UNITED STATES
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 September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
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 of Other Jurisdiction
Of Incorporation or Organization) Of Incorporation or Organization)
93-1063818 93-1064579
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
600 Corporate Pointe, 12th Floor, 600 Corporate Pointe, 12th Floor,
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)
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 November 10, 1999, Protection One, Inc. had outstanding 126,944,077
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>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
-------------- ----------
ASSETS
(Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 19,101 $ 10,025
Restricted cash................................... 8,991 11,987
Marketable securities............................. 9,617 17,770
Receivables, net.................................. 67,932 61,262
Inventories....................................... 10,976 7,895
Prepaid expenses.................................. 3,703 3,867
Tax receivable & current deferred taxes........... 78,156 55,429
Other assets...................................... 20,107 19,605
---------- ----------
Total current assets......................... 218,583 187,840
Property and equipment, net............................. 59,671 46,959
Customer accounts, net.................................. 1,164,412 1,031,956
Goodwill and trademarks, net............................ 1,118,678 1,175,153
Other................................................... 44,321 68,528
---------- ----------
Total assets......................................... $2,605,665 $2,510,436
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 21,668 $ 16,374
Accrued liabilities............................... 73,121 77,412
Purchase holdbacks................................ 45,422 42,303
Long-term debt, current portion................... 34,469 40,838
Capital leases, current portion................... 1,655 1,361
Deferred revenue.................................. 62,367 57,703
---------- ----------
Total current liabilities.................... 238,702 235,991
Long-term debt, net of current portion.................. 1,074,731 926,784
Capital leases, net of current portion.................. -- 187
Other liabilities....................................... 3,154 3,238
---------------- ----------------
Total liabilities.................................... 1,316,587 1,166,200
Commitments and contingencies ( See Note 6)
Stockholders' equity:
Preferred stock, $0.10 par value, 5,000,000 authorized,
none outstanding...................................... -- --
Common stock, $0.01 par value, 150,000,000 shares
authorized, 126,890,169 shares issued and outstanding,
at September 30, 1999 and 126,838,741 at
December 31, 1998............... 1.269 1.268
Additional paid-in capital........................... 1,392,342 1,392,256
Accumulated other comprehensive income, net.......... (4,376) (2,576)
Accumulated deficit................................. (100,157) (46,712)
---------- ----------
Total stockholders' equity................... 1,289,078 1,344,236
---------- ----------
Total liabilities and stockholders equity............ $2,605,665 $2,510,436
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<TABLE>
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except for per share amounts)
(Unaudited)
<CAPTION>
Nine Months Ended September 30,_
1999 1998
--------------------- -------------
(Restated)
<S> <C> <C>
Revenues:
Monitoring and related services......... $386,283 $254,749
Installation and other.................. 66,197 22,347
------- ------
Total revenues..................... 452,480 277,096
Cost of revenues:
Monitoring and related services......... 99,497 71,914
Installation and other.................. 33,472 16,113
------- -------
Total cost of revenues............. 132,969 88,027
------- -------
Gross profit....................... 319,511 189,069
Selling, general and administrative expense... 134,711 69,987
Amortization of intangibles and depreciation 182,606 81,064
expense.......................................
Acquisition expense........................... 21,932 14,470
Employee severance and transition cost........ 4,308 --
------- ------
Operating income................... (24,046) 23,548
Other income/expense:
Interest expense, net................... 64,334 21,297
Interest expense to parent, net......... -- 16,033
Gain on sale of Mobile Services Group... (17,249) --
Other................................... (71) (20,785)
------- -------
Income (loss) before income
taxes & (71,060) 7,003
extraordinary item..........
Income tax (expense) benefit.................. 17,615 (6,251)
------- -------
Income (loss)before extraordinary item........ (53,445) 752
Extraordinary gain, net of tax.............. -- 1,591
------- -------
Net income (loss)........................ $(53,445) $ 2,343
======== =======
Other comprehensive income:
Unrealized loss on marketable securities,
net of tax.................................... $(3,888) $(1,959)
Unrealized loss on currency translation,
net of tax.................................... (488) --
----- --------
Comprehensive income (loss): $(57,821) $ 384
======== =======
Income (loss) per common share........... $ (0.42) $ 0.01
======== =======
Extraordinary gain per common share $ (0.00) $ 0.02
======== =======
Net income(loss) per common share $ (0.42) $ 0.03
======== =======
Weighted average common shares
outstanding (in thousands)............... 126,872 102,445
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except for per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended September 30,_
1999 1998
--------------------- -------------
<S> <C> <C>
(Restated)
Revenues:
Monitoring and related services......... $131,220 $96,527
Installation and other.................. 21,911 6,734
------- -------
Total revenues..................... 153,131 103,261
Cost of revenues:
Monitoring and related services......... 39,631 27,159
Installation and other.................. 10,181 5,396
------- -------
Total cost of revenues............. 49,812 32,555
------- -------
Gross profit....................... 103,319 70,706
Selling, general and administrative expense... 50,203 23,454
Amortization of intangibles and depreciation 94,250 31,761
expense.......................................
Acquisition expense........................... 10,298 4,970
Employee severance and transition cost........ 2,309 --
------- -------
Operating income................... (53,741) 10,521
Other income/expense:
Interest expense, net................... 22,319 7,875
Interest expense to parent, net......... -- 4,554
Gain on sale of Mobile Services Group... (17,249) --
Other................................... 945 (7,372)
------- -------
Income (loss) before income tax......... (59,756) 5,464
Income tax (expense) benefit.................. 18,770 (4,489)
------- -------
Net income (loss)....................... $(40,986) $ 975
======== =======
Other comprehensive income:
Unrealized loss on marketable securities,
net of tax.................................... $(3,888) $(1,959)
Unrealized loss on currency translation,
net of tax.................................... (488) --
----- --------
Comprehensive income (loss): $(45,362) $ (984)
======== =======
Net income (loss) per common share........... $ (0.32) $ 0.01
======== =======
Weighted average common shares outstanding
(in thousands).............................. 126,890 127,345
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
1999 1998
--------------------- -------------
(Restated)
<S> <C> <C>
Cash flow from operating activities:
Net income (loss)...................................... $ (53,445) $ 2,343
Adjustments to reconcile net income (loss) to net cash
provided
by operating activities:
Extraordinary gain................................. -- (1,591)
Gain on sale of Mobile Services Group.............. (17,249) --
Gain on Guardian stock exchange transaction........ -- (2,498)
Amortization and depreciation...................... 182,606 81,064
Accretion of discount note interest................ (5,057) 4,635
Deferred income taxes.............................. (20,795) 5,817
Provision for doubtful accounts.................... 16,933 7,762
Loss on sale of marketable securities.............. 1,910 --
Changes in assets and liabilities, net of effects of acquisitions:
Receivables, net................................... (17,505) (3,550)
Other current assets............................... (1,120) (8,765)
Accounts payable................................... 5,302 (4,051)
Other liabilities.................................. (15,644) 1,368
--------- -------
Net cash provided by operating activities..... 75,936 82,534
--------- -------
Cash flows from investing activities:
Purchase of installed security systems............. (207,657) (228,352)
Purchase of property and equipment................. (26,679) (18,933)
Purchase (sale) of marketable securities........... 2,722 (14,365)
Acquisition of alarm companies, net of cash received (27,408) (554,230)
Proceeds from sale of Mobile Services Group, net of 19,087 --
cash paid..............................................
Investment in Guardian............................. -- (4,131)
--------- -------
Net cash used in investing activities......... (239,935) (820,011)
--------- --------
Cash flows from financing activities:
Proceeds from equity offering...................... -- 402,322
Payments on long-term debt......................... -- (86,205)
Proceeds from long term-debt....................... 171,725 247,160
Funding from parent................................ 434 113,239
Stock options and warrants exercised............... 273 820
--------- -------
Net cash provided by financing activities..... 172,432 677,336
--------- -------
Effect of exchange rate changes on cash and equivalents 643 --
--------- -------
Net increase (decrease) in cash and cash 9,076 (60,141)
equivalents............................................
Cash and cash equivalents:
Beginning of period................................ 10,025 75,556
--------- -------
End of period...................................... $ 19,101 $15,415
========= =======
Interest paid during the period........................ $ 54,437 $ 7,316
========= =======
Taxes paid during the period........................... $ 285 $ 42
========= =======
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
(Unaudited)
1. Basis of Consolidation and Interim Financial Information:
Protection One, Inc., a Delaware corporation ("Protection One" or the
"Company"), is principally engaged in the business of providing security alarm
monitoring services, which include sales, installation and related servicing of
security alarm systems for residential and small business subscribers in North
America, the United Kingdom and continental Europe. The accompanying unaudited
consolidated financial statements include the accounts of Protection One and its
wholly owned subsidiaries.
As of September 30, 1999, Protection One is an approximately 85% owned
subsidiary of Westar Capital, Inc. ("Westar Capital"), a wholly owned
subsidiary of Western Resources, Inc. ("Western Resources").
The Company's unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and in accordance with the instructions to Form 10-Q.
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 December 31, 1998, included in the Company's Annual Report on
Form 10-K/A filed with the Securities and Exchange Commission (the "SEC").
In the opinion of management of the Company, all adjustments considered
necessary for a fair presentation of the financial statements have been
included. All adjustments made were normal recurring adjustments except for the
adjustment related to the change in accounting principle for customer accounts
discussed in Note 3. The results of operations for the three and nine-month
periods ended September 30, 1999 are not necessarily indicative of the results
to be expected for the full year. Certain purchase price allocations for
acquisitions made in 1999 were made on a preliminary basis and are subject to
change.
2. Restatement of Financial Statements:
The Company has restated its 1998 financial statements and its interim
financial statements for the quarters ended March 31, 1999 and June 30, 1999.
These restatements result from a revaluation of amounts assigned to acquired
customers in the Multifamily business segment. During 1998, the Company acquired
businesses in its Multifamily business segment and allocated a portion of the
purchase price to the customer accounts acquired. During the third quarter of
1999, management analyzed the initial purchase price allocations for these
acquisitions and increased the amount allocated to customer accounts by $19
million, reduced goodwill by $13 million and increased deferred taxes payable by
$6 million. Due to the difference in periods over which customer accounts and
goodwill are amortized, net income was decreased for each of the reported
periods in 1999 and 1998 as follows:
<TABLE>
<CAPTION>
As Previously Reported Restatement As Restated
---------------------------- --------------------------- ---------------------------
Earnings Earnings Earnings
Amount Per Share Amount Per Share Amount Per Share
-------------- ------------ ------------- ------------- ------------ -------------
(Dollars in thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary gain
- -----------------------
1998 - Quarter Ended:
March 31 $ 398 $ - $(204) $ - $ 194 $ -
June 30 (199) - (221) (.01) (420) (.01)
September 30 1,206 .01 (229) - 977 .01
December 31 (5,459) (.05) (229) - (5,688) (.05)
-------------- ------------ ------------- ------------- ------------ -------------
For the Year Ended
December 31, 1998 $(4,054) $ (.04) $(883) $ (.01) $(4,937) $ (.05)
============== ============ ============= ============= ============ =============
Net income (loss)
- -----------------------
1999 - Quarter Ended:
March 31 $(4,553) $ (.04) $(232) $ - $(4,785) $ (.04)
June 30 (7,441) (.06) (232) - (7,673) (.06)
1998 - Quarter Ended:
March 31 398 - (204) - 194 -
June 30 1,392 .02 (221) (.01) 1,171 .01
September 30 1,206 .01 (229) - 977 .01
December 31 (5,459) (.05) (229) - (5,688) (.05)
--------------
============ ============= ============= ============ =============
For the Year Ended
December 31, 1998 $(2,463) $ (.02) $(883) $ (.01) $(3,346) $ (.03)
============== ============ ============= ============= ============ =============
The restatements did not impact previously reported revenues and do not impact the Company's net cash flow.
</TABLE>
3. Change in Accounting Principle:
The Company historically amortized the costs it allocated to its customer
accounts by using the straight-line method over a ten-year life. The
straight-line method, indicated in Accounting Principles Board Opinion No. 17
as the appropriate method for such assets, has been the predominant method
used to amortize customer accounts in the monitored services industry.
Management is not aware of whether the economic life or the rate of
realization for the Company's customer accounts differs materially from other
monitored services companies.
The choice of a ten-year life was based on management's estimates and
judgments about the amounts and timing of expected future revenues from these
assets, the rate of attrition of such revenue over customer life, and average
customer account life. Ten years was used because, in management's opinion, it
would adequately match amortization cost with anticipated revenue from those
assets even though many accounts were expected to produce revenue over periods
substantially longer than ten years. Effectively, it expensed the asset costs
ratably over an "expected average customer life" that was shorter than the
expected life of the revenue stream, thus implicitly giving recognition to
projected revenues for a period beyond ten years.
The Company has recently concluded a comprehensive review of its
amortization policy that was undertaken during the third quarter of 1999. This
review was performed specifically to evaluate the historic amortization policy
in light of the inherent declining revenue curve over the life of a pool of
customer accounts, and the Company's historical attrition experience. After
completing the review, management identified three distinct pools, each of which
has distinct attributes that effect differing attrition characteristics. The
pools correspond to the Company's North America, Multifamily and Europe business
segments. These separate pools will be used going forward. For the North America
and Europe pools, the analyzed data indicated to management that the Company can
expect attrition to be greatest in years one through five of asset life and that
a change from a straight-line to a declining balance (accelerated) method would
more closely match future amortization cost with the estimated revenue stream
from these assets. Management has elected to change to that method. No change
was made in the method used for the Multifamily pool.
The Company's amortization rates for the North America and Europe customer
pools consider the average estimated remaining life and historical and projected
attrition rates. The average estimated remaining life for each customer pool is
as follows:
Average Estimated
Remaining Life
Pool (Years) Method
- --------------- ------------------- --------------------------------
North America 8-10 Ten-year 130% declining balance
Europe 10 Ten-year 125% declining balance
Multifamily 12 Ten-year straight-line
Adoption of the declining balance method effectively shortens the estimated
expected average customer life for these two customer pools, and does so in a
way that does not make it possible to distinguish the effect of a change in
method (straight-line to declining balance) from the change in estimated lives.
In such cases, generally accepted accounting principles require that the effect
of such a change be recognized in operations in the period of the change, rather
than as a cumulative effect of a change in accounting principle. Accordingly,
the effect of the change in accounting principle increased amortization expense
reported in the third quarter by $47 million. Similarly, accumulated
amortization recorded on the balance sheet would have been approximately $41
million higher if the Company had historically used the declining balance method
through the end of the second quarter of 1999.
4. Customer Accounts:
Customer accounts are stated at cost. The cost includes amounts paid to
dealers and the estimated fair value of accounts acquired in business
acquisitions. Internal costs incurred in support of acquiring customer accounts
are expensed as incurred. Customer accounts consist of the following (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1999 December 31, 1998
------------------------ ------------------------
<S> <C> <C>
Customer accounts $ 1,150,342 $ 558,805
Acquisition of customer accounts 291,550 601,063
Non-cash charges to purchase holdbacks (9,918) (9,526)
----------- -----------
Total customer accounts 1,431,974 1,150,342
Less accumulated amortization 267,562 118,386
----------- -----------
Customer accounts, net $1,164,412 $1,031,956
=========== ==========
</TABLE>
In conjunction with certain purchases of customer accounts, the Company
withholds a portion of the purchase price as a reserve to offset qualifying
attrition of the acquired customer 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. As of September 30, 1999 and
December 31, 1998, purchase holdbacks were $45.4 million and $42.3 million,
respectively.
As the result of the attrition rates for the North America pool, the
Company intends to hire an appraiser to perform a current lifing study to
assess the impact of the 1999 customer service issues on the estimated
long-term revenues to be received from the current North America account base.
Upon completion of the study, the Company will consider the reasonableness of
the value of its North America account base and the current amortization
rates. This could result in a change in amortization rate. The Company intends
to perform an evaluation for potential impairment taking into account the
results of this study. Amounts involved may be material and would represent a
non-cash charge to earnings.
5. Debt:
During the first nine months of 1999 the Company borrowed approximately $173
million on its senior credit facility. As of September 30, 1999 and December 31,
1998, total borrowings under this facility were approximately $215 million and
$42 million, respectively. In addition, there were outstanding letters of credit
of approximately $5 million at September 30, 1999. Available borrowings under
the credit facility were approximately $30 million as of September 30, 1999 and
November 10, 1999.
The Company borrows to fund operations in excess of internally generated
cash under its senior credit facility. The Company's ability to borrow under the
facility is subject to compliance with certain financial covenants, including a
leverage ratio of 5.0 to 1.0 and an interest coverage ratio of 2.75 to 1.0. At
year end 1999, the leverage ratio required under the credit facility will be
reduced to 4.5 to 1.0. As of September 30, 1999, the ratios were approximately
6.7 to 1.0 and 2.0 to 1.0.
The indentures governing the Company's outstanding senior and subordinated
notes contain similar covenants with different calculations relating to the
Company's ability to incur indebtedness. The Company is in compliance with all
covenants contained in these indentures.
The senior credit facility lenders have waived compliance with the current
leverage and interest coverage ratio covenants through December 3, 1999. In
connection with the waiver, the amount of the credit facility was reduced from
$500 million to $250 million. The Company will not, absent successful
implementation of the alternatives discussed below, be in compliance with the
current leverage and interest coverage ratio covenants in the credit facility
following the expiration of the waiver. The Company is discussing waivers or
amendments to the senior credit facility with the lenders and exploring other
alternatives to address these covenant restrictions and the reduced amount of
the credit facility, including selling assets to reduce debt or refinancing the
facility. The credit facility lenders have requested that the Company obtain
credit support for the facility from Western Resources or one of its affiliates.
The Company's public debt contains restrictions on providing certain forms of
credit support to the credit facility. Further, there can be no assurance that
Western Resources or its affiliates will provide any credit support to the
lenders under the facility. If the Company's negotiations with its senior credit
facility lenders are not successful, the Company will be in default under the
credit facility. If the lenders elect to accelerate the outstanding indebtedness
under the credit facility, this action would result in defaults under the
indentures governing certain of the Company's outstanding notes and the
repayment of the notes could be accelerated if the defaults were not cured
within applicable grace periods. The Company would not be able to repay its
indebtedness if repayment is accelerated. Even if the lenders elect not to
accelerate the outstanding indebtedness under the credit facility, the Company
will likely experience shortfalls in liquidity which would adversely impact the
Company's ability to meet its cash obligations and have a material adverse
effect upon the Company's financial position and results of operations. If the
Company is unable to maintain adequate liquidity, Western Resources may choose
to make additional investments in the Company, but it is not obligated to do so.
Management believes the Company will be able to address this matter in a manner
so that there is no default under the credit facility or significant impact on
its liquidity, but no assurances can be given that the Company will be able to
do so or the terms thereof. See Note 11 for recent developments concerning a
review of the Company's capital structure and financial alternatives.
6. Commitments and Contingencies:
The Company has been advised by the Division of Corporation Finance that,
in the view of the staff, there are errors in the Company's financial
statements which are material and which have had the effect of inflating
earnings commencing with the year 1997. The Company has had extensive
discussions with the SEC staff about the methodology used by the Company to
amortize customer accounts, the purchase price allocation to customer
accounts in the Network Multifamily acquisition and other matters. The Company
has restated its financial statements for certain prior periods and has changed
the accounting principle used for the amortization of customer accounts as
discussed above in Notes 2 and 3. The SEC staff has not indicated it concurs
with, nor has the SEC staff determined not to object to, the restatements or the
change in accounting principle. The Company cannot predict whether the SEC
staff will make additional comments or take other action that will further
impact its financial statements or the effect or timing of any such action.
Six Protection One dealers have filed a class action lawsuit in the U. S.
District Court for the Western District of Kentucky alleging breach of contract
because of the Company's interpretation of their dealer contracts. The action is
styled Total Security Solutions, Inc., et al. v. Protection One Alarm
Monitoring, Inc., Civil Action No. 3:99CV-326-H (filed May 21, 1999). On
September 10, 1999, the Court granted Protection One's motion to stay the
proceeding pending the individual plaintiff's pursuit of arbitration as required
by the terms of their agreements. As of November 10, 1999, none of these dealers
have commenced arbitration. Other Protection One dealers have threatened
litigation or arbitration based upon similar claims. The Company believes it has
complied with the terms of these contracts and intends to vigorously defend its
position. The Company cannot currently predict the impact of these disputes with
dealers which could be material.
Under the Company's agreements with dealers, the Company may be required to
purchase customer accounts on an ongoing basis. The Company is currently
spending approximately $15 million per month to purchase these customer
accounts.
The Company, its subsidiary Protection One Alarm Monitoring, Inc.
("Monitoring"), and certain present and former officers and directors of
Protection One are defendants in a purported class action litigation pending in
the United States District Court for the Central District of California, David
Lyons v. Protection One, Inc., et al., No CV 99-3755 DT (RCx). Pursuant to an
Order dated August 2, 1999 which consolidated four pending purported class
actions, the plaintiffs filed a single Consolidated Amended Class Action
Complaint ("Amended Complaint") on October 15, 1999. The Amended Complaint
asserts claims under Section 11 of the Securities Act of 1933 and Section 10(b)
of the Securities Exchange Act of 1934 against Protection One, Monitoring, and
certain present and former officers and directors of Protection One based on
allegations that various statements concerning Protection One's financial
results and operations for 1997 and 1998 were false and misleading and not in
compliance with generally accepted accounting principles. Plaintiffs allege,
among other things, that former employees of Protection One, including an
unnamed former executive officer and an unnamed former staff accountant, have
reported that Protection One lacked adequate internal accounting controls and
that certain accounting information was unsupported or manipulated by management
in order to avoid disclosure of accurate information. The Amended Complaint
further asserts claims against Western Resources and Westar Capital as
controlling persons under Sections 11 and 15 of the Securities Act of 1933 and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. A claim is also
asserted under Section 11 of the Securities Act of 1933 against Protection One's
auditor Arthur Andersen LLP. The Amended Complaint seeks an unspecified amount
of compensatory damages and an award of fees and expenses, including attorneys'
fees. The time for the defendants to respond to the Amended Complaint has not
yet expired. The Company believes that all the claims asserted in the Amended
Complaint are without merit and intends to defend against them vigorously. We
cannot currently predict the impact of this litigation which could be material.
The Company is a party to claims and matters of litigation incidental to the
normal course of its business. The ultimate outcome of such matters cannot
presently be determined; however, in the opinion of management of the Company,
the resolution of such matters will not have a material adverse effect upon the
Company's combined financial position or results of operations.
7. Segment Reporting:
The Company's reportable segments include North America, Multifamily, and
Europe. North America provides security alarm monitoring services, which include
sales, installation and related servicing of security alarm systems in the
United States and Canada. Multifamily provides security alarm services to
apartments, condominiums and other multi-family dwellings. The Europe segment
provides security alarm services in Europe.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in the Company's
1998 Form 10-K/A, subject to the change in accounting principle for amortization
expense discussed in Note 3 above. The Company manages its business segments
based on earnings before interest and income taxes (EBIT).
<PAGE>
<TABLE>
Nine Months Ended September 30, 1999
(Dollars in thousands)
<CAPTION>
North
America Multifamily Europe Consolidated
<S> <C> <C> <C> <C>
Revenues from customers:
Monitoring and related services......... $ 290,180 $ 25,680 $ 70,423 $ 386,283
Installation and rental................. 11,009 3,218 51,970 66,197
--------- --------- --------- ---------
Total.............................. 301,189 28,898 122,393 452,480
EBITDA........................................ 115,170 12,170 35,528 162,868
Amortization of intangibles and depreciation 153,531 7,003 22,072 182,606
expense.......................................
Other1........................................ (12,825) -- (187) (13,012)
Earnings before interest and income taxes..... (25,536) 5,167 13,643 (6,726)
</TABLE>
<TABLE>
Nine Months Ended September 30, 1998
(Dollars in thousands)
<CAPTION>
North
America Multifamily Europe2 Consolidated
<S> <C> <C> <C> <C>
Revenues from customers:
Monitoring and related services......... $ 231,202 $ 21,041 $ 2,506 $ 254,749
Installation and rental................. 17,613 2,351 2,383 22,347
--------- --------- -------- ---------
Total.............................. 248,815 23,392 4,889 277,096
EBITDA........................................ 95,451 9,152 9 104,612
Amortization of intangibles and depreciation 74,953 5,520 591 81,064
expense.......................................
Other income.................................. (20,785) -- -- (20,785)
Earnings before interest and income taxes..... 41,283 3,632 (582) 44,333
</TABLE>
<TABLE>
Three Months Ended September 30, 1999
(Dollars in thousands)
<CAPTION>
North
America Multifamily Europe Consolidated
<S> <C> <C> <C> <C>
Revenues from customers:
Monitoring and related services......... $ 98,568 $ 8,697 $ 23,955 $ 131,220
Installation and rental................. 3,500 970 17,441 21,911
--------- --------- --------- ---------
Total.............................. 102,068 9,667 41,396 153,131
EBITDA........................................ 26,800 4,025 11,993 42,818
Amortization of intangibles and depreciation 80,655 2,388 11,207 94,250
expense.......................................
Other1........................................ (13,969) -- (26) (13,995)
Earnings before interest and income taxes..... (39,886) 1,637 812 (37,437)
</TABLE>
<TABLE>
Three Months Ended September 30, 1998
(Dollars in thousands)
<CAPTION>
North
America Multifamily Europe2 Consolidated
<S> <C> <C> <C> <C>
Revenues from customers:
Monitoring and related services......... $ 87,560 $ 7,510 $ 1,457 $ 96,527
Installation and rental................. 5,105 424 1,205 6,734
--------- --------- --------- ---------
Total.............................. 92,665 7,934 2,662 103,261
EBITDA........................................ 39,020 3,427 (165) 42,282
Amortization of intangibles and depreciation 29,400 1,963 398 31,761
expense.......................................
Other income.................................. (7,372) -- -- (7,372)
Earnings before interest and income taxes..... 16,992 1,464 (563) 17,893
</TABLE>
1 "Other" includes employee severance and transition cost, gain on sale of
Mobile Services Group, and other (income) expense.
2 Results for Protection One Europe do not include the operations of CET which
was acquired September 30, 1998.
8. Related Party Transactions
In the third quarter, the Company signed a letter of intent with Paradigm
Direct LLC ("Paradigm") concerning a three year marketing relationship. Western
Resources has a 40% ownership interest in Paradigm. The proposed arrangement
contemplates that the Company will purchase a targeted number of accounts from
Paradigm during each year of the agreement following an initial pilot program,
with 50,000 accounts targeted for the first year. Paradigm will be paid $775 per
installed account that generates monthly recurring revenue of $32.95 per month
and meets certain other criteria and an annual fee, in arrears, of $20 for each
account that remains in good standing for the life of the account. In addition,
the Company will purchase leads that satisfy certain criteria at $115 per lead.
The Company will have the right to terminate the agreement if Paradigm does not
deliver the targeted number of accounts or attrition exceeds certain levels for
accounts purchased or if the pilot program proves unsuccessful.
In connection with the marketing arrangement, the Company's marketing
personnel will be transferred to Paradigm. During the pilot program period and
the first year of the agreement, the Company will reimburse Paradigm for the
overhead associated with these persons plus 10%. Overhead is defined as current
salary plus benefits, but the 10% mark-up is limited to base salaries. The
number of persons for which Paradigm will be reimbursed for overhead will be
adjusted annually by agreement.
The Company expensed $1 million paid to Paradigm in the third quarter in
connection with start up costs relative to this program. The first marketing
year would start following completion of a pilot program. The Company will pay
$857 per new account for up to 2,500 accounts sold during the pilot program. The
pilot program is expected to be completed by the end of the first quarter 2000.
The Company entered into a service agreement with Western Resources during
the third quarter. Pursuant to this agreement Western Resources will provide
administrative services including accounting, human resources, legal, facilities
and technology. The Company accrued $450,000 for services provided in the third
quarter.
9. Income Taxes
The income tax benefit recorded for the nine-month period ended September
30, 1999 is 25% of the pre-tax loss. This rate represents the expected effective
rate for 1999. This effective rate was adjusted in the third quarter to reflect
the revised expected annual operating performance. The change in the expected
annual effective rate increased the tax benefit recorded in the third quarter by
approximately $3.8 million. The difference between the expected annual effective
rate of 31% and the federal statutory rate of 35% is primarily attributable to
non-deductible goodwill amortization. The Company has a tax sharing agreement
with Western Resources which allows it to be reimbursed for tax deductions
utilized by Western Resources in its consolidated tax return.
10. Sale of Mobile Services Group
During the third quarter, the Company sold the assets which had comprised
its Mobile Services Group. Cash proceeds of this sale approximated $20 million
and the Company recorded a pre-tax gain of approximately $17 million.
11. Recent Developments:
In October 1999, the Company and Western Resources jointly announced a
review of the capital structure and financial alternatives for the Company,
including: review of the Company's capital structure; changes in financial
ownership interests, including spinning or splitting off some portion or all of
Western Resources' interest; potential purchase of selected Protection One
assets by Western Resources; seeking new sources of debt and equity capital;
refinancing existing debt; the repurchase of Protection One debt by either
Protection One or Western Resources; and other options.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless the context otherwise indicates, all references in this Report on
Form 10-Q (this "Report") to the "Company," "Protection One," "we," "us" or
"our" or similar words are to Protection One, Inc., its wholly owned subsidiary,
Protection One Alarm Monitoring, Inc. ("Protection One Alarm Monitoring") and
Protection One's other wholly owned subsidiaries. Protection One's primary asset
is, and Protection One operates primarily through, its investments in Protection
One Alarm Monitoring and its other wholly owned subsidiaries. Both Protection
One and Protection One Alarm Monitoring are Delaware corporations organized in
September 1991.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations updates the information provided in and should be read
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations in our 1998 Annual Report on Form 10-K/A.
Certain matters discussed here and elsewhere in this Form 10-Q are
forward-looking statements. The Private Securities Litigation Reform Act of 1995
has established that these statements qualify for safe harbors from liability.
Forward-looking statements may include words like the Company believes,
anticipates, expects or words of similar meaning. Forward-looking statements
describe the Company's future plans, objectives, expectations, or goals. Such
statements address future events and conditions concerning capital expenditures,
earnings, restructuring the dealer program and the methods of customer
acquisition, litigation, the outcome of accounting issues being reviewed by the
SEC staff, possible corporate restructurings, mergers, acquisitions,
dispositions, liquidity and capital resources, compliance with debt covenants,
interest, Year 2000 Issue, ability to enter new markets successfully and
capitalize on growth opportunities, events in foreign markets in which
investments have been made, and accounting matters. What happens in each case
could vary materially from what the Company expects because of such things as
future economic conditions; legislative developments; competitive markets; and
other circumstances affecting anticipated operations, revenues and costs.
Overview
Protection One is one of the leading providers of property monitoring
services, providing electronic monitoring and maintenance of its alarm systems
to over 1.6 million customers in North America and Europe. We also provide our
customers with enhanced services that include:
- - extended service protection;
- - patrol and alarm response;
- - two-way voice communication;
- - pager service;
- - medical information service;
- - cellular back-up; and
- - mobile security services.
Approximately 85% of our revenues are contractually recurring for monitoring
alarm security systems and other related services. We have grown rapidly by
participating in the growth in the alarm industry and by acquiring other alarm
companies.
Our principal activity is responding to the security and safety needs of our
customers. Our revenues are generated primarily from recurring monthly payments
for monitoring and maintaining the alarm systems that are installed in our
customers' homes and businesses. Security systems are designed to detect
burglaries, fires and other events. Through a network of 57 service branches and
11 satellite offices in North America and 51 service branches in continental
Europe and the United Kingdom, we provide maintenance service of security
systems and, in certain markets, armed response to verify that an actual
emergency has occurred.
We provide our services to residential (both single family and multifamily
residences), commercial and wholesale customers. We believe residential
customers, who represent in excess of 80% of our customer base, are most
attractive because of lower penetration in this market and thus stronger growth
prospects, higher gross margins and larger potential size. In prior years, the
Company's strategy was focused primarily on growing its customer account base to
achieve critical mass. We believe we have reached such critical mass and our
strategic focus has now shifted to the following areas:
- - Improving customer service;
- - Reducing attrition;
- - Reducing customer acquisition costs; and
- - Integrating and building infrastructure such as common platforms for our
central stations, billing, and other applications.
Our company is divided into three business segments:
Protection One North America ("North America") generated approximately
$301.2 million, or 66.6%, of our revenues in the first nine months of 1999 and
is comprised of Protection One Alarm Monitoring-our core alarm monitoring
business based in Culver City, California.
Multifamily generated approximately $28.9 million, or 6.4%, of our revenues
in the first nine months of 1999 and is comprised of our alarm monitoring
business servicing the multifamily/apartment market based in Addison, Texas.
Protection One Europe ("Europe") generated approximately $122.4 million, or
27.0%, of our revenues in the first nine months of 1999 and is comprised of:
- - Protection One Continental Europe-our alarm monitoring business
servicing continental Europe established from our purchase of Compagnie
Europeenne de Telesecurite ("CET") in September 1998, based in Paris and
Vitrolles, France with offices in Germany, Switzerland, Belgium and the
Netherlands; and
- - Protection One United Kingdom-our alarm monitoring business servicing
the United Kingdom established from our purchase of Hambro Countrywide
Security in May 1998, based in Basingstoke, United Kingdom.
Attrition
Subscriber attrition has a direct impact on our results of operations since
it affects both our revenues and amortization expense. We define attrition as
a ratio, the numerator of which is the number of lost customer accounts for a
given period, net of certain adjustments, and the denominator of which is the
average number of accounts for a given period. The adjustments made to lost
accounts are primarily related to those accounts which are covered under a
purchase price holdback and are "put" back to the seller. We reduce the gross
accounts lost during a period by the amount of the guarantee provided for in
the purchase agreements with sellers. In some cases, the amount of the
purchase holdback may be less than actual attrition experience.
The Company's actual attrition experience shows that the relationship period
with any individual customer can vary significantly and may be substantially
shorter or longer than ten years. Customers discontinue service with the
Company for a variety of reasons, including relocation, service issues and
cost. A portion of the acquired customer base can be expected to discontinue
service with the Company every year. Any significant change in the pattern of
the Company's historical attrition experience would have a material effect on
the Company's results of operations.
The Company monitors attrition each quarter based on an annualized and
trailing twelve-month basis. This method utilizes each segment's average
customer account base for the applicable period in measuring attrition.
Therefore, in periods of customer account growth, customer attrition may be
understated and in periods of customer account decline, customer attrition may
be overstated. When necessary the Company will adjust amortization of the cost
of customer accounts.
During 1999, the Company has experienced an increase in customer attrition.
Total attrition for the trailing twelve months ended September 30, 1999 was
12.2% compared to 10.5% for the trailing twelve months ended June 30, 1999.
Annualized total attrition for the quarter ended September 30, 1999 was 16.0%
compared to 14.3% for the quarter ended June 30, 1999.
Customer attrition by business segment for the period ended September 30,
1999 is summarized below:
Customer Account Attrition
September 30, 1999
---------------------------------
Annualized Trailing
Current Twelve
Quarter Month
------------- -------------
North America 19.1% 14.2%
Europe 4.5% 4.8%
Multifamily 7.6% 6.5%
Total Company 16.0% 12.2%
As the result of the attrition rates for the North America pool, the
Company intends to engage an appraiser to perform a current lifing study to
assess the impact of the 1999 customer service issues on the estimated
long-term revenues to be received from the current North America account base.
Upon completion of the study, the Company will consider the reasonableness of
the value of its North America account base and the current amortization
rates. This could result in a change in amortization rate. The Company intends
to perform an evaluation for potential impairment taking into account the
results of this study. Amounts involved may be material and would represent a
non-cash charge to earnings.
The Company is addressing customer service issues which management believes
have impacted attrition. In this regard, 150 service representatives were
added in the second quarter and the Company has increased training and
technology investments. As a result of these initiatives, there were
improvements in the third quarter in measurements of key performance metrics
such as abandonment rates, acknowledgement time, average speed of answer and
service repair backlog. Additional customer service initiatives are under way
with a goal of reducing attrition rates. These include, but are not limited
to, special retention teams, new billing system implementation, proactive
customer interaction, and focusing the organization on customer service. No
assurance can be given that these efforts will be successful in reducing
customer attrition.
Recent Developments
Change in Accounting Principle. The Company historically amortized the
costs it allocated to its customer accounts by using the straight-line method
over a ten-year life. The straight-line method, indicated in Accounting
Principles Board Opinion No. 17 as the appropriate method for such assets, has
been the predominant method used to amortize customer accounts in the
monitored services industry. Management is not aware of whether the economic
life or the rate of realization for the Company's customer accounts differs
materially from other monitored services companies.
The choice of a ten-year life was based on management's estimates and
judgments about the amounts and timing of expected future revenues from these
assets, the rate of attrition of such revenue over customer life, and average
customer account life. Ten years was used because, in management's opinion, it
would adequately match amortization cost with anticipated revenue from those
assets even though many accounts were expected to produce revenue over periods
substantially longer than ten years. Effectively, it expensed the asset costs
ratably over an "expected average customer life" that was shorter than the
expected life of the revenue stream, thus implicitly giving recognition to
projected revenues for a period beyond ten years.
The Company has recently concluded a comprehensive review of its
amortization policy that was undertaken during the third quarter of 1999. This
review was performed specifically to evaluate the historic amortization policy
in light of the inherent declining revenue curve over the life of a pool of
customer accounts, and the Company's historical attrition experience. After
completing the review, management identified three distinct pools, each of which
has distinct attributes that effect differing attrition characteristics. The
pools correspond to the Company's North America, Multifamily and Europe business
segments. These separate pools will be used going forward. For the North America
and Europe pools, the analyzed data indicated to management that the Company can
expect attrition to be greatest in years one through five of asset life and that
a change from a straight-line to a declining balance (accelerated) method would
more closely match future amortization cost with the estimated revenue stream
from these assets. Management has elected to change to that method. No change
was made in the method used for the Multifamily pool.
The Company's amortization rates for the North America and Europe customer
pools consider the average estimated remaining life and historical and projected
attrition rates. The average estimated remaining life for each customer pool is
as follows:
Average Estimated
Remaining Life
Pool (Years) Method
- --------------- --------------------- -----------------------------
North America 8-10 Ten-year 130% declining balance
Europe 10 Ten-year 125% declining balance
Multifamily 12 Ten-year straight-line
Adoption of the declining balance method effectively shortens the estimated
expected average customer life for these two customer pools, and does so in a
way that does not make it possible to distinguish the effect of a change in
method (straight-line to declining balance) from the change in estimated lives.
In such cases, generally accepted accounting principles require that the effect
of such a change be recognized in operations in the period of the change, rather
than as a cumulative effect of a change in accounting principle. Accordingly,
the effect of the change in accounting principle increased amortization expense
reported in the third quarter by $47 million. Similarly, accumulated
amortization recorded on the balance sheet would have been approximately $41
million higher if the Company had historically used the declining balance method
through the end of the second quarter of 1999.
Sale of Mobile Services Group. The sale of our Mobile Services Group to ATX
Technologies ("ATX") was announced on June 28, 1999 and consummated on August
25, 1999. The sales price was approximately $20 million in cash plus a note and
a preferred stock investment in ATX. The Company will continue to deliver mobile
services through a reseller arrangement with ATX. For the nine months ended
September 30, 1999, the net loss attributable to the Mobile Services Group was
approximately $2.6 million. In August, the Company recorded a gain on the sale
of approximately $11.2 million, net of tax.
SEC Review. The Company has been advised by the Division of Corporation
Finance that, in the view of the staff, there are errors in the Company's
financial statements which are material and which have had the effect of
inflating earnings commencing with the year 1997. The Company has had
extensive discussions with the SEC staff about the methodology
used by the Company to amortize customer accounts, the purchase price allocation
to customer accounts in the Network Multifamily acquisition and other matters.
The Company has restated its financial statements for certain prior periods and
has changed the accounting principle used for the amortization of customer
accounts as discussed above in Notes 2 and 3 to the Consolidated Financial
Statements. The SEC staff has not indicated it concurs with, nor has the SEC
staff determined not to object to, the restatements or the change in accounting
principle. The Company cannot predict whether SEC staff will make additional
comments or take other action that will further impact its financial statements
or the effect or timing of any such action.
Dealer Program. In 1998, the Company expanded the Dealer Program (Dealer
Program) for its North American single family residential market. As part of the
Dealer Program, the Company entered into contracts with dealers, typically
independent alarm companies, providing for the purchase of customer accounts
generated by the dealer on an ongoing basis. The Company currently has a limited
internal sales capability and relies on the Dealer Program for the generation of
substantially all new customer accounts except those acquired as part of the
acquisition of other security companies.
In the third quarter, the Company continued to identify steps that could be
taken to reduce the cost of acquired accounts and reduce attrition by acquiring
higher quality accounts. As a result, the Company began notifying dealers that
it does not intend to renew their contracts under their current terms and
conditions when they expire. The term of dealer contracts ranges from one to
five years and automatically renews unless notice of non-renewal is given by
either party as provided in the contract. The Company is attempting to renew
contracts with terms providing for a lower cost for acquired customer accounts
based upon the multiple of monthly recurring revenue and other revised terms
that improve the quality of the acquired customer accounts. The Company cannot
predict whether it will be successful in renewing existing dealer contracts, or
entering into contracts with new dealers, on acceptable terms. This could result
in a loss of dealers and fewer customer accounts available for purchase. The
failure to replace customer accounts could have a material adverse impact on our
financial condition. Efforts to date have reduced the number of accounts being
purchased from dealers each month from 25,000 in March to 10,600 in October.
Six Protection One dealers have filed a class action lawsuit in the U. S.
District Court for the Western District of Kentucky alleging breach of contract
because of the Company's interpretation of their dealer contracts. The action is
styled Total Security Solutions, Inc., et al. v. Protection One Alarm
Monitoring, Inc., Civil Action No. 3:99CV-326-H (filed May 21, 1999). On
September 10, 1999, the Court granted Protection One's motion to stay the
proceeding pending the individual plaintiff's pursuit of arbitration as required
by the terms of their agreements. As of November 10, 1999, none of these dealers
have commenced arbitration. Other Protection One dealers have threatened
litigation or arbitration based upon similar claims. The Company believes it has
complied with the terms of these contracts and intends to vigorously defend its
position. The Company cannot currently predict the impact of these disputes with
dealers which could be material.
Termination of Lifeline Proposed Merger. In September 1999, Protection One
and Lifeline Systems, Inc. terminated their proposed merger due to delays in
obtaining effectiveness of the registration statement covering the proposed
issuance of shares of Protection One in the transaction. Protection One recorded
a charge of approximately $3.7 million for costs related to the transaction,
including a termination fee of $1 million.
Sale of Canadian Operations. In September 1999, Protection One and VOXCOM,
Incorporated ("VOXCOM") entered into a definitive purchase agreement for the
sale of Protection One's Canadian operations to VOXCOM for approximately $27
million, including approximately $23 million in cash. The parties subsequently
terminated the purchase agreement because VOXCOM was unable to obtain financing
for the transaction. The Company continues to evaluate options for its Canadian
operations.
Capital Structure Review. In October 1999, Protection One and Western
Resources jointly announced a review of the capital structure and financial
alternatives for the Company, including: review of Protection One's capital
structure; changes in financial ownership interests, including spinning or
splitting off some portion or all of Western Resources' interest; potential
purchase of selected Protection One assets by Western Resources; seeking new
sources of debt and equity capital; refinancing existing debt; the repurchase of
Protection One debt either by Protection One or Western Resources; and other
options. It is anticipated the review process will be completed by the end of
the first quarter of 2000. If Western Resources ceases to own specified
percentages of Protection One's equity securities, an event of default will
occur under the agreement governing the senior credit facility and the Company
will be obligated to make an offer to purchase its outstanding notes under the
indentures governing the notes. Protection One cannot prevent Western Resources
from pursuing a financial alternative that could result in such an event of
default.
Administrative Services. In October 1999, the Company entered into a
services agreement with Western Resources to provide administrative services to
the Company, including accounting, legal, facilities, human resources,
information technology, and supply chain services. The Company will pay Western
Resources for these services based upon various hourly charges, negotiated fees
and out of pocket expenses.
Lifing Study. The Company hired an independent appraiser to perform a lifing
study of the estimated average remaining life, as of the date of the
acquisition, of customer accounts acquired by the Company in five major
acquisitions. The results of the lifing study are summarized below:
Estimated
Acquisition Average Remaining Life
Westinghouse 8
Protection One 10
Multimedia 9.5 - 10
Network Multifamily 12
CET 10
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
General. Results for the nine months ended September 30, 1999 (the "first
three quarters of 1999") reflect a full nine months of operations for security
businesses acquired by Protection One in Europe subsequent to May, 1998, while
results for the comparable period in 1998 reflect primarily the operations of
Protection One North America. In the first three quarters of 1998, the Company
added approximately 680,000 customers through acquisitions that were completed
at various times throughout the period. Accordingly, the results of the first
three quarters of 1999 contain a full nine months of operations for such
acquisitions. Increases in revenues and expense items discussed below are
attributable to five factors, as appropriate: (i) changes in the financial
results of Protection One North America; (ii) the 1998 Acquisitions; (iii) the
acquisition of alarm businesses in Europe in the second quarter and late in the
third quarter of 1998; (iv) a significant increase in the level of customers
added through the Dealer Program; and (v) the change in accounting principle
adopted during the third quarter. Discussion of results in future periods may
not include specific discussion of contributions from the 1998 Acquisitions,
which consist primarily of Comsec, Multimedia and Network.
Revenues for the first three quarters of 1999 increased by approximately
$175.4 million, or 63.3%, to $452.5 million from $277.1 million for the
comparable period in 1998. The primary reason for the increase in revenues is
due to acquired businesses included in Protection One Europe, which had revenue
increases of $117.5 million or 67.0% of the total increase in revenues.
Approximately $26.4 million of this amount was recognized as a result of ongoing
reductions in the liability under the Company's recourse financing agreements.
Protection One Europe contributed $4.9 million of revenues in the comparable
period in 1998 compared to $122.4 million for the nine months ended September
30, 1999. Monitoring and related services revenues increased by approximately
$131.5 million, or 51.6%. Approximately 51.6% of the increase in such revenues
is due to Protection One Europe, with most of the remaining increase attributed
to the 1998 Acquisitions and the growth of Protection One North America and
Multifamily.
Installation and other revenues increased by $43.8 million, or 196.2% to
$66.2 million from $22.3 million, reflecting additional installation and other
revenues of $49.6 million from Protection One Europe and a decrease of $6.6
million in Protection One North America installation revenues. We maintain
internal sales and installation capabilities in certain areas, such as Network
Multifamily, our commercial installations and our European operations where we
principally lease security systems to customers.
Cost of revenues for the first three quarters of 1999 increased by
approximately $44.9 million, or 51.0%, to $133.0 million from $88.0 million.
Protection One Europe contributed $34.0 million or 75.6%, of the increase in
cost of revenues. Cost of revenues for Protection One North America increased
$11.9 million or 26.4%. Cost of revenues for Multifamily decreased $0.9 million,
or 2%. Cost of revenues as a percentage of total revenue decreased to 29.4% for
the first three quarters of 1999 from 31.8% for the comparable period in
1998. Protection One Europe's cost of revenues as a percentage of total revenues
decreased to 29.9% for the nine months ended September 30, 1999 compared to
54.5% for the nine months ended September 30, 1998. It should be noted that for
the nine months ended September 30, 1998, Protection One Europe consisted only
of Hambro Countrywide Security, which was acquired in May 1998, which had total
revenues of $4.9 million and cost of revenues of $2.7 million for the period.
Protection One North America cost of revenues as a percentage of total revenues
decreased to 29.4% for the nine months ended September 30, 1999 from 30.8% in
the comparable period in 1998. Monitoring and related service expenses increased
by approximately $27.6 million, or 38.4%, primarily due to Protection One
Europe, which accounted for approximately 49.3% of the total increase and
Protection One North America which contributed 45.8% or $12.6 million of the
increase. Monitoring and related service expenses as a percentage of monitoring
related services revenues decreased to 25.8% for the first three quarters of
1999, from 28.2% in the comparable period in 1998.
Installation and other cost of revenues increased by $17.4 million, or
107.7%, reflecting primarily installation activities from Protection One Europe.
Gross profit for the first three quarters of 1999 was approximately $319.5
million, representing an increase of $130.4 million or 69.0%, over the $189.1
million of gross profit recognized in the comparable period in 1998. Such
increase is primarily due to the contribution by Protection One Europe of $83.5
million, or approximately 64.0%, with the 1998 Acquisitions and the growth of
Protection One North America comprising the remainder of the increase. Gross
profit as a percentage of total revenues was 70.6% for the first three quarters
of 1999, compared to 68.2% for the comparable period in 1998. The
increase in gross profit as a percentage of revenues is due to the cost of
revenues factors noted above.
Selling, general and administrative expenses ("S,G&A") rose to $134.7
million in the first three quarters of 1999, an increase of approximately
$64.7 million, or 92.5%, over S,G&A in the comparable period in 1998.
Approximately $47.3 million or 73.1% of the increase is due to Protection One
Europe, with the growth and integration efforts of Protection One North America
and the 1998 Acquisitions contributing 22.1% of the increase. Such figure as a
percentage of total revenues increased from 25.3% in the first three quarters of
1998 to 29.9% in the first three quarters of 1999. The increase in S,G&A as a
percentage of total revenues reflects the higher percentage of S,G&A as a
percentage of revenues from Protection One Europe of approximately 40.5%. The
higher percentage of S,G&A for Protection One Europe is due to the internal
sales and installation activities.
Acquisition expenses for the first three quarters of 1999 increased to $21.9
million, an increase of approximately $7.4 million, or 51.6% from $14.5 million
in the comparable period in 1998. Approximately half of the increase is due to
the termination costs related to the Lifeline merger. Efforts to integrate the
1998 Acquisitions and costs related to the national Dealer Program comprise the
balance.
Amortization of intangibles and depreciation expense was $182.6 million for
the first three quarters of 1999, an increase of $101.5 million, or
125.3% over the $81.0 million in the comparable period in 1998. Approximately
half of the increase ($47.0 million or 46.3%) is due to the change in accounting
method and finalization of certain purchase price allocations. Approximately
$31.6 million or 31.1% of the increase is due primarily to the 1998 Acquisitions
and the growth in our Dealer Program in Protection One North America.
Depreciation and amortization expense from Protection One Europe represented
$21.5 million, or approximately 21.2% of the increase. See Note 3 to
Consolidated Financial Statements.
Employee severance and transition cost for the first three quarters of
1999 was $4.3 million. Approximately $3.2 million is the cost associated
with the severance of certain of our former officers and the balance of the
costs are related to the transition of the Company's financial functions from
Irving, Texas to Topeka, Kansas.
Other income (expense) totaled $(47.0) million of expense in the first nine
months of 1999, as compared to $(16.5) million of expense in the comparable
period in 1998. Interest expense increased by $27.0 million to $64.3 million
during the nine months ended September 30, 1999, compared to $37.3 million for
the nine months ended September 30 1998, reflecting the increased debt level
when compared to the third quarter of 1998 and the recognition of $7.1 million
of interest being recorded as a result of ongoing reductions in the liability
under the Company's recourse financing agreements in Europe. Other expense
in the first three quarters of 1999 was offset by the gain on the sale of
the Company's Mobile Services Group in the amount of $17.2 million.
Other expense in the first three quarters of 1998 was significantly offset
by other income of $20.8 million, reflecting a gain on repurchase of certain
contracts.
Income tax (expense) benefit totaled $17.6 million for the nine months ended
September 30, 1999. The increase in the benefit for the nine months ended
September 30, 1999 is due primarily to the change in accounting method.
Typically, the Company's provision for income taxes is higher than the effective
rate primarily due to the non-deductibility of goodwill amortization which was
incurred as a result of its acquisition program. We consolidate with our parent
company, Western Resources, Inc. for federal tax reporting purposes. We do not
consolidate Protection One Europe for tax reporting purposes.
Balance sheet data. At September 30, 1999, the Company's working capital
deficit was $20.1 million compared to a working capital deficit of $48.2 million
at December 31, 1998. This decrease in the working capital deficit of $28.1
million is primarily due to an increase in current deferred tax assets of $22.7
million and net receivables of $6.7 million.
Goodwill and trademarks, net and customer accounts, net, increased to $2.3
billion at September 30, 1999, from $2.2 billion at December 31, 1998. This net
increase of approximately $76.0 million, or 3.5% reflects the addition of
approximately 264,000 customer accounts, offset by amortization expense for the
first nine months of 1999 of $171.4 million. See Note 4 to Consolidated
Financial Statements for further discussion.
Total stockholders' equity decreased approximately $55.1 million to $1,289.1
million from $1,344.2 million at December 31, 1998. The decrease in such figure
reflects the net loss of $53.4 million for the nine months ended September 30,
1999 and the increase in the unrealized loss on marketable securities and
currency translation.
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Revenues for the third quarter of 1999 increased by approximately $49.8
million, or 48.3%, to $153.1 million from $103.3 million for the comparable
period in 1998. Approximately 77.7% or $38.7 million of this increase is due to
acquired businesses included in Protection One Europe. Approximately $8.1
million of the increase at Protection One Europe was recognized as a result of
ongoing reductions in the liability under the Company's recourse financing
agreements. Protection One North America contributed $9.4 million or 18.9% of
the total increase in revenues. Monitoring and related services revenues
increased by approximately $34.7 million, or 35.9%. The majority of the increase
is due to Protection One Europe (approximately $22.5 million or 64.8%) with the
1998 Acquisitions and the growth of Protection One North America comprising
$11.0 million or 31.7% of the increase.
Installation and other revenues increased by $15.2 million, or 225.4% to
$21.9 million from $6.7 million, reflecting additional installation revenues of
$16.2 million from Protection One Europe and $0.5 million from Multifamily
offset by a decrease of $1.6 million in Protection One North America
installation revenues. The decline in Protection One North America installation
revenues reflects our conversion of substantially all sales and installation
activities previously conducted by an internal sales force to the Dealer
Program. We maintain internal sales and installation capabilities in certain
areas, such as our Network Multifamily Security subsidiary, our commercial
installations and our European operations where we principally rent security
systems.
Cost of revenues for the third quarter of 1999 increased by
approximately $17.3 million, or 53.0%, to $49.8 million from $32.5 million.
Protection One Europe contributed $11.5 million or 66.4% of the increase in cost
of revenues. Protection One North America's cost of revenues increased by $5.4
million or 31.5% of the increase. Cost of revenues as a percentage of total
revenue increased to 32.5% for the third quarter of 1999 from 31.5% for
the comparable period in 1998. Protection One North America cost of revenues as
a percentage of total revenues for the quarter ended September 30, 1999
increased to 33.2% from 30.7% for the quarter ended September 30, 1998. Such
increase for Protection One North America is attributable to increased staffing
in the Company's customer care centers. Monitoring and related services expenses
increased by approximately $12.5 million, or 45.9%, primarily due to Protection
One Europe, which accounts for approximately $5.3 million or 42.7% of the total
increase. Monitoring and related services expenses as a percentage of monitoring
and related services revenues increased to 30.2% for the third quarter of 1999,
from 28.1% in the comparable period in 1998. Protection One North America
monitoring and related expenses as a percentage of monitoring and related
revenues increased to 31.9% for the quarter ended September 30, 1999 from 28.6%
for the quarter ended September 30, 1998. As noted above, such increase is due
to higher staffing levels at the Company's customer care centers.
Installation and other cost of revenues increased by $4.8 million, or 88.7%,
reflecting primarily installation activities from Protection One Europe in the
amount of $6.1 million offset by a decrease of $1.0 million and $0.3 million in
the installation activities of Protection One North America and Multifamily,
respectively.
Gross profit for the third quarter of 1999 was approximately $103.3 million,
representing an increase of $32.6 million, or 46.1%, over the $70.7 million of
gross profit recognized in the comparable period in 1998. Such increase is
primarily due to the contribution by Protection One Europe of $27.3 million, or
approximately 83.6%, with the 1998 Acquisitions and the growth of Protection One
North America comprising approximately $4.0 million or 12.2% and Multifamily the
remainder of the increase. Gross profit as a percentage of total revenues was
67.5% for the third quarter of 1999, compared to 68.5% for the comparable
period in 1998. The decrease in gross profit as a percentage of revenues is due
to the cost of revenues factors noted above.
Selling, general and administrative expenses ("S,G&A") rose to $50.2 million
in the third quarter of 1999, an increase of approximately $26.8 million,
or 114.0%, over S,G&A in the comparable period in 1998. Approximately $14.8
million or 55.2% of the increase is due to Protection One Europe. Protection One
North America S,G&A expenses increased $11.1 million or 55.5% for the quarter
ended September 30, 1999 compared to the quarter ended September 30, 1998. The
majority of the increase in such expenses is due to a larger customer account
base and efforts to integrate the 1998 Acquisitions. Other items contributing to
the increased expense include higher professional fees, higher provision for bad
debt expense and additional costs associated with changes in the dealer program.
Such figure as a percentage of total revenues increased from 22.7% in the third
quarter of 1998 to 32.8% in the third quarter of 1999 due to the factors
previously listed. The increase in S,G&A as a percentage of total revenues
reflects the higher percentage of S,G&A as a percentage of revenues from
Protection One Europe of approximately 39.0%. The higher percentage of S,G&A for
Protection One Europe is due to the internal sales and installation activities.
Acquisition expenses for the third quarter of 1999 increased to $10.3
million, an increase of approximately $5.3 million, or 107.2% from $5.0 million
in the comparable period in 1998. $3.7 million of the increase is related to the
termination of the Lifeline merger. Efforts to integrate the 1998 Acquisitions
and costs related to the national Dealer Program comprise the balance.
Amortization of intangibles and depreciation expense was $94.3 million for
the third quarter of 1999, an increase of $62.5 million, or 196.8% over
the $31.8 million in the comparable period in 1998. Approximately $46.9 million
or 75.1% of the increase is related to the change in accounting method. The
balance of the increase in Protection One North America amortization and
depreciation expense is due to the higher amortization and depreciation expense
related to the 1998 Acquisitions and the growth in our Dealer Program.
Depreciation and amortization expense from Protection One Europe represented
$10.8 million, or approximately 17.3% of the increase. See Note 3 to
Consolidated Financial Statements for further discussion.
Other income (expense) totaled $(6.0) million of expense in the third
quarter of 1999, as compared to $(5.1) million of expense in the comparable
period in 1998. Interest expense increased by $9.9 million, or 79.6% to $22.3
million during the quarter ended September 30, 1999, compared to $12.4 million
for the quarter ended September 30, 1998, reflecting the increased debt level
when compared to the third quarter of 1998 and the recognition of $2.1 million
of interest being recorded as a result of ongoing reductions in the liability
under the Company's recourse financing agreements in Europe. The increase in
debt was used to fund accounts purchased under the Dealer Program, acquisitions
and operations. Other expense in the third quarter of 1999 was significantly
offset by other income of $17.3 million, reflecting a gain on sale of the
Company's Mobile Services Group. Other expense in the third quarter of 1998
was significantly offset by other income of approximately $7.4 million,
reflecting the gain on the repurchase of certain contracts.
Income tax (expense) benefit totaled $18.8 million for the quarter ended
September 30, 1999. The income tax benefit recorded by the Company is primarily
due to the impact of the change in accounting method related to subscriber
accounts. Typically, the Company's provision for income taxes is higher than the
effective rate primarily due to the non-deductibility of goodwill amortization
which was incurred as a result of its acquisition program. We consolidate with
our parent company, Western Resources, Inc. for federal tax reporting purposes.
We do not consolidate Protection One Europe for tax reporting purposes.
Liquidity and Capital Resources
The Company borrows to fund operations in excess of internally generated
cash under its senior credit facility. The Company's ability to borrow under the
facility is subject to compliance with certain financial covenants, including a
leverage ratio of 5.0 to 1.0 and an interest coverage ratio of 2.75 to 1.0. At
year end 1999, the leverage ratio required under the credit facility will be
reduced to 4.5 to 1.0. As of September 30, 1999, the ratios were approximately
6.7 to 1.0 and 2.0 to 1.0. The Company currently borrows approximately $20
million per month, principally to fund the purchase of customer accounts.
The indentures governing the Company's outstanding senior and subordinated
notes contain similar covenants with different calculations relating to the
Company's ability to incur indebtedness. The Company is in compliance with all
covenants contained in these indentures.
The senior credit facility lenders have waived compliance with the current
leverage and interest coverage ratio covenants through December 3, 1999. In
connection with the waiver, the amount of the credit facility was reduced from
$500 million to $250 million. The Company will not, absent successful
implementation of the alternatives discussed below, be in compliance with the
current leverage and interest coverage ratio covenants in the credit facility
following the expiration of the waiver. The Company is discussing waivers or
amendments to the senior credit facility with the lenders and exploring other
alternatives to address these covenant restrictions and the reduced amount of
the credit facility, including selling assets to reduce debt or refinancing
the facility. The credit facility lenders have requested that the Company
obtain credit support for the facility from Western Resources or one of its
affiliates. The Company's public debt contains restrictions on providing
certain forms of credit support to the credit facility. Further, there can be
no assurance that Western Resources or its affiliates will provide any credit
support to the lenders under the facility. If the Company's negotiations with
its senior credit facility lenders are not successful, the Company will be in
default under the credit facility. If the lenders elect to accelerate the
outstanding indebtedness under the credit facility, this action would result
in defaults under the indentures governing certain of the Company's
outstanding notes and the repayment of the notes could be accelerated if the
defaults were not cured within applicable grace periods. The Company would not
be able to repay its indebtedness if repayment is accelerated. Even if the
lenders elect not to accelerate the outstanding indebtedness under the credit
facility, the Company will likely experience shortfalls in liquidity which
would adversely impact the Company's ability to meet its cash obligations and
have a material adverse effect upon the Company's financial position and
results. The Company has been advised by its independent public accountants
that if the issues related to the Company's credit facility have not been
resolved prior to the completion of their audit of the Company's financial
statements for the year ending December 31, 1999, their auditors' report on
those financial statements may be qualified as being subject to the ultimate
outcome of that contingency. If the Company is unable to maintain adequate
liquidity, Western Resources may choose to make additional investments in the
Company, but it is not obligated to do so. Management believes the Company
will be able to address this matter in a manner so that there is no default
under the credit facility or significant impact on its liquidity, but no
assurances can be given that the Company will be able to do so or the terms
thereof. See Note 11 to the Consolidated Financial Statements for recent
developments concerning a review of the Company's capital structure and
financial alternatives.
Cash will also be generated from recurring revenue from our security alarm
monitoring services customer base, which generated $162.9 million of EBITDA in
the nine months ended September 30, 1999. Cash flow from operations per the
statement of cash flows was $75.9 million. EBITDA is derived by adding to income
(loss) before income taxes, the sum of interest expense, depreciation and
amortization expense and employee severance and transition costs, and deducting
the gain on sale of Mobile Services Group and other income. EBITDA does not
represent cash flow from operations as defined by generally accepted accounting
principles, should not be construed as an alternative to operating income and is
indicative of neither operating performance nor cash flows available to fund our
cash needs. Items excluded from EBITDA are significant components in
understanding and assessing our financial performance. EBITDA is used by senior
lenders and subordinated creditors and the investment community to determine the
current borrowing capacity and to estimate the long-term value of companies with
recurring cash flows from operations. Our computation of EBITDA may not be
comparable to other similarly titled measures of other companies.
We generated $75.9 million of net cash provided by operating activities for
the nine months ended September 30, 1999, compared to the $85.5million net cash
provided by operating activities in the nine months ended September 30, 1998.
The decrease in net cash provided by operating activities reflects the impact of
approximately $23 million in interest payments on debt incurred in 1998.
We used $239.4 million of net cash in investing activities for the nine
months ended September 30, 1999, compared to the use of $820.0 million for the
comparable period in 1998. Investing activities during the nine months ended
September 30, 1999, included Dealer Program purchases and enterprise-wide
software expenditures. Investing activities during the nine months ended
September 30, 1998, included the acquisition of Multimedia, Campagnie Europeenne
de Telesecurite ("CET"), Comsec, Canguard and Hambro as well as Dealer Program
purchases.
We generated $172.4 million of net cash through financing activities for the
nine months ended September 30, 1999, compared to generating $677.3 million for
the nine months ended September 30, 1998. We obtained funding of approximately
$173 million through our $250 million senior credit facility.
In response to liquidity and operational issues and the announcement by
Western Resources that it is exploring strategic alternatives for Protection One
(See "Recent Developments- Capital Structure Review"), Moody's, S & P and Fitch
downgraded their ratings on our credit facility and outstanding securities.
These ratings as of November 10, 1999 were as follows:
Senior Senior
Unsecured Subordinated
Debt Unsecured Debt
----------------- ---------------------
S & P BB B+
Moody's Ba3 B2
Fitch BB B+
The indentures governing the Senior Subordinated Discount Notes and Senior
Subordinated Notes contain certain restrictions on the transfer of Company
funds, including dividends, loans and advances made by the Company. Refer to the
Company's 1998 Form 10-K/A for additional information on these notes.
As a result of the Company's failure to complete an exchange offer for the
outstanding senior subordinated notes issued in December 1998, the interest rate
on the notes increased to 8 5/8% per annum in June 1999.
Material Commitments. Under the Company's agreements with dealers, the
Company may be required to purchase customer accounts on an ongoing basis. The
Company is currently spending approximately $15 million per month to purchase
these customer accounts.
Capital Expenditures. We anticipate making capital expenditures in 1999 of
approximately $35 million, including $20.0 million to complete the development
and installation of our new software platforms, $5.0 million for computer
hardware to replace and upgrade existing operations and $10.0 million for other
capital items. These are estimates, but actual expenditures in 1999 for these
and possibly other items not presently anticipated are not expected to vary
materially from these estimates.
Tax Matters. Protection One is consolidated into income tax returns filed by
its parent, Western Resources. The two parties have entered into a tax sharing
agreement whereby Western Resources will make cash payments to us for current
tax benefits utilized for income tax return purposes and which will require cash
payments from us for current tax expenses incurred for income tax return
purposes. This arrangement has allowed us to provide a current tax benefit for
the year ended December 31, 1998, as well as for the nine months ended September
30, 1999.
In the future, if and when we generate income for tax return purposes, we
will proportionately over time utilize existing net operating loss carryforwards
in amounts up to approximately $60 million. Currently, the deferred tax assets
related to the net operating loss carryforwards are fully reserved due to
uncertainty as to their future realizability. However, when net operating loss
carryforwards are utilized, the relief of the corresponding reserve will not
create a benefit, but, as required by generally accepted accounting principles,
will reduce our goodwill balances. The net financial statement effect of this
treatment will cause us to recognize deferred tax expense we might otherwise not
recognize.
Year 2000 Issue
An issue exists for all companies that rely on computers as the year 2000
approaches. The "Year 2000" problem is the result of the past practice in the
computer industry of using two digits rather than four to identify the
applicable year. This practice could result in incorrect results when computers
perform arithmetic operations, comparisons, or data field sorting involving
years later than 1999.
We have reviewed our computer programs, computer hardware and embedded
systems identified as critical to our businesses and operational needs to assess
and to correct any components that could be affected by the change of date to
January 1, 2000, as well as other dates in 2000. In addition, we engaged an
outside consulting firm with an international reputation in Year 2000 compliance
to conduct an independent validation and verification (IV&V) of our Y2K
readiness programs.
We have completed the review and assessment of our systems, although changes
in the state of compliance or preparedness within companies that provide
services or equipment to us will require us to continue our evaluations of these
third-party vendors as the need arises or as prudence dictates, until January 1,
2000 or later if need be.
A number of our accounts are monitored by other firms on Protection One's
behalf. In the Protection One North America monitoring division, we are
assimilating these accounts into our own facilities, but will not have completed
this effort prior to January 1, 2000. We therefore evaluated these third-party
monitoring (TPM) firms and their facilities for Y2K readiness and used the
results of this evaluation as inputs to our account-assimilation priorities. In
the European division, TPMs will be continued in operation in Germany, Belgium,
Netherlands and Switzerland until superceded by Protection One-owned facilities.
Evaluation of these third-party monitoring firms (one for each of the four
countries) will be completed prior to the end of November 1999. U.K. accounts
have been consolidated into the Protection One U.K. monitoring
facility in London, with the exception of one remaining TPM. This TPM is now
being evaluated for Y2K compliance. Network Multifamily does not use TPMs. The
total number of TPM accounts is less than 7% of all accounts as of September 30,
1999, and is expected to be less than 4% at year-end 1999.
Our Year 2000 policy requires testing as a method for verifying the Year
2000 readiness of business-critical items. For those items that are impossible
to test, other methods may be used to identify the readiness status, provided
adequate contingency plans are established to provide a workaround or backup for
the item. Development of contingency plans commenced in January 1999 and
concluded in October 1999. Testing and refinement of contingency plans, and
mobilization for "Millennium Day", commenced in the third quarter and will
conclude in the fourth quarter of 1999. Protection One North America's equipment
testing is scheduled to be completed by December 20, 1999.
We have largely completed the remediation and readiness verification phase
of our plans with respect to our Protection One North America monitoring
operations where problems that were identified are being corrected and
re-tested. Our highest priority has been to ensure the Y2K-readiness of
Protection One's call centers responsible for alarm monitoring and for
responding to customer telephone calls. At this time we believe that our call
centers will continue to be able to receive and act upon alarm signals and
in-person telephone calls, so long as infrastructure elements over which
Protection One has no control (such as electrical power, telephones, and
governmental services) are not disrupted or overwhelmed by consumer demand. The
majority of our current efforts are now concentrated in contingency planning,
and concluding our Year 2000 readiness verification testing.
In the Protection One North America Monitoring division, remediation of
known non-compliant computer-based systems has been completed except for one
billing system serving some 50,000 accounts. Remediation and testing of this
system is scheduled to be completed by the end of November. Remediation and
testing of systems at Network Multifamily is complete. In Europe and UK,
remediation of in-house systems will conclude in November 1999. In all
divisions, readiness verification (testing of business-critical systems
previously assessed as Y2K-compliant) is proceeding in priority order, and will
continue throughout the calendar year, as a double-check. A substantial amount
of readiness verification has already been completed on Protection One North
America Monitoring major systems, with only non-critical errors found.
We have estimated the total cost to update all critical operating systems
for Year 2000 readiness to be less than $5.0 million. As of September 30, 1999,
approximately $3.5 million of these costs had been incurred. These costs include
labor for both company employees and contract personnel used in the Year 2000
program and non-labor costs for software tools used in the remediation and
testing efforts, replacement software, replacement hardware, replacement
embedded devices, and other such costs associated with testing and replacement.
Management continues to review the projected costs associated with the Year 2000
readiness. To date, the costs of the Year 2000 readiness program have been
substantially information-technology related. Non-information technology systems
are highly critical to our business, but are largely beyond our ability to
control. This includes telephones, electricity, water, transportation, and
governmental infrastructure.
The costs of the Year 2000 project and the date on which we plan to complete
the Year 2000 modification, estimated to be during 1999, are based on the best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans, and other factors. However, there can be no guarantee that
these estimates will be achieved; actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
The table below summarizes the status of the components of the Year 2000
Readiness Program as of September 30, 1999.
<TABLE>
<CAPTION>
North American Network Multi-Family Protection One Europe
Phase: Monitoring
------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Identification and assessment Completed Completed Completed
Remediation and unit testing 95% Complete Completed 90% Complete
Comprehensive Y2K readiness
verification:
Guidelines and tools Completed Completed Completed
Testing 70% Complete Completed 85% Complete
Contingency planning:
Guidelines and tools Completed Completed Completed
Plan development Completed Completed 90% Complete
Contingency plan testing and
resourcing:
Guidelines and tools Completed Completed Completed
Testing and resourcing In progress Sept-Nov In progress Sept-Nov In progress Sept-Nov
1999 1999 1999
Mobilization, alert, and standby In progress Nov-Dec In progress Nov-Dec In progress Nov-Dec
1999 1999 1999
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not experienced any significant changes in its exposure to
market risk since December 31, 1998. For additional information on the Company's
market risk, see the Form 10-K/A dated December 31, 1998.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company, its subsidiary Protection One Alarm Monitoring, Inc.
("Monitoring"), and certain present and former officers and directors of
Protection One are defendants in a purported class action litigation pending in
the United States District Court for the Central District of California, David
Lyons v. Protection One, Inc., et al., No CV 99-3755 DT (RCx). Pursuant to an
Order dated August 2, 1999 which consolidated four pending purported class
actions, the plaintiffs filed a single Consolidated Amended Class Action
Complaint ("Amended Complaint") on October 15, 1999. The Amended Complaint
asserts claims under Section 11 of the Securities Act of 1933 and Section 10(b)
of the Securities Exchange Act of 1934 against Protection One, Monitoring, and
certain present and former officers and directors of Protection One based on
allegations that various statements concerning Protection One's financial
results and operations for 1997 and 1998 were false and misleading and not in
compliance with generally accepted accounting principles. Plaintiffs allege,
among other things, that former employees of Protection One, including an
unnamed former executive officer and an unnamed former staff accountant, have
reported that Protection One lacked adequate internal accounting controls and
that certain accounting information was unsupported or manipulated by management
in order to avoid disclosure of accurate information. The Amended Complaint
further asserts claims against Western Resources and Westar Capital as
controlling persons under Sections 11 and 15 of the Securities Act of 1933 and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. A claim is also
asserted under Section 11 of the Securities Act of 1933 against Protection One's
auditor Arthur Andersen LLP. The Amended Complaint seeks an unspecified amount
of compensatory damages and an award of fees and expenses, including attorneys'
fees. The time for the defendants to respond to the Amended Complaint has not
yet expired. The Company believes that all the claims asserted in the Amended
Complaint are without merit and intends to defend against them vigorously. We
cannot currently predict the impact of this litigation which could be material.
Six Protection One dealers have filed a class action lawsuit in the U. S.
District Court for the Western District of Kentucky alleging breach of contract
because of the Company's interpretation of their dealer contracts. The action is
styled Total Security Solutions, Inc., et al. v. Protection One Alarm
Monitoring, Inc., Civil Action No. 3:99CV-326-H (filed May 21, 1999). On
September 10, 1999, the Court granted Protection One's motion to stay the
proceeding pending the individual plaintiff's pursuit of arbitration as required
by the terms of their agreements. As of November 10, 1999, none of these dealers
have commenced arbitration. Other Protection One dealers have threatened
litigation or arbitration based upon similar claims. The Company believes it has
complied with the terms of these contracts and intends to vigorously defend its
position. The Company cannot currently predict the impact of these disputes with
dealers which could be material.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed with this Current Report on
Form 10-Q or incorporated by reference.
Exhibit
Number Exhibit Description
10.1 Waiver letter dated as of September 30, 1999 among Protection
One Alarm Monitoring, Inc., Bank of America, N.A., as
Administrative Agent, and the Syndication Agent, the
Documentation Agent and the Lenders named in the Credit
Agreement dated as of December 21, 1998 to which all such
persons are a party.
10.2 Waiver letter dated as of October 29, 1999 among Protection
One Alarm Monitoring, Inc., Bank of America, N.A., as
Administrative Agent, and the Syndication Agent, the
Documentation Agent and the Lenders named in the Credit
Agreement dated as of December 21, 1998 to which all such
persons are a party.
10.3 Service Agreement dated as of April 1, 1999 between Western
Resources, Inc. and Protection One, Inc. and Exhibits 3 and 4
thereto dated October 14, 1999.
10.4 Letter of Intent dated September 16, 1999 between Paradigm
Direct LLC and Protection One Alarm Monitoring, Inc.
18.1 Letter of Arthur Andersen LLP regarding Change in Accounting
Principle
27.1 Financial Data Schedule
- ---------
(b) During the quarter ended September 30, 1999, the Company filed six Reports
on Form 8-K. A Current Report on Form 8-K dated July 2, 1999, reported the
proposed sale of the Company's Mobile Services Group. A Current Report on Form
8-K dated August 12, 1999, reported second quarter earnings. A Current Report on
Form 8-K/A dated August 13, 1999, reported a correction in the Form 8-K filed on
August 12, 1999. A current report on Form 8-K dated August 26, 1999, reported
the sale of the Company's Mobile Services Group to ATX Technologies. A current
report on Form 8-K dated September 3, 1999, reported the termination of the
proposed merger with Lifeline Systems, Inc. A current report on Form 8-K dated
September 29, 1999, reported the proposed sale of the Company's Canadian
operations.
<PAGE>
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.
Date: November 12, 1999 PROTECTION ONE, INC.
--------------------
PROTECTION ONE ALARM MONITORING, INC.
By: /s/ Anthony D. Somma
Anthony D. Somma
Chief Financial Officer
<PAGE>
Exhibit List
Exhibit
Number Exhibit Description
10.1 Waiver letter dated as of September 30, 1999 among Protection
One Alarm Monitoring, Inc., Bank of America, N.A., as
Administrative Agent, and the Syndication Agent, the
Documentation Agent and the Lenders named in the Credit
Agreement dated as of December 21, 1998 to which all such
persons are a party.
10.2 Waiver letter dated as of October 29, 1999 among Protection
One Alarm Monitoring, Inc., Bank of America, N.A., as
Administrative Agent, and the Syndication Agent, the
Documentation Agent and the Lenders named in the Credit
Agreement dated as of December 21, 1998 to which all such
persons are a party.
10.3 Service Agreement dated as of April 1, 1999 between Western
Resources, Inc. and Protection One, Inc. and Exhibits 3 and 4
thereto dated October 14, 1999.
10.4 Letter of Intent dated September 16, 1999 between Paradigm
Direct LLC and Protection One Alarm Monitoring, Inc.
18.1 Letter of Arthur Andersen LLP regarding Change in Accounting
Principle
27.1 Financial Data Schedule
As of September 30, 1999
Protection One Alarm Monitoring, Inc.
818 South Kansas Avenue
P.O. Box 889
Topeka, Kansas 66601
Re: Request for Waiver
Gentlemen:
Reference is hereby made to that certain Credit Agreement dated as of December
21, 1998, executed by Protection One Alarm Monitoring, Inc., a Delaware
corporation ("Borrower"), NationsBank, N.A. (now known as Bank of America,
N.A.), as Administrative Agent ("Administrative Agent"), the Syndication Agent
defined therein, the Documentation Agent defined therein, and the Lenders
defined therein (as modified, amended, renewed, extended, and restated from time
to time, the "Credit Agreement"). Capitalized terms used herein shall, unless
otherwise indicated, have the respective meanings set forth in the Credit
Agreement.
Borrower has notified Administrative Agent that, as of September 30, 1999,
Borrower may not be in compliance with the Leverage Ratio set forth in Section
10.13(a) of the Credit Agreement and the Interest Coverage Ratio set forth in
Section 10.13(b) of the Credit Agreement (the "Covenant Violations").
By execution of this letter in the space provided below, each Lender executing
this letter (collectively, "Consenting Lenders"), subject to the terms and
conditions of this letter, hereby waives the existence of the Covenant
Violations and any Default created thereby until 5:00 p.m. (Dallas, Texas time)
on November 1, 1999.
As a condition precedent to each Consenting Lender's execution of this letter,
Borrower hereby notifies Administrative Agent that, pursuant to Section 2.3 of
the Credit Agreement, Borrower elects to partially terminate the Total
Commitment in an amount equal to $250,000,000 and, after giving effect to such
partial termination, the Total Commitment shall equal $250,000,000. Borrower and
Consenting Lenders agree that such partial termination of the Total Commitment
shall be effective as of the date hereof (notwithstanding the notice
requirements set forth in Section 2.3 of the Credit Agreement.
As a material inducement to the Credit Parties to execute this letter, Borrower
hereby represents and warrants to the Credit Parties that, after giving effect
to this letter and the waiver contained herein: (a) other than the Covenant
Violations, all of the representations and warranties contained in the Credit
Agreement and the other Loan Documents are true and correct as of the date
hereof as though made as of such date (unless they speak to a specific date or
are based upon facts which have changed by transactions expressly contemplated
or permitted by the Credit Agreement); and (b) other than the Covenant
Violations, no Potential Default or Default exists.
<PAGE>
Protection One Alarm Monitoring, Inc.
As of September 30, 1999
Page 2
By execution of this letter in the space provided below, Borrower ratifies and
confirms that the Credit Agreement and all other Loan Documents, and all
renewals, extensions, and restatements of, and amendments and supplements to,
any of the foregoing, are and remain in full force and effect in accordance with
their respective terms.
The waiver hereby granted by Consenting Lenders does not (a) constitute a waiver
or modification of any other terms or provisions set forth in the Credit
Agreement or any other Loan Document and shall not impair any right that any
Credit Party may now or hereafter have under or in connection with the Credit
Agreement or any other Loan Document, and (b) impair any Credit Party's rights
to insist upon strict compliance with the Credit Agreement, as amended or
otherwise modified hereby, or the other Loan Documents. The Loan Documents
continue to bind and inure to Borrower and the Credit Parties and their
respective successors and permitted assigns.
This letter, when countersigned by the Required Lenders, shall be a "Loan
Document" as defined and referred to in the Credit Agreement and the other Loan
Documents, and may be signed in any number of counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument. THIS LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS.
THIS LETTER, THE CREDIT AGREEMENT, AND THE OTHER LOAN DOCUMENTS EMBODY THE
FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR
COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR
ORAL, RELATING TO THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED OR
VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR
DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE
PARTIES HERETO.
Please execute a copy of this letter in the space provided below to acknowledge
your agreement to the foregoing.
[Remainder of Page Intentionally Left Blank;
Signature Pages to Follow.]
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
Sincerely,
BANK OF AMERICA, N.A., (f/k/a Bank of America
National Trust and Savings Association,
successor by merger to Bank of America, N.A.,
f/k/a NationsBank, N.A.), as Administrative
Agent and a Lender
By: /s/ David E. Sisler
David E. Sisler
Principal
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
FIRST UNION NATIONAL BANK,
as Syndication Agent and a Lender
By: /s/ Michael J. Kolosowsly
Name: Michael J. Kolosowsly
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
TORONTO DOMINION (TEXAS) INC.,
as Documentation Agent and a Lender
By: /s/ Debbie A. Greene
Name: Debbie A. Green
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
TORONTO DOMINION (TEXAS) INC.,
as Documentation Agent and a Lender
By: /s/ Michael Bandzierz
Name: Michael Banzierz
Title: Managing Director
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
MORGAN STANLEY SENIOR FUNDING, INC.,
as a Lender
By: /s/ T. Morgan Edwards II
Name: T. Morgan Edwards II
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
CHASE MANHATTAN BANK,
as a Lender
By: /s/ Paul V. Farrell
Name: Paul V. Farrell
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
WESTDEUTSCHE LANDESBANK GIROZENTRALE,
NEW YORK BRANCH,
as a Lender
By: /s/ Duncan M. Robertson
Name: Duncan M. Robertson
Title: Vice President
By: /s/ Walter T. Duffy III
Name: Walter T. Duffy III
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
BANK ONE, NA (formerly known as THE FIRST
NATIONAL BANK OF CHICAGO), as a Lender
By: /s/ Mary Lu D. Cramer
Name: Mary Lu D. Cramer
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
UBS AG, STAMFORD BRANCH,
as a Lender
By: /s/ Paul R. Morrison
Name: Paul R. Morrison
Title: Executive Director
By: /s/ Andrew N. Taylor
Name: Andrew N. Taylor
Title: Associate Director
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
MERITA BANK PLC,
as a Lender
By: /s/ Charles I. Lansdown
Name: Charles I. Lansdown
Title: Senior Vice President
By: /s/ Joseph A. Ciccolini
Name: Joseph A. Ciccolini
Title: Assistant Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
GUARANTY FEDERAL BANK, F.S.B.,
as a Lender
By: /s/ Robert S. Hays
Name: Robert S. Hays
Title: Senior Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
VIA BANQUE,
as a Lender
By:
Name:
Title:
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
MERCANTILE BANK NATIONAL ASSOCIATION,
as a Lender
By: /s/ Gail F. Scannell
Name: Gail F. Scannell
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
AGREED TO AND ACCEPTED AS OF THE DATE FIRST WRITTEN ABOVE.
PROTECTION ONE ALARM MONITORING INC., a
Delaware corporation, as Borrower
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: CFO, Secretary & Treasurer
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
To induce the Credit Parties to enter into this letter, each of the undersigned
(a) consents and agrees to this letter's execution and delivery, (b) ratifies
and confirms that all guaranties, assurances, and Liens, if any, granted,
conveyed, or assigned to the Credit Parties under the Loan Documents are not
released, diminished, impaired, reduced, or otherwise adversely affected by this
letter and continue to guarantee, assure, and secure the full payment and
performance of all present and future Obligation (except to the extent
specifically limited by the terms of such guaranties, assurances, or Liens), (c)
agrees to perform such acts and duly authorize, execute, acknowledge, deliver,
file, and record such additional guaranties, assignments, security agreements,
deeds of trust, mortgages, and other agreements, documents, instruments, and
certificates as the Credit Parties may reasonably deem necessary or appropriate
in order to create, perfect, preserve, and protect those guaranties, assurances,
and Liens, and (d) waives notice of acceptance of this consent and agreement,
which consent and agreement binds the undersigned and its successors and
permitted assigns and inures to the Credit Parties and their respective
successors and permitted assigns.
PROTECTION ONE, INC., a Delaware corporation
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: C.F.O.
COMSEC/NARRAGANSETT SECURITY, INC., a
Delaware corporation
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: Treasurer
NETWORK MULTI-FAMILY SECURITY CORPORATION, a
Delaware corporation
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: Asst. Secretary
<PAGE>
PROTECTION ONE INTERNATIONAL, INC., a
Delaware corporation
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: Secretary and Treasurer
PROTECTION ONE INVESTMENTS, INC., a
Delaware corporation
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: Secretary and Treasurer
<PAGE>
As of October 29, 1999
Protection One Alarm Monitoring, Inc.
818 South Kansas Avenue
P.O. Box 889
Topeka, Kansas 66601
Re: Request for Waiver
Gentlemen:
Reference is hereby made to that certain Credit Agreement dated as of December
21, 1998, executed by Protection One Alarm Monitoring, Inc., a Delaware
corporation ("Borrower"), NationsBank, N.A. (now known as Bank of America,
N.A.), as Administrative Agent ("Administrative Agent"), the Syndication Agent
defined therein, the Documentation Agent defined therein, and the Lenders
defined therein (as modified, amended, renewed, extended, and restated from time
to time, the "Credit Agreement"). Capitalized terms used herein shall, unless
otherwise indicated, have the respective meanings set forth in the Credit
Agreement.
Borrower has notified Administrative Agent that, as of September 30, 1999,
Borrower may not be in compliance with the Leverage Ratio set forth in Section
10.13(a) of the Credit Agreement and the Interest Coverage Ratio set forth in
Section 10.13(b) of the Credit Agreement (the "Covenant Violations"). Pursuant
to a letter dated as of September 30, 1999, the Required Lenders waived the
existence of the Covenant Violations until 5:00 p.m. (Dallas, Texas time) on
November 1, 1999 (the "Waiver Period").
By execution of this letter in the space provided below, each Lender executing
this letter (collectively, "Consenting Lenders"), subject to the terms and
conditions of this letter, hereby extend the Waiver Period until 5:00 p.m.
(Dallas, Texas time) on December 3, 1999.
As a material inducement to the Credit Parties to execute this letter, Borrower
hereby represents and warrants to the Credit Parties that, after giving effect
to this letter and the waiver contained herein: (a) other than the Covenant
Violations, all of the representations and warranties contained in the Credit
Agreement and the other Loan Documents are true and correct as of the date
hereof as though made as of such date (unless they speak to a specific date or
are based upon facts which have changed by transactions expressly contemplated
or permitted by the Credit Agreement); and (b) other than the Covenant
Violations, no Potential Default or Default exists.
By execution of this letter in the space provided below, Borrower ratifies and
confirms that the Credit Agreement and all other Loan Documents, and all
renewals, extensions, and restatements of, and amendments and supplements to,
any of the foregoing, are and remain in full force and effect in accordance with
their respective terms.
<PAGE>
Protection One Alarm Monitoring, Inc.
As of October 29, 1999
Page 2
The waiver hereby granted by Consenting Lenders does not (a) constitute a waiver
or modification of any other terms or provisions set forth in the Credit
Agreement or any other Loan Document and shall not impair any right that any
Credit Party may now or hereafter have under or in connection with the Credit
Agreement or any other Loan Document, and (b) impair any Credit Party's rights
to insist upon strict compliance with the Credit Agreement, as amended or
otherwise modified hereby, or the other Loan Documents. The Loan Documents
continue to bind and inure to Borrower and the Credit Parties and their
respective successors and permitted assigns.
This letter, when countersigned by the Required Lenders, shall be a "Loan
Document" as defined and referred to in the Credit Agreement and the other Loan
Documents, and may be signed in any number of counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument. THIS LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS.
THIS LETTER, THE CREDIT AGREEMENT, AND THE OTHER LOAN DOCUMENTS EMBODY THE
FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR
COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR
ORAL, RELATING TO THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED OR
VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR
DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE
PARTIES HERETO.
Please execute a copy of this letter in the space provided below to acknowledge
your agreement to the foregoing.
[Remainder of Page Intentionally Left Blank;
Signature Pages to Follow.]
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
Sincerely,
BANK OF AMERICA, N.A., (f/k/a Bank of America
National Trust and Savings Association,
successor by merger to Bank of America, N.A.,
f/k/a NationsBank, N.A.), as Administrative
Agent and a Lender
By: /s/ Wade B. Sample
Wade B. Sample
Managing Director
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
FIRST UNION NATIONAL BANK,
as Syndication Agent and a Lender
By: /s/ Joe K. Daney
Name: Joe K. Daney
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
TORONTO DOMINION (TEXAS) INC.,
as Documentation Agent and a Lender
By: /s/ Debbie A. Greene
Name: Debbie A. Greene
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
MORGAN STANLEY SENIOR FUNDING, INC.,
as a Lender
By: /s/ T. Morgan Edwards II
Name: T. Morgan Edwards II
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
CHASE MANHATTAN BANK,
as a Lender
By: /s/ Paul V. Farrell
Name: Paul V. Farrell
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
WESTDEUTSCHE LANDESBANK GIROZENTRALE,
NEW YORK BRANCH,
as a Lender
By: /s/ Duncan M. Robertson
Name: Duncan M. Robertson
Title: Vice President
By: /s/ Walter T. Duffy III
Name: Walter T. Duffy III
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
BANK ONE, NA (formerly known as THE FIRST
NATIONAL BANK OF CHICAGO), as a Lender
By: /s/ Mary Lu D. Cramer
Name: Mary Lu D. Cramer
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
UBS AG, STAMFORD BRANCH,
as a Lender
By: /s/ Paul R. Morrison
Name: Paul R. Morrison
Title: Executive Director
By: /s/ Andrew N. Taylor
Name: Andrew N. Taylor
Title: Associate Director
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
MERITA BANK PLC,
as a Lender
By: /s/ Charles J. Lansdown
Name: Charles J. Lansdown
Title: Senior Vice President
By: /s/ Frank Maffei
Name: Frank Maffei
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
GUARANTY FEDERAL BANK, F.S.B.,
as a Lender
By:
Name:
Title:
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
VIA BANQUE,
as a Lender
By:
Name:
Title:
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
MERCANTILE BANK NATIONAL ASSOCIATION,
as a Lender
By: /s/ Gail F. Scannell
Name: Gail F. Sannell
Title: Vice President
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
AGREED TO AND ACCEPTED AS OF THE DATE FIRST WRITTEN ABOVE.
PROTECTION ONE ALARM MONITORING INC., a
Delaware corporation, as Borrower
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: CFO, Secretary and Treasurer
<PAGE>
SIGNATURE PAGE TO LETTER AGREEMENT BETWEEN
PROTECTION ONE ALARM MONITORING, INC.,
BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT,
THE SYNDICATION AGENT DEFINED THEREIN,
THE DOCUMENTATION AGENT DEFINED THEREIN, AND
THE LENDERS DEFINED THEREIN
To induce the Credit Parties to enter into this letter, each of the undersigned
(a) consents and agrees to this letter's execution and delivery, (b) ratifies
and confirms that all guaranties, assurances, and Liens, if any, granted,
conveyed, or assigned to the Credit Parties under the Loan Documents are not
released, diminished, impaired, reduced, or otherwise adversely affected by this
letter and continue to guarantee, assure, and secure the full payment and
performance of all present and future Obligation (except to the extent
specifically limited by the terms of such guaranties, assurances, or Liens), (c)
agrees to perform such acts and duly authorize, execute, acknowledge, deliver,
file, and record such additional guaranties, assignments, security agreements,
deeds of trust, mortgages, and other agreements, documents, instruments, and
certificates as the Credit Parties may reasonably deem necessary or appropriate
in order to create, perfect, preserve, and protect those guaranties, assurances,
and Liens, and (d) waives notice of acceptance of this consent and agreement,
which consent and agreement binds the undersigned and its successors and
permitted assigns and inures to the Credit Parties and their respective
successors and permitted assigns.
PROTECTION ONE, INC., a Delaware corporation
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: CFO, Secretary and Treasurer
COMSEC/NARRAGANSETT SECURITY, INC., a
Delaware corporation
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: Secretary and Treasurer
NETWORK MULTI-FAMILY SECURITY CORPORATION,
a Delaware corporation
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: Assistant Secretary
<PAGE>
PROTECTION ONE INTERNATIONAL, INC.,
a Delaware corporation
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: Secretary and Treasurer
PROTECTION ONE INVESTMENTS, INC.,
a Delaware corporation
By: /s/ Anthony D. Somma
Name: Anthony D. Somma
Title: Secretary and Treasuer
SERVICE AGREEMENT
WESTERN RESOURCES, INC.
and
PROTECTION ONE, INC.
THIS SERVICE AGREEMENT (together with one or more Exhibits which may be
incorporated into this agreement from time to time, the "Agreement") is made and
entered into as of this 1st day of April, 1999 by and between WESTERN RESOURCES,
INC., a Kansas corporation, ("Western") and PROTECTION ONE, INC., a Delaware
corporation ("Protection One").
WHEREAS, Protection One has requested that Western assist it by
providing to Protection One and certain of its subsidiaries and affiliates
identified in the respective individual Exhibits which may, from time to time be
attached hereto (each such entity a "Client Group Member", and collectively the
"Client Group") the services described in the Exhibits hereto (the "Services"),
and Western has agreed to provide such Services to Client Group Members, subject
to the terms and conditions of this Agreement.
NOW THEREFORE, for and in consideration of the mutual covenants set
forth herein, as well as other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Services. Protection One hereby retains Western to cause the
Services described in Section 1 of each Exhibit to this Agreement to be provided
to each Client Group Member (as defined in Section 3 of such respective
Exhibit), and Western agrees to cause such Services to be provided, subject to
the terms and conditions of this Agreement.
2. Payment for Services. In exchange for the Services, Protection One
shall cause Western to be paid in accordance with the terms set forth in Section
4 of each respective Exhibit to this Agreement. Protection One shall be solely
responsible, without right of reimbursement, for the satisfaction of any tax,
other than income tax, imposed by a state or local taxing authority with respect
to, or arising out of, the Services provided under this Agreement or payment
thereof ("Transaction Taxes").
3. Term and Termination. The term for which a particular Service shall
be provided shall be set forth in Section 2 of each respective Exhibit to this
Agreement.
4. Notices. All notices which are required or may be given pursuant to
the terms of this Agreement shall be in writing and shall be sufficient in all
respects if given in writing and delivered personally or by registered or
certified mail, return receipt requested, and such notice shall be deemed to be
given on the date hand-delivered or on the third day after the date deposited in
the United States mail, or other comparable commercial delivery system, with
postage or delivery charges thereon prepaid, addressed as follows:
<PAGE>
If to Western: If to Protection One:
Rita A. Sharpe John E. Mack III
818 South Kansas 600 Corporate Pointe, 12th Floor
Topeka, Kansas 66612 Culver City, California 90230
with copy to: with copy to:
General Counsel
5. Governing Law. This Agreement shall be governed by and construed
according to the internal laws of, and without regard to conflicts of law
provisions, the State of Kansas.
6. Amendment. This Agreement may be amended only by a writing executed
with the same formality as this Agreement.
7. Contractual Arrangement. It is expressly acknowledged by the parties
hereto that Western is an independent contractor. Nothing contained herein is
intended or shall be construed to create an employer-employee relationship,
joint venture or partnership between Western and Protection One and/or any
Client Group Member. The parties acknowledge and agree that Protection One will
not withhold from the compensation payable to Western hereunder any sums for
income tax, employment insurance, workers compensation, Social Security, or any
other withholding pursuant to any state or federal law or requirement of any
governmental agency.
8. Limitations on Liability for Work Performed. Western agrees to
perform the work in a good and workmanlike manner consistent with the customs
and practices of the industry providing services substantially similar to the
Services. WESTERN EXPRESSLY EXCLUDES ALL OTHER GUARANTEES, WARRANTIES OR
REPRESENTATIONS OF ANY KIND WHATSOEVER. WESTERN WILL NOT BE RESPONSIBLE FOR ANY
INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL, OR OTHER DAMAGES WITH WESTERN'S SOLE
LIABILITY BEING LIMITED TO THE REPAIR AND REASONABLE COSTS OF CORRECTING ANY
ERRORS WHICH ARE ATTRIBUTABLE TO THE WORK OF WESTERN, NOT TO EXCEED IN THE
AGGREGATE THE AMOUNTS PAID TO WESTERN WITH RESPECT TO THE APPLICABLE EXHIBIT.
9. Indemnification. Protection One shall indemnify and hold Western,
its members, directors, officers, employees, parents, affiliates, subsidiaries
and independent contractors ("Indemnitees") harmless against any and all claims,
losses, costs, damages and expenses, including, but not limited to Transaction
Taxes and attorney fees, arising out of or in connection with the services
provided to each Client Group Member by Western hereunder or from any breach by
Western of any provision of this Agreement, or any act, omission or neglect by
Western, or any Indemnitee.
10. Confidential Information. Western and Protection One, on behalf of
itself and of each Client Group Member agree that any information received by
either in connection with this contract, which concerns the confidential
<PAGE>
personal, financial or other affairs of the other will be treated in full
confidence and will not be revealed to any other persons, firms or organizations
except as may be required by judicial process, applicable law or regulation.
11. Entire Agreement. This Agreement contains the entire agreement and
understanding between Protection One and Western and supersedes all prior
agreements and understandings, if any, relating to the subject matter hereof.
Except for those set forth in this Agreement, the parties hereby agree that no
obligation or contractual commitment of any kind, other than as specifically set
out in this Agreement, (or definitive agreement(s) as may be entered into
between the parties, if any, including agreements with respect to Additional
Services), shall be deemed to exist between the parties, and with respect to
subject matter hereof, and none of Protection One, and any Client Group Member,
or Western shall be under any legal obligation of any kind whatsoever to enter
into any transaction or agreement by virtue of this Agreement.
12. Third Party Beneficiaries. There are no third party beneficiaries,
express or implied, intended or unintended, to this Agreement.
13. Binding Effect and Assignment. This Agreement and the rights and
obligations under this Agreement shall not be assignable or transferable by the
parties (including by operation of law in connection with a merger,
consolidation or sale of all or substantially all the assets of a party) without
the prior written consent of the other party hereto, except that Western may
assign and transfer all its rights and obligations under this Agreement to an
affiliate of Western without such written consent; provided any such assignment
or transfer shall not release Western Resources of its obligations hereunder.
Western will provide prompt notice to Protection One of any such assignment and
transfer. All the terms and provisions of this Agreement shall be binding upon
and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto, whether so expressed or not.
14. Prior Negotiations. This Agreement supersedes all prior
negotiations and agreements between the parties hereto relative to the
transaction contemplated by this Agreement, which contains the entire
understanding of the parties hereto.
15. Waiver of Breach. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate as or be construed to be a waiver
of any subsequent breach by any party.
16. Dispute Resolution. Each of Protection One, for itself and each
Client Group Member, and Western hereby agrees that (i) it shall, promptly upon
its dispute of a matter arising under this Agreement which may involve a
claim(s) against the other, or a Client Group member, as the case may be, of
more that $5,000 or injunctive relief, provide appropriate written notification
("Notice") of such dispute ("Dispute") to such other party(ies), (ii) it will
attempt in good faith to resolve the Dispute through meeting(s) and discussions
("Discussions") with the other party(ies) to the Dispute, such Discussions to be
held from time to time during the 30 calendar days immediately after the date of
the Notice, and (iii) it shall designate in the Notice appropriate senior
management to actively participate in the Discussions for the purpose of
resolving the Dispute, proposed alternative dates
<PAGE>
and locations of such meetings, and the nature of the Dispute.
Protection One, for itself and each Client Group Member, and Western
each hereby agree that none of Protection One, Western, or any Client Group
Member, shall bring a legal action against any Client Group Member, Western, or
Protection One, as the case may be, without first having complied with the
provisions set forth in this Section 16.
17. Venue. Any dispute not resolved pursuant to paragraph 16 above, if
raised in litigation, shall be brought in state or federal court having situs in
Shawnee County, Kansas, as the parties agree that venue for all such disputes
shall be in Shawnee County, Kansas.
18. Invalid Provision. The invalidity or unenforceability of any
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first-above written.
WESTERN RESOURCES, INC. PROTECTION ONE, INC.
Signature: /s/ Signature: /s/
By: Rita A. Sharpe By: John E. Mack III
Its: Vice President Shared Services Its: Chief Financial Officer
Date: 5/3/99 Date: 5/3/99
<PAGE>
EXHIBIT 3
This Exhibit 3 is incorporated as of October14, 1999 ("Exhibit 3
Effective Date") to that certain Service Agreement ("Service Agreement") made
and entered into as of the 3rd day of May 1999 ("Effective Date") by and between
WESTERN RESOURCES, INC., a Kansas corporation ("Western"), and PROTECTION ONE,
INC., a Delaware corporation ("Protection One"). For purposes of this Exhibit 3,
the term "Agreement" means, and is limited to, the Service Agreement together
with this Exhibit 3.
Section 1. SERVICES INCLUDED.
Western shall cause the Services described below to be provided upon
Protection One's reasonable request for itself, and for its more than 50% owned
subsidiaries that are identified in Section 3 (each a "Client Group Member",
and, collectively "Client Group").
Generally. Western will, as more specifically set forth in this Exhibit
3, provide, or cause to be provided, Services to one or more Client Group
Members. Unless expressly indicated otherwise, all references to Sections and
subsections in this Exhibit 3 are references to such respective Sections and
subsections in this Exhibit 3.
Certain Definitions.
"Accounting Services" means accounting oversight, tax compliance, cash
management, general leger financial reporting, and similar services.
"Facilities Services" means facility management services, project
services, duplication services, mail services, real estate services, facility
administration services, facility services, and other similar services.
"Human Resources Services" means employment administration, benefits
administration, training services, payroll services, and other similar services.
"Information Technology Services" means
(i) Help Desk Call Center Support including
1. single point of contact end user support on a 24 x 7 basis,
2. high quality, responsive support according to defined
service levels,
3. escalation of issues to Western Resources and third
party resources,
4. management of service levels provided by Western Resources and
third party resources,
5. performance and analysis reporting, 6. end user satisfaction
surveys performed by a third
party organization;
<PAGE>
EXHIBIT 3
(ii) IT Asset Leasing including procurement, leased asset procurement
services, lease administration services and coordination of lease
expiration functions;
(iii)Budget/SLA Development and Management including development of
the annual budget and service level agreements, monthly budget
analysis and development of special budget reports;
(iv) Technical Support including technical services requested via the
Help Desk Call Center, the e-mail request system, and
IT-Request,
for the following products and services:
(a) PC, telephone and related peripherals adds/moves/changes, (b)
software and hardware installations and modifications, (c) provide
high quality, skilled technicians and electronic
workflow management;
(v) Internet services including access to the Internet through Western
Resources firewall;
(vi) Support and administration of Lotus Notes SmartSuite desktop
clients, and
(vii)telephone services including access to Company network, voice
mail, toll free dialing to all network locations and all other
ISDN features.
1. These services will be billed at the monthly rate of $5.00 per
phone number.
2. Phoneset hardware and PBX port charges will be billed
separately.
3. Actual long distance usage and calling card charges will be
billed on a monthly basis.
"Legal Services" means legal representation and counseling services,
and other similar services.
"Supply Chain Services" means accounts payable management services and
oversight, accounts payable transition activities, processing invoices, check
printing, invoice document services, credit card (travel and entertainment,
procurement and fleet) related activities, strategic sourcing management
services and oversight, procurement of goods and services related activities,
materials management services and oversight, supply chain related administrative
services (budget, SLAs, etc.) and similar services.
"Services" means one or more of services composing Accounting Services,
Facilities Services, Human Resources Services, Information Technology Services,
Legal Services, and Supply Chain Services.
<PAGE>
EXHIBIT 3
ADDITIONAL SERVICES
Additional Services shall be provided only pursuant to a definitive
written agreement, if any, as may be entered into between Western Resources and
Protection One. For purposes of this Exhibit 3, the term "Additional Services"
means services constituted or represented by any material increase, expansion,
or broadening of Western's obligations hereunder, relative to the Services to
otherwise be provided hereunder by Western to Client Group.
Protection One, for itself, and for each Client Group Member, and
Western hereby agree, with respect to Additional Services, if any, that
Protection One and Western shall, from time to time, attempt to negotiate in
good faith a mutually agreeable definitive agreement for the performance of such
Additional Services by Western for Protection One and Client Group, as
contemplated by Section 1; provided, except as expressly set forth in this
Exhibit 3, nothing shall be deemed to create any legal obligation of any kind
whatsoever upon any party to enter into any agreement with respect to Additional
Services.
Section 2. TERM.
a. Unless terminated pursuant to Section 2(b), this Agreement
shall be effective from the Exhibit 3 Effective Date and shall
automatically terminate upon the earlier of (i) June 30, 2000,
unless thereafter extended by written mutual agreement on a
month to month basis or (ii) Closing, as defined in the merger
agreement dated March 18, 1998 between Western Resources, Inc.
and Kansas City Power & Light Company
("Merger Agreement"), of the Merger Agreement.
b. Termination. This Agreement may also terminate:
i. At any time by written mutual agreement of the
parties; or
iii. Upon sixty (60) calendar days prior written notice from
one party to the other stating that party's intent to
terminate this Agreement for "cause." For the purposes
of this Agreement, the term "cause" means, and is
limited to, a material breach of this Agreement by
either party which remains uncured more than 30 days
after written notice of such breach has been provided.
Section 3. CLIENT GROUP.
For purposes of providing the Services described in Section 1, the term
"Client Group" means, and is limited to:
<PAGE>
EXHIBIT 3
Protection One Alarm Monitoring, Inc. Protection One, Inc.
Security Monitoring Services, Inc. Comsec Narragansett Security, Inc
Protection One International, Inc. Comsec Systems, Inc.
P-1 Merger Sub (Del) Network Multifamily Security
Corporation, Inc.
P-1 Merger Sub (Mass) Protection One Investments, Inc.
Protection One Canada, Inc. Canguard, Inc.
Protection One U.K., Inc. Compagnie Euorpeenne de
Telesecurete, S.A.
CET Benelux, S.A. CET Swisse
CET Technishe Sicherheirsdienste GmbH Eurocontact
Europ Telesecurite Grance Reseau Telesecurite
Actar Aldis
Servelance Electroreque de France Croese Larroch
E.S. Beveliging Protection One Acquisition Holding
Protection One Alarm Monitoring of Corporation, Inc.
Mass, Inc.
Section 4. CONSIDERATION.
(a) Subject to Sections 4(b), (c), (d), and (e) Protection One shall
cause to be paid in cash to Western, in exchange for the Services, an amount
equal to the sum of
(i) the aggregate of the mathematical products of the total
Chargeable Hours for such Services and the respective hourly
rate(s) set forth on Attachment A to this Exhibit 3;
(ii) Western's out-of-pocket costs including without limitation,
travel, lodging meals, long distance charges and overnight mail
as itemized on a statement; and
(iii) any other costs for services and/or products that are not
susceptible to hourly rate pricing which are directly provided
or contracted out by Western to be provided to Protection One.
Any amount due under Section 4 shall be paid by the 10th calendar day
of the month coinciding with or next following the date on which Protection One
receives from Western a statement itemizing such amounts due. For purposes of
this Exhibit 3, the term "Chargeable Hour" means an actual labor hour worked by
a person in the classification of personnel set forth on Attachment A.
(b) Each of the parties hereby agrees that, notwithstanding anything to
the contrary in this Agreement, if Western Resources determines during the term
of this Agreement that the aggregate amount paid or payable as of such
determination by Protection One under Section 4(a) is less than 90% (ninety
percent) of the actual costs incurred and as documented by Western in
<PAGE>
EXHIBIT 3
providing the related Services, then the amount payable by Protection One for
Services provided after such determination shall be automatically increased as
described in Section 4(c).
(c) The amount payable by Protection One for Services shall be
increased, if at all, as contemplated by Section 4(b), such that the amount then
payable by Protection One for Services provided after any such determination is
at least 90% (ninety percent) of the actual costs incurred by Western in
providing Services under this Agreement after such determination.
(d) Any change in the organizational structure of either Western or
Protection One which also results in a change of Services contrary to this
Agreement, will result in negotiations to determine the proper payable amount in
light of those changes.
(e) Notwithstanding anything to the contrary in this Exhibit 3, in no
event shall the aggregate amount payable by Protection One under Section 4
exceed $3.5 million (three million five hundred thousand dollars).
Unless otherwise agreed to in writing all payments shall be made by
wire transfer to the account identified immediately below.
Bank of America, Dallas, Texas
Western Resources, Inc.
Acct # 375-095-4775
Routing No. 111000012
IN WITNESS WHEREOF, the parties have executed this Exhibit 3 on the day
and year first-above written.
WESTERN RESOURCES, INC. PROTECTION ONE, INC.
Signature:/s/ Rita A. Sharpe Signature:/s/ Annette Beck
By: Rita A. Sharpe By: Annette Beck
Title: Vice President Shared Services Title: President
Date: Date: October 29, 1999
<PAGE>
Attachment A
to Exhibit 3
DESCRIPTION HOURLY RATE
Clerical $24
Staff $38
Senior Staff $55
Manager $66
Director $82
Executive Director $95
<PAGE>
EXHIBIT 4
This Exhibit 4 is incorporated as of October 14, 1999 ("Exhibit 4 Effective
Date") to that certain Service Agreement ("Service Agreement") made and entered
into as of the 3rd day of May 1999 ("Effective Date") by and between WESTERN
RESOURCES, INC., a Kansas corporation ("Western"), and PROTECTION ONE, INC., a
Delaware corporation ("Protection One"). For purposes of this Exhibit 4, the
term "Agreement" means, and is limited to, the Service Agreement together with
this Exhibit 4.
Section 1. SERVICES.
Western will, as more specifically set forth in this Exhibit 4,
provide, or cause to be provided, SSMS to one or more Client Group Members.
Unless expressly indicated otherwise, all references to Sections and subsections
in this Exhibit 4 are references to such respective Sections and subsections in
this Exhibit 4.
Generally. Western shall cause the Shared Services Management Services
("SSMS") to be provided upon Protection One's reasonable request for itself, and
for its more than 50% owned subsidiaries that are identified in Section 3 (each
a "Client Group Member", and, collectively "Client Group").
Certain Definitions.
"Services" has the meaning ascribed to such term in Exhibit 3 to the
Service Agreement.
"Shared Services Management Services" means, and is limited to,
oversight and coordination of the provision of any one or more of the Services
and/or supervision of Protection One employees engaged in providing similar
services.
Additional Services. Additional Services shall be provided only
pursuant to a definitive written agreement, if any, as may be entered into
between Western and Protection One. For purposes of this Exhibit 4, the term
"Additional Services" means services constituted or represented by any material
increase, expansion, or broadening of Western's obligations hereunder, relative
to the SSMS to otherwise be provided hereunder by Western to Client Group.
Protection One, for itself, and for each Client Group Member, and
Western hereby agree, with respect to Additional Services, if any, that
Protection One and Western shall, from time to time, attempt to negotiate in
good faith a mutually agreeable definitive agreement for the performance of such
Additional Services by Western for Protection One and Client Group, as
contemplated by Section 1; provided, except as expressly set forth in this
Exhibit 4, nothing shall be deemed to create any legal obligation of any kind
whatsoever upon any party to enter into any agreement with respect to Additional
Services.
<PAGE>
EXHIBIT 4
Section 2. TERM.
a.Unless terminated pursuant to Section 2(b), this Agreement shall be
effective from the Exhibit 4 Effective Date and shall automatically
terminate upon the earlier of (i) June 30, 2000, unless thereafter
extended by written mutual agreement on a month to month basis, or
(ii) Closing, as defined in the merger agreement dated March 18, 1998
between Western Resources, Inc. and Kansas City Power & Light Company
("Merger Agreement"), of the Merger Agreement.
b. Termination. This Agreement may also terminate
i. at any time by written mutual agreement of the parties; or
ii. upon sixty (60) calendar days prior written notice from one
party to the other stating that party's intent to terminate
this Agreement for "cause." For the purposes of this Agreement,
the term "cause" means, and is limited to, a material breach of
this Agreement by either party which remains uncured more than
30 days after written notice of such breach has been provided.
Section 3. CLIENT GROUP.
For purposes of providing the SSMS described in Section 1, the term
"Client Group" means, and is limited to:
Protection One Alarm Monitoring, Inc. Protection One, Inc.
Security Monitoring Services, Inc. Comsec Narragansett Security, Inc.
Protection One International, Inc. Comsec Sytems, Inc.
P-1 Merger Sub (Del) Network MultiFamily Security
Corporation, Inc.
P-1 Merger Sub (Mass) Protection One Investments, Inc.
Protection One Canada, Inc. Canguard, Inc.
Protection One U.K., Inc. Compagnie Euorpeenne de
Telesecurete, S.A.
CET Benelux, S.A. CET Swisse
CET Technishe Sicherheirsdienste GmbH Eurocontact
Europ Telesecurite Grance Reseau Telesecurite
Actar Aldis
Servelance Electoreque de France Croese Larroch
E.S. Beveliging Protection One Acquisition Holding
Protection One Alarm Monitoring of Corporation, Inc.
Mass, Inc.
<PAGE>
EXHIBIT 4
Section 4. CONSIDERATION.
(a) Subject to Sections 4(b), (c), (d), and (e) Protection One shall cause
to be paid in cash to Western,
(i) in exchange for the SSMS, $54,000 (fifty-four thousand
dollars) per month in 1999 and $38,000 (thirty-eight
thousand dollars) per month in 2000 for each month this
Agreement is in effect. In the event this Agreement extends
past 2000, the amount due each month in exchange for SSMS
will be determined by mutual written agreement; and
(ii) Western's out-of-pocket costs including without limitation,
travel, lodging meals, long distance charges and overnight
mail as itemized on a statement.
Any amount due under Section 4 shall be paid by the 10th calendar day
of the month coinciding with or next following the date on which Protection One
receives from Western a statement itemizing such amounts due.
(b) Each of the parties hereby agrees that, notwithstanding anything to
the contrary in this Agreement, if Western determines during the term of this
Agreement that the aggregate amount paid or payable as of such determination by
Protection One under Section 4(a) is less than 90% (ninety percent) of the
actual costs incurred and as documented by Western in providing the related
SSMS, then the amount payable by Protection One for SSMS provided after such
determination shall be automatically increased as described in Section 4(c).
(c) The amount payable by Protection One for SSMS shall be increased,
if at all, as contemplated by Section 4(b), such that the amount then payable by
Protection One for SSMS provided after any such determination is at least 90%
(ninety percent) of the actual costs incurred by Western in providing SSMS under
this Agreement after such determination.
(d) Any change in the organizational structure of either Western or
Protection One which also results in a change of Services contrary to this
Agreement, will result in negotiations to determine the proper payable amount in
light of those changes.
(e) Notwithstanding anything to the contrary in this Exhibit 4, in no
event shall the aggregate amount payable by Protection One under Section 4
exceed $1.5 million (one million five hundred thousand dollars).
<PAGE>
EXHIBIT 4
Unless otherwise agreed to in writing all payments shall be made by
wire transfer to the account identified immediately below.
Bank of America, Dallas, Texas
Western Resources, Inc.
Acct # 375-095-4775
Routing No. 111000012
IN WITNESS WHEREOF, the parties have executed this Exhibit 4 on the day
and year first above written.
WESTERN RESOURCES, INC. PROTECTION ONE, INC.
Signature:/s/ Rita A. Sharpe Signature:/s/ Annette Beck
By: Rita A. Sharpe By: Annette Beck
Title: Vice President Shared Services Title: President
Date: Date: October 29, 1999
<PAGE>
September 16, 1999
Mr. Marc Byron
Chief Executive Officer
Paradigm Direct LLC
Two Executive Drive
Fort Lee, NJ 07024
RE: LETTER OF INTENT
Dear Marc:
This is to set forth the letter of intent between Protection One Alarm
Monitoring, Inc., 600 Corporate Pointe, Suite 1200, Culver City, California
90230 (herein "Protection One") and Paradigm Direct, LLC, Two Executive Drive,
Fort Lee, New Jersey 07024 (herein "Paradigm") with respect to the proposed
marketing relationship which will be memorialized in a more comprehensive and
final agreement ("Marketing Agreement') between Protection One and Paradigm.
However, in order to allow the parties to commence a pilot program, we have
committed to putting forth our intentions in this letter.
1. Name: Paradigm would conduct business under the Marketing Agreement
under the name Protection One Marketing Services ("POMS").
2. Term: The term of the Marketing Agreement would be for three years (each
referred to herein as a "Marketing Year") following the completion of the Pilot
Program as described below. The first Marketing Year would start following
completion of the Pilot Program, which would be such time as Paradigm has
delivered 2,500 accounts to Protection One; Paradigm would use its best efforts
to produce these first 2,500 sales within the 5 month time frame or sooner.
3. New Accounts: Protection One currently anticipates that it could accept up to
50,000 new accounts during the first year. Protection One would pay Paradigm
$775.00 per installed account with monthly recurring revenue of $32.95 per month
and meeting the criteria set forth in the Marketing Agreement ("Qualified
Account(s)"). A sample of customary account criteria for installed accounts is
attached to this letter as Exhibit A, and Exhibit A shall be the required
account criteria during the Pilot Program. No later than ninety days prior to
the end of the first Marketing Year the parties would agree on the targeted
number of sales, the minimum monthly recurring revenue per account and the
amount to be paid for those sales for the second Marketing Year. The same
process would occur with respect to the third Marketing Year.
4. Termination: Protection One would be free to terminate the agreement in the
event the Pilot Program is not concluded within 5 months from the
effective date of this letter of intent.
<PAGE>
Marc Byron, Letter of Intent
September 16, 1999, p.2
Additionally, Protection One would be free to cancel the agreement after the
first year in any of the following circumstances:
Paradigm does not deliver the targeted number of accounts for the previous
Marketing Year (or any lesser minimum established by Protection One),
subject to a 10% cushion for the targeted number, or
in the event attrition on accounts delivered by Paradigm exceeds by 25% or
greater, that of a statistically valid random sample of Protection
One's traditional dealer business over a similar period of time, or
in the event either Marc Byron or David Graf are no longer employees of
either Paradigm or an organization that owns a controlling interest in
Paradigm; or are no longer actively involved in the management of POMS
or the program created by the Marketing Agreement.
Management Fee: Upon signing of this letter of intent, Paradigm will bill
Protection One in full for a $1million management fee, which will constitute
payment in full for all services provided by Paradigm during June, July and
August of 1999. Protection One will pay the management fee upon the sooner of
the signing of the Marketing Agreement or thirty (30) days following the signing
of this Letter of Intent. The parties intend to enter into the Marketing
Agreement no later than the end of September, and earlier if possible.
6. Pre-payment of Pilot Programs: Protection One would prepay Paradigm for the
2,500 Pilot Program Qualified Accounts in the amount of $856.70 per account, or
an aggregate of $2,141,750. One-half of this amount would be billed in November
of 1999 and the balance would be billed in January of 2000. These invoices would
be due net 30 days. In the event the program is terminated as provided for
above, and the 2500 Pilot Program accounts have not been delivered by Paradigm,
then Protection One shall be entitled to a refund of the full purchase price of
$856.70 for each such Qualified Account less than 2500, that is delivered to
Protection One. Such refund would be due net 30 days from termination of the
program.
7. Continuing Fees: Protection One would pay Paradigm $20 for each account that
remains an account in good standing (paid through the term) for each twelve
month period of time for the life of the account, regardless of whether or not
the Marketing Agreement is in effect. Protection One would provide a list of
such active and current accounts to Paradigm at the end of each twelve month
period, and Paradigm will bill Protection One for those accounts for which the
$20 payment is due. Provided that the Marketing Agreement remains in
<PAGE>
effect and Paradigm is not in breach of any of the terms thereof, Protection One
would allow a limited-term grace period (to be defined in the Marketing
Agreement) following the expiration of each year, for the accounts to become
current. If upon the expiration of such grace period, such accounts become
current, then Paradigm would be entitled to the $20 payment for such account.
Notwithstanding anything to the contrary contained in this section, in the event
the Marketing Agreement is terminated,
Marc Byron, Letter of Intent
September 16, 1999, p.3
Protection One would have the option to make a one time lump sum payment of
$75.00 per account at the time of termination in lieu of any further $20
obligations. Additionally, Paradigm would have the option to request a one time
lump sum payment of $60.00 per account at the time of termination in lieu of any
further $20 obligations, provided, however, that such lump sum payment does not
cause Protection One to default on its debt covenants. Payment of the lump
payment would be due within 30 days of the effective time of termination.
8. Overhead: Protection One would pay Paradigm, for the Pilot Period and the
First Marketing Year, the Overhead, plus 10%, for the marketing personnel
reallocated from Protection One to Paradigm/POMS. For the purposes of this
letter of intent, "Overhead" is defined as current salary plus benefits,
however, the 10% mark up shall apply to base salaries only. Ninety days prior to
the end of the first year and similarly in each rolling twelve month period,
Paradigm and Protection One would agree upon the appropriate employee headcount
that Protection One will reimburse to Paradigm (plus the 10% mark-up) for the
succeeding year. Paradigm would have sole discretion as to whether or not to
continue the employment of any persons whose Overhead is not reimbursed by
Protection One. Paradigm would conduct normal course of business personnel
reviews every six months for each employee to determine appropriateness for
raises, bonuses, new assignments or other normal course of business review
procedures. The Marketing Agreement would include a specific listing of all
personnel and salaries at that time who will be transitioned to Paradigm/POMS,
and also would include some specific benchmarks for salary increases and
benefits. Those reallocated employees who would have been eligible had they
remained Protection One employees, will be eligible for participation in
Protection One's short term incentive plans for 1999 and 2000, provided,
however, such employees will be subject to the same criteria for pay out under
those plans as regular Protection One employees. Additionally, for those
reallocated employees who have been awarded stock options under Protection One's
stock option or long term incentive plans, continuing employment with POMS shall
be treated as continuing employment with Protection One for the purpose of
determining vesting under those plans. The reallocation of personnel will occur
upon signing of this Letter and Overhead charges will accrue as of that date.
Protection One shall pay the Overhead payments monthly, in advance, with the
first payment, including sums incurred prior to such date, being due upon
signing of the Marketing Agreement.
9. Leads Management: Paradigm would generate qualified leads for sale to
<PAGE>
Protection One. In order to qualify for sale, a lead must be (a) subject to
taped verification of customer's agreement to a sales appointment; (b) within
the service territory of Protection One, as amended from time to time; (c)
credit scored at a minimum of 600 FICO score. Protection One's service territory
will be defined in the Marketing Agreement but would generally be described as a
geographic territory within a certain radius of existing Protection One
operations facilities. Paradigm would sell the qualified leads to Protection One
for $115.00 each. Payment would be due net 30. Leads generated during the Pilot
Period will be subject to the terms of this paragraph.
Marc Byron, Letter of Intent
September 16, 1999, p.4
10. Miscellaneous:
A) Agency and consulting fees: Any agency or consultancy fees sought to be
reimbursed by Paradigm from Protection One would require pre-approval in
writing. Protection One would establish in advance a minimum budget per
quarter for such expenses.
B) Paradigm would submit a plan for monthly sales. In the event Paradigm
wishes to exceed that forecast by more than 20%, Paradigm would obtain
prior consent in writing from Protection One.
C) ADEMCO rebate: Protection One would retain the rebate in full.
D) Management of dealer program: Protection One would retain management of
its dealer program.
E) Credit scoring: The Marketing Agreement would contain credit scoring
criteria for POMS new customers, with a floor of FICO 600 or the
equivalent. POMS would obtain Protection One's prior written approval
before marketing to the sub 600 marketplace.
F) The Marketing Agreement would provide a budget for certain specified
direct expenses incurred by POMS to be billed directly to Protection One
and paid net 30 days. 90 days prior to the end of each year of the
Marketing Agreement, a budget for such expenses would be provided by POMS
to Protection One for approval.
G) The Marketing Agreement shall contain such indemnities as are customary
to contracts of that type and during the Pilot Period, the parties agree
that each of them shall hold harmless and indemnify the other and each of
their parent, subsidiary, or affiliated companies and their officers,
directors, shareholders, employees, attorneys and agents, from all claims,
demands, causes of action and liabilities of every kind or nature,
including reasonable attorneys fees, arising out of or related to this
Letter or the Marketing Agreement, asserted by any past, present or future
officer, director, shareholder, employee,
<PAGE>
attorney, agent or creditor of the indemnifying party, any of such party's
affiliated companies, any prospective or actual customer of the services
contemplated by this letter, and any other third parties, except any such
claims, demands, causes of action or liabilities arising solely out of the
action or inaction of such party seeking indemnification.
H) Paradigm agrees that for as long as this Letter and the Marketing
Agreement are in effect, it will not enter into any marketing or other
relationship with any other security alarm service company or other
competitor of Protection One offering the same or similar services to
those of Protection One. Additionally, the Marketing Agreement will
contain provisions customary in the industry regarding solicitation of
customer accounts.
<PAGE>
Marc Byron, Letter of Intent
September 16, 1999, p.5
I) Each party agrees that it will keep the terms of this Letter and the
Marketing Agreement confidential and will only disclose the details
thereof to those persons associated with each party that have a need to
know or as necessary to comply with applicable law. The Marketing
Agreement will contain such further terms regarding confidentiality and
disclosure as are agreed to by the parties. Neither party shall make any
press releases concerning the subject matter of this Letter or the
Marketing Agreement without the express written consent of the other
party.
11. Approvals: Except as specifically set forth in section 12 below, the
transactions contemplated by this letter of intent are subject to:
the approval of the transactions contemplated hereby by the Boards of
Directors of each party, and,
the negotiation, execution and delivery of the Marketing Agreement by
Protection One and Paradigm upon mutually agreeable terms and
conditions, and
theapproval and or licensing as may be required by any governmental
agency or administrative body necessary to lawfully consummate the
transactions contemplated hereby.
12. Failure to Agree: In the event the Marketing Agreement is not entered into
by December 31, 1999 for any reason, the following shall occur:
Paradigm shall be entitled to retain the $1,000,000 management fee,
Protection One shall reimburse Paradigm for each Pilot Period account
delivered to Protection One during such period at the rate set forth in
paragraph 6 above,
<PAGE>
Protection One shall reimburse Paradigm for each qualified lead delivered
to Protection One during such period at the rate set forth in paragraph
9 above,
Thepersonnel reallocated to POMS would return to Protection One
employment, and accrued but unpaid Overhead, if any, would be paid to
Paradigm.
Other than as set forth in A, B, C and D above, neither party shall have
any further obligation to the other.
IN WITNESS WHEREOF, this letter of intent is entered into by each of
the parties as set forth below, to be effective as of September 15, 1999.
Protection One Alarm Monitoring, Inc. Paradigm Direct, LLC
By:/s/ Annette Beck By:/s/ Marc Byron
Title: President & COO Title: CEO
<PAGE>
Marc Byron, Letter of Intent
September 16, 1999, p.6
EXHIBIT A
INSTALLED CUSTOMER ACCOUNT REQUIREMENTS
Each Customer Account offered to Protection One must comply with the following:
theinstallation of the alarm system to be installed pursuant to the
applicable Dealer Contract and P-ONE Contract shall be completed and
the alarm system shall be fully operational, capable of being monitored
by Protection One's monitoring facility, and capable of being billed
for monitoring and repair services by Protection One, with Protection
One having a reasonable expectation of payment therefor;
Protection One shall have received, in it's reasonable judgment, a
satisfactory result from it's telephone survey to the Customer;
the Customer Account shall have met the criteria set forth in the
definition of Customer Account;
alloriginal documentation (including monitoring codes, upload codes,
download codes, installer codes and programming codes) shall have been
delivered to Protection One;
thealarm system shall have sent test signals to Protection One's
monitoring facility in a manner reasonably acceptable to Protection
One;
the Customer shall have paid or financed: (i) the complete sales price
for the alarm system or (ii) the complete installation and labor
charges for a non-sold system;
theCustomer shall have met Protection One's minimum credit requirements
as set forth in the Letter of Intent dated September 15, 1999, at the
time such Customer's credit score was run by Paradigm; and
theinstallation of the alarm system shall be compliant with the standard
as set forth in the P-ONE Installation Manual.
Protection One, Inc.
Re: Form 10-Q Report for the quarter ended September 30, 1999.
Gentlemen/Ladies:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
We have been informed that, as of July 1, 1999, Protection One, Inc. (the
Company) changed from the straight-line method of accounting for amortizing
customer acquisition costs for its North America and Europe customer account
pools to a declining balance (accelerated) method. According to the management
of the Company, this change was made to more closely match future amortization
cost with the estimated revenue stream from these assets.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
We have not audited the application of this change to the financial statements
of any period subsequent to December 31, 1998. Further, we have not examined and
do not express any opinion with respect to your financial statements for the
three and nine months ended September 30, 1999.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at September 30, 1999, and the Statement of Income for the nine months
ended September 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,101
<SECURITIES> 9,617
<RECEIVABLES> 94,416
<ALLOWANCES> 26,484
<INVENTORY> 10,976
<CURRENT-ASSETS> 218,583
<PP&E> 82,249
<DEPRECIATION> 22,578
<TOTAL-ASSETS> 2,605,665
<CURRENT-LIABILITIES> 238,702
<BONDS> 824,032
0
0
<COMMON> 1,269
<OTHER-SE> 1,287,809
<TOTAL-LIABILITY-AND-EQUITY> 2,605,665
<SALES> 452,480
<TOTAL-REVENUES> 452,480
<CGS> 132,969
<TOTAL-COSTS> 132,969
<OTHER-EXPENSES> (71)
<LOSS-PROVISION> 16,933
<INTEREST-EXPENSE> 64,334
<INCOME-PRETAX> (71,060)
<INCOME-TAX> (17,615)
<INCOME-CONTINUING> (53,445)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,445)
<EPS-BASIC> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
