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SECURITY NETWORKS, LLC AND SUBSIDIARIES
Consolidated Financial Statements
(Unaudited)
For the Three Months Ended March 31, 2013 and 2012
Contents
| | Page | |||
|---|---|---|---|---|
Independent Auditors' Review Report | F-2 | |||
Consolidated Balance Sheet (unaudited) | F-3 | |||
Consolidated Statements of Operations (unaudited) | F-4 | |||
Consolidated Statement of Member's Equity (unaudited) | F-5 | |||
Consolidated Statements of Cash Flows (unaudited) | F-6 | |||
Notes to Consolidated Financial Statements | F-7 | |||
Independent Auditors' Review Report
The Board of Directors
Security Networks, LLC:
We have reviewed the accompanying consolidated balance sheet of Security Networks, LLC and its subsidiaries as of March 31, 2013, and the related consolidated statements of operations for the three-month periods ended March 31, 2013 and 2012, member's equity for the three-month period ended March 31, 2013, and cash flows for the three-month periods ended March 31, 2013 and 2012.
Management's Responsibility
The Company's management is responsible for the preparation and fair presentation of the interim financial information in accordance with U.S. generally accepted accounting principles; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with U.S. generally accepted accounting principles.
Auditors' Responsibility
Our responsibility is to conduct our reviews in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.
Conclusion
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Dallas, Texas
July 3, 2013
F-2
SECURITY NETWORKS, LLC AND SUBSIDIARIES
Consolidated Balance Sheet
(unaudited)
| | March 31, 2013 | |||
|---|---|---|---|---|
Assets | ||||
Current assets: | ||||
Cash | $ | 1,694,743 | ||
Accounts receivable, net of allowance of $334,092 | 1,368,353 | |||
Accounts receivable other | 436,090 | |||
Parts inventory | 475,115 | |||
Deposits | 103,886 | |||
Prepaid expenses | 412,689 | |||
Total current assets | 4,490,876 | |||
Fixed assets: | ||||
Furniture and fixtures | 337,897 | |||
Computer software and equipment | 3,821,795 | |||
Vehicles | 14,104 | |||
Leasehold improvements | 205,783 | |||
Total fixed assets | 4,379,579 | |||
Accumulated depreciation | (2,417,040 | ) | ||
Total fixed assets, net | 1,962,539 | |||
Other assets: | ||||
Acquired/originated contracts, net of accumulated amortization of $48,862,824 | 217,140,842 | |||
Deferred financing costs, net of accumulated amortization of $3,206,842 | 5,271,937 | |||
Trademarks | 3,600,000 | |||
Goodwill | 54,628,747 | |||
Total other assets | 280,641,526 | |||
Total assets | $ | 287,094,941 | ||
Liabilities and Member's Equity | ||||
Current liabilities: | ||||
Accounts payable | $ | 2,476,820 | ||
Accrued expenses | 738,682 | |||
Accrued interest | 1,075,474 | |||
Deferred revenues | 3,393,843 | |||
Due on acquired contracts—short term | 2,926,292 | |||
Current portion of capital lease obligations | 647 | |||
Total current liabilities | 10,611,758 | |||
Noncurrent liabilities: | ||||
Notes payable | 217,552,872 | |||
Due on acquired contracts—long term | 5,738,794 | |||
Total noncurrent liabilities | 223,291,666 | |||
Commitments and Contingencies | ||||
Total member's equity | 53,191,517 | |||
Total liabilities and member's equity | $ | 287,094,941 | ||
See accompanying notes to consolidated financial statements.
F-3
SECURITY NETWORKS, LLC AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
| | Three months ended March 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2013 | 2012 | |||||
Revenues: | |||||||
Monitoring revenue, retail | $ | 22,548,830 | 16,116,301 | ||||
Monitoring revenue, wholesale | 325,633 | 329,364 | |||||
Service and other | 381,825 | 293,867 | |||||
Total revenues | 23,256,288 | 16,739,532 | |||||
Operating expenses: | |||||||
Monitoring | 1,897,378 | 1,236,204 | |||||
Service and other | 1,903,442 | 1,335,823 | |||||
Selling, general and administrative | 5,910,174 | 4,619,626 | |||||
Amortization of customer accounts | 7,131,447 | 4,869,040 | |||||
Depreciation | 286,176 | 261,479 | |||||
Total operating expense | 17,128,617 | 12,322,172 | |||||
Operating income | 6,127,671 | 4,417,360 | |||||
Other expense: | |||||||
Interest expense (including amortization of deferred financing fees of $435,552 for 2013 and $301,661 for 2012) | 4,881,318 | 3,058,099 | |||||
Other expense | 37,734 | 620 | |||||
Total other income and expense | 4,919,052 | 3,058,719 | |||||
Net income | $ | 1,208,619 | 1,358,641 | ||||
See accompanying notes to consolidated financial statements.
F-4
SECURITY NETWORKS, LLC AND SUBSIDIARIES
Consolidated Statement of Member's Equity
(unaudited)
| | Contributed Capital | Distributions | Accumulated Deficit | Total Member's Equity | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2012 | $ | 56,836,061 | $ | — | $ | (4,951,736 | ) | $ | 51,884,325 | ||||
Adjustment for stock-based compensation | 98,573 | — | — | 98,573 | |||||||||
Net income | — | — | 1,208,619 | 1,208,619 | |||||||||
Balance at March 31, 2013 | $ | 56,934,634 | $ | — | $ | (3,743,117 | ) | $ | 53,191,517 | ||||
See accompanying notes to consolidated financial statements.
F-5
SECURITY NETWORKS, LLC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
| | Three months ended March 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2013 | 2012 | |||||
Cash flows from operating activities: | |||||||
Net income | $ | 1,208,619 | 1,358,641 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation | 286,176 | 261,479 | |||||
Amortization | 7,566,999 | 5,170,701 | |||||
Provision for uncollectible accounts receivable | 557,824 | 388,667 | |||||
Stock-based compensation expense | 98,573 | 92,643 | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable | (331,406 | ) | (181,311 | ) | |||
Accounts receivable—other | (271,046 | ) | (107,066 | ) | |||
Deposits | (8,169 | ) | (183,151 | ) | |||
Prepaid expenses | (52,747 | ) | 61,215 | ||||
Accounts payable and accrued expenses | 979,411 | 117,323 | |||||
Accrued Interest | 36,617 | (121,583 | ) | ||||
Deferred revenue | 237,776 | 251,661 | |||||
Net cash provided by operating activities | 10,308,627 | 7,109,219 | |||||
Cash flows from investing activities: | |||||||
Purchase of property and equipment | (352,391 | ) | (284,277 | ) | |||
Purchase of inventory | (34,373 | ) | (8,163 | ) | |||
Origination of customer contracts | (18,684,501 | ) | (18,739,187 | ) | |||
Deferred holdbacks paid/held | 162,115 | 749,454 | |||||
Net cash used in investing activities | (18,909,150 | ) | (18,282,173 | ) | |||
Cash flows from financing activities: | |||||||
Payments on capital leases | (1,905 | ) | (14,510 | ) | |||
Borrowings under senior lending facilities | 9,416,218 | 9,253,682 | |||||
Payments of deferred financing fees | — | (51,087 | ) | ||||
Shareholder Loan | — | 2,639,903 | |||||
Net cash provided by financing activities | 9,414,313 | 11,827,988 | |||||
Net increase in cash and cash equivalents | 813,789 | 655,034 | |||||
Cash at beginning of period | 880,954 | 598,603 | |||||
Cash at end of period | $ | 1,694,743 | 1,253,637 | ||||
See accompanying notes to condensed consolidated financial statements.
F-6
SECURITY NETWORKS, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1—Basis of Presentation
Security Networks, LLC and subsidiaries (the "Company") is a Florida limited liability company in West Palm Beach, Florida founded in April 2000. The Company is a full service life safety solutions company, specializing in maintenance and monitoring of commercial and residential burglar alarms and fire alarms throughout the United States. Security Networks Acceptance, LLC ("SNA") is a wholly-owned subsidiary where a portion of the Company's security alarm contracts are held. The Company has two other wholly-owned subsidiaries, SNMCM, LP and SNCA, LLC, which have no operations and were created to facilitate licensing in certain states. The Company has one other wholly-owned subsidiary, SN Puerto Rico, Inc., which is part of the consolidation and their activity is included in the accompanying financial statements.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
The accompanying interim consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments (consisting of normal recurring items) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the year ended December 31, 2012.
Note 2—Recent Accounting Pronouncements
There were no new accounting pronouncements issued during the three months ended March 31, 2013 that are expected to have a material impact on the Company.
Note 3—Acquired/Originated Contracts, Net
The following is an analysis of the changes in acquired/originated customer contracts for the three months ended March 31, 2013:
Balance at December 31, 2012 | $ | 205,587,788 | ||
Origination of customer accounts from affiliates | 18,684,501 | |||
Amortization of customer accounts | (7,131,447 | ) | ||
Impairment of customer contracts | — | |||
Balance at March 31, 2013 | $ | 217,140,842 | ||
F-7
SECURITY NETWORKS, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4—Notes Payable
Notes payable consisted of the following:
| | March 31, 2013 | |||
|---|---|---|---|---|
$10 million subordinated note matures November 5, 2017, 12% per annum cash interest and 2% per annum compounded quarterly for interest capitalization | $ | 10,499,439 | ||
$10 million subordinated note matures November 5, 2018, 12% per annum cash interest and 2% per annum compounded quarterly for interest capitalization | 10,499,439 | |||
Subordinated notes maturing November 5, 2018, 11% per annum cash interest and 1.75% compounded quarterly for interest capitalization | 14,114,826 | |||
$220 million multi term loan matures November 5, 2016, LIBOR plus applicable margin, subject to a LIBOR floor of 1.5% | 153,400,000 | |||
$30 million revolving commitment matures November 5, 2016, LIBOR plus applicable margin, subject to a LIBOR floor of 1.5% | 29,039,168 | |||
Less current portion of Notes payable | — | |||
Long-term Notes payable | $ | 217,552,872 | ||
Subordinated Notes
On November 5, 2010, the Company entered into a $10,000,000 subordinated note with Bank of New York Mellon-Alcentra Mezzanine Partners and a $10,000,000 subordinated note with Northwestern Mutual Capital Mezzanine Fund II, LP. The first note matures on November 5, 2017 and the second on November 5, 2018. The notes shall bear interest on the aggregate adjusted principal amount outstanding at a rate of 12% per annum payable quarterly in arrears in cash on the last day of the quarter in each year and at a rate of 2% per annum compounded quarterly on each interest payment date by capitalizing such interest by an increase in the aggregate adjusted principal amount of the notes outstanding.
On September 6, 2012, the Company entered into a $2,046,571 subordinated note and a $714,286 subordinated note with Northwestern Mutual Life Insurance Company. The Company entered into a $96,286 subordinated note with Northwestern Mutual Capital Mezzanine Fund II, LP. The Company entered into a $1,142,857 subordinated note with United Insurance Company of America. On October 29, 2012, the Company entered into a $5,116,428 subordinated note and a $1,785,714 subordinated note with Northwestern Mutual Life Insurance Company. The Company entered into a $240,714 subordinated note with Northwestern Mutual Capital Mezzanine Fund II, LP and a $2,857,143 subordinated note with United Insurance Company of America. These notes mature on November 5, 2018. The notes shall bear interest on the aggregate adjusted principal amount outstanding at a rate of 11.00% per annum payable quarterly in arrears in cash on the last day of the quarter in each year and at a rate of 1.75% per annum compounded quarterly on each interest payment date by capitalizing such interest by an increase in the aggregate adjusted principal amount of the notes outstanding.
F-8
SECURITY NETWORKS, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4—Notes Payable (Continued)
Per the agreements, the following financial loan covenants are required:
Maximum Consolidated Capital Expenditures | $ | 1,800,000 | ||
Maximum Creation Multiple | 41.80 | |||
Maximum Total Leverage Ratio | 33.00:1.00 | |||
Maximum Senior Leverage Ratio | 27.50:1.00 | |||
Maximum Attrition Rate | 15.40 | % | ||
Minimum Consolidated Liquidity | $ | 900,000 |
Management believes that the Company is in compliance with all covenants as of March 31, 2013.
Credit Facility
On November 5, 2010, the Company entered into a $120,000,000 multi-term loan and a $30,000,000 revolving commitment with Goldman Sachs Specialty Lending Group, LP and Barclays Private Credit Partners, LLC (the Lenders). As of April 17, 2012, the Company extended the total revolver up to $250,000,000, which is made up of a total $220,000,000 on the multi-term loan and $30,000,000 for the revolving commitment. Under the terms of these agreements, funds borrowed under these facilities will accrue interest at a rate equal to LIBOR with floor at 1.5% plus the applicable margin as defined in the agreements. Interest is paid monthly in arrears.
The agreement is secured by a first priority lien on substantially all of its assets, including a pledge of all of the capital stock of each of its domestic subsidiaries and 65% of all of the capital stock of its foreign subsidiaries. This agreement will mature on November 5, 2016.
Per the agreement, the following financial loan covenants are required:
Maximum Consolidated Capital Expenditures | $ | 1,500,000 | ||
Maximum Creation Multiple | 38.00 | |||
Maximum Total Leverage Ratio | 30.00:1.00 | |||
Maximum Senior Leverage Ratio | 25.00:1.00 | |||
Maximum Attrition Rate | 14.00 | % | ||
Minimum Consolidated Liquidity | $ | 1,000,000 |
Management believes that the Company is in compliance with all covenants as of March 31, 2013.
Estimated maturities of notes payable as of March 31, 2013 are as follows:
Remainder of 2013 | $ | — | ||
2014 | — | |||
2015 | — | |||
2016 | 182,439,168 | |||
2017 | 10,499,439 | |||
2018 | 24,614,265 | |||
Thereafter | — | |||
Total payments | $ | 217,552,872 | ||
F-9
SECURITY NETWORKS, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 5—Commitments and Contingencies
The Company experiences routine litigation in the normal conduct of its business. The Company believes that any such pending litigation will not have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations.
ADT, LLC vs. Security Networks, LLC
During the quarter ended March 31, 2013, the Company was involved with litigation alleging that affiliates had violated federal and state law by making deceptive sales statements to certain ADT customers. The likelihood of an unfavorable outcome or an amount of potential loss is not currently estimable.
Note 6—Subsequent Events
Management evaluated the activity of the Company through July 3, 2013 (the date the financial statements were available to be issued) and concluded that no subsequent events have occurred that would require recognition in the Financial Statements or disclosure in the Notes to the Financial Statements.
F-10
Independent Auditors' Review Report
SECURITY NETWORKS, LLC AND SUBSIDIARIES Consolidated Balance Sheet (unaudited)
SECURITY NETWORKS, LLC AND SUBSIDIARIES Consolidated Statements of Operations (unaudited)
SECURITY NETWORKS, LLC AND SUBSIDIARIES Consolidated Statement of Member's Equity (unaudited)
SECURITY NETWORKS, LLC AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited)
SECURITY NETWORKS, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements