SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Ninth Avenue, New York, New York 10001-1695
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(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
August 12, 1997: 6,315,791.
Certain statements in this Quarterly Report on Form 10-Q/A 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/A for the fiscal year ended December 31, 1996.
2
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
FORM 10-Q/A FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the three-month and six-month periods
ended June 30, 1997 and 1996.....................................................................4
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996............................5
Consolidated Statements of Cash Flows for the six-month periods ended
June 30, 1997 and 1996...........................................................................6
Notes to Financial Statements....................................................................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................10
PART II OTHER INFORMATION
Item 6. EXHIBITS ........................................................................................13
Signatures.......................................................................................14
3
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)
Three Months Ended Six Months Ended
----------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------- ------------ ---------- -----------
(Restated) (Restated)
REVENUES:
Monitoring and service $ 9,683 $ 8,919 $ 19,010 $ 18,012
Installation 5,360 2,422 8,432 4,654
Franchise royalties, product sales and other 1,541 1,009 2,842 1,989
------------- ----------- ---------- -----------
Total revenues 16,584 12,350 30,284 24,655
COST OF SALES (exclusive of depreciation
and amortization shown below):
Monitoring and service 4,999 4,318 9,761 8,869
Installation 3,229 1,144 5,077 2,117
Franchise royalties, product sales and other 1,214 918 2,339 1,823
------------- ----------- ---------- -----------
Total cost of sales 9,442 6,380 17,177 12,809
Selling, general and administrative 5,693 3,649 11,029 6,844
Depreciation and amortization 2,795 2,769 5,463 5,432
Non-recurring charge - - 1,500 -
------------- ----------- ---------- -----------
17,930 12,798 35,169 25,085
Loss from operations (1,346) (448) (4,885) (430)
Other income 4 - 58 11
Interest expense, net (346) (134) (560) (318)
------------- ----------- ---------- -----------
Loss before income taxes (1,688) (582) (5,387) (737)
Benefit for income taxes (506) (194) (1,616) (104)
------------- ----------- ---------- -----------
Net Loss $ (1,182) $ (388) $ (3,771) $ (633)
============= =========== ========== ===========
Loss per common share: $ (0.20) $ (0.09) $ (0.64) $ (0.14)
============= =========== ========== ===========
Weighted Average Shares Outstanding 5,925 4,459 5,883 4,459
============= =========== ========== ===========
(See accompanying notes.)
4
HOLMES PROTECTION GROUP,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted)
June 30, December 31,
1997 1996
-------------------- -------------------
(Unaudited)
(Restated)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,446 $ 990
Accounts receivable, less allowance for doubtful accounts of
$990 in 1997 and $973 in 1996 8,510 5,333
Inventories 3,360 2,795
Prepaid expenses and other 3,726 2,448
-------------------- -------------------
Total current assets 17,042 11,566
-------------------- -------------------
FIXED ASSETS, net 48,318 47,198
SUBSCRIBER CONTRACTS, at cost, less accumulated amortization
of $26,666 in 1997 and $25,137 in 1996 25,664 19,650
TRADENAMES, less accumulated amortization of $2,130 in 1997 and
$2,045 in 1996 3,979 4,063
OTHER ASSETS 8,612 7,917
-------------------- -------------------
$ 103,615 $ 90,394
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,292 $ 364
Accounts payable and accrued expenses 7,888 7,290
Deferred revenue 4,648 3,969
Customer deposits 2,909 2,813
-------------------- -------------------
Total current liabilities 16,737 14,436
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LONG-TERM LIABILITIES:
Long-term debt 18,663 4,370
Other long-term liabilities 2,531 2,503
Deferred income taxes 8,691 10,457
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Total long-term liabilities 29,885 17,330
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SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000 authorized; none outstanding - -
Common stock, $0.01 par value; 12,000 authorized shares; 6,070
issued in 1997 and 5,835 issued in 1996 61 58
Additional paid-in capital 135,384 133,251
Accumulated deficit (78,367) (74,596)
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57,078 58,713
Less- Treasury stock - 7 shares in 1997 and 1996 at cost (85) (85)
-------------------- -------------------
Total shareholders' equity 56,993 58,628
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$ 103,615 $ 90,394
==================== ===================
(See accompanying notes.)
5
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
Six Months Ended
-----------------------------
June 30, June 30,
1997 1996
---------- ----------
(Restated)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (3,771) $ (633)
Adjustments to reconcile net income (loss) to cash provided by
operating activities -
Depreciation and amortization 5,463 5,432
Provision for doubtful accounts 24 (58)
Non-recurring charge 1,500 --
Deferred income taxes (1,766) (204)
Changes in operating assets and liabilities -
(Increase) decrease in accounts receivable (2,687) 1,107
(Increase) decrease in inventories (355) 167
(Increase) decrease in prepaid expenses and other current assets (1,277) 737
Decrease in accounts payable and accrued expenses (358) (1,811)
Increase in customer deposits 96 151
Increase in deferred revenue 356 171
Decrease in pension and other liabilities (210) (536)
---------- ----------
Net cash (used in) provided by operating activities (2,985) 4,523
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (4,492) (4,296)
Acquisition of businesses, net of cash acquired (6,365) --
Purchase of short-term investments -- --
Maturities of short-term investments -- 2,043
Other (6) --
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Net cash used by investing activities (10,863) (2,253)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations 13,800 --
Proceeds from exercised stock options 848 --
Payment on other long-term debt (344) (1,223)
Payment on short-term borrowings -- (943)
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Net cash provided by (used in) financing activities 14,304 (2,166)
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Net increase in cash and cash equivalents 456 104
CASH AND CASH EQUIVALENTS, beginning of period 990 435
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CASH AND CASH EQUIVALENTS, end of period $ 1,446 $ 539
========== ==========
CASH PAYMENTS FOR:
Interest $ 306 $ 337
Income taxes $ 336 $ 111
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of notes payable in connection with acquired businesses $ 884 $ --
Issuance of common stock in connection with acquired businesses $ 1,288 $ --
(See accompanying notes.)
6
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
Notes to Interim Financial Statements
Note 1 Restatement
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 the
estimated selling costs and amortized such difference over the initial
term of the non-cancelable customer monitoring and service contract
(generally five years) (the "Deferral Method"). Following discussions
with the staff of the Division of Corporation Finance of the Securities
and Exchange Commission, in connection with a Registration Statement
filed by the Company, the Company has determined to restate its
consolidated financial statements for the interim periods of 1997 and
the years ended December 31, 1996 and 1995 using the Deferral Method.
Accordingly, the accompanying consolidated financial statements have
been restated from those originally reported to reflect such
determination. This Deferral Method of recording revenue had no impact
on the Company's liquidity or cash flows. The following table provides
selected summarized financial information illustrating the effect of
the restatement on the Company's consolidated financial statements for
the three months and six months ended June 30, 1997 and June 30,1996:
Three Months Ended
June 30, 1997 June 30, 1996
-------------------------------- -------------------
As Originally As Originally
Reported As Restated Reported As Restated
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Revenue $16,665 $16,584 $12,191 $12,350
Loss before income taxes (1,607) (1,688) (741) (582)
Net Loss (1,125) (1,182) (483) (388)
Loss per common share (0.19) (0.20) (0.11) (0.09)
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Six Months Ended
June 30, 1997 June 30, 1996
-------------------------------- -------------------
As Originally As Originally
Reported As Restated Reported As Restated
----------------------------------------------------------------------------------------------------------
Revenue $30,315 $30,284 $24,483 $24,655
Loss before income taxes (5,356) (5,387) (909) (737)
Net Loss (3,749) (3,771) (736) (633)
Loss per common share (0.64) (0.64) (0.17) (0.14)
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7
Note 2 Financial Statements
The restated consolidated statements of operations and statements of
cash flows for the three month and six-month periods ended June 30,
1997 and 1996 and the restated balance sheet as of June 30, 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/A, filed with the Securities and
Exchange Commission. Results of operations for the three-month and
six-month periods ended June 30, 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, except for the
$1,500,000 pretax charge relating to the outsourcing agreement
termination (See Note 3).
Note 3 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. 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 4 Acquisitions
In the first half of 1997, the Company acquired alarm companies for an
aggregate purchase price of $6,365,000. In addition, the Company
acquired three alarm companies in exchange for 91,775 shares of the
Company's Common Stock. 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 allocation of estimated values is subject to final
adjustments of purchase price. The results of operations for these
acquisitions were not significant to the consolidated financial
statements of the Company and therefore no pro forma financial data has
been included.
8
Note 5 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.
9
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
Restatement
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 the estimated selling costs and amortized such difference
over the initial term of the non-cancelable customer monitoring and service
contract (generally five years) (the "Deferral Method"). Following discussions
with the staff of the Division of Corporation Finance of the Securities and
Exchange Commission, in connection with a Registation Statement filed by the
Company, the Company has determined to restate its consolidated financial
statements for the interim periods of 1997 and the years ended December 31, 1996
and 1995 using the Deferral Method. Accordingly, the accompanying consolidated
financial statements have been restated from those originally reported to
reflect such determination. This Deferral Method of recording revenue had no
impact on the Company's liquidity or cash flows.
Three Months Ended June 30, 1997 Compared with Three Months Ended June 30, 1996
Revenues increased $4.2 million (34.3%) to $16.6 million in the second quarter
of 1997 from $12.4 million in the second quarter of 1996. This increase was
primarily attributable to an increase in installation revenue of $3.0 million
(121.3%) from $2.4 million in the second quarter of 1996 to $5.4 million in the
second quarter of 1997.
Cost of sales increased $3.1 million (48.0%) to $9.4 million in the second
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. Selling, general and administrative expenses increased $2.0 million
(56.0%) to $5.7 million from $3.6 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 its National Accounts operation. Depreciation and
amortization expense remained constant at $2.8 million in both the second
quarter of 1997 and the second quarter of 1996.
Loss from operations was $1.3 million for the second quarter of 1997 compared to
a loss of $0.4 million for the second quarter of 1996, primarily as a result of
the investment the Company has made in selling and marketing costs partially
offset by increased revenues and related cost of sales.
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996
Revenues increased $5.6 million (22.8%) in the six months ended June 30, 1997 to
$30.3 million from $24.7 million in the six months ended June 30, 1996. This
increase was primarily attributable to an increase in installation revenue of
$3.8 million (81.2%). 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 $37.2 million at June 30, 1997, principally as a result of
recurring revenues acquired during the fourth quarter of 1996 and the first half
of 1997. The recurring revenue base at June 30, 1996 was $34.3 million.
Cost of sales increased 34.1% from $12.8 million in the six months ended June
30, 1996 to $17.2 million in the six months ended June 30, 1997. This increase
was primarily the result of increased installation costs related to the growth
in related revenue. Selling, general and administrative expenses were $11.0
million for the six months ended June 30, 1997 compared to $6.8 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 its National Accounts operation.
Depreciation and amortization expense was $5.5 million in the six months ended
June 30, 1997 compared to $5.4 million in the six months ended June 30, 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 3).
Loss from operations reflected a loss of $4.9 million for the six months ended
June 30, 1997 compared to a loss of $0.4 million for the six months ended June
30, 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.
10
Liquidity and Capital Resources
Six months Ended June 30, 1997
Cash and cash equivalents increased by $0.4 million from $1.0 million to $1.4
million during the six months ended June 30, 1997. Net cash provided by
financing activities was $14.3 million, offset by cash utilized by operating
activities of $3.0 million and net cash utilized by investing activities of
$10.9 million.
Net cash utilized by operating activities of $3.0 million principally consisted
of cash provided by sales of electronic security services, adjusted for non-cash
charges for depreciation and amortization, an increase in accounts receivable
($2.7 million), a decrease in accounts payable and accrued expenses ($0.4
million), an increase in prepaid expenses and other current assets ($1.3
million), and an increase in deferred revenue ($0.4 million).
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 $14.3 million during this period
consisted of bank borrowings of $13.8 million and proceeds from the exercise of
stock options of $0.8 million, offset by repayments of other long term debt
obligations of $0.3 million.
Future Commitments and Cash Requirements
Liquid assets available to the Company as of June 30, 1997 included cash and
cash equivalents of $1.4 million.
On August 30, 1996, the Company entered into a credit agreement (the "Credit
Agreement"), amended and restated as of December 31, 1996 and subsequently
amended as of January 1, 1997, 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's ability to obtain future borrowings under this credit
facility is contingent upon its compliance 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 Credit Agreement).
On June 30, 1997, the outstanding balance under the Credit Agreement was $18.3
million, including an outstanding irrevocable letter of credit of $1.0 million
(See Note 3).
11
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.
The Company believes that net cash provided by operations, together with funds
available under the Credit Facility, will enable it to meet its future cash
operating needs.
The forgoing information under this caption "Future Commitments and Cash
Requirements" is set forth as of August 14, 1997, the date of filing of the Form
10-Q being amended by this Form 10-Q/A. For current information relating to the
Company's liquidity and other matters set forth under such captions, see the
Company's Form 10-Q/A for the quarterly period ended September 30, 1997.
12
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 June 30, 1997.
13
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: December 29, 1997 /s/ George V. Flagg
------------------------------------
George V. Flagg
President and Chief Executive Officer
Date: December 29, 1997 /s/ Lawrence R. Irving
------------------------------------
Lawrence R. Irving
Vice President - Finance