1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
PROTECTION ONE, INC.( COMMISSION FILE NO. 0-24780)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER AND ITS COMMISSION
FILE NUMBER)
DELAWARE 93-1063818
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6011 BRISTOL PARKWAY, CULVER CITY, CALIFORNIA 90230
(310) 338-6930
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PROTECTION ONE ALARM MONITORING, INC.(COMMISSION FILE NO. 33-73002-01)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER AND ITS COMMISSION
FILE NUMBER)
DELAWARE 93-1064579
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6011 BRISTOL PARKWAY, CULVER CITY, CALIFORNIA 90230
(310) 338-6930
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrants (1) have 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 and (2) have been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
As of May 8, 1996, Protection One, Inc. had outstanding 12,306,450 shares
of Common Stock, par value $.01 per share. At such date, Protection One Alarm
Monitoring, Inc. had outstanding 100 shares of Common Stock, par value $.10.
Protection One Alarm Monitoring, Inc. meets the conditions set forth in
General Instruction H(1)(a) and (b) of Form 10-Q and therefore is filing this
form with the reduced disclosure format provided for therein.
2
PART I
FINANCIAL INFORMATION
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
ITEM 1. FINANCIAL STATEMENTS
September 30, March 31,
1995 1996
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,256 $ 4,833
Receivables, net 5,806 7,770
Inventories 3,125 2,932
Prepaid expenses 547 955
--------- ---------
Total current assets 10,734 16,490
Property and equipment, net 5,307 7,223
Subscriber accounts, intangibles and goodwill, net 162,239 202,178
Deposits 389 419
--------- ---------
$ 178,669 $ 226,310
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1 $ 1
Accounts payable 2,078 2,494
Accrued salaries, wages and benefits 1,401 1,227
Accrued interest 318 367
Other accruals 210 58
Purchase holdbacks 4,949 10,670
Acquisition transition costs 970 2,068
Other current liabilities 800 627
Deferred revenue 9,166 11,592
--------- ---------
Total current liabilities 19,893 29,104
Long-term debt, net of current portion 146,023 168,290
Other liabilities 279 787
--------- ---------
Total liabilities 166,195 198,181
--------- ---------
Commitments and contingencies (Note 12)
Redeemable preferred stock, redemption value $6,127 at
September 30, 1995 6,127
Stockholders' equity:
Common Stock, $.01 par value, 24,000,000 shares
authorized, 9,115,410 and 12,297,147 shares issued
and outstanding at September 30,1995 and
March 31, 1996, respectively 90 123
Additional paid-in capital 41,829 70,817
Accumulated deficit (35,572) (42,811)
--------- ---------
Total stockholders' equity 6,347 28,129
--------- ---------
$ 178,669 $ 226,310
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
1
3
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Six months ended March 31,
-----------------------------
1995 1996
---- ----
Revenues:
Monitoring and service $ 20,846 $ 29,523
Other 4,434 3,655
-------- --------
Total revenues 25,280 33,178
Cost of revenues:
Monitoring and service 5,279 8,191
Other 3,985 3,174
-------- --------
Total cost of revenues 9,264 11,365
-------- --------
Gross profit 16,016 21,813
Selling, general and administrative expenses 5,473 6,556
Acquisition and transition expenses 1,687 1,927
Amortization of subscriber accounts and goodwill 6,837 10,061
-------- --------
Operating income 2,019 3,269
Other expenses:
Interest expense, net 5,072 1,856
Amortization of debt issuance costs 500 615
Amortization of OID 122 8,018
Loss on sales of assets 19
-------- --------
Loss before income taxes and cumulative effect
of change in accounting method, net of taxes (3,675) (7,239)
Income tax benefit 1,380 --
-------- --------
Loss before cumulative effect of change in
accounting method, net of taxes (2,295) (7,239)
Cumulative effect of change in accounting method, net of taxes (1,955) --
-------- --------
Net loss (4,250) (7,239)
Preferred stock dividends 614 248
Accretion of redeemable preferred stock 796 --
-------- --------
Loss attributable to common stock $ (5,660) $ (7,487)
======== ========
Loss per common share:
Before cumulative effect of change in accounting method $ (0.44) $ (0.75)
Net loss per share $ (0.67) $ (0.75)
The accompanying notes are an integral part
of the consolidated financial statements.
2
4
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Three months ended March 31,
----------------------------
1995 1996
-------- --------
Revenues:
Monitoring and service $ 11,125 $ 15,695
Other 2,183 1,971
-------- --------
Total revenues 13,308 17,666
Cost of revenues:
Monitoring and service 2,820 4,346
Other 1,985 1,611
-------- --------
Total cost of revenues 4,805 5,957
-------- --------
Gross profit 8,503 11,709
Selling, general and administrative expenses 2,939 3,427
Acquisition and transition expenses 816 1,172
Amortization of subscriber accounts and goodwill 3,683 5,284
-------- --------
Operating income 1,065 1,826
Other expenses:
Interest expense, net 2,712 921
Amortization of debt issuance costs 257 309
Amortization of OID 61 4,077
Loss on sales of assets 19
-------- --------
Loss before income tax (1,965) (3,500)
Income tax benefit 728 --
-------- --------
Net loss (1,237) (3,500)
Preferred stock dividends 184 79
-------- --------
Loss attributable to common stock $ (1,421) $ (3,579)
======== ========
Net loss per share $ (0.16) $ (0.33)
The accompanying notes are an integral part
of the consolidated financial statements.
3
5
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
Six months ended March 31,
----------------------------
1995 1996
-------- --------
Cash flows from operating activities:
Net loss $ (4,250) $ (7,239)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 471 780
Amortization of subscriber accounts and goodwill 6,837 10,061
Amortization of debt issuance costs 500 615
Amortization of OID 122 8,018
Cumulative effect of change in accounting method 1,955 --
Deferred tax benefit (1,380) --
Provision for doubtful accounts 896 1,039
Changes in assets and liabilities, net of effects of acquisitions:
Receivables 361 (3,005)
Inventories (343) 271
Prepaid expenses and deposits (898) (438)
Accounts payable (758) 416
Accrued liabilities (170) (355)
Deferred revenue (475) 352
-------- --------
Net cash provided by operating activities 2,868 10,515
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,222) (2,387)
Acquisitions, net of cash received (24,147) (38,776)
Payments on purchase holdbacks (934) (50)
Deferred acquisition payments (1,463) (1,295)
Acquisition transition costs (1,077) (1,525)
Payment of other liabilities (52) --
-------- --------
Net cash used in investing activities (28,895) (44,033)
-------- --------
Cash flows from financing activities:
Payments on long-term debt (16,355) (23,828)
Proceeds from long-term debt 31,043 38,077
Debt and equity issuance costs (582) (634)
Payments on shareholders' notes receivable 47 --
Issuance of preferred and common stock and warrants 18,301 23,648
Redemption of preferred stock (82) --
Cash dividends paid (2,471) (168)
-------- --------
Net cash provided by financing activities 29,901 37,095
-------- --------
Net increase in cash and cash equivalents 3,874 3,577
Cash and cash equivalents:
Beginning of period 1,057 1,256
-------- --------
End of period $ 4,931 $ 4,833
======== ========
Interest paid during the period $ 5,075 $ 1,500
======== ========
Supplemental disclosure (see Note 9)
The accompanying notes are an integral part
of the consolidated financial statements.
4
6
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY; INTERIM FINANCIAL INFORMATION:
The accompanying financial statements of Protection One, Inc. ("POI") and
its subsidiaries (the "Company") include the accounts of POI, POI's wholly owned
subsidiary, Protection One Alarm Monitoring, Inc. ("Monitoring"), and
Monitoring's former wholly owned subsidiary, Protection One Alarm Services, Inc.
("Services"). On May 13, 1996, Services was merged into Monitoring. The assets,
results of operations and stockholder's equity of Monitoring comprise
substantially all of the assets, results of operations and stockholders' equity
of the Company on a consolidated basis. See Note 13 for separate consolidated
financial information of Monitoring.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q which mandates
adherence to Rule 10-01 of Regulation S-X. Accordingly, these statements do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management of
the Company, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the audited financial statements and notes thereto for the year
ended September 30, 1995 included in the Company's Annual Report on Form 10-K/A
filed with the Securities and Exchange Commission on December 28, 1995.
The results of operations for the six month and three month periods ended
March 31, 1996 are not necessarily indicative of the results to be expected for
the full fiscal year.
2. CHANGE IN ACCOUNTING METHOD:
In the third quarter of fiscal 1995, the Company changed its method of
accounting for certain subscriber account acquisition and transition costs,
effective as of October 1, 1994. Under the new method, the Company's personnel
and related support costs and duplicative costs incurred solely in support of
acquiring and transitioning subscriber accounts are expensed as incurred.
The new method is consistent with the guidelines adopted by the Emerging
Issues Task Force of the Financial Accounting Standards Board in Issue 95-3,
Recognition of Liabilities in Conjunction with Purchase Business Combinations.
The consolidated financial statements for the year ended September 30, 1995
reflect the change in accounting method as of October 1, 1994. The effect of the
change on such year was to increase the loss before cumulative effect of the
accounting change, net loss and loss attributable to Common Stock by
approximately $1.5 million or $0.17 per share. The cumulative effect of the
change as of October 1, 1994 was approximately $1.95 million or $0.23 per share,
net of income taxes of approximately $1.2 million, and is reported separately in
the consolidated statement of operations for the year ended September 30, 1995.
3. RECEIVABLES:
Receivables, which consist primarily of trade accounts receivable of
$10,731 at March 31, 1996 and $8,309 at September 30, 1995, have been reduced by
allowances for doubtful accounts of $2,961 and $2,503, respectively. Included in
receivables and deferred revenue at March 31, 1996 and September 30, 1995 are
April 1996 and October 1995 invoices billed in advance of the periods in which
services are
5
7
provided totaling $5,334 and $4,667, respectively. The provisions
for doubtful accounts for the three months ended March 31, 1996 and March 31,
1995 were $632 and $264, respectively. The provisions for doubtful accounts for
the six months ended March 31, 1996 and March 31, 1995 were $1,039 and $896,
respectively.
4. SUBSCRIBER ACCOUNTS, INTANGIBLES AND GOODWILL:
Subscriber accounts, intangibles and goodwill (at cost) consist of the
following (dollar amounts in thousands):
September 30, March 31,
1995 1996
---- ----
Acquired subscriber accounts $ 184,463 $ 234,952
Debt issuance costs 7,405 7,531
Goodwill and other 1,641 1,641
--------- ---------
193,509 244,124
Less accumulated amortization (31,270) (41,946)
--------- ---------
$ 162,239 $ 202,178
========= =========
Reconciliation of acquired subscriber accounts (dollar amounts in
thousands):
Six Months Six Months
Ended Ended
March 31, March 31,
1995 1996
---- ----
Balance, beginning of period $ 122,330 $ 184,463
Cumulative effect of change in accounting method (3,802) --
Acquisition of subscriber accounts 34,370 51,925
Charges against acquisition holdbacks (1,069) (1,436)
Sale of subscriber accounts (222) --
--------- ---------
Balance, end of period $ 151,607 $ 234,952
========= =========
5. PURCHASE HOLDBACKS:
In conjunction with certain purchases of subscriber accounts, the Company
withholds a portion of the purchase price as a reserve to offset qualifying
attrition of the acquired subscriber accounts for a specified period as provided
for in the purchase agreements, and as a reserve for purchase price settlements
of assets acquired and liabilities assumed.
Reconciliation of purchase holdbacks (dollar amounts in thousands):
Six Months Six Months
Ended Ended
March 31, March 31,
1995 1996
---- ----
Balance, beginning of period $ 4,250 $ 4,949
Purchase holdback additions 2,826 7,207
Charges against subscriber accounts (1,069) (1,436)
Cash paid to sellers (934) (50)
-------- --------
Balance, end of period $ 5,073 $ 10,670
======== ========
6
8
6. LOSS PER COMMON SHARE:
The computation of fully diluted net loss per common share for each of the
periods presented was antidilutive; as such, no presentation of fully diluted
loss per share has been included in the consolidated statements of operations.
The weighted average shares outstanding used in the computation of the net loss
attributable to common shares are as follows:
Six Months Ended Three Months Ended
March 31, March 31,
----------------------------- ----------------------------
1995 1996 1995 1996
---- ---- ---- ----
Common Stock 8,507,330 9,959,926 8,790,839 10,828,400
7. CHANGES IN STOCKHOLDERS' EQUITY:
During the six month period ended March 31, 1996, the Company issued 2.5
million shares of common stock with proceeds of $23,625,000. Concurrently with
the issuance of common stock, the Company converted 6,127 shares of Series H
Preferred Stock to 680,777 shares of common stock at $9 per share. Additionally,
warrants and options for 68,732 shares of common stock were exercised for $.02
million.
Also during the period, additional paid in capital was reduced by $.5
million and $.2 million for expenses related to the secondary offering and
accrued preferred stock dividends, respectively.
8. DIVIDEND RESTRICTIONS:
The Company's Credit Agreement governing its Revolving Credit Facility and
Indenture governing its Discount Notes place certain restrictions on POI and
Monitoring's ability to make dividend payments, distributions and other asset
transfers in respect of such company's capital stock and assets. At March 31,
1996, under provisions of the Credit Agreement (the most restrictive agreement),
no amounts were available for such dividend payments, distributions or other
transfers by either POI or Monitoring.
9. STOCK WARRANTS AND OPTIONS:
Performance Warrants to purchase 500,472 shares of Common Stock at an
exercise price of $0.167 per share were issued to certain officers of the
Company on September 16, 1991 and were to be earned upon attainment of certain
return on investment objectives and were to vest over a five year period of
employment after the date of issuance. Such objectives were not achieved as of
June 29, 1994, when the Board of Directors and the officers modified the
earnings and vesting criteria such that vesting occurred on that date for all
Performance Warrants. The modified Performance Warrant agreements provide that
the officers will not exercise more than 40%, and 70% of the Warrants prior to
September 16, 1995 and 1996, respectively. In the event the Company is acquired,
such restriction on exercise by officers would be released. Accordingly,
compensation expense in an amount equal to the excess of the fair market value
of the Common Stock issuable on exercise of the Performance Warrants over the
exercise price is reflected as a non-cash expense in the amount of $4,504 in the
year ended September 30, 1994. The outstanding warrants are exercisable and
expire in September of 2002.
On November 3, 1993, the Company issued 50,000 units (the "Units") with
each Unit consisting of one, $1,000 face value, 12%, Series A Senior
Subordinated Note and 28 detachable Warrants (total of 1,400,000 warrants) to
purchase shares of the Company's Common Stock. Each warrant, when
7
9
exercised, will entitle the holder to receive six-tenths of a share of the
Company's Common Stock at an exercise price of $0.167 per share, subject to
adjustment. The outstanding warrants are exercisable and will automatically
expire on November 1, 2003.
In June 1994, the Board of Directors adopted, and the stockholders of the
Company approved, the 1994 Stock Option Plan (the "Plan"). The Plan provides for
the award of incentive stock options to directors, officers and key employees.
Three hundred fifty four thousand (354,000) share were reserved for issuance
under the Plan, subject to such adjustment as may be necessary to reflect
changes in the number or kind of share of Common Stock or other securities of
the Parent Company. In November 1995, the Board of Directors adopted, and
in January 1996, the shareholders of the Company approved, amending the Option
Plan to increase the number of shares for which options may be granted
reserved from 354,000 shares to 944,000 shares. The Option Plan provides for
the granting of options that qualify as incentive stock options under the
Internal Revenue Code and options that do not so qualify.
During the year ended September 30, 1995, the Company granted options to
purchase an aggregate of 273,600 shares of common stock including 132,000
shares to officers of the Company. Each option has a term of 10 years and
vests 20% on each of the third through seventh anniversaries of the
commencement of the participant's employment with the Company. During the six
months ended March 31, 1996, the Company granted options to purchase 572,000
shares of common stock including options for 400,000 shares granted to
officers of the Company. Each option has a term of 10 years and vests 20% on
each of the first through fifth anniversaries of the grant of the option.
The purchase price of the shares issuable pursuant to the options is equal to
or greater than the fair market value of the shares at the date of issue.
In connection with the issuance of the Senior Subordinated Discount
Notes in May of 1995, the Company issued warrants to purchase 531,200 shares of
common stock at an exercise price of $6.60 per share. The outstanding warrants
are exercisable and expire in May of 2005.
A summary of warrant and option activity is as follows:
Warrants
and Options Price Range
----------- -----------
Outstanding September 30, 1994 1,572,429 $0.167 - 3.633
Granted 804,800 5.875 - 9.125
Exercised (256,799) 0.167 - 6.50
Surrendered (14,400) 6.50
Outstanding September 30, 1995 2,106,030 0.167 - 9.125
Granted 572,000 8.00 - 15.00
Exercised (68,732) 0.167 - 6.50
Surrendered (2,880) 6.50
---------
Outstanding at March 31, 1996 2,606,418 0.167 - 15.00
=========
Exercisable:
September 30, 1995 1,907,310 0.167 - 6.50
March 31, 1996 1,709,077 0.167 - 6.50
10. INCOME TAXES:
For the six months ended March 31, 1996, the Company experienced a net
increase in its deferred tax asset of $3.0 million. However, such additional
deferred tax asset amount was offset in its entirety by a valuation allowance
increase due to the uncertainty that the deferred tax benefits will be
recognized in the future. Such benefits are recognized when valuation allowances
are reduced as a result of utilization of
8
10
net operating loss ("NOL") carryforwards to offset deferred tax liabilities
during the carryforward period. At March 31, 1996, the Company had $34.7 million
in NOL carryforwards for regular tax purposes and $28.4 million for alternative
minimum tax ("AMT NOL") purposes which expire in the years 2006-2010. The
Company also has certain general and job credit carryforwards. These
carryforwards are available, subject to certain restrictions, to reduce taxable
income, alternative minimum taxable income and income tax payable in future
periods. As a result of various prior issuances of preferred and common stock,
or if there are future substantial changes in the Company's ownership, there may
be annual limitations on the amounts of NOL and AMT NOL, as well as credits,
that can be used to reduce the Company's taxable income, alternative minimum
taxable income and income tax liability.
September 30, March 31,
1995 1996
---- ----
Deferred tax assets:
Accounts receivable, due to allowance
for doubtful accounts $ 1,000 $ 1,183
Acquisition reserves and holdbacks 2,365 4,755
Performance warrants 1,800 1,800
Net operating loss carryforwards 15,688 13,881
Original issue discount amortization 2,174 5,293
Other 37 47
Less valuation allowance (3,573) (6,539)
-------- --------
Total deferred tax assets 19,491 20,420
Deferred tax liabilities:
Differences in depreciation and amortization (19,491) (20,420)
-------- --------
Net deferred tax liabilities $ 0 $ 0
======== ========
The valuation allowance at March 31, 1996 reflects limitations on the
utilization of NOL carryforwards for federal and state income tax purposes of
$5.6 million and $0.9 million, respectively. These valuation allowances reflect
uncertainties regarding the utilization of such NOL carryforwards on the
Company's tax returns prior to their dates of expiration.
11. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions:
Six months ended March 31,
1995 1996
------- -------
Subscriber accounts acquired $34,370 $51,925
Other assets acquired 81 391
------- -------
Total assets acquired 34,451 52,316
------- -------
Cash paid to seller 21,737 38,382
Acquisition expenses 405 391
Deferred revenue acquired 2,720 2,074
Other liabilities assumed 9,589 11,469
------- -------
Total purchase price $34,451 $52,316
======= =======
Cash paid to sellers, payments for acquisition expenses and payments on
liabilities assumed in conjunction with acquisitions are included in cash used
in investing activities in the period paid. Deferred revenue, which represents
advance billings to subscribers, is recognized as revenue in the period in which
the related service is provided. Such amounts are considered a non-cash
component of operations and are reflected as a reduction in cash provided by
operating activities.
9
11
The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and stockholders' equity
accounts resulting from non-cash investing and financing activities which
occurred in the six months ended March 31, 1995 (dollar amounts in thousands):
Class B
Redeemable Common Additional
Purchase Preferred Common & Preferred Paid-in Accumulated
Intangibles Holdbacks Stock Stock Stock Capital Deficit
----------- --------- ---------- ------ ------------ ---------- -----------
Accretion to redemption
value of preferred stock $ $ $ (14) $ $ $ $ 14
Charge-off of purchase
holdbacks (1,070) 1,070
Accelerated accretion upon
conversion of preferred stock (782) $ 782
Reclassification of IPO costs (1,305) 1,305
Conversion of Class B
Common and preferred 12,897 (55) 85 (12,927)
-------- ------- -------- -------- ----- -------- --------
$ (2,375) $ 1,070 $ 12,101 $ (55) $ 85 $(11,622) $ 796
======== ======= ======== ======== ===== ======== ========
The following reflects increases (decreases) in assets, and decreases
(increases) in liabilities and additional paid-in capital resulting from
non-cash investing and financing activities which occurred in the six months
ended March 31, 1996 (dollar amounts in thousands):
Purchase Common Additional Paid Series H
Intangibles Holdbacks Stock in Capital Preferred Stock
----------- --------- ------ --------------- ---------------
Charge off of purchase holdbacks $ (1,436) $ 1,436 -- -- --
Conversion of Series H preferred stock -- -- $(7) $ (6,120) $ 6,127
Reclassification of stock
offering costs ( 507) -- -- 507 --
--------- ------- --- -------- --------
$ (1,943) $ 1,436 $(7) $(5,613) $ 6,127
======== ======= === ======== ========
12. COMMITMENT AND CONTINGENCIES:
The Company is a party to claims and matters of litigation incidental to
the normal course of business. The ultimate outcome of these matters cannot
presently be determined; however, in the opinion of management of the Company,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations and cash flows.
13. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION:
POI and Services have fully and unconditionally guaranteed the 13 5/8%
Senior Subordinated Discount Notes of Monitoring due 2005 ("Discount Notes") on
a joint and several basis. POI has no independent operations and the
consolidated revenues and costs of operations of POI are substantially reflected
in the accounts of Monitoring. Prior to the merger of Services into Monitoring,
the operations of Monitoring and Services were significantly interconnected and
Monitoring and Services shares common management,
10
12
13. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION
(CONTINUED):
employees and facilities and serve a common customer base. Separate summarized
financial information of Services is not presented because management believes
that such separate summarized financial information is not material to
investors. The summarized consolidated financial information of Monitoring and
its former subsidiary Services (see Note 1 above) is presented below (dollar
amounts in thousands).
September 30, March 31,
1995 1996
---- ----
Summarized Balance Sheet
Assets
Current assets $ 10,734 $ 16,490
Subscriber accounts and intangibles, net 162,239 202,178
Other non-current assets 5,695 7,642
Liabilities and Stockholders' Equity
Deferred revenue $ 9,166 $ 11,592
Other current liabilities 10,727 17,512
Long-term debt, net of current portion 146,023 168,290
Other long-term liabilities 279 787
Stockholders' equity 12,473 28,129
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1995 1996 1995 1996
---- ---- ---- ----
Summarized Statements of Operations
Revenues $ 13,308 $ 17,666 $ 25,280 $ 33,178
Gross Profit 8,503 11,709 16,061 21,813
Loss before extraordinary item
and cumulative effect of change in
accounting method, net of taxes (1,237) (3,500) (2,295) (7,239)
Net loss (1,237) (3,500) (4,250) (7,239)
11
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
For an overview of the Company's accounting policies and specific
discussions of, among other things, a change in the method of accounting for
certain acquisition and transition expenses, a change in statement of operations
presentation format and the impact of SFAS 121 on the Company's financial
statements, see the Company's Form 10-K/A for the fiscal year ended September
30, 1995.
Acquisition and Dealer Program Activity. As described in this Form 10-Q, a
significant portion of the Company's growth has been generated by the
acquisition of portfolios of subscriber accounts from other alarm companies.
Because the Company typically acquires only the subscriber accounts (and not the
accounts receivable or other assets) of the sellers, the Company focuses its
pre-acquisition review and analysis on the quality and stability of the
subscriber accounts to verify the monthly recurring revenue ("MRR") represented
by such accounts. If the subscriber accounts to be purchased pass such due
diligence scrutiny, the Company then applies its monitoring costs to such MRR as
a basis for determining the purchase price to be paid by the Company. To protect
the Company against the loss of acquired accounts, the Company typically seeks
to obtain from the seller a guarantee against the subscriber account
cancellation for a period following the acquisition and the right to retain a
portion of the acquisition price (a "purchase price holdback") against the MRR
lost due to subscriber account cancellations during the specified period.
During the six months ended March 31, 1996 the Company added (through
acquisitions of 18 portfolios of subscriber accounts and through its Dealer
Program) an aggregate of approximately 46,000 subscriber accounts for a total
purchase price of approximately $51.9 million. The MRR of the acquired accounts
ranged from approximately $10.00 to $60.00, with an average of $28.56, and the
average purchase price holdback was approximately 12% of the initial purchase
price. Approximately 83% of the acquired subscriber accounts were residential.
Subscriber Attrition. Subscriber attrition has a direct impact on the
Company's results of operations, since it affects both the Company's revenues
and its amortization expense. Attrition can be measured in terms of canceled
subscriber accounts and in terms of decreased MRR resulting from canceled
subscriber accounts. Gross subscriber attrition is defined by the Company for a
particular period as a quotient, the numerator of which is equal to the number
of subscribers who disconnect service during such period and the denominator of
which is the average of the number of subscribers at each month end during such
period. Net MRR attrition is defined by the Company for a particular period as a
quotient, the numerator of which is an amount equal to gross MRR lost as the
result of canceled subscriber accounts or services during such period, net of
(i) MRR generated during such period by the sale of additional services and
increases in rates to existing subscribers, (ii) MRR generated during such
period from the connection of subscribers who move into premises previously
occupied by subscribers and in which existing systems are installed and from
conversion of accounts that were previously monitored by other companies to the
Company's monitoring service (i.e., "reconnects" and "conversions"); and (iii)
MRR attributable to canceled accounts that, by virtue of a purchase holdback are
"put" back to the seller of such accounts during such period (i.e., "guaranteed
accounts"); and the denominator of which is the average month-end MRR in effect
during such period. While the Company reduces the gross MRR lost during a period
by the amount of guaranteed accounts provided for in purchase agreements with
sellers, in some cases the Company may not collect all or any of the
reimbursement due it from the seller.
12
14
The following table sets forth the Company's gross subscriber attrition and
net MRR attrition for the periods indicated:
Twelve Months Ended
-------------------
3/31/95 6/30/95 9/30/95 12/31/95 3/31/96
------- ------- ------- -------- -------
Gross subscriber attrition......... 18.8% 18.6% 19.3% 20.3% 20.5%
Net MRR attrition.................. 5.6 6.2 6.6 6.6 7.9
Because the Company determines payments to sellers under purchase price
holdbacks subsequent to the periods to which such holdbacks apply, and because
holdbacks are not allocated to specific guaranteed accounts or specific fiscal
periods, the Company reduces gross MRR lost during a period by the amount of
guaranteed accounts provided for in purchase agreements with sellers. However,
in some cases, the Company has not retained the full amount of such holdback to
which the Company is contractually entitled. If guaranteed accounts for which
the Company was not compensated by the seller were taken into account in
calculating net MRR attrition, net MRR attrition would have been higher in each
period presented in the table above.
Generally, net MRR attrition is less than actual "net account attrition,"
which the Company defines as canceled subscriber accounts net of reconnects,
conversions and guaranteed accounts. Estimated net account attrition is the
basis upon which the Company determines the period over which it amortizes its
investment in subscriber accounts. The Company amortizes such investment over 10
years based on current estimates. If actual subscriber account attrition were to
exceed such estimated attrition, the Company could be required to amortize its
investment in subscriber accounts over a shorter period, thus increasing
amortization expense in the period in which such adjustment is made and in
future periods. Since a significant portion of the subscriber accounts acquired
by the Company since its formation were purchased recently, there can be no
assurance that the actual attrition rates for such accounts will not be greater
than the rate assumed by the Company.
The table below sets forth the change in the Company's subscriber base over
the periods indicated:
Twelve Months Ended
Mar. 31, Mar. 31,
1995 1996
---- ----
Number of subscribers:
Beginning of period ............................... 67,654 107,401
Additions through portfolio acquisitions and Dealer
Program, net of sales of subscriber accounts ...... 51,374 80,449
Installations by Company personnel ................ 1,735 1,179
Reconnects and conversions ........................ 3,390 4,023
Gross subscriber attrition ........................ (16,752) (27,810)
-------- --------
End of period ................................ 107,401 165,242
======== ========
Joint Ventures and Alliances. To evaluate other potential sources of
subscriber growth, the Company has initiated an analysis of companies that may
have an interest in entering the residential security alarm market. In addition,
certain companies in industries facing deregulation (such as the
telecommunications and electric utility industries) have expressed to the
Company an interest in offering security alarm services to develop more
comprehensive relationships with their customers. The Company has from time to
time discussed with such companies, and intends to continue to explore, possible
joint ventures, co-marketing arrangements and other strategic alliances as a
method of enhancing its subscriber growth and reducing its cost of generating
new subscribers. As of the filing date of this Form 10-Q, the Company has not
entered into any agreement or arrangement for any such joint venture or other
alliance.
Recent Developments. The Company has reached preliminary agreement with
its lenders to amend the Credit Agreement governing its Revolving Credit
Facility (the "Proposed Amendment"). The Proposed Amendment includes, among
other things, increasing the principal amount of the Revolving Credit Facility
to $100 million and extending the term of the Credit Agreement to January 3,
2000. The Company anticipates that final documentation and approval of the
Proposed Amendment will occur no later than May 31, 1996, although there can be
no assurance that the Proposed Amendment will be implemented by such date or at
all.
13
15
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
Three months ended Six months ended
March 31, March 31,
------------------- --------------------
1995 1996 1995 1996
------ ------ ------ ------
Revenues:
Monitoring and Service 83.6% 88.8% 82.5% 89.0%
Other 16.4 11.2 17.5 11.0
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of revenues:
Monitoring and Service 21.2% 24.6% 20.9% 24.7%
Other 14.9 9.1 15.7 9.6
----- ----- ----- -----
Total cost of revenues 36.1 33.7 36.6 34.3
----- ----- ----- -----
Gross profit 63.9 66.3 63.4 65.7
Selling, general and administrative expenses 22.1 19.4 21.7 19.8
Acquisition and transition expenses 6.1 6.6 6.7 5.8
Amortization of subscriber accounts
and goodwill 27.7 29.9 27.0 30.3
----- ----- ----- -----
Operating income 8.0% 10.4% 8.0% 9.8%
===== ===== ===== =====
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995
Revenues. Revenues for the six months ended March 31, 1996 (the "first half
of fiscal 1996") increased by approximately $7.9 million, or 31.2%, to $33.2
million from $25.3 million in the comparable period in 1995. Monitoring and
service revenues increased by approximately $8.7 million, or 41.6%, a
substantial majority of which resulted from the addition of subscribers through
the acquisition of portfolios of subscriber accounts and purchases of subscriber
accounts from independent alarm dealers with whom the Company has exclusive
purchase agreements (the "Dealer Program"). The Company's subscriber base
increased by 53.9% to approximately 165,200 subscribers at the end of the second
quarter of fiscal 1996 as compared to 107,400 subscribers at the end of the
second quarter of fiscal 1995. The sale of enhanced services and new subscribers
generated by Company personnel comprised the remainder of revenue growth. Other
revenues, consisting primarily of revenues generated by the Company's patrol and
alarm response, installation and lock businesses, decreased by $0.8 million, or
17.6%, to $3.7 million. Such decrease was caused primarily by a decline in
installation revenues of 41.9%, or approximately $0.9 million. The decline in
installation revenues (and the decline in installation expense described below)
resulted from the Company's increased emphasis on growth through acquisitions
and the Dealer Program, rather than through the sale of new alarm systems by
Company personnel.
Cost of revenues. Cost of revenues for the first half of fiscal 1996
increased by approximately $2.1 million, or 22.7%, to $11.4 million. Cost of
revenues as a percentage of total revenues declined to 34.3% for the first half
of fiscal 1996 from 36.6% for the comparable period in fiscal 1995. Monitoring
and service expenses increased by approximately $2.9 million, or 55.2%,
primarily due to increased activity at the Company's central monitoring station
and field service branches due to a substantially larger subscriber base.
Monitoring and service expenses as a percentage of monitoring and service
revenues increased to 27.7% for the first half of fiscal 1996 from 25.3% during
the comparable period in fiscal 1995. Such increase reflects a higher level of
staffing at the Company's central monitoring station as well as a lower MRR per
subscriber in the first half of fiscal 1996, due primarily to the acquisition of
portfolios of subscriber accounts that had a lower average MRR per subscriber
than the Company's average at that time. Other expenses decreased by
approximately $0.8 million, or 20.3%, to approximately $3.2 million for the
first half of fiscal 1996 from $4.0 million for the first six months of fiscal
1995. The decrease primarily was caused by a 41.8% decrease ($0.7 million) in
installation expense. In addition, both patrol and alarm response and lock
expenses declined slightly in the quarter.
14
16
Gross profit. Gross profit for the first half of fiscal 1996 was
approximately $21.8 million, which represents an increase of approximately $5.8
million, or 36.2%, over the $16.0 million of gross profit recognized in the
comparable period in fiscal 1995. Such increase was caused primarily by an
increase in monitoring and service activities, which paralleled the increase in
the Company's subscriber base noted above. Gross profit as a percentage of total
revenues was 65.7% for the first half of fiscal 1996 compared to 63.4% for the
comparable period in fiscal 1995. This increase was caused primarily by an
increase in monitoring and service revenues as a percentage of total revenues to
89.0% in the first half of fiscal 1996. Gross profit from other revenues
increased slightly to approximately $0.5 million for the first six months of
fiscal 1996 from $0.4 million for the comparable period in fiscal 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses rose to approximately $6.6 million in the first half of
fiscal 1996, which represents an increase of approximately $1.1 million, or
19.8%, over selling, general and administrative expenses in the comparable
period in fiscal 1995. Such figure as a percentage of total revenues declined
from 21.7% in the first half of fiscal 1995 to 19.8% in the first half of fiscal
1996, due primarily to a decline in sales and marketing expense of 34.3% (or
$0.5 million) offset by an increase of 39.2% (or $1.6 million) in general and
administrative expenses. Sales and marketing expenses declined due to the
Company's increased emphasis on growth through acquisitions and the Dealer
Program, rather than through sales of new alarm systems by Company personnel.
The increase in general and administrative expenses was caused by increases in
corporate and branch management and overhead expenses incurred to supervise a
larger employee base associated with a larger subscriber base. Advertising and
marketing expenses are expensed as incurred and comprised less than 1% of
revenues in each of the six month periods ending March 31, 1995 and 1996. The
provision for doubtful accounts increased to approximately $1.0 million for the
first half of fiscal 1996 from approximately $0.9 million for the comparable
period in fiscal 1995.
Acquisition and transition expenses. Acquisition and transition expenses
for the first six months of fiscal 1996 totaled approximately $1.9 million
compared to $1.7 million for the comparable period in fiscal 1995. Such increase
reflects the Company's increased acquisition activity during the first half of
fiscal 1996. Such expenses will fluctuate from quarter to quarter based
primarily on the amount of the Company's acquisition activity and its ability to
require sellers to bear certain of such acquisition-related expenses.
Amortization of subscriber accounts and goodwill. Amortization expense for
the first half of fiscal 1996 increased by approximately $3.2 million, or 47.2%,
to $10.1 million. This increase is the result of the addition of subscriber
accounts through the acquisition of portfolios of subscriber accounts and the
Dealer Program.
Operating income. Operating income for the first six months of fiscal 1996
was approximately $3.3 million, compared to approximately $2.0 million in the
comparable period in fiscal 1995. Operating income as a percentage of total
revenues was 9.8% in the first half of fiscal 1996, compared to 8.0% in the
comparable period in fiscal 1995. The increase in such figure over the
comparable period in fiscal 1995 reflects the increase in gross profit as a
percentage of total revenues and economies of scale evidenced by the favorable
disparity between period-to-period growth rates in revenues (31.2%) and selling,
general and administrative expenses (19.8%).
Interest expense, net and amortization of debt issuance costs and OID.
These amounts increased by $4.8 million, or 84.2%, to $10.5 million in the first
half of fiscal 1996, reflecting the Company's use of debt to finance a
substantial portion of its subscriber account growth. Because the Company
refinanced its cash interest-paying subordinated debt in May of 1995 with
non-cash interest paying subordinated debt (see"- Liquidity and Capital
Resources"), amortization of debt issuance costs and original issue discount
("OID") increased during the first half of fiscal 1996 to approximately $8.6
million and the Company estimates that such expense will be at least $17.8
million in fiscal 1996. Such amount could be higher if the Company pursues
additional financing activities.
15
17
Balance sheet data. At March 31, 1996, the Company's working capital
deficit was $12.6 million, as compared to a working capital deficit of $9.2
million at September 30, 1995. The increase in the working capital deficit was
caused primarily by increases in purchase holdbacks, deferred revenue and
acquisition transition costs of $9.2 million offset by increases in cash and
accounts receivable of $5.5 million. Subscriber accounts and intangibles, net
increased to $202.2 million at March 31, 1996 from $162.2 million at September
30, 1995. This increase of $40.0 million, or 24.6%, was caused by the addition
of new subscribers, net of amortization expense. Total stockholders' equity
increased to approximately $28.1 million at March 31, 1996 from $6.3 million at
September 30, 1995. The increase in such figure reflects the Company's public
offering of 2.5 million shares of Common Stock (resulting in approximately $23.1
million of net proceeds) and the conversion of the Company's Series H Redeemable
Preferred Stock to Common Stock in February 1996, partially offset by
approximately $7.5 million of losses in the first half of fiscal 1996.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Revenues. Revenues for the three months ended March 31, 1996 (the "second
quarter of fiscal 1996") increased by approximately $4.4 million, or 32.8%, to
$17.7 million from $13.3 million in the comparable period in 1995. Monitoring
and service revenues increased by approximately $4.6 million, or 41.1%, a
substantial majority of which resulted from the addition of subscribers through
the acquisition of portfolios of subscriber accounts and the Dealer Program. The
Company's subscriber base increased by 55.9% to approximately 165,200
subscribers at the end of the second quarter of fiscal 1996 as compared to
107,400 subscribers at the end of the second quarter of fiscal 1995. The sale of
enhanced services and new subscribers generated by Company personnel comprised
the remainder of revenue growth. Other revenues, consisting primarily of
revenues generated by the Company's patrol and alarm response, installation and
lock businesses, decreased by $0.2 million, or 9.7%, to $2.0 million. Such
decrease was caused primarily by a decline in installation revenues of 38.3%, or
approximately $0.4 million offset by a slight increase in patrol and alarm
response revenues. The decline in installation revenues resulted from the
Company's increased emphasis on growth through acquisitions and the Dealer
Program, rather than through the sale of new alarm systems by Company personnel.
Cost of revenues. Cost of revenues for the second quarter of fiscal 1996
increased by approximately $1.2 million, or 24.0%, to $6.0 million. Cost of
revenues as a percentage of total revenues declined to 33.7% for the second
quarter of fiscal 1996 from 36.1% for the comparable period in fiscal 1995.
Monitoring and service expenses increased by approximately $1.5 million, or
54.1%, primarily due to increased activity at the Company's central monitoring
station and field service branches due to a substantially larger subscriber
base. Monitoring and service expenses as a percentage of monitoring and service
revenues increased to 27.7% for the second quarter of fiscal 1996 from 25.3%
during the comparable period in fiscal 1995. Such increase reflects a higher
level of staffing at the Company's central monitoring station as well as a lower
MRR per subscriber in the second quarter of fiscal 1996, due primarily to the
acquisition of portfolios of subscriber accounts that had a lower average MRR
per subscriber than the Company's average. Other expenses decreased by
approximately $0.4 million, or 18.8%, to approximately $1.6 million for the
second quarter in fiscal 1996 from $2.0 million for the second quarter of fiscal
1995. The decrease primarily was caused by a 40.4% decrease ($0.3 million) in
installation expense. In addition, both lock and patrol and alarm response
expenses declined slightly in the quarter.
Gross profit. Gross profit for the second quarter of fiscal 1996 was
approximately $11.7 million, which represents an increase of approximately $3.2
million, or 37.7%, over the $8.5 million of gross profit recognized in the
comparable period in fiscal 1995. Such increase was caused primarily by an
increase in monitoring and service activities which paralleled the increase in
the Company's subscriber base noted above. Gross profit as a percentage of total
revenues was 66.3% for the second quarter of fiscal 1996 compared to 63.9% for
the comparable period in fiscal 1995. This increase was caused primarily by an
increase in monitoring and service revenues as a percentage of total revenues to
88.8% in the second
16
18
quarter of fiscal 1996. Gross profit from other revenues increased to
approximately $0.4 million for the second quarter of fiscal 1996 from
$0.2 million for the comparable period in fiscal 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses rose to approximately $3.4 million in the second quarter
of fiscal 1996, which represents an increase of approximately $0.5 million, or
16.6%, over selling, general and administrative expenses in the comparable
period in fiscal 1995. Such figure as a percentage of total revenues declined
from 22.1% in the second quarter of fiscal 1995 to 19.4% in the second quarter
of fiscal 1996, due primarily to a decline in sales and marketing expense of
36.2% (or $0.3 million) offset by an increase of 34.3% (or $0.8 million) in
general and administrative expenses. The increase in general and administrative
expenses was caused by increases in corporate and branch management and overhead
expenses incurred to supervise a larger employee base associated with a larger
subscriber base. Advertising and marketing expenses comprised less than 1% of
revenues in each of the quarters ending March 31, 1995 and 1996. The provision
for doubtful accounts increased to approximately $0.6 million for the second
quarter of fiscal 1996 from $0.3 million for the comparable period in fiscal
1995.
Acquisition and transition expenses. Acquisition and transition expenses
for the second quarter of fiscal 1996 totaled approximately $1.2 million
compared to $0.8 million for the comparable period in fiscal 1995. Such increase
was caused by significant acquisition activity in the second quarter of fiscal
1996, during which period the Company added approximately 46,000 subscriber
accounts.
Amortization of subscriber accounts and goodwill. Amortization expense for
the second quarter of fiscal 1996 increased by approximately $1.6 million, or
43.5% to $5.3 million. This increase is the result of the addition of subscriber
accounts through the acquisition of portfolios of subscriber accounts and the
Dealer Program.
Operating income. Operating income for the second quarter of fiscal 1996
was approximately $1.8 million, compared to approximately $1.1 million in the
comparable period in fiscal 1995. Operating income as a percentage of total
revenues was 10.4% in the second quarter of fiscal 1996, compared to 8.0% in the
comparable period in fiscal 1995. The increase in such figure over the
comparable period in fiscal 1995 reflects the increase in gross profit as a
percentage of total revenues and economies of scale evidenced by the favorable
disparity between quarter-to-quarter growth rates in revenues (32.8%) and
selling, general and administrative expenses (16.6%).
Interest expense, net, and amortization of debt issuance costs and OID.
These amounts increased by $2.3 million, or 75.1%, to $5.3 million in the second
quarter of fiscal 1996, reflecting the Company's use of debt to finance a
substantial portion of its subscriber account growth. See "Interest expense, net
and amortization of debt issuance costs and OID" above and "Liquidity and
Capital Resources" below.
LIQUIDITY AND CAPITAL RESOURCES
General. Since September 1991, the Company has financed its operations and
growth from a combination of long-term debt, including the proceeds of the $50.0
million principal amount of Senior Subordinated Notes issued in November 1993
and the $166.0 million principal amount ($105.2 million net proceeds) of
Discount Notes issued in May 1995, short-term borrowings under its Revolving
Credit Facility, sales of stock and, to a lesser extent, cash flows from
operations. In February 1996, the Company completed a public offering of 4.0
million shares of Common Stock (2.5 million shares of which were sold by the
Company and 1.5 million shares of which were sold by two selling stockholders).
Net proceeds from such offering were approximately $23.1 million, all of which
were used to reduce borrowings under the Revolving Credit Facility. The Company
believes that, based on the amount of net cash provided by operating activities
in fiscal 1994 and 1995 and the first half of fiscal 1996, cash flows from
operations will be sufficient to fund the Company's interest payments on its
debt and capital
17
19
expenditures, which are the Company's principal uses of cash other than the
purchases of subscriber accounts from the Company's dealers and acquisitions of
portfolios of subscriber accounts.
On a long-term basis, the Company has several material commitments.
Borrowings under the Revolving Credit Facility were approximately $46.5 million
at March 31, 1996 and could be as high as $75.0 million through the period ended
November 3, 1997, the current maturity date of the Revolving Credit Facility.
Although the Company believes that it will be able to obtain further extensions
of the maturity date of the Revolving Credit Facility from time to time, or will
be able to refinance the Revolving Credit Facility prior to its maturity date,
there can be no assurance that the Company will be able to do so. The Discount
Notes require the Company to begin to make interest payments on such obligations
on December 31, 1998. Based on an interest rate of 13 5/8%, such payment will be
approximately $11.3 million semiannually, or $22.6 million on an annual basis.
As a result, a substantial portion of the Company's cash flows from operations
will be required to make interest payments on the Discount Notes, and there can
be no assurance that the Company's cash flow from operations will be sufficient
to meet such obligation, or that there will be sufficient funds available to the
Company after such interest payments to meet other debt, capital expenditure and
operational obligations. The $166.0 million principal amount of Discount Notes
matures on June 30, 2005. There can be no assurance that the Company will have
the cash necessary to repay the Discount Notes at maturity or will be able to
refinance such obligations. The Company maintains a $2.0 million letter of
credit sub-facility under its Revolving Credit Facility, and has extended an
approximately $1.2 million letter of credit to a seller, scheduled payments
under which are approximately $0.4 million during each of fiscal 1997, 1998 and
1999.
The Company intends to use the remaining cash flows from operations,
together with borrowings under the Revolving Credit Facility, to finance the
addition of subscriber accounts. Although the Company anticipates that it will
continue to acquire portfolios of subscriber accounts, the Company cannot
estimate the number, size or timing of such acquisitions. Depending on such
factors, additional funds beyond those currently available to the Company may be
required to continue the acquisition program and to finance the Dealer Program,
and there can be no assurance that the Company will be able to obtain such
financing on acceptable terms or at all.
As noted above, the Company has had, and expects to continue to have, a
working capital deficit. There are two principal categories of current
liabilities that cause the Company to have a working capital deficit: (i)
"purchase holdbacks," which represent the portion of the aggregate acquisition
cost of subscriber accounts retained by the Company to offset lost MRR arising
from the cancellation of acquired accounts; and (ii) "deferred revenue," which
represents billings and cash collections received by the Company from its
subscriber base in advance of performance of services. Both purchase holdbacks
and deferred revenues are recorded as a current liability on the Company's
balance sheet.
For the first half of fiscal 1996, the Company's net cash provided by
operating activities was $10.5 million, compared to $2.9 million for the
comparable period in fiscal 1995. The increase in net cash provided by
operations of approximately $7.6 million was a result of higher earnings before
interest, taxes, depreciation and amortization (approximately $4.8 million) and
lower cash interest payments (approximately $3.2 million) offset by slightly
higher investment in working capital (approximately $0.5 million). The decline
in cash interest payments was due to the refinancing of cash interest paying
debt with the Discount Notes as described above.
For the first half of fiscal 1996, the Company's net cash used in investing
activities was $44.0 million, compared to $28.9 million during the first six
months of fiscal 1995, primarily as a result of the acquisition of portfolios of
subscriber accounts.
During the first half of fiscal 1996, the Company's net cash provided by
financing activities was $37.1 million, compared to $29.9 million in the
comparable period in fiscal 1995. Financing activities reflect the Company's
borrowings under its Revolving Credit Facility and proceeds from the Company's
secondary stock offering in February 1996.
18
20
Restrictions on Dividends. POI has never paid any cash dividends on the
Common Stock and does not intend to pay cash dividends in the foreseeable
future. Both the Revolving Credit Facility and the Indenture governing the
Discount Notes restrict POI's ability to declare or pay any dividend on, or make
any other distribution in respect of, POI's capital stock.
Capital Expenditures. The Company has expended approximately $2.4 million, and
anticipates making additional capital expenditures of approximately $1.6 million
in fiscal 1996 for routine replacement and upgrading of vehicles, computers,
phone switches and other capital items. In addition, the Company anticipates
making capital expenditures of approximately $1.0 million for the upgrading of
its monitoring and administrative hardware and software. The Company believes
the installation of the new computer software will create efficiencies
Company-wide, and particularly in the customer service, data entry and field
service functions. The Company believes the complete implementation of the new
software will not occur until fiscal 1997. In addition, the Company anticipates
making capital expenditures of approximately $500,000 in fiscal 1997 and 1998 to
expand the capacity of the central monitoring station to approximately 500,000
subscribers. The Company believes cash flows from operations, together with
borrowing under the Revolving Credit Facility, will be sufficient to fund the
Company's capital expenditures in fiscal 1996.
19
21
PART II
OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The following matters were submitted to and approved by the
shareholders of POI at an annual meeting of the shareholders held on January 26,
1996;
1. The following nominees for election as directors, to hold office for
a one year term and until their successors are duly elected and qualified, were
elected as directors and received the number of votes set opposite their
respective names:
NOMINEE FOR WITHHELD
------- --- --------
James M. Mackenzie, Jr 7,239,086 100
Robert M. Chefitz 7,239,086 100
Dr. Ben Enis 7,239,086 100
Craig Longfield 6,127 0
Messrs. Mackenzie and Chefitz and Dr. Enis were elected by the holders of
the Common Stock; Mr. Longfield was elected by PacifiCorp Financial Services as
the holder of all then outstanding shares of POI's 11% Series H Cumulative
Redeemable Convertible Preferred Stock. Following the conversion of such
preferred stock into Common Stock and the sale of such Common Stock in the
February 1996 public offering, Mr. Longfield resigned as a director of POI.
2. The selection of Coopers & Lybrand L.L.P. as auditors of the Company
was ratified by the Company's shareholders by a count of 7,224,796 share votes
(representing 79.26% of the outstanding shares) for the proposal, 4,100 against,
and 10,110 abstaining.
3. The amendment to the Company's 1994 Stock Option Plan increasing the
number of shares of Common Stock available for issuance under such plan from
354,000 shares to 944,000 shares was approved by the shareholders by a count of
5,561,803 share votes (representing 61.02% of the outstanding shares) for the
proposal, 800,813 against, and 1,100 abstaining, with 875,470 broker non-votes.
4. The Protection One, Inc. Employee Stock Purchase Plan was approved
by the shareholders by a count of 6,360,616 share votes (representing 69.79% of
the outstanding shares) for the proposal, 3,100 against and 0 abstaining, with
875,470 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K.
Exhibit Exhibit Description
Number -------------------
------
3.1 Bylaws of Protection One, Inc.
10.1 1994 Stock Option Plan as amended through January 26, 1996
27 Financial Data Schedule as required by Article 5 of Regulation S-X
20
22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
have duly caused this report to be signed on their behalf by the undersigned
thereunto duly authorized.
May 14, 1996 PROTECTION ONE, INC.
PROTECTION ONE ALARM MONITORING, INC.
By: /s/ John W. Hesse
--------------------
John W. Hesse
Executive Vice President
and Chief Financial Officer
21