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 MARCH 31, 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
May 1, 1996: 4,459,257.
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-
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
March 31, March 31,
1996 1995
--------- ----------
Revenues $12,292 $12,584
Cost of sales 6,429 6,179
Selling, general and administrative 3,195 3,626
Depreciation and amortization 2,663 2,519
------- -------
12,287 12,324
Income from operations 5 260
Other income 11 4
Interest expense, net (184) (207)
------- -------
Income (Loss) before income taxes and cumulative effect of change
in accounting principle (168) 57
Provision for income taxes 85 52
------- -------
Income (Loss) before cumulative effect of change in
accounting principle (253) 5
Cumulative effect of change in accounting principle, net of income
taxes of $1,942 - 2,477
------- -------
Net Income (Loss) $ (253) $ 2,482
======= =======
Earnings (Loss) per common share:
Earnings (Loss) before cumulative effect of change in accounting
principle $ (0.06) $ 0
Cumulative effect of change in accounting principle - 0.55
------- -------
Net earnings (Loss) per common share $ (0.06) $ 0.55
======= =======
Weighted Average Shares Outstanding 4,459 4,459
======= =======
(See accompanying notes.)
3
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted)
March 31, December 31,
1996 1995
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 262 $ 435
Short-term investments 2,043
Accounts receivable, less allowance for doubtful accounts of
$1,119 in 1996 and $1,340 in 1995 4,872 4,997
Inventories 1,840 1,923
Prepaid expenses and other 3,480 3,320
-------- --------
Total current assets 10,454 12,718
-------- --------
FIXED ASSETS, net 45,940 45,231
SUBSCRIBER CONTRACTS, at cost, less accumulated amortization
of $23,169 in 1996 and $22,522 in 1995 18,247 18,894
TRADENAMES, less accumulated amortization of $1,918 in 1996 and
$1,875 in 1995 4,191 4,234
OTHER ASSETS 528 552
-------- --------
$ 79,360 $ 81,629
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ $ 943
Current maturities of long-term debt 2,452 2,497
Accounts payable and accrued expenses 8,914 10,110
Deferred revenue 3,310 2,664
Customer deposits 1,886 1,750
-------- --------
Total current liabilities 16,562 17,964
-------- --------
LONG-TERM LIABILITIES:
Long-term debt 4,248 4,862
Other long-term liabilities 834 834
Deferred income taxes 10,297 10,297
-------- --------
Total long-term liabilities 15,379 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 (70,441) (70,188)
Minimum pension liability adjustment (2,863) (2,863)
-------- --------
47,504 47,757
Less- Treasury stock - 7 shares in 1996 and 1995 at cost (85) (85)
-------- --------
Total shareholders' equity 47,419 47,672
-------- --------
$ 79,360 $ 81,629
======== ========
(See accompanying notes.)
4
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
Unaudited
Three Months Ended
March 31, March 31,
1996 1995
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (253) $ 2,482
Adjustments to reconcile net income (loss) to cash provided by
operating activities -
Depreciation and amortization 2,663 2,519
Provision for doubtful accounts 54 72
Cumulative effect of change in accounting principle - (2,477)
Deferred income taxes 35 27
Changes in operating assets and liabilities -
Decrease in accounts receivable 71 130
Decrease in inventories 83 192
Increase in prepaid expenses and other current assets (183) (752)
Decrease (increase) in accounts payable and accured expenses (1,081) 343
Increase (decrease) in customer deposits 136 (943)
Increase in deferred revenue 646 660
Decrease in pension and other liabilities (115) (123)
------- -------
Net cash provided by operating activities 2,056 2,130
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (2,670) (1,917)
Purchase of subscriber contracts - (71)
Purchase of short-term investments - (3,614)
Maturities of short-term investments 2,043 4,000
Other - (50)
------- -------
Net cash used by investing activities (627) (1,652)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on secured note and other long-term debt (659) (595)
Payment on short-term borrowings (943) -
------- -------
Net cash used by financing activities (1,602) (595)
------- -------
Net decrease in cash and cash equivalents (173) (117)
CASH AND CASH EQUIVALENTS, beginning of period 435 1,409
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 262 $ 1,292
======= =======
CASH PAYMENTS FOR:
Interest $ 166 $ 247
Income Taxes $ 107 $ 42
(See accompanying notes.)
5
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
three-month periods ended March 31, 1996 and 1995 and the balance sheet as
of March 31, 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 three 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. Excluding the
cumulative effect, this change resulted in a reduction of net income of
$71,000 or $0.02 per share in the first quarter of 1995.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST QUARTER 1996 COMPARED WITH FIRST QUARTER 1995
- ---------------------------------------------------
Revenues declined 2.3% to $12.3 million in the first quarter of 1996 from
$12.6 million in the first quarter of 1995. The decline was primarily
attributable to a reduction of monitoring and service revenue, due to the excess
of cancellations over new recurring revenue added to the base by the Company's
sales efforts, offset in part, by revenue from the One Service business,
acquired March 27, 1995. The annualized subscriber cancellation rate was 10.1%
in the first quarter of 1996 compared to 11.9% in the first quarter of 1995.
The Company's annual recurring revenue base declined from $35.5 million at
December 31, 1995 to $35.2 million at March 31, 1996. However, it was $37.1
million at March 31, 1995. The severe winter weather during the first quarter
of 1996 was partially responsible for a reduction in additions to recurring
revenue from the sales efforts and billings for service work during this period.
Cost of sales increased, from $6.2 million in the first quarter of 1995 to
$6.4 million in the same quarter of 1996, due primarily to the One Service
business. Selling, general and administrative expenses were lower in 1996,
reflecting some of the initiatives taken in late 1995 to reduce overall
overheads. Depreciation and amortization charges increased to $2.7 million in
the 1996 first quarter from $2.5 million in the first quarter of 1995. This
increase relates primarily to depreciation expense on additions of Company-owned
systems on subscribers' premises.
Income from operations decreased from $260,000 in the first quarter of 1995
to $5,000 in the first quarter of 1996, primarily as a result of the reduced
revenue and increased depreciation expense, offset by lower cost of sales, as
described above.
Income (loss) before cumulative effect of change in accounting principle
was ($253,000) in the 1996 first quarter, compared to $5,000 in the first
quarter of 1995. The Company's tax provision in each period reflects the
minimum franchise tax accrual, plus a proportionate estimate of the deferred
federal and state income taxes that will be payable based on the full year's
forecasted pretax income, in accordance with generally accepted accounting
principles.
LIQUIDITY AND CAPITAL RESOURCES
FIRST QUARTER 1996
- ------------------
Cash and cash equivalents decreased by $.1 million from $.4 million to $.3
million during the first quarter of 1996. Net cash provided by operating
activities was $2.1 million, offset by cash utilized by investing activities of
$.6 million and cash utilized by financing activities (debt repayment) of $1.6
million.
Net cash provided by operating activities in the 1996 first quarter
consisted primarily of cash provided by sales of electronic security services
($2.4 million), offset by a decrease in accounts payable and accrued expenses
($1.1 million), an increase in prepaid expenses and other current assets ($.2
million) and an increase in deferred revenue ($.7 million).
-7-
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 $1.6 million during this period
consisted primarily of principal repayments under the Company's bank term loan
($.6 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 March 31, 1996 included cash
and cash equivalents of $.3 million.
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 is
presently discussing alternative arrangements with certain banks and other
financial institutions and anticipates obtaining financing by mid-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, $51 million
Outsourcing Agreement with PremiTech Corporation, a subsidiary of Electronic
Data Systems Corporation ("EDS"), which provides 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. Of the $51 million, the Company will pay a total of
$3.3 million for the consolidation activities, of which $500,000 was paid in
1995 and $2.8 million is payable in installments during 1996. The balance of
the amount due under the Outsourcing Agreement is payable over its ten-year
term. The Outsourcing Agreement also provides for additional payments to
PremiTech in the event of a substantial increase in the Company's subscriber
accounts.
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.
-8-
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
. 27 Financial data schedule
(b) The following report on Form 8-K was filed with the Securities and Exchange
Commission during the quarter ended March 31, 1996:
. Form 8-K dated January 8, 1996 reporting Item 5 regarding the appointment
of the Company's President and Chief Executive Officer
-9-
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 8, 1996 /s/ George V. Flagg
-------------------------------------
George V. Flagg
President and Chief Executive Officer
Date: May 8, 1996 /s/ Neville N. Rosemin
-------------------------------------
Neville N. Rosemin
Senior Vice President and Financial
Controller
-10-