<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 MARCH 31, 1997
Commission file number 0-24510
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HOLMES PROTECTION GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1070719
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(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
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(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
May 13, 1997: 5,872,537.
<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 Annual Report
on Form-10K for the fiscal year ended December 31, 1996.
2
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HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
- ---------------------------- --------
Item 1. FINANCIAL STATEMENTS
<S> <C> <C>
Consolidated Statements of Operations for the three-month periods ended
March 31, 1997 and 1996..........................................................................4
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996...........................5
Consolidated Statements of Cash Flows for the three-month periods ended
March 31, 1997 and 1996..........................................................................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 6. EXHIBITS.........................................................................................11
Signatures.......................................................................................12
</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
March 31, March 31,
1997 1996
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REVENUES:
<S> <C> <C>
Monitoring and service $ 9,327 $9,093
Installation 3,022 2,219
Franchise royalties, product sales and other 1,301 980
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Total revenues 13,650 12,292
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COST OF SALES:
Monitoring and service 4,762 4,552
Installation 1,848 972
Franchise royalities, product sales and other 1,125 905
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Total cost of sales 7,735 6,429
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Selling general and administrative 5,336 3,195
Depreciation and amortization 2,668 2,663
Non-recurring charge 1,500 -
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17,239 12,287
Income (Loss) from operations (3,589) 5
Other income (expense) 54 11
Interest expense, net (214) (184)
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Income (Loss) before income taxes (3,749) (168)
Provision (Benefit) for income taxes (1,125) 85
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Net Income (Loss) $ (2,624) $ (253)
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Earnings (Loss) per common share: $ (0.45) $(0.06)
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Weighted Average Shares Oustanding 5,828 4,459
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</TABLE>
(See accompanying notes.)
4
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HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
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(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 179 $ 990
Accounts receivable, less allowance for doubtful accounts of
$967 in 1997 and $973 in 1996 6,172 5,333
Inventories 2,585 2,795
Prepaid expenses and other 2,575 1,871
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Total current assets 11,511 10,989
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FIXED ASSETS, net 47,686 47,198
SUBSCRIBER CONTRACTS, at cost, less accumulated amortization
of $27,575 in 1997 and $25,137 in 1996 22,898 19,650
TRADENAMES, less accumulated amortization of $2,088 in 1997 and
$2,045 in 1996 4,022 4,063
OTHER ASSETS 7,960 7,917
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$ 94,077 $ 89,817
=========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 562 $ 364
Accounts payable and accrued expenses 8,094 7,290
Deferred revenue 3,454 2,693
Customer deposits 2,719 2,813
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Total current liabilities 14,829 13,160
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LONG-TERM LIABILITIES:
Long-term debt 10,785 4,370
Other long-term liabilities 555 555
Deferred income taxes 10,137 11,337
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Total long-term liabilities 21,477 16,262
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SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000 authorized; none outstanding - -
Common stock, $0.01 par value; 12,000 authorized shares; 5,835
issued in 1997 and in 1996 58 58
Additional paid-in capital 133,251 133,251
Accumulated deficit (75,453) (72,829)
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57,856 60,480
Less- Treasury stock - 7 shares in 1997 and 1996 at cost (85) (85)
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Total shareholders' equity 57,771 60,395
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$ 94,077 $ 89,817
=========== ========
</TABLE>
(See accompanying notes.)
5
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
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CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ (2,624) $ (253)
Adjustments to reconcile net income (loss) to cash provided by
operating activities -
Depreciation and amortization 2,668 2,663
Provision for doubtful accounts 15 54
Non-recurring charge 1,500 -
Deferred income taxes (1,200) 35
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable (772) 71
Decrease in inventories 247 83
Increase in prepaid expenses and other current assets (698) (183)
Decrease in accounts payable and accrued expenses (770) (1,081)
(Decrease) increase in customer deposits (94) 136
Increase in deferred revenue 623 646
Decrease in pension and other liabilities (105) (115)
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Net cash (used) provided by operating activities (1,210) 2,056
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (2,223) (2,670)
Acquisition of businesses, net of cash acquired (3,640) -
Maturities of short-term investments - 2,043
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Net cash used by investing activities (5,863) (627)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations 6,500 -
Payments on secured note and other long-term debt - (659)
Payment on other long-term debt (238) -
Payment on short-term borrowings - (943)
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Net cash provided (used) by financing activities 6,262 (1,602)
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Net decrease in cash and cash equivalents (811) (173)
CASH AND CASH EQUIVALENTS, beginning of period 990 435
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CASH AND CASH EQUIVALENTS, end of period $ 179 $ 262
======== ========
CASH PAYMENTS FOR:
Interest $ 170 $ 166
Income taxes $ 205 $ 107
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of notes payable in connection with acquired businesses $ 350 $ -
</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 operations and statements of cash flows
for the three-month periods ended March 31, 1997 and 1996 and the
balance sheet as of March 31, 1997 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-months ended March 31, 1997 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 Outsourcing Agreement Termination
On March 12, 1997, the Company announced that it had reached an
agreement in principle (the "Agreement") with PremiTech to terminate
its outsourcing agreement effective April 1, 1997. Recent changes in
the Company's growth strategy and the sale by PremiTech of its alarm
monitoring business in late 1995 led both parties to re-evaluate the
outsourcing agreement. On April 1, 1997, pursuant to the Agreement, the
Company paid $650,000 in cash and executed a noninterest bearing
promissory note ("Note") in the amount of $1,000,000 payable to EDS in
twenty quarterly installments of $50,000, beginning January 1, 1998.
The Note is secured by an irrevocable letter of credit for $1,000,000.
In addition, the Company agreed to lease certain computer equipment for
a three year term with an option to purchase the equipment at the end
of the lease for the fair market value. The Company has recorded a
pretax charge of $1,500,000 in connection with the Agreement.
Note 3 Acquisitions
In the first quarter of 1997, the Company acquired five alarm companies
for an aggregate purchase price of $3,640,000. These acquisitions were
accounted for using the purchase method of accounting. Accordingly, the
purchase price was allocated based on their estimated values and the
results of operations of the acquired entities have been included in
the accompanying consolidated statements of operations from the
respective dates of the acquisition. The results of operations for
these acquisitions were not significant to the consolidated financial
statements of the Company.
7
<PAGE>
Note 4 Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings
Per Share. This statement establishes standards for computing and
presenting earnings per share (EPS), replacing the presentation of
currently required primary EPS with a presentation of Basic EPS. For
entities with complex capital structures, the statement requires the
dual presentation of both Basic EPS and Diluted EPS on the face of the
statement of operations. Under this new standard, Basic EPS is computed
based on weighted average shares outstanding and excludes any potential
dilution; Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to
issue common stock and is similar to the currently required fully
diluted EPS. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods, and
earlier application is not permitted. When adopted, the Company will be
required to restate its EPS data for all prior periods presented. The
Company does not expect the impact of the adoption of this statement to
be material to previously reported EPS amounts.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
First Quarter 1997 Compared to First Quarter 1996
- -------------------------------------------------
Revenues increased $1.4 million (11.1%) to $13.7 million in the first
quarter of 1997 from $12.3 million in the first quarter of 1996. This increase
was primarily attributable to an increase in installation revenue of $0.8
million (36.2%) from $2.2 million in the first quarter of 1996 to $3.0 million
in the first quarter of 1997. Increased revenues from the One Service business
and growth in the Company's recurring revenue base also contributed to the
increase. The Company's annual recurring revenue base increased from $35.0
million at December 31, 1996 to $36.1 million at March 31, 1997 as a result of
the Company's increased sales efforts and recurring revenues acquired during the
fourth quarter of 1996 and the first quarter of 1997. The recurring revenue base
at March 31, 1996 was $35.2 million.
Cost of sales increased $1.3 million (20.3%) to $7.7 million in the first
quarter of 1997 from $6.4 million for the comparable period of 1996, due
primarily to increased installation costs related to the growth in related
revenue and lower than anticipated margins on customer owned systems. Selling,
general, and administrative expenses increased $2.1 million (67.0%) to $5.3
million from $3.2 million for the same period of 1996. This increase is
primarily related to costs associated with increased sales, marketing and
administrative support as the Company implements its nation-wide growth strategy
including National Accounts. Depreciation and amortization expense remained
constant at $2.7 million in both the first quarter of 1997 and the first quarter
of 1996. Additionally, in the first quarter of 1997, the Company incurred a
non-recurring charge of $1.5 million related to the termination of its
Outsourcing Agreement with PremiTech (See Note 2).
Income (Loss) from operations reflected a loss of $3.6 million for the first
quarter of 1997 compared to income of $5,000 for the first quarter of 1996,
primarily as a result of the investment the Company has made in selling and
marketing costs and the non-recurring charge, as described above.
Liquidity and Capital Resources
Three months Ended March 31, 1997
Cash and cash equivalents decreased by $0.8 million from $1.0 million to $0.2
million during the three months ended March 31, 1997. Net cash provided by
financing activities was $6.3 million, offset by cash utilized by operating
activities of $1.2 million and net cash utilized by investing activities of $5.9
million.
Net cash utilized by operating activities of $1.2 million principally consisted
of cash provided by sales of electronic security services, adjusted for non-cash
charges for depreciation and amortization, a decrease in accounts payable and
accrued expenses ($0.8 million), an increase in prepaid expenses and other
current assets ($0.7 million), and an increase in deferred revenue ($0.6
million).
9
<PAGE>
Net cash used in investing activities consisted primarily of acquisition costs
and the additions to Company-owned equipment on subscribers' premises and other
fixed assets.
Net cash provided by financing activities of $6.3 million during this period
consisted of bank borrowings of $6.5 million, offset by repayments of other long
term debt obligations of $0.2 million.
Future Commitments and Cash Requirements
Liquid assets available to the Company as of March 31, 1997 included cash and
cash equivalents of $0.2 million.
On August 30, 1996, the Company entered into a new credit agreement (the "Credit
Agreement"), amended and restated on December 31, 1996 and subsequently amended
with Merita Bank Ltd. and Bank of Boston Connecticut (together, the "Banks")
pursuant to which the 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, the borrowings pursuant to which would automatically convert into a
five-year term loan on September 30, 1998. The Company is required to comply
with various financial covenants, tests and ratios, including those relating to
(i) ratios of total debt to EBITDA, (ii) ratios of total debt to recurring
monthly revenue, (iii) minimum debt service coverage, (iv) minimum net worth,
(v) maximum capital expenditures and (vi) maximum subscriber attrition rate (as
defined in the Agreement). On March 31, 1997, the outstanding balance under the
Credit Agreement was $10.0 million.
On April 4, 1995, the Company entered into a ten-year, $51 million Outsourcing
Agreement with PremiTech Corporation ("Premitech"), a subsidiary of Electronic
Data Systems Corporation ("EDS"), which provided for PremiTech to assist in the
consolidation of the Company's central monitoring facilities, to manage the
Company's technological infrastructure and to perform certain of the Company's
administrative functions. On March 12, 1997, the Company reached an agreement in
principle (the "Agreement") with Premitech to terminate its Outsourcing
Agreement effective April 1, 1997. As a result, on April 1 1997, the Company
paid $650,000 in cash and executed a noninterest bearing promissory note
("Note") in the amount of $1,000,000 payable to EDS in twenty quarterly
installments of $50,000, beginning January 1, 1998. The Note is secured by an
irrevocable letter of credit for $1,000,000. In addition, the Company agreed to
lease certain computer equipment for a three year term with an option to
purchase the equipment at the end of the lease for the fair market value.
10
<PAGE>
Part II - Other Information
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 March 31, 1997.
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: May 14, 1997 /s/ George V. Flagg
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George V. Flagg
President and Chief Executive Officer
Date: May 14, 1997 /s/ Lawrence R. Irving
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Lawrence R. Irving
Vice President - Finance
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 179
<SECURITIES> 0
<RECEIVABLES> 7,139
<ALLOWANCES> 967
<INVENTORY> 2,585
<CURRENT-ASSETS> 11,511
<PP&E> 124,307
<DEPRECIATION> 76,621
<TOTAL-ASSETS> 94,077
<CURRENT-LIABILITIES> 14,829
<BONDS> 11,347
0
0
<COMMON> 58
<OTHER-SE> 57,713
<TOTAL-LIABILITY-AND-EQUITY> 94,077
<SALES> 2,629
<TOTAL-REVENUES> 13,650
<CGS> 2,261
<TOTAL-COSTS> 7,735
<OTHER-EXPENSES> 8,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (214)
<INCOME-PRETAX> (3,749)
<INCOME-TAX> (1,125)
<INCOME-CONTINUING> (2,624)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,624)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
