Protection One, Inc.'s 1994 Stock Option Plan of
our reports dated March 29, 1996 and February 10, 1995, except as to note 12
which is as of April 4, 1995, relating to the consolidated balance sheets of
Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December 31,
1994 and 1993, and the related consolidated statements of operations,
stockholders' deficiency and cash flows for the years ended December 31, 1995,
1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated
June 28, 1996.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 1, 1996
<PAGE> 1
EXHIBIT 5.5
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to incorporation by reference in the registration statement filed on
the Amendment No. 1 to Form S-3 (File No. 33-99220) of Protection One, Inc. of
our reports dated March 29, 1996 and February 10, 1995, except as to note 12
which is as of April 4, 1995, relating to the consolidated balance sheets of
Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December
31, 1994 and 1993, and the related consolidated statements of operations,
stockholders' deficiency and cash flows for the years ended December 31, 1995,
1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated
June 28, 1996.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 1, 1996
<PAGE> 1
EXHIBIT 5.6
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to incorporation by reference in the registration statement filed on
Form S-8 (File No. 33-97542) of Protection One, Inc.'s Employee Stock Purchase
Plan of our reports dated March 29, 1996 and February 10, 1995, except as to
note 12 which is as of April 4, 1995, relating to the consolidated balance
sheets of Metrol Security Services, Inc. as of December 31, 1995 and 1994 and
December 31, 1994 and 1993, and the related consolidated statements of
operations, stockholders' deficiency and cash flows for the years ended December
31, 1995, 1994 and 1993, which reports appear in Protection One, Inc.'s Form
8-K/A dated June 28, 1996.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 1, 1996
<PAGE> 1
EXHIBIT 5.7
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to incorporation by reference in the registration statement filed on
Form S-8 (File No. 33-95702) of Protection One, Inc.'s 1994 Stock Option Plan of
our reports dated March 29, 1996 and February 10, 1995, except as to note 12
which is as of April 4, 1995, relating to the consolidated balance sheets of
Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December 31,
1994 and 1993, and the related consolidated statements of operations,
stockholders' deficiency and cash flows for the years ended December 31, 1995,
1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated
June 28, 1996.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 1, 1996
<PAGE> 1
EXHIBIT 5.8
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to incorporation by reference in the registration statement filed on
the Post-Effective Amendment No. 1 to Form S-3 (File No. 33-83494) of Protection
One, Inc. of our reports dated March 29, 1996 and February 10, 1995, except as
to note 12 which is as of April 4, 1995, relating to the consolidated balance
sheets of Metrol Security Services, Inc. as of December 31, 1995 and 1994 and
December 31, 1994 and 1993, and the related consolidated statements of
operations, stockholders' deficiency and cash flows for the years ended December
31, 1995, 1994 and 1993, which reports appear in Protection One, Inc.'s Form
8-K/A dated June 28, 1996.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 1, 1996
