<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
<TABLE>
<CAPTION>
<S> <C>
0-24780 33-73002-01
(Commission File Number) (Commission File Number)
PROTECTION ONE, INC. PROTECTION ONE ALARM MONITORING, INC.
(EXACT NAME OF REGISTRANT (EXACT NAME OF REGISTRANT
AS SPECIFIED IN ITS CHARTER) AS SPECIFIED IN ITS CHARTER)
DELAWARE DELAWARE
(State or Other Jurisdiction (State or Other Jurisdiction
of Incorporation or Organization) of Incorporation or Organization)
93-1063818 93-1065479
(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 Offices, (Address of Principal Executive Offices,
Including Zip Code) Including Zip Code)
(310) 342-6300 (310) 342-6300
(Registrant's Telephone Number, (Registrant's Telephone Number,
Including Area Code) Including Area Code)
</TABLE>
Indicate by check mark whether each of the registrants (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that such registrants were required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 8, 1997, Protection One, Inc. had outstanding 13,745,002 shares
of Common Stock, par value $0.01 per share. As of such date, Protection One
Alarm Monitoring, Inc. had outstanding 110 shares of Common Stock, par value
$0.10 per share, all of which shares were owned by Protection One, Inc..
Protection One Alarm Monitoring, Inc. meets the conditions set forth in General
Instructions H(1)(a) and (b) for Form 10-Q and is therefore filing this form
with the reduced disclosure format set forth therein.
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1996 1997
-------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 1,782 $ 0
Restricted cash ....................................... 3,680 5,016
Receivables, net ...................................... 12,743 14,909
Inventories ........................................... 1,920 1,910
Prepaid expenses ...................................... 1,221 1,774
Deferred tax asset .................................... 7,561 9,197
--------- ---------
Total current assets ............................. 28,907 32,806
Property and equipment, net ................................. 9,952 11,948
Subscriber accounts and intangibles, net .................... 257,354 299,193
Assets held for sale ........................................ 775 --
Deposits .................................................... 648 449
--------- ---------
$ 297,636 $ 344,396
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 2,278 $ 2,190
Accrued salaries, wages and benefits .................. 1,495 1,385
Other accruals ........................................ 1,048 597
Purchase holdbacks .................................... 9,942 13,176
Acquisition transition costs .......................... 4,326 6,865
Other current liabilities ............................. 1,623 1,330
Deferred revenue ...................................... 13,827 16,042
--------- ---------
Total current liabilities ........................ 34,539 41,585
Long-term debt, net of current portion ...................... 225,650 264,340
Deferred tax liability ...................................... 7,561 8,393
Other liabilities ........................................... 1,059 649
--------- ---------
Total liabilities ................................ 268,809 314,967
--------- ---------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common Stock, $.01 par value, 40,000,000 shares authorized,
12,914,783 and 13,728,663 shares issued and outstanding,
at September 30, 1996 and March 31, 1997, respectively ... 129 137
Additional paid-in capital .................................. 79,767 89,182
Accumulated deficit ......................................... (51,069) (59,890)
--------- ---------
Total stockholders' equity ....................... 28,827 29,429
--------- ---------
$ 297,636 $ 344,396
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE> 3
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------
1996 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues:
Monitoring and related services .............. $ 30,966 $ 45,367
Other ........................................ 2,212 1,708
-------- --------
Total revenues .......................... 33,178 47,075
Cost of revenues:
Monitoring and related services .............. 8,853 12,575
Other ........................................ 1,374 1,146
-------- --------
Total cost of revenues .................. 10,227 13,721
-------- --------
Gross profit ............................ 22,951 33,354
Selling, general and administrative expenses ....... 6,914 9,535
Acquisition and transition expenses ................ 1,927 2,632
Amortization of intangibles and depreciation expense 10,841 17,565
-------- --------
Operating income ........................ 3,269 3,622
Other expenses:
Interest expense, net ........................ 1,856 4,054
Amortization of OID and debt issuance costs .. 8,633 10,009
Loss on sales of assets ...................... 19 --
Loss on assets held for sale ................. -- 166
-------- --------
Loss before income taxes ................ (7,239) (10,607)
Income tax benefit ................................. -- (1,786)
-------- --------
Net loss ..................................... (7,239) (8,821)
Preferred stock dividends .......................... 248 --
-------- --------
Loss attributable to common stock ............ $ (7,487) $ (8,821)
======== ========
Net loss per common share .................... $ (0.75) $ (0.65)
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE> 4
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues:
Monitoring and related services .............. $ 16,431 $ 23,451
Other ........................................ 1,235 963
-------- --------
Total revenues .......................... 17,666 24,414
Cost of revenues:
Monitoring and related services .............. 4,677 6,504
Other ........................................ 709 523
-------- --------
Total cost of revenues .................. 5,386 7,027
-------- --------
Gross profit ............................ 12,280 17,387
Selling, general and administrative expenses ....... 3,601 5,036
Acquisition and transition expenses ................ 1,172 1,378
Amortization of intangibles and depreciation expense 5,681 9,247
-------- --------
Operating income ........................ 1,826 1,726
Other expenses:
Interest expense, net ........................ 921 2,167
Amortization of OID and debt issuance costs .. 4,386 5,090
Loss on sales of assets ...................... 19 --
Loss on assets held for sale ................. -- 43
-------- --------
Loss before income taxes ................ (3,500) (5,574)
Income tax expense ................................. -- 71
-------- --------
Net loss ..................................... (3,500) (5,645)
Preferred stock dividends .......................... 79 --
-------- --------
Loss attributable to common stock ............ $ (3,579) $ (5,645)
======== ========
Net loss per common share .................... $ (0.33) $ (0.41)
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE> 5
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------
1996 1997
--------- ----------
(UNAUDITED)
<S> <C> <C>
Cash flow from operating activities:
Net loss .......................................................... $ (7,239) $ (8,821)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation .................................................. 780 1,282
Amortization of intangibles .................................. 10,061 16,282
Amortization of OID and debt issuance costs ................... 8,633 10,009
Deferred tax benefit .......................................... -- (2,327)
Provision for doubtful accounts ............................... 1,039 1,792
Changes in assets and liabilities, net of effects of acquisitions:
Receivables ................................................... (3,005) (3,566)
Inventories ................................................... 271 49
Prepaid expenses and deposits ................................. (438) (298)
Accounts payable .............................................. 416 (88)
Accrued liabilities ........................................... (355) (838)
Deferred revenue .............................................. 352 722
-------- --------
Net cash provided by operating activities ................ 10,515 14,198
-------- --------
Cash flows from investing activities:
Cash restricted for acquisitions .............................. 0 (1,336)
Purchases of property and equipment ........................... (2,387) (3,260)
Sales of assets previously held for sale ...................... -- 187
Acquisitions, net of cash received ............................ (38,776) (37,893)
Payments on purchase holdbacks ................................ (50) (331)
Deferred acquisition payments ................................. (1,295) (977)
Acquisition transition costs .................................. (1,525) (1,136)
-------- --------
Net cash used in investing activities ............... (44,033) (44,746)
-------- --------
Cash flows from financing activities:
Payments on long-term debt .................................... (23,828) (7,500)
Proceeds from long-term debt .................................. 38,077 37,002
Debt and equity issuance costs ................................ (634) (753)
Issuance of preferred and common stock and warrants ........... 23,648 17
Cash dividends paid ........................................... (168) --
-------- --------
Net cash provided by financing activities ................ 37,095 28,766
-------- --------
Net decrease in cash and cash equivalents ................ 3,577 (1,782)
Cash and cash equivalents:
Beginning of period ........................................... 1,256 1,782
-------- --------
End of period ................................................. $ 4,833 $ 0
======== ========
Interest paid during the period ................................... $ 1,500 $ 4,087
======== ========
Taxes paid during current year (see Note 6) ....................... $ -- $ 627
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE> 6
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollar amounts in thousands)
1. BASIS OF CONSOLIDATION AND INTERIM FINANCIAL INFORMATION:
The accompanying unaudited consolidated financial statements include the
accounts of Protection One, Inc. ("POI") and its wholly owned subsidiary
Protection One Alarm Monitoring, Inc. ("Monitoring" and together with POI, the
"Company"). Monitoring's former wholly owned subsidiary, Security Holdings, Inc.
was merged into Monitoring on March 31, 1997. The assets, results of operations
and stockholder's equity of Monitoring comprise substantially all the assets,
results of operations and stockholders' equity of the Company on a consolidated
basis. POI's principal assets and sole operations are in and through its
investment in Monitoring. All significant intercompany balances and transactions
have been eliminated in consolidation. Separate financial statements for
Monitoring have not been provided because the Company does not believe such
separate financial statements are material to investors. Summarized consolidated
financial information of Monitoring is included in Note 9. The Company's
unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions to Form 10-Q which mandate adherence to
Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended September 30, 1996
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on December 31, 1996. In the opinion of management of
the Company, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included. The results of
operations for the three and six month periods ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
Certain items in the September 30, 1996 financial statements have been
reclassified to conform to the March 31, 1997 presentation.
Recent Accounting Pronouncement: In February 1997, The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128 -
"Earnings per Share", which is required to be adopted in 1997. The unaudited pro
forma "basic" and "diluted" earnings per share under the new standard do not
differ from the earnings per share calculated under the existing standard.
2. RECEIVABLES:
Receivables, which consist primarily of trade accounts receivable of
$22,552 at March 31, 1997 and $18,284 at September 30, 1996 have been reduced by
allowances for doubtful accounts of $7,643 and $5,541, respectively. Included in
receivables and deferred revenue at March 31, 1997 and September 30, 1996 are
invoices billed in advance of the periods in which services are provided
totaling $8,364 and $7,309, respectively. The provisions for doubtful accounts
for the six months ended March 31, 1997 and 1996 were $1.8 million and $1.0
million, respectively.
3. SUBSCRIBER ACCOUNTS AND INTANGIBLES:
Subscriber accounts and intangibles (at cost) consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1997
--------- ---------
<S> <C> <C>
Acquired subscriber accounts $ 298,767 $ 355,397
Debt issuance costs ......... 11,847 12,607
Goodwill and other .......... 2,497 4,049
--------- ---------
313,111 372,053
Less accumulated amortization (55,757) (72,860)
--------- ---------
$ 257,354 $ 299,193
========= =========
</TABLE>
6
<PAGE> 7
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
3. SUBSCRIBER ACCOUNTS AND INTANGIBLES (CONT.):
Reconciliation of acquired subscriber accounts:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
September 30, March 31,
1996 1997
------------- ---------
<S> <C> <C>
Balance, beginning of period ..... $ 184,463 $ 298,767
Acquisition of subscriber accounts 119,629 59,021
Charges against purchase holdbacks (5,325) (2,391)
--------- ---------
Balance, end of period ........... $ 298,767 $ 355,397
========= =========
</TABLE>
In conjunction with certain purchases of subscriber accounts, the Company
withholds a portion of the purchase price as a reserve to offset qualifying
attrition of the acquired subscriber accounts for a specified period as provided
for in the purchase agreements, and as a reserve for purchase price settlements
of assets acquired and liabilities assumed.
Reconciliation of purchase holdbacks:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
September 30, March 31,
1996 1997
------------- ----------
<S> <C> <C>
Balance, beginning of period ...... $ 4,949 $ 9,942
Purchase holdback additions ....... 13,850 5,956
Charges against subscriber accounts (5,325) (2,391)
Cash paid to sellers .............. (3,532) (331)
-------- --------
Balance, end of period ............ $ 9,942 $ 13,176
======== ========
</TABLE>
4. LOSS PER COMMON SHARE:
The computation of fully diluted net loss per share for each of the
periods presented was antidilutive; as such, no presentation of fully diluted
earnings per share has been included in the consolidated statements of
operations. The weighted average shares outstanding used in the computation of
the net loss attributable to common shares are as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
March 31, March 31,
-------------------------- ----------------------------
1996 1997 1996 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common Stock 9,959,926 13,576,579 10,828,400 13,707,012
</TABLE>
5. DIVIDEND RESTRICTIONS:
The Company's Amended and Restated Credit Agreement (the "Credit
Agreement") governing its revolving credit facility (the "Revolving Credit
Facility") and the Indenture governing Monitoring's 13 5/8% Senior Subordinated
Discount Notes due 2005 (the "Discount Notes") place certain restrictions on
POI's and Monitoring's ability to make dividend payments, distributions and
other asset transfers in respect of such company's capital stock. At March 31,
1997, under provisions of the Credit Agreement (the most restrictive agreement),
no amounts were available for such dividend payments, distributions or other
transfers by POI or Monitoring.
7
<PAGE> 8
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
6. INCOME TAXES:
For the six months ended March 31, 1997, the Company experienced a net
increase in its net deferred tax asset valuation allowance of $3.3 million. At
March 31, 1997, the Company had $28.1 million in Federal net operating loss
("NOL") carryforwards for regular tax purposes and $29.3 million for alternative
minimum tax ("AMT NOL") purposes, which expire in the years 2006-2010. These
carryforwards are available, subject to certain restrictions, to reduce taxable
income, alternative minimum taxable income and income taxes payable in future
years. As a result of the issuance of warrants in conjunction with the Company's
refinancing plan, as well as various prior issuances of preferred and common
stock and stock warrants, there are annual limitations on the amount of regular
tax NOL and AMT NOL carryforwards, that can be used to reduce taxable income,
alternative minimum taxable income and income tax payable. Future substantial
changes in the Company's ownership could create additional limitations. The
Company has utilized $4.0 million in net operating loss carryforwards for the
six months ended March 31, 1997 which results in the effective tax rate being
lower than the expected statutory rate.
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowances for doubtful accounts .................. $ 2,214 $ 2,966
Acquisition transition costs and purchase holdbacks 5,701 7,778
Performance warrants .............................. 1,662 1,685
Net operating loss carryforwards .................. 12,814 10,279
OID amortization .................................. 8,634 11,858
Other ............................................. 139 61
Less valuation allowance .......................... (1,907) (5,199)
-------- --------
Total deferred tax assets .................... 29,257 29,428
Deferred tax liabilities:
Differences in depreciation, amortization and
acquisition basis ............................. (29,257) (28,624)
-------- --------
Net deferred tax asset ....................... $ -- $ 804
======== ========
</TABLE>
The valuation allowances at September 30, 1996 and March 31, 1997 reflect
current estimates of limitations on utilization of NOL carryforwards for Federal
and state income tax purposes.
The balance sheet presentation of the net deferred tax asset is as
follows:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1997
------------- ---------
<S> <C> <C>
Current deferred tax asset $7,561 $9,197
Non-current deferred
tax liability 7,561 8,393
------ ------
$ -- $ 804
====== ======
</TABLE>
In October, 1996, the Company acquired all of the outstanding shares of
Security Holdings, Inc. For financial reporting purposes, the assets acquired
and the liabilities assumed were valued at fair market value as of the date of
purchase. For income tax reporting purposes, the acquisition was treated as a
non-taxable stock purchase with acquired assets and liabilities retaining their
historical tax basis. The deferred tax liability resulting from the acquisition
basis difference exceeded the Company's existing net deferred tax asset (before
reduction for valuation allowance) at the date of acquisition. Consequently, the
existing deferred tax asset valuation allowance as of the acquisition date was
eliminated. This resulted in a reduction to the goodwill and deferred tax
liability account balances that were recognized as a result of
8
<PAGE> 9
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
6. INCOME TAXES (CONT.):
the acquisition. For the six months ended March 31, 1997, the Company generated
(subsequent to the acquisition) additional deferred tax assets which exceeded
the Company's net deferred tax liability. To the extent these additional
deferred tax assets offset the net deferred tax liability that was required to
be recognized on the acquisition, a deferred income tax benefit was recognized
on the Company's income statement. Due to uncertainties regarding the future
utilization of a portion of the deferred tax asset, a valuation allowance was
recorded.
7. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions:
<TABLE>
<CAPTION>
Six months ended March 31,
--------------------------
1996 1997
-------- --------
<S> <C> <C>
Subscriber accounts acquired .............. $ 51,925 $ 56,708
Goodwill .................................. -- 1,523
Inventories ............................... 78 39
Accounts receivable, net .................. 56 282
Property and equipment .................... 22 18
Other assets acquired ..................... 235 137
-------- --------
Total assets acquired ................ 52,316 58,707
-------- --------
Cash paid to seller ....................... 38,382 37,471
Stock issued to seller .................... -- 9,406
Acquisition expenses ...................... 391 572
Purchase holdbacks ........................ 7,207 3,235
Acquisition transition reserves ........... 2,303 3,675
Deferred revenue acquired ................. 2,074 1,492
Other liabilities assumed ................. 1,959 2,856
-------- --------
Purchase price and assumed liabilities $ 52,316 $ 58,707
======== ========
</TABLE>
Cash paid to sellers, payments for acquisition expenses and payments on
liabilities assumed in conjunction with acquisitions are included in cash used
in investing activities in the period paid. Deferred revenue, which represents
advance billings to subscribers, is recognized as revenue in the period in which
the related service is provided. Such amounts are considered a non-cash
component of operations and are reflected as a reduction in cash provided by
operating activities.
The following reflects (decreases) in assets and decreases (increases) in
liabilities and capital stock resulting from non-cash investing and financing
activities which occurred in the six months ended March 31, 1996:
<TABLE>
<CAPTION>
Additional Series H
Purchase Common Paid-In Preferred
Intangibles Holdbacks Stock Capital Stock
----------- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Charge off of purchase holdbacks... $(1,436) $ 1,436 -- -- --
Conversion of Series H Preferred... -- -- $ (7) $(6,120) $ 6,127
Reclassification of stock
offering costs .................. (507) -- -- 507 --
------- ------- ------- ------- -------
$(1,943) $ 1,436 $ (7) $(5,613) $ 6,127
======= ======= ======= ======= =======
</TABLE>
9
<PAGE> 10
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
7. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES(CONT.)
The following reflects increases (decreases) in assets and increases in
liabilities and capital stock resulting from non-cash investing and financing
activities which occurred in six months ended March 31, 1997:
<TABLE>
<CAPTION>
Additional
Other Assets Held Purchase Common Paid-In
Receivables For Sale Intangibles Holdbacks Stock Capital
----------- ------------ ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Chargeoff of purchase holdbacks ............. $(2,391) $ 2,391
Common shares issued for acquisitions ....... 9,406 $ (8) $(9,398)
Sale of guard and patrol operations ......... $ 588 $ (588)
------- ------ ------- ------- ------- -------
$ 588 $ (588) $ 7,015 $ 2,391 $ (8) $(9,398)
======= ====== ======= ======= ======= =======
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
The Company is a party to claims and matters of litigation incidental to
the normal course of business. The ultimate outcome of these matters cannot
presently be determined; however, in the opinion of management of the Company,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations and cash flows.
9. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION:
POI has fully and unconditionally guaranteed the Discount Notes and the
$103.5 million principal amount of 6 3/4% Convertible Senior Subordinated Notes
due 2003 (the "Convertible Notes") on a joint and several basis. The assets,
results of operations and stockholder's equity of Monitoring comprise
substantially all of the assets, results of operations and stockholders' equity
of the Company on a consolidated basis. POI's principal assets and sole
operations are in and through its investment in Monitoring. Monitoring's former
wholly owned subsidiary, Security Holdings, Inc., was merged into Monitoring on
March 31, 1997. All significant intercompany balances and transactions have been
eliminated in consolidation. Separate audited financial statements for
Monitoring have not been provided because the Company does not believe such
separate financial statements and separate summarized financial information are
material to investors. Summarized consolidated financial information of
Monitoring is presented below:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1997
------------- ----------
(unaudited) (unaudited)
<S> <C> <C>
Summarized Balance Sheet
Assets
Current assets .................................. $ 28,907 $ 32,806
Subscriber accounts and intangibles, net ..... $257,354 $299,193
Other non-current assets ..................... $ 11,375 $ 12,397
Liabilities and Stockholders' Equity
Deferred revenue ............................. $ 13,827 $ 16,042
Other current liabilities .................... $ 20,712 $ 25,543
Long-term debt, net of current portion ....... $225,650 $264,340
Other long-term liabilities .................. $ 8,620 $ 9,042
Stockholders' equity ......................... $ 28,827 $ 29,429
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 3, 1996 March 31, 1997 March 31, 1996 March 31, 1997
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Summarized Statements of Operations
Revenue .................................... $ 17,666 $ 24,414 $ 33,178 $ 47,075
Gross Profit ......................... $ 12,280 $ 17,387 $ 22,951 $ 33,354
Net loss ............................. $ (3,500) $ (5,645) $ (7,239) $ (8,821)
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain matters discussed in this section are "forward-looking statements"
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements generally can be identified as such because the context of the
statement includes words such as the Company or its management "believes,"
"expects," "anticipates" or other words of similar import. Similarly, statements
herein that describe the Company's objectives, plans or goals are
forward-looking statements. All such forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Information with
respect to these risks and uncertainties is included on pages 5-11 of POI's
prospectus dated January 2, 1997, and under the caption "Risk Factors" in Item
5(d) on the Current Report on Form 8-K filed by Protection One, Inc. and
Protection One Alarm Monitoring, Inc. dated September 20, 1996, which
information is incorporated herein by reference. POI's sole asset is, and all of
POI's operations are conducted through, POI's investment in Monitoring; in
addition, all of Monitoring's long-term debt has been guaranteed on a full and
unconditional basis by POI. Accordingly, no separate analysis of results of
operations of Monitoring has been included herein.
OVERVIEW
For an overview of the Company's accounting policies and specific
discussions of, among other things, a change in the method of accounting for
certain acquisition and transition expenses and the impact of SFAS 121 on the
Company's financial statements, see the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
Acquisition and Dealer Program Activity. A significant portion of the
Company's growth has been generated by the purchase of subscriber accounts
through the Company's Dealer Program and through the acquisition of portfolios
of subscriber accounts from other alarm companies. The Company's Dealer Program
consists of exclusive purchase agreements with independent alarm companies
specializing in the sale and installation of new alarm systems. Dealer Program
participants install alarm systems (which have a Protection One logo on the
keypad), arrange for subscribers to enter into Protection One alarm monitoring
agreements, and install Protection One yard signs and window decals. All of
these subscribers are contacted individually by Company personnel, at the time
of purchase of the accounts from the dealer, to facilitate customer satisfaction
and quality control. In addition, the Company requires dealers to evaluate the
credit history of prospective new subscribers.
The Company also purchases portfolios of subscriber accounts. Because the
Company typically acquires only the subscriber accounts (and not the accounts
receivable or similar assets) of the sellers, the Company focuses its
pre-acquisition review and analysis on the quality and stability of the
subscriber accounts to verify the monthly recurring revenue ("MRR") represented
by such accounts. If the subscriber accounts to be purchased pass such due
diligence scrutiny, the Company then applies its monitoring and other servicing
costs to such MRR as a basis for determining the purchase price to be paid by
the Company. To protect the Company against the loss of acquired accounts, the
Company typically seeks to obtain from the seller a guarantee against the
subscriber account cancellation for a period following the acquisition and the
right to retain a portion of the acquisition price (a "purchase price holdback")
against the MRR lost due to subscriber account cancellations during the
specified period. The Company obtains a similar purchase price holdback in its
purchases through the Dealer Program.
During the six months ended March 31, 1997 (the "first half of fiscal
1997"), the Company added (through its Dealer Program and acquisitions of nine
portfolios of subscriber accounts) an aggregate of approximately 48,400
subscriber accounts for a total purchase price of approximately $59.0 million.
The MRR of the acquired accounts ranged from approximately $15.00 to $60.00,
with an average MRR of $28.27. Of the nine acquisitions completed during the
first half of fiscal 1997 by the Company, purchase price holdbacks in amounts
that ranged from 0% to 20% of the initial purchase price (and averaged 12% of
the initial purchase price) and attrition guarantee periods ranged from 0 months
to 12 months (and averaged 11.9 months).
11
<PAGE> 12
Subscriber Attrition. Subscriber attrition has a direct impact on the
Company's results of operations, since it affects both the Company's revenues
and its amortization expense. Attrition can be measured in terms of canceled
subscriber accounts and in terms of decreased MRR resulting from canceled
subscriber accounts. Gross subscriber attrition is defined by the Company for a
particular period as a quotient, the numerator of which is equal to the number
of subscribers who disconnect service during such period and the denominator of
which is the average of the number of subscribers at each month end during such
period. Net MRR attrition is defined by the Company for a particular period as a
quotient, the numerator of which is an amount equal to gross MRR lost as the
result of canceled subscriber accounts or services during such period, net of
(i) MRR generated during such period by the sale of additional services and
increases in rates to existing subscribers, (ii) MRR generated during such
period from the connection of subscribers who move into premises previously
occupied by subscribers and in which existing systems are installed and from
conversion of accounts that were previously monitored by other companies to the
Company's monitoring service (i.e., "reconnects" and "conversions"); and (iii)
MRR attributable to canceled accounts that, by virtue of a purchase holdback are
"put" back to the seller of such accounts during such period (i.e., "guaranteed
accounts"); and the denominator of which is the average month-end MRR in effect
during such period. While the Company reduces the gross MRR lost during a period
by the amount of guaranteed accounts provided for in purchase agreements with
sellers, in some cases the Company may not collect all or any of the
reimbursement due it from the sellers.
The following table sets forth the Company's gross subscriber attrition
and net MRR attrition for the periods indicated:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
---------------------------------------------------
3/31/96 6/30/96 9/30/96 12/31/96 3/31/97
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Gross subscriber attrition 20.5% 19.9% 18.3% 16.6% 17.6%
Net MRR attrition 7.9 7.1 7.0 6.5 6.9
</TABLE>
MRR represents the monthly recurring revenue the Company is entitled to
receive under subscriber contracts in effect at the end of the period. Included
in MRR and the number of subscribers are amounts associated with past due
balances. It is the policy and practice of the Company that every effort be made
to preserve the revenue stream associated with these contractual obligations. To
this end, the Company actively works to both collect amounts owed and to retain
the customer. In certain instances, the collection and evaluation period may
exceed six months in length. When, in the judgment of the Company's collection
personnel, all reasonable efforts have been made to collect balances due,
subscribers are disconnected from the Company's monitoring center and are
included in the calculation of gross subscriber and net MRR attrition.
Because the Company determines payments to sellers under purchase price
holdbacks subsequent to the periods to which such holdbacks apply, and because
holdbacks are not allocated to specific guaranteed accounts or specific fiscal
periods, the Company reduces gross MRR lost during a period by the amount of
guaranteed accounts provided for in purchase agreements with sellers. However,
in some cases, the Company has not retained the full amount of such holdback to
which the Company is contractually entitled. If guaranteed accounts for which
the Company was not compensated by the seller were taken into account in
calculating net MRR attrition, net MRR attrition would have been higher in each
period presented in the table above.
Generally, net MRR attrition is less than actual "net account attrition,"
which the Company defines as canceled subscriber accounts net of reconnects,
conversions and guaranteed accounts. Estimated net account attrition is the
basis upon which the Company determines the period over which it amortizes its
investment in subscriber accounts. The Company amortizes such investment over 10
years based on current estimates. If actual subscriber account attrition were to
exceed such estimated attrition, the Company could be required to amortize its
investment in subscriber accounts over a shorter period, thus increasing
amortization expense in the period in which such adjustment is made and in
future periods. There can be no assurance that the actual attrition rates for
such accounts will not be greater than the rate assumed by the Company.
12
<PAGE> 13
The table below sets forth the change in the Company's subscriber base
over the periods indicated below:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED MARCH 31,
-----------------------
1996 1997
-------- --------
<S> <C> <C>
Number of subscribers:
Beginning of period ............................... 107,401 165,242
Additions through portfolio acquisitions and Dealer
Program, net of sales of subscriber accounts .... 80,449 93,283
Installations by Company personnel ................ 1,179 504
Reconnects and conversions ........................ 4,023 4,818
Gross subscriber attrition ........................ (27,810) (35,022)
-------- --------
End of period .................................. 165,242 228,825
======== ========
</TABLE>
Change in Presentation Format. Beginning with its Quarterly Report on Form
10-Q for the first quarter of fiscal 1997, the Company made changes to its
presentation of income statement information. First, the Company has
reclassified revenues and cost of revenues associated with its alarm response
and patrol operations from the "other" category to "monitoring and related
services." The "other" category now reflects solely results from the Company's
installation, lock and other operations. The Company made this change to better
reflect its efforts to sell a bundle of monitoring, field service and alarm
response services to both existing and new subscribers. Second, the Company has
reclassified depreciation expense from monitoring and service cost of revenues,
other cost of revenues and the selling, general and administrative expenses
category, and included depreciation expense in a line item entitled
"amortization of intangibles and depreciation expense." The Company made this
change to allow readers to more easily calculate the aggregate amount of
non-cash charges in the income statement. Finally, the Company has reclassified
customer service expense from monitoring and service cost of revenues to
selling, general and administrative expenses. This change reflects the Company's
move to centralize all customer service functions into a single facility in
Chatsworth, California. Customer service personnel formerly dedicated to the
support of monitoring and related services are responsible for the Company's
entire customer service efforts. Results reported in this Quarterly Report for
the three and six months ended March 31, 1996 have been modified to reflect
these changes and make the information for such periods comparable to
information for the three and six months ended March 31, 1997.
The table below displays selected income statement data for fiscal years
1994-1996 after giving effect to the changes described above:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Monitoring and related services ................. $ 29,297 $ 48,909 $ 68,778
Other ........................................... 5,183 6,973 4,679
-------- -------- --------
Total revenues ............................... 34,480 55,882 73,457
Cost of revenues:
Monitoring and related services ................. 8,355 13,627 19,065
Other ........................................... 3,224 3,887 2,513
-------- -------- --------
Total cost of revenues ....................... 11,579 17,514 21,578
-------- -------- --------
Gross profit ....................................... 22,901 38,368 51,879
Selling, general and administrative expense ........ 10,607 13,031 15,478
Loss on acquisition terminations ................... 26 208 --
Performance warrants compensation expense .......... 4,504 -- --
Acquisition and transition expenses ................ -- 3,090 4,219
Amortization of intangibles and depreciation expense 9,290 16,543 25,121
-------- -------- --------
Operating income (loss) ....................... $ (1,526) $ 5,496 $ 7,061
======== ======== ========
</TABLE>
13
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
March 31, March 31,
------------------ -------------------
1996 1997 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Monitoring and related services .................. 93.3% 96.4% 93.0% 96.1%
Other ............................................ 6.7 3.6 7.0 3.9
----- ----- ----- -----
Total revenues ........................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Cost of revenues:
Monitoring and related services ............ 26.7% 26.7% 26.5% 26.6%
Other ........................................... 4.1 2.4 4.0 2.2
----- ----- ----- -----
Total cost of revenues ................... 30.8 29.1 30.5 28.8
----- ----- ----- -----
Gross profit ............................. 69.2 70.9 69.5 71.2
Selling, general and administrative expense ........ 20.8 20.3 20.4 20.6
Acquisition and transition expenses ................ 5.8 5.6 6.6 5.6
Amortization of intangibles and depreciation expense 32.7 37.3 32.2 37.9
----- ----- ----- -----
Operating income (loss) .................. 9.9% 7.7% 10.3% 7.1%
===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 31, 1997 COMPARED TO SIX MONTHS ENDED MARCH 31, 1996
Revenues for the six months ended March 31, 1997 increased by
approximately $13.9 million, or 41.9%, to $47.1 million from $33.2 million for
the comparable period in 1996. Monitoring and related services revenues
increased by approximately $14.4 million, or 46.5%, a substantial majority of
this increase resulted from the addition of subscribers through the Dealer
Program and the acquisition of portfolios of subscriber accounts. The Company's
subscriber base increased by 38.5% to approximately 228,825 subscribers at March
31, 1997 as compared to 165,242 subscribers at March 31, 1996. The sale of
enhanced services and new subscribers generated by Company personnel comprised
the remainder of revenue growth. Other revenues, consisting primarily of
revenues generated by the Company's installation and lock businesses, decreased
by $0.5 million, or 22.8%, to $1.7 million. Such decrease was caused primarily
by a decline in installation revenues of 28.2%, or approximately $0.4 million.
The decline in installation revenues resulted from the Company's continued
emphasis on growth through the Dealer Program and acquisitions, rather than
through the sale of new alarm systems by Company personnel.
Cost of revenues for the six months ended March 31, 1997 increased by
approximately $3.5 million, or 34.2%, to $13.7 million. Cost of revenues as a
percentage of total revenues declined to 29.1% for the six months ended March
31, 1997 from 30.8% for the comparable period in fiscal 1996. Monitoring and
related services expenses increased by approximately $3.7 million, or 42.0%,
reflecting increased activity at the Company's central monitoring station and
field service branches due to a substantially larger subscriber base. Monitoring
and related services expenses as a percentage of monitoring and related services
revenues decreased to 27.7% for the six months ended March 31, 1997 from 28.6%
during the comparable period in fiscal 1996. Such decrease was generated by
efficiencies realized in the monitoring center and by greater service technician
productivity. Other expenses decreased by approximately $0.2 million, or 16.6%,
to approximately $1.1 million for the six months ended March 31, 1997 from $1.3
million for the six months ended March 31, 1996. The decrease primarily was
caused by a 16.1% decrease ($0.1 million) in installation expense.
Gross profit for the six months ended March 31, 1997 was approximately
$33.4 million, representing an increase of approximately $10.4 million, or
45.3%, over the $23.0 million of gross profit recognized in the comparable
period in fiscal 1996. Such increase was caused primarily by an increase in
monitoring and related services activities, which paralleled the increase in the
Company's subscriber base noted above. Gross profit as a percentage of total
revenues was 70.9% for the six months ended March 31, 1997 compared to 69.2% for
the comparable period in fiscal 1996. This increase was caused by both an
improvement in the gross profit margin for monitoring and related services and
an increase in monitoring and related services revenues as a percentage of total
revenues (96.4% for the six months ended March 31, 1997 compared to 93.3% for
the six months ended March 31, 1996). Gross profit from other revenues declined
to approximately $0.6 million for the six months ended March 31, 1997 from $0.8
million for the comparable period in fiscal 1996. Such decline was caused
primarily by a decrease in the gross profit from reduced installation
activities.
14
<PAGE> 15
Selling, general and administrative expenses rose to approximately $9.5
million in the six months ended March 31, 1997, which represents an increase of
approximately $2.6 million, or 37.9%, over selling, general and administrative
expenses in the comparable period in fiscal 1996. The majority of the increase
reflects higher general and administrative expenses arising from the Company's
growth, including the addition of two branch offices and the implementation of a
24 hour, 7 day a week customer service call center. Such figure as a percentage
of total revenues decreased from 20.8% in the six months ended March 31, 1996 to
20.3% in the six months ended March 31, 1997. Advertising and marketing expenses
are expensed as incurred and comprised less than 1% of revenues in each of the
six month periods ended March 31, 1996 and 1997. The provision for doubtful
accounts increased to approximately $1.8 million for the six months ended March
31, 1997 from $1.0 million for the comparable period in fiscal 1996.
Acquisition and transition expenses for the six months ended March 31,
1997 totaled $2.6 million compared to $1.9 million for the comparable period in
fiscal 1996. Such expenses will fluctuate from quarter to quarter based
primarily on the amount of the Company's acquisition and Dealer Program activity
and its ability to require sellers to bear certain of such acquisition-related
expenses.
Amortization of intangibles and depreciation expense for the six months
ended March 31, 1997 increased by approximately $6.7 million, or 62.0%, to $17.6
million. This increase is primarily the result of the addition of subscriber
accounts through the acquisition of portfolios of subscriber accounts and
through the Dealer Program.
Operating income for the six months ended March 31, 1997 was $3.6 million,
compared to $3.3 million in the comparable period in fiscal 1996. Operating
income as a percentage of total revenues was 7.7% in the six months ended March
31, 1997, compared to 9.9% in the comparable period in fiscal 1996. The decrease
in such figure over the comparable period in fiscal 1996 reflects substantial
increases in operating expenses and amortization expense, offset by improvement
in the Company's gross profit and higher revenues.
Interest expense, net and amortization of debt issuance costs and OID.
These amounts increased by $3.6 million, or 34.1%, to $14.1 million in the six
months ended March 31, 1997, reflecting the Company's use of debt to finance a
substantial portion of its subscriber account growth.
Balance sheet data. At March 31, 1997, the Company's working capital
deficit was $8.8 million, as compared to a working capital deficit of $5.6
million at September 30, 1996. This decrease of $4.4 million in the working
capital deficit was caused primarily by an increase of $2.2 million in accounts
receivable and a $1.6 million increase in deferred tax assets offset by
increases in purchase holdbacks of $3.2 million, acquisition transition costs of
$2.5 million, deferred revenues of $2.2 million and a decrease in cash of $0.4
million. Subscriber accounts and intangibles, net, increased to $299.2 million
at March 31, 1997 from $257.4 million at September 30, 1996. This increase of
$41.8 million, or 16.2%, was caused by the addition of new subscribers, net of
amortization expense. Total stockholders' equity increased to approximately
$29.4 million at March 31, 1997 from $28.8 million at September 30, 1996. The
increase in such figure reflects the issuance of shares of the Company's Common
Stock as a portion of the purchase price of Security Holdings, Inc.
(approximately $7.3 million) and Phillips Electronics, Inc. (approximately $2.0
million), offset by the Company's $8.8 million loss for the six months ended
March 31, 1997.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Revenues for the three months ended March 31, 1997 (the "second quarter of
fiscal 1997") increased by approximately $6.7 million, or 38.2%, to $24.4
million from $17.7 million for the comparable period in 1996 (the "second
quarter of fiscal 1996"). Monitoring and related services revenues increased by
approximately $7.0 million, or 42.7%, a substantial majority of this increase
resulted from the addition of subscribers through the Dealer Program and the
acquisition of portfolios of subscriber accounts. The sale of enhanced services
and new subscribers generated by Company personnel comprised the remainder of
revenue growth. Other revenues, consisting primarily of revenues generated by
the Company's installation and lock businesses, decreased by $0.3 million, or
22.0%, to $1.0 million. Such decrease was caused by a decline in installation
revenues of 17.9%, or approximately $0.1 million.
Cost of revenues for the second quarter of fiscal 1997 increased by
approximately $1.6 million, or 30.5%, to $7.0 million. Cost of revenues as a
percentage of total revenues declined to 28.8% for the second quarter of fiscal
1997 from 30.5% for the comparable period in fiscal 1996. Monitoring and related
services expenses increased by approximately
15
<PAGE> 16
$1.8 million, or 39.1%, primarily due to increased activity at the Company's
central monitoring station and field service branches due to a substantially
larger subscriber base. Monitoring and related services expenses as a
percentage of monitoring and related services revenues decreased to 27.7%
for the second quarter of fiscal 1997 from 28.5% during the comparable period in
fiscal 1996. Such decrease was generated by efficiencies realized in the
monitoring center and by greater service technician productivity. Other expenses
decreased by approximately $0.2 million, or 26.2%, to approximately $0.5 million
for the second quarter in fiscal 1997 from $0.7 million for the second quarter
of fiscal 1996. The decrease primarily was caused by a 24.8% decrease ($0.1
million) in installation expense.
Gross profit for the second quarter of fiscal 1997 was approximately $17.4
million, representing an increase of approximately $5.1 million, or 41.6%, over
the $12.3 million of gross profit recognized in the comparable period in fiscal
1996. Such increase was caused primarily by an increase in monitoring and
related services activities, which paralleled the increase in the Company's
subscriber base noted above. Gross profit as a percentage of total revenues was
71.2% for the second quarter of fiscal 1997 compared to 69.5% for the comparable
period in fiscal 1996. This increase was caused primarily by an improved gross
profit margin for monitoring and related services and an increase in monitoring
and related services revenues as a percentage of total revenues (96.1% for the
second quarter of fiscal 1997 compared to 93.0% for the second quarter of fiscal
1996). Gross profit from other revenues declined to approximately $0.4 million
for the second quarter of fiscal 1997 from $0.5 million for the comparable
period in fiscal 1996. Such decline was caused primarily by a decrease in the
gross profit from reduced installation activities.
Selling, general and administrative expenses rose to $5.0 million in the
second quarter of fiscal 1997, which represents an increase of approximately
$1.4 million, or 39.9%, over selling, general and administrative expenses in the
comparable period in fiscal 1996. The majority of the increase reflects higher
general and administrative expenses arising from the Company's growth, including
the addition of two branch offices. Such figure as a percentage of total
revenues increased from 20.4% in the second quarter of fiscal 1996 to 20.6% in
the second quarter of fiscal 1997. Advertising and marketing expenses are
expensed as incurred and comprised less than 1% of revenues in each of the
quarters ending March 31, 1996 and 1997. The provision for doubtful accounts
increased to approximately $1.0 million for the second quarter of fiscal 1997
from $0.6 million for the comparable period in fiscal 1996.
Acquisition and transition expenses for the second quarter of fiscal 1997
totaled $1.4 million compared to $1.2 million for the comparable period in
fiscal 1996. As described above, such expenses will fluctuate from quarter to
quarter based primarily on the amount of the Company's acquisition and Dealer
Program activity and its ability to require sellers to bear certain of such
acquisition-related expenses.
Amortization of intangibles and depreciation expense for the second
quarter of fiscal 1997 increased by approximately $3.6 million, or 62.8%, to
$9.2 million. This increase is primarily the result of the addition of
subscriber accounts through the acquisition of portfolios of subscriber accounts
and through the Dealer Program.
Operating income for the second quarter of fiscal 1997 was $1.7 million,
compared to $1.8 million in the comparable period in fiscal 1996. Operating
income as a percentage of total revenues was 7.1% in the second quarter of
fiscal 1997, compared to 10.3% in the comparable period in fiscal 1996. The
decrease in such figure over the comparable period in fiscal 1996 reflects
substantial increases in operating expenses and amortization expense, offset by
improvement in the Company's gross profit and higher revenues.
Interest expense, net and amortization of debt issuance costs and OID.
These amounts increased by $2.0 million, or 36.8%, to $7.3 million in the second
quarter of fiscal 1997, reflecting the Company's use of debt to finance a
substantial portion of its subscriber account growth.
LIQUIDITY AND CAPITAL RESOURCES
General. Since its formation in September 1991, the Company has financed
its operations and growth from a combination of capital raised through debt and
equity offerings and to a lesser extent, cash flow from operations. During the
fiscal 1994-1996 period, the Company completed three long-term debt offerings,
including the proceeds of the $50.0 million principal amount of senior
subordinated notes issued in November 1993 (which notes were retired in fiscal
1995), $166.0 million principal amount ($105.2 million net proceeds) of senior
subordinated discount notes issued in May 1995
16
<PAGE> 17
(the "Discount Notes") and $103.5 million principal amount of senior
subordinated convertible notes issued in September and October of 1996 (the
"Convertible Notes"); the Company also has utilized borrowings under its
Revolving Credit Facility to fund acquisitions and the Dealer Program. In
September 1994, the Company raised $18.3 million in net proceeds from its
initial public offering of Common Stock and in February 1996, the Company raised
$23.1 million in net proceeds from another public offering of the Common Stock.
The Company intends to continue to use cash flows from operations, together with
borrowings under the Revolving Credit Facility, to finance the addition of
subscriber accounts and capital expenditures. Although the Company anticipates
that it will continue to acquire portfolios of subscriber accounts, the Company
cannot estimate the number, the size, or timing of such acquisitions. Depending
on such factors, additional funds beyond those currently available to the
Company may be required to continue the acquisition program and to finance the
Dealer Program, and there can be no assurance that the Company will be able to
obtain such financing on acceptable terms or at all.
On a long-term basis, the Company has several material commitments.
Borrowings under the Revolving Credit Facility were approximately $21.3 million
at March 31, 1997 and could be as high as $100.0 million through the period
ended January 3, 2000, the current maturity date of the Revolving Credit
Facility. While the Company believes it will be able to obtain further
extensions of the maturity date of the Revolving Credit Facility from time to
time, or will be able to refinance the Revolving Credit Facility prior to its
maturity date, there can be no assurance that the Company will be able to do so.
The Convertible Notes require the Company to make semi-annual cash interest
payments of $3.5 million, the first of which was made on March 15, 1997. The
Discount Notes require the Company to begin to make interest payments on such
obligations on December 31, 1998. Based on an interest rate of 13 5/8%, such
payment will be approximately $11.3 million semiannually, or approximately $22.6
million on an annual basis. As a result, a substantial portion of the Company's
cash flows from operations will be required to make interest payments on the
Convertible Notes and the Discount Notes, and there can be no assurance that the
Company's cash flow from operations will be sufficient to meet such obligation,
or that there will be sufficient funds available to the Company after such
interest payments to meet other debt, capital expenditure and operational
obligations. The $103.5 million principal amount of the Convertible Notes
matures on September 15, 2003, although the Notes may be converted into Common
Stock at any time prior to such date. The $166.0 million principal amount of
Discount Notes matures on June 30, 2005. There can be no assurance that the
Company will have the cash necessary to repay either the Convertible Notes or
the Discount Notes at maturity or will be able to refinance such obligations.
The Company maintains a $2.0 million letter of credit sub-facility under its
Revolving Credit Facility, and has extended an approximately $0.8 million letter
of credit to a seller, scheduled payments under which are approximately $0.4
million during each of fiscal 1998 and 1999.
The Company has had, and expects to continue to have, a working capital
deficit. At March 31, 1997, the Company had a working capital deficit of $8.8
million. There are two principal categories of current liabilities that cause
the Company to have a working capital deficit: (i) "purchase holdbacks," which
represent the portion of the aggregate acquisition cost of subscriber accounts
retained by the Company to offset lost MRR arising from the cancellation of
acquired accounts; and (ii) "deferred revenue," which represents billings and
cash collections received by the Company from its subscriber base in advance of
performance of services. Both purchase holdbacks and deferred revenues are
recorded as a current liability on the Company's balance sheet.
The Company generated $14.2 million of net cash provided by operating
activities in the six months ended March 31, 1997, compared to $10.5 million net
cash provided by operating activities for the comparable period in fiscal 1996.
The increase in net cash provided by operating activities reflects the Company's
substantial growth.
In the six months ended March 31, 1997, the Company's net cash used in
investing activities was $44.7 million, compared to $44.0 million during the six
months ended March 31, 1996. Investing activities during the six months ended
March 31, 1997 included purchases through the Dealer Program, as well as the
acquisition of portfolios of subscriber accounts, including the purchase of
Security Holdings, Inc. and Phillips Electronics, Inc.
During the six months ended March 31, 1997, the Company's net cash
provided by financing activities was $28.8 million, compared to $37.1 million
for the six months ended March 31, 1996. The Company's primary financing
activities during the six months ended March 31, 1997 were the issuance of $13.5
million of Convertible Notes pursuant to the underwriters' exercise of an
over-allotment option and $9.3 million of Common Stock in connection with the
acquisitions of Security Holdings, Inc. ($7.3 million) and Phillips Electronics,
Inc. ($2.0 million).
17
<PAGE> 18
The Discount Notes Indenture, the Convertible Notes Indenture and the
Credit Agreements contain certain restrictions on transfers of funds, such as
dividends, loans and advances, by the Company. The Company believes that such
restrictions have not had and will not have a significant impact on the
Company's ability to meet its cash obligations. The Company does not anticipate
payment of dividends on Common Stock, and such dividends are currently
prohibited by the Credit Agreement and the Discount Notes Indenture.
Capital Expenditures. The Company anticipates making capital expenditures
in the remainder of fiscal 1997 of approximately $2.0 million for routine
replacement and upgrading of vehicles, computers and other capital items. In
addition, the Company anticipates making capital expenditures of approximately
$0.7 million to complete a project to upgrade its monitoring and administrative
hardware and software. The Company believes the installation of the new computer
software will create efficiencies Company-wide, and particularly in the customer
service, data entry and field maintenance and repair functions. The Company
believes the complete implementation of the new software will not occur until
the end of fiscal 1997. The Company believes cash flows from operations,
together with borrowing under the Revolving Credit Facility, will be sufficient
to fund the Company's capital expenditures in fiscal 1997.
18
<PAGE> 19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Amendment of Certificate of Incorporation. As previously reported, the
Fifth Restated Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), of Protection One, Inc. ("POI") was further amended effective
upon the filing of a Certificate of Amendment of Certificate of Incorporation
with the Secretary of State of Delaware on February 6, 1997, to increase the
number of authorized shares of Common Stock from 24,000,000 shares to 40,000,000
shares. For additional information with respect to this amendment, see Item 2 of
POI's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996.
Issuances of Securities. Pursuant to an Agreement for Purchase and Sale of
Assets dated as of March 19, 1997 (the "Purchase Agreement"), Protection One
Alarm Monitoring, Inc. ("Monitoring") purchased the security alarm accounts,
equipment, telephone line and certain other assets of Peterson Alarm Service of
Riverside, California ("Peterson Alarm"). In consideration of the acquisition,
Monitoring (i) assumed certain operating obligations of Peterson Alarm, (ii)
paid to Mr. Homer Peterson, the owner of Peterson Alarm, approximately $922,000
in cash, and (iii) delivered to Mr. Peterson 11,904 shares of Common Stock (the
"Shares") newly issued by POI, which number was valued for purposes of the
acquisition at the average of the closing price of the Common Stock on the
NASDAQ National Market during the period of the 10 most recent trading days
ending on the second trading day prior to the acquisition.
The offer and sale of the Shares was not registered under the Securities
Act in reliance on Section 4(2) thereof. Mr. Peterson certified to POI that Mr.
Peterson was an "accredited investor" as such term is defined in Rule 501 under
the Securities Act, and was provided by POI with registration statements and
reports of, and access to other information concerning POI and its subsidiaries.
Mr. Peterson represented to POI that he was acquiring the Shares for investment
and not with a view to distribution thereof. No underwriter participated in the
offer or sale of any of these securities and no underwriter's fees or
commissions were paid.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
19
<PAGE> 20
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1997 annual meeting of POI's stockholders (the "Annual Meeting")
was held on January 29, 1997. All directors nominated were elected at the Annual
Meeting. For the election of directors, the results were as follows:
<TABLE>
<S> <C> <C>
James M. Mackenzie, Jr ................... For: 10,479,922
Withheld: 15,400
Robert Chefitz ........................... For: 10,479,922
Withheld: 15,400
Ben Enis ................................. For: 10,478,987
Withheld: 16,335
James Q. Wilson .......................... For: 10,479,122
Withheld: 16,200
</TABLE>
On the ratification of the appointment of Coopers & Lybrand LLP as
auditors for fiscal 1997, the results were as follows:
<TABLE>
<S> <C>
For: 10,479,457
Against: 15,165
Abstained: 700
</TABLE>
On the proposal to amend the Certificate of Incorporation to increase
the authorized number of shares of Common Stock to 40,000,000, the results were
as follows:
<TABLE>
<S> <C>
For: 9,738,334
Against: 574,088
Abstained: 2,900
Broker Non-Votes: 270,354
</TABLE>
On the proposal to amend the 1994 Stock Option Plan as amended, to
increase the number of shares of Common Stock for which options might be issued,
the results were as follows:
<TABLE>
<S> <C>
For: 8,879,934
Against: 1,440,688
Abstained: 700
Broker Non-Votes: 270,354
</TABLE>
ITEM 5. OTHER INFORMATION
None.
20
<PAGE> 21
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits. The following exhibits are filed with this Quarterly
Report on Form 10-Q:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
3.1 Fifth Restated Certificate of Incorporation of Protection One, Inc.,
as amended (incorporated by reference to Exhibit 3.1 to the Quarterly
Report on Form 10-Q filed by Protection One, Inc. ("POI") and
Protection One Alarm Monitoring, Inc. ("Monitoring") for the quarter
ended December 31, 1996).
3.2 Certificate of Incorporation of Monitoring (incorporated by reference
to the Registration Statement on Form S-3 (Registration No. 333-09401)
filed by POI and Monitoring on August 1, 1996).
3.3 By-laws of POI, as amended (incorporated by reference to Exhibit 3.1
to the Quarterly Report on Form 10-Q filed by POI and Monitoring for
the quarter ended March 31, 1996).
3.4 By-laws of Monitoring (incorporated by reference to Exhibit 3.2 to the
Annual Report on Form 10-K filed by POI and Monitoring for the fiscal
year ended September 30, 1994).
10.1 Second Amendment to Amended and Restated Credit Agreement dated as of
March 31, 1997, among Monitoring, Heller Financial Inc. and the other
financial institutions signatory thereto as Lenders.
10.2 Amendment No. 1 to Amended and Restated Employment Agreement dated as
of February 28, 1997, between POI and John W. Hesse.
27.1 Financial Data Schedule.
99.1 Information included under the caption "Risk Factors" on pages 5-11 of
POI's Prospectus dated January 2, 1997, as filed pursuant to Rule
424(b) (incorporated by reference to said Prospectus, which is a part
of POI's Registration Statement on Form S-3 (Registration No.
333-18159)).
</TABLE>
Reports on Form 8-K. No report on Form 8-K was filed during the quarter
for which this Quarterly Report on Form 10-Q is filed.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
May 12, 1997 PROTECTION ONE, INC.
PROTECTION ONE ALARM MONITORING, INC.
By: /s/ John W. Hesse
-------------------------------
John W. Hesse
Executive Vice President
and Chief Financial Officer
22
<PAGE> 23
<TABLE>
<CAPTION>
Exhibit Sequential
Number Exhibit Page #
- ------- ------- -----------
<S> <C> <C>
3.1 Fifth Restated Certificate of Incorporation of Protection One, Inc.,
as amended (incorporated by reference to Exhibit 3.1 to the Quarterly
Report on Form 10-Q filed by Protection One, Inc. ("POI") and
Protection One Alarm Monitoring, Inc. ("Monitoring") for the quarter
ended December 31, 1996). ..............................................
3.2 Certificate of Incorporation of Monitoring (incorporated by reference
to the Registration Statement on Form S-3 (Registration No. 333-09401)
filed by POI and Monitoring on August 1, 1996).
........................................................................
3.3 By-laws of POI, as amended (incorporated by reference to Exhibit 3.1
to the Quarterly Report on Form 10-Q filed by POI and Monitoring for
the quarter ended March 31, 1996).......................................
3.4 By-laws of Monitoring (incorporated by reference to Exhibit 3.2 to the
Annual Report on Form 10-K filed by POI and Monitoring for the fiscal
year ended September 30, 1994)..........................................
10.1 Second Amendment to Amended and Restated Credit Agreement dated as of
March 31, 1997, among Monitoring, Heller Financial Inc. and the other
financial institutions signatory thereto as Lenders..................... 24-28
10.2 Amendment No. 1 to Amended and Restated Employment Agreement dated as
of February 28, 1997, between POI and John W. Hesse..................... 29
27.1 Financial Data Schedule................................................. 30
99.1 Information included under the caption "Risk Factors" on pages 5-11 of
POI's Prospectus dated January 2, 1997, as filed pursuant to Rule
424(b) (incorporated by reference to said Prospectus, which is a part
of POI's Registration Statement on Form S-3
(Registration No. 333-18159))...........................................
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO AMENDED AND
RESTATED CREDIT AGREEMENT
This Second Amendment to Amended and Restated Credit Agreement, dated
as of March __, 1997 (this "Agreement"), is between PROTECTION ONE ALARM
MONITORING, INC., a Delaware corporation ("Borrower"), the Lenders identified on
the signature pages hereto and HELLER FINANCIAL, INC., a Delaware corporation,
in its individual capacity as a Lender and in its capacity as agent for the
Lenders, "Agent".
WITNESSETH:
WHEREAS, Agent, Borrower and Lenders are parties to that certain
Amended and Restated Credit Agreement dated as of June 7, 1996 (as heretofore
amended, the "Credit Agreement"; capitalized terms not otherwise defined herein
shall have the definitions provided therefor in the Credit Agreement) and to
certain other documents executed in connection with the Credit Agreement; and
WHEREAS, the parties wish to further amend the Credit Agreement as
provided herein;
NOW, THEREFORE, the parties agree as follows:
1. Amendments to the Credit Agreement.
(a) The definition of "Indebtedness Ratio Test" set forth in subsection
1.1 of the Credit Agreement is hereby deleted in its entirety and replaced with
the following:
"Indebtedness Ratio Test" means, as of any date of
determination, that (i) the Senior Indebtedness to Annualized EBIDAT
Ratio as of such date does not exceed: 2.75 as of any date of
determination on or prior to December 31, 1997; 3.00 as of any date of
determination during the period from January 1, 1998 to September 30,
1998; 2.75 as of any date of determination during the period from
September 30, 1998 to June 30, 1999; and 2.50 as of any date of
determination on or after June 30, 1999; (ii) the Total Indebtedness to
Annualized EBIDAT Ratio as of such date does not exceed (A) for any
date of determination on or prior to December 31, 1997, the lesser of
(I) 6.25 or (II) the Debt to EBIDAT Ratio then in effect under
subsection 4.03(a) of the Subordinated Discount Note Indenture (after
giving effect to clauses (i) through (vi) thereof), and (B) for any
date of determination after December 31, 1997, 6.0; and (iii) the
Senior Indebtedness to MRR Ratio as of such date does not exceed: 21 as
of any date of determination prior to September 30, 1998; and 19 as of
any date of determination on or after September 30, 1998. All
calculations shall be based upon the EBIDAT and MRR for the most recent
month for which financial statements are required to be delivered
pursuant to subsection 5.1(A), adjusted to include (a) pro forma EBIDAT
and MRR for any prior acquisitions made during the course of the month
covered by such financial statements and (b) pro forma EBIDAT and MRR
for any prior acquisitions made subsequent to the date of such
financial statements.
(b) Subsection 2.2(A) of the Credit Agreement is hereby amended by
inserting the following new paragraph immediately preceding the last paragraph
of said subsection:
"If at any time through and including December 31, 1997 the
Total Indebtedness to Annualized EBIDAT Ratio exceeds 6.0, an amount of
the Loans equal to the Excess Indebtedness shall bear interest as
follows:
(X) if a Base Rate Loan, then at the sum of the Base Rate plus
two percent (2%) per annum; and
(Y) if a LIBOR Rate Loan, then at the sum of the LIBOR Rate
plus three and one-half percent (3.50%) per annum.
23
<PAGE> 2
For purposes of this subsection 2.2(A), (i) "Excess Indebtedness"
means, for any monthly period, (I) Total Indebtedness minus (II) (A)
six multiplied by (B) EBIDAT for such one month period multiplied by
twelve (12); provided that Excess Indebtedness shall never be less than
zero; and (ii) "Total Indebtedness" means, at any date of
determination, the aggregate principal amount of all Indebtedness of
Holdings, Borrower and Borrower's Subsidiaries as of such date on a
consolidated basis plus the aggregate liquidation preference or
redemption amount of all Disqualified Stock as of such date. Further,
for purposes of this paragraph only, Total Indebtedness shall be
calculated based on: (x) the average daily balance of all Indebtedness
(excluding Subordinated Indebtedness) during such one month Interest
Period, and (y) the Subordinated Indebtedness outstanding as of the
last day of such month. Excess Indebtedness for any month, and the
corresponding additional interest charge, shall be calculated by Agent
as soon as reasonably practicable after receipt by Agent of financial
information for the month in question from Borrower sufficient to allow
Agent to make the necessary calculations. Any such calculation of the
additional interest charge by Agent shall, absent manifest error, be
deemed to be conclusive and binding on Borrower. Borrower hereby
covenants and agrees to provide Agent with the necessary financial
information on or before the thirtieth day of each month through
January 1998."
(c) Subsection 6.1 of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
6.1 Capital Expenditure Limits.
The aggregate amount of all Capital Expenditures of Borrower
and its Subsidiaries will not exceed $6,000,000 during any Fiscal Year.
2. No Waiver of Past Defaults. Nothing contained herein shall be
deemed to constitute a waiver of any Event of Default that may heretofore or
hereafter occur or have occurred and be continuing or to modify any provision of
the Credit Agreement except as expressly provided herein.
3. Representations and Warranties. To induce Agent and Lenders to
enter into this Agreement, Borrower represents and warrants to Agent on behalf
of the Lenders that the execution, delivery and performance by Borrower of this
Agreement are within its corporate powers, have been duly authorized by all
necessary corporate action and do not and will not contravene or conflict with
any provision of law applicable to Borrower, the Certificate of Incorporation or
Bylaws of Borrower, or any order, judgment or decree of any court or other
agency of government or any contractual obligation binding upon Borrower; and
the Credit Agreement as amended as of the date hereof is the legal, valid and
binding obligation of Borrower enforceable against Borrower in accordance with
its terms.
4. Conditions. The effectiveness of the amendments stated in this
Agreement is subject to each of the following conditions precedent or
concurrent:
(a) No Default. No Default or Event of Default under the
Credit Agreement, as amended hereby, shall have occurred and be continuing;
(b) Warranties and Representations. The warranties and
representations of Borrower contained in this Agreement shall be true and
correct as of the effective date hereof, with the same effect as though made on
such date; and
(c) Amendment Fee. Borrower shall have paid to Agent, for the
pro rata benefit of Lenders, an amendment fee of $100,000.
(d) Subordinated Indebtedness. No default under the
Subordinated Indebtedness shall have occurred and be continuing or be caused by
the effectiveness of this Agreement.
5. Miscellaneous.
(a) Captions. Section captions used in this Agreement are for
convenience only, and shall not affect the construction of this Agreement.
24
<PAGE> 3
(b) Governing Law. This Agreement shall be a contract made
under and governed by the laws of the State of Illinois, without regard to
conflict of laws principles. Whenever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under such law, such provision shall be ineffective to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
(c) Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Agreement.
(d) Successors and Assigns. This Agreement shall be binding
upon Agent, Borrower, and Lenders and their respective successors and assigns,
and shall inure to the sole benefit of Agent, Borrower and Lenders and the
successors and assigns of Agent, Borrower and Lenders.
(e) References. Any reference to the Credit Agreement
contained in any notice, request, certificate, or other document executed
concurrently with or after the execution and delivery of this Agreement shall be
deemed to include this Agreement unless the context shall otherwise require.
(f) Continued Effectiveness. Notwithstanding anything
contained herein, the terms of this Agreement are not intended to and do not
serve to effect a novation as to the Credit Agreement. The parties hereto
expressly do not intend to extinguish the Credit Agreement. Instead, it is the
express intention of the parties hereto to reaffirm the indebtedness created
under the Credit Agreement which is evidenced by the Revolving Note and secured
by the Collateral. The Credit Agreement as amended hereby and each of the other
Loan Documents remains in full force and effect.
(g) Costs, Expenses and Taxes. Borrower affirms and
acknowledges that subsection 10.1 of the Credit Agreement applies to this
Agreement and the transactions and Agreements and documents contemplated
hereunder.
Delivered at Chicago, Illinois, as of the day and year first above
written.
PROTECTION ONE
ALARM MONITORING, INC.
By:_______________________________
Name Printed:_____________________
Title:____________________________
HELLER FINANCIAL, INC.,
as Lender and as Agent
By:______________________________
Name Printed:____________________
Title:___________________________
BANQUE NATIONALE DE PARIS, NEW YORK
BRANCH, as a Lender
By:______________________________
Name Printed:____________________
Title:___________________________
25
<PAGE> 4
MERITA BANK, LTD., as a Lender
By:______________________________
Name Printed:____________________
Title:___________________________
TORONTO DOMINION (TEXAS), INC.,
as Lender
By:______________________________
Name Printed:____________________
Title:___________________________
IBJ SCHRODER BANK & TRUST, as Lender
By:______________________________
Name Printed:____________________
Title:___________________________
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA, as Lender
By:______________________________
Name Printed:____________________
Title:___________________________
26
<PAGE> 5
Acknowledgment
PROTECTION ONE, INC. hereby acknowledges and consents to the terms of
this Agreement and hereby affirms, ratifies and confirms all of the terms and
provisions of the Amended and Restated Guaranty dated June 7, 1996.
PROTECTION ONE, INC.
By:_____________________________________
Name Printed:___________________________
Title:__________________________________
27
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 1
TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated
as of February 28, 1997, is entered into between John W. Hesse (the "Employee")
and Protection One, Inc. (previously known as P1 Acquisition Corporation), a
Delaware corporation (the "Company"), with reference to the following facts and
objectives:
A. The Employee and the Company are parties to an Amended and
Restated Employment Agreement dated as of May 24, 1996 (as so
amended, the "Employment Agreement").
B. The Employee and the Company desire to further amend the
Employment Agreement as provided herein.
NOW, THEREFORE, the Company and the Employee hereby agree as follows:
Section 2 of the Employment Agreement is amended to read in full
as follows:
2. The term of this Agreement commenced on September 16, 1991 and
shall be continually extended such that at all times the remaining term
hereof is three years; provided, however, that this Agreement shall be
subject to termination as provided in Section 13 hereof."
In the second paragraph of Section 17, the date "September 30,
1998" is replaced with the date "May 24, 1999."
In the third paragraph of Section 17, the date "September 30,
1998" is replaced with the date "May 24, 2000."
Subject to the foregoing amendments, the Employment Agreement
remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first written above.
PROTECTION ONE, INC.
By: /s/ James M. Mackenzie, Jr. /s/ John W. Hesse
-------------------------------------- --------------------------
James M. Mackenzie, Jr. JOHN W. HESSE
President
28
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000916230
<NAME> PROTECTION ONE INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,016
<SECURITIES> 0
<RECEIVABLES> 22,552
<ALLOWANCES> 7,643
<INVENTORY> 1,910
<CURRENT-ASSETS> 32,806
<PP&E> 17,046
<DEPRECIATION> 5,098
<TOTAL-ASSETS> 344,396
<CURRENT-LIABILITIES> 41,585
<BONDS> 243,060
0
0
<COMMON> 137
<OTHER-SE> 29,292
<TOTAL-LIABILITY-AND-EQUITY> 344,396
<SALES> 47,075
<TOTAL-REVENUES> 47,075
<CGS> 13,721
<TOTAL-COSTS> 13,721
<OTHER-EXPENSES> 166
<LOSS-PROVISION> 1,792
<INTEREST-EXPENSE> 4,054
<INCOME-PRETAX> (10,607)
<INCOME-TAX> (1,786)
<INCOME-CONTINUING> (8,821)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,821)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000916310
<NAME> PROTECTION ONE ALARM MONITORING INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,016
<SECURITIES> 0
<RECEIVABLES> 22,562
<ALLOWANCES> 7,643
<INVENTORY> 1,910
<CURRENT-ASSETS> 32,806
<PP&E> 17,046
<DEPRECIATION> 5,098
<TOTAL-ASSETS> 344,396
<CURRENT-LIABILITIES> 41,585
<BONDS> 243,060
0
0
<COMMON> 137
<OTHER-SE> 29,292
<TOTAL-LIABILITY-AND-EQUITY> 344,696
<SALES> 47,075
<TOTAL-REVENUES> 47,075
<CGS> 13,721
<TOTAL-COSTS> 13,721
<OTHER-EXPENSES> 166
<LOSS-PROVISION> 1,792
<INTEREST-EXPENSE> 4,054
<INCOME-PRETAX> (10,607)
<INCOME-TAX> (1,786)
<INCOME-CONTINUING> (8,821)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,821)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
