<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996
Commission file number 0-24510
HOLMES PROTECTION GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1070719
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
440 Ninth Avenue, New York, New York 10001-1695
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(212) 760-0630
------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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 the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-------- ---------
Number of shares of Common Stock, par value $.01 per share, outstanding as of
August 13, 1996: 4,459,257.
<PAGE>
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions: cancellation rates of subscribers;
competitive factors in the industry, including additional competition from
existing competitors or future entrants to the industry; social and economic
conditions; local, state and federal regulations; changes in business strategy
or development plans. The Company's indebtedness; quality of management;
availability, terms and deployment of capital; business abilities and judgment
of personnel; availability of qualified personnel; and other factors.
2
<PAGE>
Part 1 - Financial Information
Item 1. Financial Statements
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted, except earnings per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 12,191 $ 12,539 $ 24,483 $ 25,123
Cost of sales 6,380 6,384 12,809 12,563
Selling, general and administrative 3,649 4,134 6,844 7,760
Depreciation and amortization 2,769 2,576 5,432 5,095
-------- -------- -------- --------
12,798 13,094 25,085 25,418
Income (loss) from operations (607) (555) (602) (295)
Other income (expense) -- (17) 11 (13)
Interest expense, net (134) (158) (318) (365)
-------- -------- -------- --------
Income (Loss) before income taxes and
cumulative effect of change
in accounting principle (741) (730) (909) (673)
Provision for income taxes (258) (85) (173) (33)
-------- -------- -------- --------
Income (Loss) before cumulative
effect of change in
accounting principle (483) (645) (736) (640)
Cumulative effect of change in accounting
principle, net of income taxes of $1,942 -- -- -- 2,477
-------- -------- -------- --------
Net Income (Loss) $ (483) $ (645) $ (736) $ 1,837
======== ======== ======== ========
Earnings (Loss) per common share:
Earnings (Loss) before cumulative effect
of change in accounting principle $ (0.11) $ (0.14) $ (0.17) $ (0.14)
Cumulative effect of change in
accounting principle -- -- -- 0.55
-------- -------- -------- --------
Net earnings (loss) per common share $ (0.11) $ (0.14) $ (0.17) $ 0.41
======== ======== ======== ========
Weighted Average Shares Outstanding 4,459 4,459 4,459 4,459
======== ======== ======== ========
</TABLE>
(See accompanying notes).
3
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 539 $ 435
Short-term investments - 2,043
Accounts receivable, less allowance for
doubtful accounts of $1,097 in 1996
and $1,340 in 1995 3,948 4,997
Inventories 1,756 1,923
Prepaid expenses and other 2,597 3,320
------------ -----------
Total current assets 8,840 12,718
------------ -----------
FIXED ASSETS, net 45,516 45,231
SUBSCRIBER CONTRACTS, at cost, less accumulated
amortization of $23,814 in 1996 and
$22,522 in 1995 17,602 18,894
TRADENAMES, less accumulated amortization of
$1,984 in 1996 and $1,875 in 1995 4,137 4,234
OTHER ASSETS 506 552
------------ -----------
$ 76,601 $ 81,629
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ - $ 943
Current maturities of long-term debt 2,468 2,497
Accounts payable and accrued expenses 7,640 10,110
Deferred revenue 3,007 2,664
Customer deposits 1,901 1,750
------------ -----------
Total current liabilities 15,016 17,964
------------ -----------
LONG-TERM LIABILITIES:
Long-term debt 3,668 4,862
Other long-term liabilities 684 834
Deferred income taxes 10,297 10,297
------------ -----------
Total long-term liabilities 14,649 15,993
------------ -----------
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000
authorized; none outstanding - -
Common stock, $0.01 par value; 12,000 authorized
shares 4,466 issued in 1996 and 1995 45 45
Additional paid-in capital 120,763 120,763
Accumulated deficit (70,924) (70,188)
Minimum pension liability adjustment (2,863) (2,863)
------------ -----------
47,021 47,757
Less- Treasury stock - 7 shares in 1996 and
1995 at cost (85) (85)
------------ -----------
Total shareholders' equity 46,936 47,672
------------ -----------
$ 76,601 $ 81,629
============ ===========
</TABLE>
(See accompanying notes.)
4
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1996 1995
------- -------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (736) $ 1,837
Adjustments to reconcile net income (loss) to cash provided by
operating activities -
Depreciation and amortization 5,432 5,095
Provision for doubtful accounts (58) 135
Cumulative effect of change in accounting principle -- (2,477)
Deferred income taxes (273) (133)
Changes in operating assets and liabilities -
Decrease (increase) in accounts receivable 1,107 (49)
Decrease (increase) in inventories 167 (18)
Decrease in prepaid expenses and other current assets 737 68
Decrease in accounts payable and accrued expenses (1,811) (890)
Increase (decrease) in customer deposits 151 (324)
Increase in deferred revenue 343 295
Decrease in pension and other liabilities (536) (504)
------- -------
Net cash provided by operating activities 4,523 3,035
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (4,296) (3,440)
Purchase of subscriber contracts -- (71)
Purchase of short-term investments -- (4,516)
Maturities of short-term investments 2,043 4,850
Other -- (50)
------- -------
Net cash used by investing activities (2,253) (3,227)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on secured note and other long-term debt (1,223) (1,217)
Payment on short-term borrowings (943) --
------- -------
Net cash used by financing activities (2,166) (1,217)
------- -------
Net increase (decrease) in cash and cash equivalents 104 (1,409)
CASH AND CASH EQUIVALENTS, beginning of period 435 1,409
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 539 $ --
======= =======
CASH PAYMENTS FOR:
Interest $ 337 $ 489
Income taxes $ 111 $ 84
NON CASH INVESTING ACTIVITIES:
Fair value of assets acquired net of cash paid of $50,000 $ -- $ 189
</TABLE>
(See accompanying notes.)
5
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
Note 1
The consolidated statements of income and statements of cash flows for
the six-month periods ended June 30, 1996 and 1995 and the balance
sheet as of June 30, 1996 have been prepared by Holmes Protection
Group, Inc. ("Holmes" or "the Company") without audit. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated results
should be read in conjunction with the audited financial statements and
notes thereto included in the Company's annual report on Form 10-K,
filed with the Securities and Exchange Commission. Results of
operations for six months are not necessarily indicative of the
operating results for the full year. Interim statements are prepared on
a basis consistent with year-end statements.
In the opinion of management, the unaudited interim financial
statements furnished herein include all adjustments necessary for a
fair presentation of the results of the operations of the Company. All
such adjustments are of a normal recurring nature.
Note 2
On March 27, 1995, the Company effected a reverse stock split pursuant
to which one new share of Common Stock, $.01 par value, was exchanged
for every 14 shares of Common Stock, $.25 par value, then issued or
outstanding. In addition, the Company reduced its authorized shares of
preferred stock and common stock from 10,000,000 and 100,000,000 shares
to 1,000,000 and 12,000,000 shares, respectively. All earnings per
share amounts have been adjusted to give effect to the reverse stock
split.
Note 3
Effective January 1, 1995, the Company changed its method of accounting
for installation revenue with respect to the recording of
non-refundable payments received from customers upon the completion of
the installation of Company-owned systems. Previous to this change, the
Company deferred the difference between these payments and estimated
selling costs and amortized such difference over the life of the
non-cancelable customer monitoring and service contract (generally five
years). The Company believes recognizing revenue upon completion of the
installation results in a better matching of revenue and expenses,
better reflects recorded installation revenues with the actual level of
new business activity, and conforms with the dominant practice being
followed by the security alarm industry. The accounting change resulted
in a reduction of net income of $196,000 or $0.04 per share in the
first half of 1995.
Note 4
On July 26, 1996, the Company filed a registration statement with the
Securities and Exchange Commission providing for the issuance of up to
1.15 million shares (including the underwriters' over-allotment option)
of newly issued common stock, the proceeds of such offering will be
used to pursue all or part of its business strategy, including pursuing
strategic acquisitions, expanding its security services product
offerings, establishing a national accounts program, increasing its
sales and marketing efforts and expanding its dealer operations.
6
<PAGE>
Note 5
The Company has entered into commitment letters with two banks pursuant
to which such banks have agreed, subject to the terms and conditions
set forth therein (including, without limitation, negotiation of a
definitive loan agreement), to provide a two-year revolving credit
facility (of up to $25 million) which, following the expiration of such
two-year period, converts into a five-year term loan. Subject to
specified borrowing conditions, up to $12.5 million will become
available for borrowing upon the closing of such credit facility, and
up to an additional $12.5 million will become available upon the
Company's receipt of at least $10 million in net proceeds from the sale
of newly issued common stock by October 31, 1996.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended June 30, 1996 Compared with Three Months Ended June 30, 1995
Revenues declined $.3 million (2.8%) to $12.2 million in the second quarter of
1996 from $12.5 million in the second quarter of 1995. The decline was primarily
attributable to a reduction of $.5 million (5.2%) in monitoring and service
revenue, partially offset by an increase in installation revenue of $.2 million
(8.2%). The decline in monitoring and service revenues is due to an excess of
cancellations over new recurring revenues added to the base by the Company's
sales efforts.
Cost of sales remained constant at $6.4 million in the second quarter of 1996
compared with the comparable period of 1995. In the second quarter of 1996,
selling, general and administrative expenses declined $.5 million (11.7%)
compared to the second quarter of 1995, reflecting the reduced costs from staff
reductions initiated in the fourth quarter of 1995. Depreciation and
amortization expenses increased 7.5% to $2.8 million in the second quarter of
1996 from $2.6 million in the second quarter of 1995. This increase relates
primarily to depreciation expense on additions of Company-owned systems on
subscribers' premises.
Income (loss) from operations was unchanged with a loss of $.6 million in the
second quarter of 1996 compared with the second quarter of 1995, primarily as a
result of reduced selling, general and administrative expenses offset by reduced
revenues and higher depreciation expense as described above.
Income (loss) before cumulative effect of change in accounting principle was a
loss of $.5 in the second quarter of 1996, compared to a loss of $.6 million in
the comparable quarter of 1995.
Six Months Ended June 30, 1996 Compared with Six Months Ended June 30, 1995
Revenues declined $.6 million (2.6%) in the six months ended June 30, 1996 to
$24.5 million from $25.1 million in the six months ended June 30, 1995. The
decline was attributable to a reduction in revenues of $1.0 million from the
Company's monitoring and service operations relating to the cancellation of
annual recurring revenues in excess of new sales. The annual recurring revenue
base declined from $36.5 million at June 30, 1995 to $34.3 million at June 30,
1996. The recurring revenue base was $35.5 million at December 31, 1995. The
decrease in recurring and service revenue was partially offset by $.4 million
increase in installation revenue and other revenues associated with the One
Service business, acquired March 27, 1995.
Cost of sales increased 2.0% from $12.6 million for the six months ended June
30, 1995 to $12.8 million for the comparable period of 1996, due primarily to
the One Service business. Selling, general and administrative expenses were $6.8
million for the six months ended June 30, 1996 compared to $7.8 million for the
same period of 1995, reflecting the reduced costs from staff reductions
initiated in the fourth quarter of 1995. Depreciation and amortization expense
increased to $5.4 million for the six months ended June 30, 1996 compared to
$5.1 million for the comparable period of 1995. This increase relates primarily
to depreciation expense on additions of Company-owned systems on subscribers
premises.
8
<PAGE>
Income (loss) from operations reflected a loss of $.6 million for the six months
ended June 30, 1996 compared to $.3 million for the same period in 1995,
primarily as a result of decreased revenue and increased depreciation expense,
offset by lower selling, general and administrative expenses, as described
above.
Income (loss) before cumulative effect of change in accounting principle was a
loss of $.7 million for the six months ended June 30, 1996 compared to a loss of
$.6 million for the six months ended June 30, 1995. The Company's tax benefit in
each period reflects the minimum capital tax accrual plus a proportionate
estimate of deferred federal and state income tax benefits that were based on
the full years forecasted pre-tax income in accordance with generally accepted
accounting principles.
Liquidity and Capital Resources
Six Months Ended June 30, 1996
Cash and cash equivalents increased by $.1 million from $.4 million to $.5
million during the six months ended June 30, 1996. Net cash provided by
operating activities was $4.5 million, offset by cash utilized by investing
activities of $2.2 million and cash utilized by financing activities (debt
repayment) of $2.2 million.
Net cash provided by operating activities consisted primarily of cash provided
by sales of electronic security services ($4.7 million), offset by a decrease in
accounts payable and accrued expense ($1.8 million), an increase in prepaid
expenses and other current assets ($.7 million), a decrease in accounts
receivable ($1.1 million), and an increase in deferred revenue ($.3 million).
Net cash used in investing activities consisted primarily of the additions to
Company-owned equipment on subscribers' premises and other fixed assets, offset
by maturities of short-term investments.
Net cash used by financing activities of $2.2 million during this period
consisted primarily of principal repayments under the Company's bank term loan
($1.1 million) and repayments of short-term borrowings of $1.0 million from a
margin account which was secured against the value of securities in the
Company's short-term investment account.
Future Commitments and Cash Requirements
Liquid assets available to the Company as of June 30, 1996 included cash and
cash equivalents of $.5 million.
9
<PAGE>
In 1993, the Company entered into a loan agreement with NatWest Bank N.A. (the
"Bank") providing for a $9 million, five-year term note and a $3 million
revolving loan facility. The Company is currently unable to draw down any
amounts under the loan agreement, as the Bank, in November 1995, informed the
Company that there would be no further extensions of credit. The Company has
entered into commitment letters with two other banks pursuant to which such
banks have agreed, subject to the terms and conditions set forth therein
(including, without limitation, negotiation of a definitive loan agreement), to
provide a two-year revolving credit facility of up to $25 million (the "Credit
Facility") which, following the expiration of such two-year period, converts
into a five-year term loan. Subject to specified borrowing conditions, up to
$12.5 million will become available for borrowing upon the closing of such
credit facility, and up to an additional $12.5 million will become available
upon the Company's receipt of at least $10 million in net proceeds from the sale
of newly issued common stock by October 31, 1996. However, there can be no
assurance as to the availability of such financing or the acceptability of the
terms of such financing to the Company.
On April 4, 1995, the Company entered into a ten-year information technology
services agreement, as amended (the "Outsourcing Agreement"), with PremiTech
Corporation ("PremiTech"), a subsidiary of EDS. The Outsourcing Agreement
provides for PremiTech to manage the Company's technological infrastructure,
perform certain of the Company's administrative functions, and assist in the
consolidation of the Company's central monitoring facilities. For ongoing
services during the ten-year term of the agreement, the Company is obligated to
pay PremiTech a total of $47.7 million in equal monthly installments aggregating
$4.8 million per year, subject to certain adjustments. In addition, the Company
is obligated to pay PremiTech a total of $3.3 million for its consolidation
activities, of which $500,000 was paid in 1995, $550,000 was paid during the
first half of 1996 and the balance ($2.3 million), which was due as of August 1,
1996, is anticipated to be paid upon the closing of the Credit Facility. As of
June 30, 1996, with respect to the consolidation activities, only payments made
to date have been recorded in the Company's financial statements.
On July 26, 1996, the Company filed a registration statement with the Securities
and Exchange Commission providing for the issuance of up to 1.15 million shares
(including the underwriters' over-allotment option) of newly issued common
stock, the proceeds of such offering will be used to pursue all or part of its
business strategy, including pursuing strategic acquisitions, expanding its
security services product offerings, establishing a national accounts program,
increasing its sales and marketing efforts and expanding its dealer operations.
The Company believes that net cash provided by operations, together with
potential financing from banks or other financial institutions, should be
sufficient to meet its financial and operating obligations for the foreseeable
future, assuming there are no material adverse changes in its business or
business environment.
In the course of its business, the Company plans on-going annual capital
expenditures for Company-owned alarm equipment installed at subscriber premises.
Additionally, the Company continues to invest in the replacement and
modernization of the equipment utilized in its central monitoring activities and
associated security services. All such capital expenditures will require
substantial financial resources which are expected to be provided by internally
generated funds and, as necessary, supplemental funding from other sources.
10
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30, 1996.
11
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLMES PROTECTION GROUP, INC.
----------------------------------
(Registrant)
Date: August 14, 1996 /s/ George V. Flagg
----------------------------------
George V. Flagg
President and Chief Executive Officer
Date: August 14, 1996 /s/ Lawrence R. Irving
----------------------------------
Lawrence R. Irving
Vice President - Finance
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HOLMES
PROTECTION GROUP, INC. SECOND QUARTER FORM 10-Q AND IS QUALIFED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 539
<SECURITIES> 0
<RECEIVABLES> 5,045
<ALLOWANCES> 1,097
<INVENTORY> 1,756
<CURRENT-ASSETS> 8,840
<PP&E> 118,179
<DEPRECIATION> 72,663
<TOTAL-ASSETS> 76,601
<CURRENT-LIABILITIES> 15,016
<BONDS> 3,668
0
0
<COMMON> 45
<OTHER-SE> 46,891
<TOTAL-LIABILITY-AND-EQUITY> 76,601
<SALES> 3,402
<TOTAL-REVENUES> 24,483
<CGS> 2,797
<TOTAL-COSTS> 12,809
<OTHER-EXPENSES> 12,276
<LOSS-PROVISION> (58)
<INTEREST-EXPENSE> 318
<INCOME-PRETAX> (909)
<INCOME-TAX> (173)
<INCOME-CONTINUING> (736)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (736)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
