<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 QUARTERLY PERIOD ENDED SEPTEMBER 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
November 13, 1996: 5,828,062.
<PAGE>
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All 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; availability, terms and deployment of capital; availability of
qualified personnel; and other factors detailed in the Company's Prospectus
dated September 25, 1996 filed with the Securities and Exchange Commission
pursuant to Rule 424(b).
2
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
- ---------------------------- --------
<S> <C>
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the three-month and nine-month
periods ended September 30, 1996 and 1995........................................................4
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995.......................5
Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 1996 and 1995......................................................................6
Notes to Financial Statements....................................................................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................9
PART II OTHER INFORMATION
- -------------------------
Item 2. CHANGES IN SECURITIES............................................................................12
Item 6. EXHIBITS.........................................................................................12
Signatures.......................................................................................13
</TABLE>
3
<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 Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Monitoring and service $ 8,745 $ 9,440 $ 26,757 $ 28,495
Installation 3,069 2,133 7,551 6,400
Franchise royalties, product sales and other 1,223 996 3,212 2,797
--------- ---------- ---------- ---------
Total revenues 13,037 12,569 37,520 37,692
--------- ---------- ---------- ---------
COST OF SALES:
Monitoring and service 4,394 4,710 13,263 13,855
Installation 1,767 989 3,884 2,981
Franchise royalties, product sales and other 1,079 1,083 2,902 2,509
--------- ---------- ---------- ---------
Total cost of sales 7,240 6,782 20,049 19,345
--------- ---------- ---------- ---------
Selling, general and administrative 4,030 4,389 10,874 12,149
Depreciation and amortization 2,638 2,589 8,070 7,684
--------- ---------- ---------- ---------
13,908 13,760 38,993 39,178
Income (loss) from operations (871) (1,191) (1,473) (1,486)
Other income (expense) 136 44 147 31
Interest expense, net (144) (181) (462) (546)
--------- ---------- ---------- ---------
Income (Loss) before income taxes and cumulative effect of change
in accounting principle (879) (1,328) (1,788) (2,001)
Provision for income taxes (167) (288) (340) (321)
--------- ---------- ---------- ---------
Income (Loss) before cumulative effect of change in
accounting principle (712) (1,040) (1,448) (1,680)
Cumulative effect of change in accounting principle, net of income
taxes of $1,942 - - - 2,477
--------- ---------- ---------- ---------
Net Income (Loss) $ (712) $ (1,040) $ (1,448) $ 797
========= ========== ========== =========
Earnings (Loss) per common share:
Earnings (Loss) before cumulative effect of change in accounting
principle $ (0.15) (0.23) $ (0.32) $ (0.37)
Cumulative effect of change in accounting principle - - - 0.55
----------- ---------- ---------- --------
Net earnings (loss) per common share $ (0.15) (0.23) $ (0.32) 0.18
=========== ========== ========== ========
Weighted Average Shares Outstanding 4,801 4,459 4,596 4,459
=========== ========== ========== ========
</TABLE>
(See accompanying notes.)
4
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,478 $ 435
Short-term investments - 2,043
Accounts receivable, less allowance for doubtful accounts of
$1,197 in 1996 and $1,340 in 1995 5,414 4,997
Inventories 2,154 1,923
Prepaid expenses and other 3,465 3,320
---------- ---------
Total current assets 22,511 12,718
---------- ---------
FIXED ASSETS, net 46,147 45,231
SUBSCRIBER CONTRACTS, at cost, less accumulated amortization
of $24,460 in 1996 and $22,522 in 1995 16,956 18,894
TRADENAMES, less accumulated amortization of $2,094 in 1996 and
$1,875 in 1995 4,107 4,234
OTHER ASSETS 508 552
---------- ---------
$ 90,229 $ 81,629
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ - $ 943
Current maturities of long-term debt 178 2,497
Accounts payable and accrued expenses 6,630 10,110
Deferred revenue 2,784 2,664
Customer deposits 2,422 1,750
---------- ---------
Total current liabilities 12,014 17,964
---------- ---------
LONG-TERM LIABILITIES:
Long-term debt 9,166 4,862
Other long-term liabilities 534 834
Deferred income taxes 10,297 10,297
---------- ---------
Total long-term liabilities 19,997 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; 5,835
issued in 1996 and 4,466 issued in 1995 58 45
Additional paid-in capital 133,002 120,763
Accumulated deficit (71,894) (70,188)
Minimum pension liability adjustment (2,863) (2,863)
---------- ---------
58,303 47,757
Less- Treasury stock - 7 shares in 1996 and 1995 at cost (85) (85)
---------- ---------
Total shareholders' equity 58,218 47,672
---------- ---------
$ 90,229 $ 81,629
========== =========
</TABLE>
(See accompanying notes.)
5
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (1,448) $ 797
Adjustments to reconcile net income (loss) to cash provided by
operating activities -
Depreciation and amortization 8,070 7,683
Provision for doubtful accounts (109) 263
Cumulative effect of change in accounting principle - (2,477)
Deferred income taxes (490) (471)
Changes in operating assets and liabilities -
(Increase) decrease in accounts receivable (195) 268
(Increase) decrease in inventories (231) 8
Increase in prepaid expenses and other current assets (148) (358)
Decrease in accounts payable and accrued expenses (2,833) (566)
Increase (decrease) in customer deposits 672 (849)
Increase in deferred revenue 120 133
Decrease in pension and other liabilities (947) (371)
----------- --------
Net cash provided by operating activities 2,461 4,060
----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (6,755) (4,707)
Purchase of subscriber contracts - (104)
Purchase of short-term investments - (4,516)
Maturities of short-term investments 2,043 6,114
Other - (50)
----------- --------
Net cash used by investing activities (4,712) (3,263)
----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations 8,496 -
Net proceeds from sale of common stock 12,252 -
Payments on secured note and other long-term debt (6,188) (1,688)
Payment on other long-term debt (323) (209)
Payment on short-term borrowings (943) -
----------- --------
Net cash provided (used) by financing activities 13,294 (1,897)
----------- --------
Net increase (decrease) in cash and cash equivalents 11,043 (1,100)
CASH AND CASH EQUIVALENTS, beginning of period 435 1,409
----------- --------
CASH AND CASH EQUIVALENTS, end of period $ 11,478 $ 309
========== ========
CASH PAYMENTS FOR:
Interest $ 503 $ 607
Income taxes $ 117 $ 126
NON CASH INVESTING ACTIVITIES:
Fair value of assets acquired net of cash paid of $50,000 $ - $ 189
Capital lease obligations $ - $ 1,033
</TABLE>
(See accompanying notes.)
6
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
Notes to Interim Financial Statements
Note 1 Financial Statements
The consolidated statements of income and statements of cash flows for
the three-month and nine-month periods ended September 30, 1996 and
1995 and the balance sheet as of September 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 the three-month and nine-month periods ended
September 30, 1996 are not necessarily indicative of the operating
results expected 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 Reverse Stock Split
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 Change in Accounting Method
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 $324,000 or $0.07 per share for the
nine months ended September 30, 1995.
7
<PAGE>
Note 4 Credit Agreement
The Company entered into a credit agreement dated as of August 30, 1996
with Merita Bank Ltd. and Bank of Boston Connecticut (together, the
"New Banks") pursuant to which the New Banks have agreed, subject to
the terms and conditions set forth therein, to provide a two-year $25
million revolving credit facility to the Company which converts into a
five-year term loan on September 30,1998 (the "Credit Facility"). At
September 30, 1996, the outstanding balance under the Credit Facility
was $8.5 million. Such funds have been used to pay $4.7 million to
Fleet Bank N.A. (formerly NatWest Bank N.A.), to repay the outstanding
balance under the Term Note and to pay $1.0 million to PremiTech
Corporation ("Premitech") for its consolidation activities under the
information technology services agreement with the Company dated April
4, 1996, with the balance used to meet the Company's working capital
needs. The remaining available proceeds of the Credit Facility will be
used to finance capital expenditures and permitted acquisitions and for
general corporate purposes.
The Credit Facility matures on September 30, 2003 with principal
payments payable in increasing quarterly installments commencing
December 31, 1998. Borrowings under the Credit Facility bear interest,
at the Company's option, at an annual rate equal to either a base rate,
defined as the higher of the prime rate of a specified federal funds
rate, or a specified Eurodollar rate plus, in each case, an applicable
margin which varies with the Company's leverage (the ratio of total
debt to EBITDA less capital expenditures). The Company is obligated to
pay a commitment fee of 1/2% per annum of any undrawn amounts. The New
Banks also received warrants to purchase an aggregate of 166,666 shares
of Common Stock at an initial exercise price of $9.75 per share (the
"New Bank Warrants") and were granted certain registration rights in
connection therewith. Mandatory prepayment of the Credit Facility will
be required under certain conditions.
The Company is subject to certain covenants under the Credit Facility
which include, but are not limited to, ratios of total debt to
recurring monthly revenue, minimum debt service coverage, minimum net
worth, maximum capital expenditures, maximum subscriber attrition rate
(as defined in the Credit Facility), restrictions on additional
indebtedness, certain acquisitions, dividends, investments, mergers and
sale of assets, creation of liens, guarantees and issuance of capital
stock by the Company's subsidiaries.
The Credit Facility is secured by all current and future assets, and
the pledge of the capital stock, of the Company's subsidiaries.
Note 5 Offering
On September 25, 1996 the Company issued 1,265,000 shares of Common
Stock, par value $0.01 per share, in a public offering for net proceeds
of approximately $12.3 million. The Company intends to use the net
proceeds from the sale 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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended September 30, 1996 Compared with Three Months Ended September
30, 1995
Revenues increased $.4 million (3.7%) to $13.0 million in the third quarter of
1996 from $12.6 million in the third quarter of 1995. The increase was primarily
attributable to an increase in installation revenues of $.9 million (43.9%) and
an increase in other revenues of $.2 million (22.7%), partially offset by a
reduction of $.7 million (7.4%) in monitoring and service revenue. 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 increased $.4 million (6.8%) to $7.2 million in the third quarter
of 1996 from $6.8 million in the third quarter of 1995. This increase resulted
from costs related to the increased installation and other revenues. In the
third quarter of 1996, selling, general and administrative expenses declined $.4
million (8.2%) compared to the third quarter of 1995, reflecting the reduced
costs from staff reductions initiated in the fourth quarter of 1995.
Depreciation and amortization expenses remained constant at $2.6 million.
Income (loss) from operations reflected a loss of $.9 million for the third
quarter of 1996 compared to a loss of $1.2 million for the same period in 1995,
primarily as a result of reduced selling, general and administrative expenses.
Income (loss) before cumulative effect of change in accounting principle was a
loss of $.7 million in the third quarter of 1996, compared to a loss of $1.0
million in the comparable quarter of 1995.
Nine Months Ended September 30, 1996 Compared with Nine Months Ended September
30, 1995
Revenues declined $.2 million (.5%) in the nine months ended September 30, 1996
to $37.5 million from $37.7 million in the nine months ended September 30, 1995.
The decline was attributable to a reduction in revenues of $1.7 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 $36.0 million at September 30, 1995 to $34.3 million at
September 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 a
$1.5 million increase in installation revenue and other revenues associated with
the One Service business, acquired March 27, 1995.
Cost of sales increased $.7 million (3.6%) from $19.3 million for the nine
months ended September 30, 1995 to $20.0 million for the comparable period of
1996, due primarily to increased installations and to costs relating to the One
Service business. Selling, general and administrative expenses were $10.9
million for the nine months ended September 30, 1996 compared to $12.1 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 $8.1 million for the nine months ended September 30, 1996 compared
to $7.7 million for the comparable period of 1995. This increase relates
primarily to depreciation expense on additions of Company-owned systems on
subscribers' premises.
9
<PAGE>
Income (loss) from operations remained constant reflecting a loss of $1.5
million for the nine months ended September 30, 1996 and September 30, 1995.
Income (loss) before cumulative effect of change in accounting principle was a
loss of $1.4 million for the nine months ended September 30, 1996 compared to a
loss of $1.7 million for the nine months ended September 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 year's forecasted pre-tax income in accordance with
generally accepted accounting principles.
Liquidity and Capital Resources
Nine Months Ended September 30, 1996
Cash and cash equivalents increased by $11.1 million from $.4 million to $11.5
million during the nine months ended September 30, 1996. Net cash provided by
operating activities was $2.5 million and net cash provided by financing
activities was $13.3 million, offset by cash utilized by investing activities of
$4.7 million.
Net cash provided by operating activities of $2.5 million principally consisted
of cash provided by sales of electronic security services, adjusted for non-cash
charges for depreciation and amortization, a decrease in pension and other
liabilities of $.9 million, and an increase in customer deposits of $.7 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 provided by financing activities of $13.3 million during this period
consisted primarily of proceeds from debt obligation of $8.5 million and
proceeds from issuing common stock of $12.3 million , offset by principal
repayments under the Company's bank term loan of $6.2 million, payments on long-
term debt of $.3 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 September 30, 1996 included cash
and cash equivalents of $11.5 million.
10
<PAGE>
In 1993, the Company entered into a loan agreement with Fleet Bank (the "Bank")
providing for a $9 million, five-year term note and a $3 million revolving loan
facility. The Company repaid the entire obligation to the Bank upon entering
into a two-year revolving credit facility of up to $25 million (the "Credit
Facility") with Merita Bank, Ltd. and Bank of Boston Connecticut in August,
1996. Following the expiration of such two-year period, it converts into a
five-year term loan. At September 30, 1996 the outstanding balance under the
Credit Facility was $8.5 million.
On April 4, 1995, the Company entered into a ten-year information technology
services agreement, as amended (the "Outsourcing Agreement"), with PremiTech
Corporation. 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.
On September 25, 1996, the Company issued 1,265,000 shares of Common Stock, par
value $0.01 per share, in a public offering for net proceeds of approximately
$12.3 million. The Company intends to use the net proceeds from the sale 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 its
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.
There can be no assurances that any required additional financing can be
obtained, and if obtained, at reasonable terms.
11
<PAGE>
Part II - Other Information
Item 2. Changes in Securities
See Note 2 and Note 5 in the Notes to Financial Statements in Part I - Financial
Information of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit-27 Financial Data Schedule Worksheet (For SEC Use Only).
(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30, 1996.
12
<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: November 14, 1996 /s/ George V. Flagg
--------------------------------------
George V. Flagg
President and Chief Executive Officer
Date: November 14, 1996 /s/ Lawrence R. Irving
--------------------------------------
Lawrence R. Irving
Vice President - Finance
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 11,478
<SECURITIES> 0
<RECEIVABLES> 6,611
<ALLOWANCES> 1,097
<INVENTORY> 2,154
<CURRENT-ASSETS> 22,511
<PP&E> 120,775
<DEPRECIATION> 74,608
<TOTAL-ASSETS> 90,229
<CURRENT-LIABILITIES> 12,014
<BONDS> 9,166
0
0
<COMMON> 58
<OTHER-SE> 58,160
<TOTAL-LIABILITY-AND-EQUITY> 90,229
<SALES> 6,198
<TOTAL-REVENUES> 37,520
<CGS> 3,804
<TOTAL-COSTS> 20,049
<OTHER-EXPENSES> 18,944
<LOSS-PROVISION> (109)
<INTEREST-EXPENSE> 462
<INCOME-PRETAX> (1,788)
<INCOME-TAX> (340)
<INCOME-CONTINUING> (1,448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,448)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
