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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
0-24780 33-73002-01
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(Commission File Number) (Commission File Number)
Protection One Alarm
Protection One, Inc. Monitoring, Inc.
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(Exact Name of Registrant as (Exact Name of Registrant as
Specified in its Charter) Specified in its Charter)
Delaware Delaware
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(State or Other Jurisdiction (State or Other Jurisdiction of
of Incorporation or Organization) Incorporation or Organization)
93-1063818 93-1065479
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(I.R.S. Employee Identification No.) (I.R.S. Employee Identification No.)
6011 Bristol Parkway, 6011 Bristol Parkway,
Culver City, California 90230 Culver City, California 90230
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(Address of Principal Executive (Address of Principal Executive
Offices, Including Zip Code) Offices, Including Zip Code)
(310) 338-6930 (310) 338-6930
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(Registrant's Telephone Number, (Registrant's Telephone Number,
Including Area Code) Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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6 3/4% Convertible Senior New York Stock Exchange
Subordinated Notes Due 2003
of Protection One Alarm
Monitoring, Inc. Guaranteed by
Protection One, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share of Protection One, Inc.
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(Title of Class)
Indicate by check mark whether each 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 such shorter period as that such
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common stock of Protection One, Inc.
held by nonaffiliates on December 27, 1996 (based on the last sale price of such
shares) on the Nasdaq National Market was $100,293,182.
As of December 27, 1996, Protection One, Inc. had outstanding
13,466,671 shares of Common Stock, par value $0.01 per share. As of such date,
Protection One Alarm Monitoring, Inc. had outstanding 110 shares of Common
Stock, par value $0.10 per share, all of which shares were owned by Protection
One, Inc. Protection One Alarm Monitoring, Inc. meets the conditions set forth
in General Instructions J(1)(a) and (b) for Form 10-K and is therefore filing
this form with the reduced disclosure format set forth therein.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Protection One, Inc.'s Proxy Statement for the Annual Meeting of the
Shareholders to be held on January 29, 1997 are incorporated by reference in
Part III.
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INTRODUCTORY NOTE
COMPANY STRUCTURE. Unless the context otherwise indicates, all
references in this Annual Report on Form 10-K to "the Company" or "Protection
One" are to Protection One, Inc.("POI"), and its direct wholly owned subsidiary,
Protection One Alarm Monitoring, Inc.("Monitoring"). Each of POI and Monitoring
is sometimes referred to herein as "Registrant." POI's sole asset is, and POI
operates solely through, its investment in Monitoring. Each of POI and
Monitoring is a Delaware corporation organized in September 1991.
MRR AND EBITDA. As used in this Annual Report on Form 10-K, "MRR"
means monthly recurring revenue (excluding revenues from patrol services) that
the Company is entitled to receive under contracts in effect at the end of the
period and "EBITDA" means earnings before interest, taxes, depreciation and
amortization (excluding adjustments of purchase accounting accruals, losses or
gains on disposition of fixed assets, loss on assets held for sale, loss on
abandoned acquisitions and extraordinary items). MRR is a term commonly used in
the security alarm industry as a measure of the size of a company, but not as a
measure of profitability or performance, and does not include any allowance for
future attrition or allowance for doubtful accounts. EBITDA is derived by adding
to loss before income taxes, extraordinary items and cumulative effect of change
in accounting method--net of taxes, the sum of (i) loss on sales of assets, (ii)
loss on assets held for sale, (iii) amortization of debt issuance costs and
original issue discount ("OID"), (iv) interest expense, net, (v) amortization of
subscriber accounts and goodwill, (vi) depreciation expense, (vii) performance
warrants compensation expense, (viii) adjustment of purchase accounting
accruals, net and (ix) loss on acquisition terminations. EBITDA does not
represent cash flow from operations as defined by generally accepted accounting
principles, should not be construed as an alternative to net income and is
indicative neither of the Company's operating performance nor of cash flows
available to fund the Company's cash needs. Items excluded from EBITDA are
significant components in understanding and assessing the Company's financial
performance. Management believes presentation of EBITDA enhances an
understanding of the Company's financial condition, results of operations and
cash flows because EBITDA is used by the Company to satisfy its debt service
obligations and its capital expenditure and other operational needs as well as
to provide funds for growth. In addition, EBITDA has been used by senior
lenders and subordinated creditors and the investment community to determine the
current borrowing capacity and to estimate the long-term value of companies with
recurring cash flows from operations and net losses.
FORWARD-LOOKING STATEMENT. Certain matters discussed in Item 1,
Business and Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, included in this Annual Report on Form 10-K are
"forward-looking statements" intended to qualify for the safe harbor from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements generally can be identified as such because the
context of the statement includes words such as the Company or its management
"believes," "expects," "anticipates" or other words of similar import.
Similarly, statements herein that describe the Company's objectives, plans or
goals also are forward-looking statements. All such forward-looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those in the forward-looking statements. Information
with respect to these risks and uncertainties is contained in Item 5(d) of the
Current Report on Form 8-K filed by POI and Monitoring dated September 20, 1996,
which information is incorporated herein by reference. Stockholders, potential
investors and other readers are urged to consider these factors carefully in
evaluating the forward-looking statements. The forward-looking statements
included herein are made only as of the date of this Annual Report on Form 10-K
and the Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
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PART I
ITEM 1. BUSINESS
The information contained below includes statements of the Company's or
management's beliefs, expectations, hopes, goals and plans that are
forward-looking statements subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the
forward-looking statements. For a description of such risks and uncertainties,
see the information set forth and incorporated by reference in the Introductory
Note to this Annual Report on Form 10-K under the caption "Forward-Looking
Statements," which information is incorporated in this Item by reference.
Protection One provides security alarm monitoring services for
residential and small business subscribers. Based on its 196,531 subscribers as
of September 30, 1996 (approximately 80% of which are residential), Protection
One believes it is the fourth largest residential security alarm monitoring
company in the United States and the largest in the seven western states of
Arizona, California, Nevada, New Mexico, Oregon, Utah and Washington.
The Company's revenues consist primarily of recurring payments under
written contracts for the monitoring and servicing of security systems and the
provision of additional enhanced security services. For the year ended September
30, 1996 ("fiscal 1996"), monitoring and service revenues represented 89.7% of
total revenues. The Company monitors digital signals arising from burglaries,
fires and other events through security systems installed at subscribers'
premises. Most of these signals are received and processed at the Company's
state-of-the-art central monitoring station located in Portland, Oregon, which,
as currently configured, has the capacity to support up to 250,000 subscribers.
The Company also sells enhanced security services, patrol and alarm response
services and alarm systems and provides local field repair services through 13
branch offices. Enhanced security services provided by the Company include,
among others, two-way voice communication, supervised monitoring services, pager
service, medical identification card, wireless backup service and extended
service protection.
From the Company's inception, the Company's growth has come primarily
through the acquisition of portfolios of subscriber accounts. Between September
30, 1991 and September 30, 1996, the Company acquired 117 subscriber portfolios,
representing an aggregate of approximately 168,000 subscribers. Management
believes that numerous acquisition opportunities continue to be available, and
the Company is pursuing, and intends to continue to pursue, acquisitions of
portfolios of subscriber accounts, some of which may be significant. Since the
beginning of fiscal 1995, the Company has increased its emphasis on the Dealer
Program, which has become a more significant source of growth than in prior
years. In fiscal 1996, for instance, subscribers generated by the Dealer
Program comprised 38% of the Company's total subscriber additions, compared to
17% in fiscal 1995. The Company plans to continue its emphasis on the Dealer
Program because of the greater predictability, expected lower attrition and
relatively lower cost of adding subscribers through its dealers as compared with
acquisitions of larger portfolios of subscriber accounts. In addition, the
Dealer Program generates a comparatively steady flow of new subscribers spread
more evenly over the Company's branch offices, making it easier for the
Company's branch operations to successfully assimilate these accounts. See
"--The Dealer Program."
MARKET OVERVIEW AND TRENDS
The Company's target market consists of owners of single family
residences and small businesses. According to the most recent U.S. Census Bureau
data, there are over 10 million single-family residences and over 800,000
businesses with 100 or fewer employees in the seven states in which the Company
operates.
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The security alarm industry is characterized by the following attributes:
- HIGH DEGREE OF FRAGMENTATION. The security alarm industry is currently
comprised mostly of a large number of small providers of alarm systems
and services. According to certain data concerning the residential
security alarm market prepared in December 1995 by the J. P. Freeman
Co. (the "Freeman Data"), there are approximately 12,700 security
alarm companies nationally, and the Company estimates that
approximately 3,000 operate in the seven states the Company currently
serves. A survey published by SDM Magazine (formerly Security
Distributing and Marketing) in May 1996 reported that in 1995, based
upon information provided by the respondents, the 100 largest
companies in the industry accounted for approximately 23% of alarm
industry revenues. Based on its acquisition experience, the Company
believes that many smaller alarm service companies, because of their
size, have higher overhead expenses as a percentage of revenues than
the Company and lack access to capital on terms as attractive as those
available to the Company. Due to a decline in security system
installation prices over the last two years, security alarm companies
participating in market growth are required today to make a
substantial investment in each new subscriber. As a result, access to
capital has become an increasingly important factor in a security
alarm company's success.
- RAPID GROWTH AND LOW PENETRATION. The residential security alarm
market is growing rapidly but is still characterized by a low level of
market penetration. The Freeman Data indicate that residential
security alarm monitoring revenues grew at a compounded annual rate of
9.9% between 1989 and 1995. The Company believes that several factors,
including increased concern about crime and favorable demographic
trends, have contributed to the increased demand for residential
security alarm services. In addition, based on the Freeman Data, the
Company estimates that at November 1995, the percentage of total
households in the United States with monitored security alarm systems
was approximately 10.9%.
- ADVANCES IN DIGITAL COMMUNICATIONS TECHNOLOGY. Prior to the
development of digital communications technology, alarm monitoring
required a dedicated telephone line, which made long-distance
monitoring uneconomic. Consequently, in order to achieve a national or
regional presence, alarm monitoring companies were required to
maintain a large number of geographically dispersed monitoring
stations. The development of digital communications technology
eliminated the need for dedicated telephone lines, reducing the cost
of monitoring services to the subscriber and permitting the monitoring
of subscriber accounts over a wide geographic area from a central
monitoring station. The elimination of local monitoring stations has
decreased the cost of providing alarm monitoring services and has
substantially increased the economies of scale for larger alarm
service companies. In addition, the concurrent development of
microprocessor-based control panels has substantially reduced the cost
of the equipment available to subscribers in the residential and small
business markets. Digital technology has also enabled equipment
manufacturers to build more features into security systems (i.e.,
remote user interface, lighting and heating controls, user programming
features.)
- INCREASING FALSE ALARMS. According to American City & County
Magazine, police officers respond to more than 13.7 million alarm
activations annually, 94% to 98% of which are false. The magazine
reports that while alarm ownership is increasing by 11% annually,
police department budgets are rising by 3% annually. Municipalities
have responded to increasing false alarms by implementing alarm permit
and fine systems and by limiting police response to private alarms
until further verified by another response entity. The Company
believes this trend will continue in the future.
- ENTRANCE OF TELECOMMUNICATIONS COMPANIES AND UTILITIES. Large,
consumer oriented companies in industries facing deregulation,
including long distance and local telephone companies and electric and
gas utilities, have demonstrated an increased interest in the security
alarm industry over the last several years. For instance, in October
1995, the Ameritech Corporation, a regional bell operating
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company, completed the acquisition of National Guardian Corp., and in
December 1996, Western Resources, an electric utility, announced an
agreement to acquire Westinghouse Security Systems. These two
acquisitions are the largest in the security industry as of the date
of this Annual Report on Form 10-K. The Company believes
telecommunication and utility companies are interested in offering
their customers additional services, including security services, as a
means of enhancing customer loyalty and reducing future risk of losing
customers in a fully competitive environment.
The Company believes that several factors contribute to a favorable
market for security alarm services both generally in the United States and
specifically in the western portion of the country:
- INCREASE IN CRIME RATES. According to the Uniform Crime Report
published by the Federal Bureau of Investigation in 1996 (the "UCR"),
between 1986 and 1995 the number of violent crimes reported in the
United States increased by 20.8% and the total number of
reported criminal offenses increased by 5.0%. The UCR also reported
that although the number of reported criminal offenses decreased on a
nationwide basis from 1994 to 1995 by 0.9%, a property crime was
committed in the United States in 1995 once every three seconds. In
the states in which the Company operates, the property crime rate in
1995 was 28.1% higher than the nation as a whole, averaging
approximately 5,885 property crimes per 100,000 residents. In
California, Protection One's largest market, the 1995 property crime
and overall crimes rates were 5.9% and 10.5%, respectively, above the
national averages.
- HIGH LEVEL OF CONCERN ABOUT CRIME. As violent crime and the reporting
of crime by the news media has increased, the perception by Americans
that crime is a significant problem has also grown. In a December 1996
poll conducted by the Wall Street Journal, survey participants ranked
reducing crime as one of the two highest priorities for Congress.
- PER CAPITA POLICE PROTECTION. The UCR reported that urban areas in the
western region of the United States had the lowest ratio of law
enforcement employees per capita of the four reporting regions in 1995,
the most recent period for which a UCR has been published. According to
population and law enforcement employee data presented in the UCR, in
1995 Los Angeles had 3.2 law enforcement employees per 1,000 citizens,
while New York had 6.4 and Chicago had 5.7. The number of law
enforcement employees per 1,000 citizens was 3.0 for Las Vegas, 2.8 for
Phoenix, 2.8 for Portland, 3.0 for Salt Lake City, 2.3 for San Diego,
3.3 for San Francisco, 3.3 for Seattle and 2.4 for Tucson.
- DEMOGRAPHIC TRENDS. According to the United States Census Bureau, from
1989 to 1994 the rate of population growth in the states in which the
Company operates was approximately twice the national average.
According to the United States Department of Commerce, median income
in California has been above the national average since 1989. Other
recent trends that are favorable to the residential security alarm
business include: the increase in women in the workforce resulting in
more children being left at home alone and creating increased demand
for security alarm services; the aging of the population in general,
as older people tend to be more concerned about security; and the
increase in people working at home, resulting in increasing demand for
security services to protect home office equipment.
- INSURANCE DISCOUNTS. The increase in demand for security systems may
also be attributable in part to the granting by insurance companies of
discounts to homeowners who purchase alarm systems, and such discounts
are typically greater when systems are monitored by a central station.
In addition, insurance companies may require that businesses install
an alarm system as a condition of insurance coverage.
BUSINESS STRATEGY
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The Company's strategy is to enhance its position as the largest
residential security alarm monitoring company in the seven western states in
which it operates by pursuing a balanced growth plan incorporating the Dealer
Program, acquisitions of portfolios of subscribers, joint ventures and other
strategic alliances and the sale of enhanced services and new alarm systems.
The Company's historical growth has enabled it to realize economies of
scale in its central monitoring station, branch operations and corporate
offices. As the number of subscribers monitored by the Company has increased,
the fixed costs of the central monitoring station have been spread over a
larger base, improving monitoring gross margins. Additionally, subscribers have
been added in areas surrounding the Company's branch offices (i.e., increasing
the density of the Company's subscriber base), allowing the Company to spread
the branch office fixed costs over a larger base and increasing the
productivity of field service technicians through more efficient scheduling and
dispatching. Based on the Company's subscriber base at September 30, 1996, the
Company services an average of over 15,000 subscribers per branch, which it
believes to be among the highest averages in the security industry. Finally,
the Company's revenue growth has exceeded the growth of its selling, general
and administrative expenses, as the Company has realized management
efficiencies and has spread additional revenue over its fixed corporate
expenses. Such economies of scale have allowed the Company to add subscriber
accounts at attractive purchase prices.
The principal components of the Company's business strategy are as
follows:
- THE DEALER PROGRAM. The Company participates in the growth of the
residential security alarm market by providing monitoring and field
repair services to subscriber accounts generated on a monthly basis
through exclusive purchase agreements with independent alarm companies
specializing in the sale and installation of new alarm systems. The
Company added approximately 36,000 subscriber accounts through its
Dealer Program in fiscal 1996, an increase of approximately 220% over
the approximately 11,000 subscribers added through the Dealer Program
in fiscal 1995. As of September 30, 1996, the Company had 45 active
participants in the Dealer Program. The Company believes that
participation in the Dealer Program will expand due to: (i) the
Company's concentrated presence in areas surrounding its branch
offices, which enhances the Company's name recognition and therefore
the marketability of the Company's services; (ii) the Company's
ability to obtain volume purchase discounts on security system
equipment on behalf of its dealers; (iii) the Company's support
services provided to dealers in the areas of administration, marketing
and employee training; and (iv) the Company's ability to generate new
customer leads through affinity programs and strategic alliances.
- ACQUISITIONS OF PORTFOLIOS OF SUBSCRIBER ACCOUNTS. The Company also
grows by acquiring subscriber accounts from smaller alarm companies.
These acquisitions represented approximately 51,000, 53,000 and 55,000
subscribers in fiscal 1994, 1995 and 1996, respectively. The Company
typically acquires only the subscriber accounts, and not the
facilities or liabilities, of such companies. As a result, the
Company is able to obtain gross margins on the monitoring of acquired
subscriber accounts that are similar to those the Company currently
generates on the monitoring of its existing subscriber base. In
addition, the Company institutes price increases over time for
acquired subscriber accounts where the Company determines that the
charges previously paid by those subscribers do not appropriately
reflect the higher quality of services to be provided by the Company.
- JOINT VENTURES AND OTHER STRATEGIC ALLIANCES. To evaluate other
potential sources of subscriber growth, the Company analyzes companies
in other industries that may have an interest in entering the
residential security alarm market. In addition, as mentioned above,
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 entered into a co-branding arrangement with PacifiCorp, a
Portland, Oregon-based utility holding company, and an affinity
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marketing relationship with Kaufman & Broad Home Corporation, the
largest homebuilder in the Company's markets. In addition, the
Company is discussing with certain other companies, and intends to
continue to explore, additional joint ventures, co-marketing
arrangements and other strategic alliances as a method of enhancing
its subscriber growth and reducing its costs of generating new
subscribers. As of the filing of this Annual Report on Form 10-K, the
Company does not believe that any such joint venture or other
strategic alliance is probable.
- SALE OF ENHANCED SERVICES; PATROL AND ALARM RESPONSE SERVICES. The
Company seeks to increase revenues from current and newly added
subscribers by actively marketing enhanced services to such
subscribers. Such services include extended service protection,
two-way voice communication, supervised monitoring services, pager
service, medical identification card and wireless back-up. The
Company also offers patrol and alarm response services, principally in
southern California and Las Vegas.
- CONVERSIONS, NEW OWNERS AND NEW ALARM SYSTEMS. The Company seeks to
convert subscribers from competitors' services to the Company's
services, particularly in areas in which the Company's patrol and
alarm response services enhance the Company's presence and name
recognition. The Company also generates new subscriber accounts by
signing monitoring contracts with new owners of residences previously
occupied by Protection One subscribers and through sales of alarm
systems by its own personnel.
The Company believes the successful execution of its growth strategy
will lead to increases in subscribers and high margin monitoring revenues in
excess of the growth in selling, general and administrative expenses. For
instance, in fiscal 1996, monitoring and service revenues increased by 42.2%
while selling, general and administrative expenses increased by 19.3%. (See
"Selected Consolidated Financial Data" in Item 6.) In addition, the Company
intends to continue to grow primarily in the areas surrounding its branch
offices. As the density of its subscriber account base in such areas increases,
the Company expects to achieve further economies of scale in the scheduling and
dispatching of field service technicians and alarm response officers.
THE DEALER PROGRAM
The dealers the Company selects for the Dealer Program are small alarm
companies that specialize in selling and installing alarm systems for
residential or small business subscribers, as well as specialized direct sales
companies. Such companies often cannot profitably provide monitoring and repair
services because they lack a sufficient number of subscribers to support the
fixed operating expenses associated with such services. Also, many dealers do
not have access to capital on attractive terms, a key factor that the Company
believes is necessary to finance the investment required to grow rapidly. The
Company enters into exclusive contracts with such dealers that provide for the
purchase by the Company of the dealers' subscriber accounts on an ongoing
basis. The dealers install alarm systems (which have a Protection One logo on
the keypad), arrange for subscribers to enter into Protection One alarm
monitoring agreements, and install Protection One yard signs and window decals.
All of these subscribers are contacted individually by Company personnel, at
the time of the purchase of the accounts from the dealers, to facilitate
subscriber satisfaction and quality control. In addition, the Company requires
dealers to evaluate the credit history of prospective new subscribers. The
Company strives to provide quality, responsive field service to accounts
purchased from dealers; the Company's principal competitors often subcontract
the field service of subscriber accounts they purchase, which the Company
believes increases attrition rates and may dissuade dealers from selling their
subscriber accounts to such competitors.
The Company believes that its increased market share in the areas
surrounding its branch offices has enhanced both the Company's ability to
attract dealers and the ability of such dealers to attract new subscribers. To
further attract high quality dealers, the Company enables them to obtain volume
purchase
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discounts on security systems, coordinates cooperative dealer advertising, and
provides administrative, marketing and employee training support services.
The Company's dealers employ a variety of marketing methods to
identify and create sales leads, including telemarketing, direct mail and
door-to-door solicitation. In addition, in certain markets, the Company has
organized a cooperative television advertising effort through which dealers
make voluntary contributions to an advertising fund in exchange for sales leads
generated by such advertising. The majority of the Company's dealers sell and
install a hard-wired, low-cost security system manufactured by Ademco, a
subsidiary of Pittway Corporation. The typical system includes protection of
the front and back doors of a home, one interior motion detection device, a
central processing unit with the ability to communicate signals to the
Company's central monitoring station, a siren, window decals and a lawn sign.
This basic system often will be offered for little or no up-front price, but
will be sold to a subscriber with additional equipment customized to a
subscriber's specific needs. Such equipment add-ons encompass additional
perimeter protection, fire protection devices (heat and smoke detectors),
environmental protection devices (freeze sensors and water detectors), panic
buttons and home automation devices (lighting or appliance controls).
Typically, dealers sign subscribers to alarm monitoring contracts that include
a bundled monthly charge for monitoring and extended service protection.
Extended service protection covers the normal costs of repair of the security
system by the Company's service technicians at the subscriber's premises during
normal business hours after the expiration of the security system's initial
warranty period. Although a customer may elect to sign an alarm monitoring
contract that excludes extended service protection, few customers choose to do
so, and the Company believes the bundling of monitoring and extended service
protection provides additional value to subscribers and allows the Company to
more efficiently provide field repair services. Dealers also sell the Company's
enhanced services.
THE ACQUISITION PROGRAM
The Company also seeks to grow by acquiring portfolios of subscriber
accounts from other alarm companies. The Company focuses on acquisitions that
allow it to "infill" areas surrounding branch operations, which in turn leads
to greater field maintenance, repair and patrol efficiencies. The Company
estimates there are approximately 3,000 alarm companies in its markets,
substantially all of which are independently owned and may, from time to time,
become acquisition targets. The Company believes that it is an effective
competitor in the acquisition market because of the substantial experience of
its management in acquiring alarm companies and subscriber accounts, both as a
result of the 117 acquisitions made by the Company between September 30, 1991
and September 30, 1996 and acquisitions made by members of management when they
were employed by other alarm service companies. The Company also believes that,
through its acquisition activities, it has developed a reputation in the alarm
service industry as an active purchaser of subscriber accounts. Although most
acquisitions add subscribers in the Company's existing market areas to achieve
greater account density, the Company may also make acquisitions outside these
areas.
Because the Company's primary consideration in making an acquisition
is the amount of cash flow that can be derived from the MRR associated with the
purchased accounts, the price paid by the Company is customarily based upon
such MRR. To protect the Company against the loss of acquired accounts and to
encourage the seller of such accounts to facilitate the transfer of
subscribers, management typically requires the seller to provide guarantees
against account cancellations for a period following the acquisition. The
Company usually holds back from the seller a portion of the acquisition price,
and has the contractual right to utilize such holdback to recapture a portion
of the purchase price based on the lost MRR arising from the cancellation of
acquired accounts.
In evaluating the quality of the accounts acquired, the Company relies
primarily on management's knowledge of the industry, its due diligence
procedures, its experience integrating accounts into the Company's operations,
its assumptions as to attrition rates for the acquired accounts, and the
representations and warranties of the sellers.
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THE ACQUISITION MANAGEMENT SYSTEM
The Company employs a comprehensive acquisition management system to
identify, evaluate, and assimilate acquisitions of new subscriber accounts that
includes three components: (i) the identification and negotiation stage; (ii)
the due diligence stage; and (iii) the assimilation stage.
The Company actively seeks to identify prospective companies and
dealers with targeted direct mail, trade magazine advertising, trade show
participation, membership in key alarm industry trade organizations, and
contacts through various prominent vendors and other industry participants.
Management's extensive experience in identifying and negotiating previous
acquisitions, and the Company's use of standard form agreements, help to
facilitate the successful negotiation and execution of acquisitions in a timely
manner.
The Company conducts an extensive pre-closing review and analysis of
all facets of the seller's operations. The process includes a combination of
selective field equipment inspections, individual review of substantially all
of the subscriber contracts, an analysis of the rights and obligations under
such contracts and other types of verification of the seller's operations.
The Company develops a specific assimilation program, in conjunction
with the seller, for each acquisition. Assimilation efforts typically include a
letter, approved by the Company, from the seller to its subscribers, explaining
the sale and transition, followed by one or more letters and packages that
include the Company's subscriber service brochures, field service and
monitoring phone number stickers, yard signs and window decals. Thereafter,
each new subscriber is contacted individually by telephone by a member of the
Company's customer service group for the purpose of soliciting certain
information and addressing the subscriber's questions or concerns. Finally, the
subscriber receives a follow-up telephone call after six months and
periodically thereafter. The acquisition management system's goal is to enhance
new subscriber identification with Protection One as the service provider and
to maintain subscriber satisfaction, and thus realize a higher portion of the
potential value of the MRR generated by purchased subscriber accounts.
DESCRIPTION OF OPERATIONS
The Company's operations consist principally of alarm monitoring
services, enhanced security services, field repair services and patrol and
alarm response services.
ALARM MONITORING SERVICES
Subscriber Security Alarm Systems. Security alarm systems include
devices installed at the subscribers' premises designed to detect or react to
various occurrences or conditions, such as intrusion or the presence of fire or
smoke. These devices are connected to a computerized control panel that
communicates through telephone lines to a central monitoring station.
Subscribers may also initiate an emergency signal from a device such as a
"panic button." In most systems, control panels can identify the nature of the
alarm and the areas within a building where the sensor was activated, and can
transmit that information to the central monitoring station.
The Central Monitoring Station. The Company monitors substantially all
of its subscriber accounts at its central monitoring station in Portland,
Oregon. In addition, in connection with certain acquisitions, the monitoring of
certain subscriber accounts is subcontracted to independent monitoring
companies to comply with certain state regulations. However, it is the
Company's policy to transfer all monitoring services for its acquired
subscriber accounts to its central monitoring station as soon as practicable.
The central monitoring station incorporates the use of advanced
communications and computer systems that route incoming alarm signals and
telephone calls to operators. Each operator sits before a
8
10
computer monitor that provides immediate information concerning the nature of
the alarm signal, the subscriber whose alarm has been activated, and the
premises on which such alarm is located. All telephone conversations are
automatically recorded.
The central monitoring station has the capacity to monitor up to
250,000 subscribers and its capacity can be increased to 500,000 subscribers
for a cost of approximately $500,000. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" included in Item 7. The equipment at the central monitoring station
includes: sophisticated phone switching equipment; digital receivers that
process the incoming signals; two computers with built-in redundancy; a network
of "smart" computer terminals; a multi-channel, voice-activated recording
system; uninterruptable power supply; and dual backup generators supplied by
different fuel sources.
The Company's central monitoring station is listed by Underwriters
Laboratories Inc. ("UL") as a protective signaling services station. UL
specifications for central monitoring stations include building integrity,
back-up systems, staffing and standard operating procedures. In many
jurisdictions, applicable law requires that security alarms for certain
buildings be monitored by UL-listed facilities. In addition, such listing is
required by certain commercial subscribers' insurance companies as a condition
to insurance coverage.
Operation of the Central Monitoring Station. Depending upon the type
of service for which the subscriber has contracted, central monitoring station
personnel respond to alarms by relaying information to the local fire or police
departments, notifying the subscriber, or taking other appropriate action, such
as dispatching alarm response personnel to the subscriber's premises where this
service is available. The Company also provides a substantial number of
subscribers with remote audio verification capability that enables the central
monitoring station to listen and speak directly into the subscriber's premises
in the event of an alarm activation. This feature allows the Company's
personnel to verify that an emergency exists, to reassure the subscriber, and
to expedite emergency response, even if the subscriber is unable to reach a
telephone. Remote audio verification capability also assists the Company in
quickly determining if the alarm was activated inadvertently, and thus whether
a response is required.
The Company's central monitoring station operates 24 hours per day,
seven days a week, including all holidays. Each operator receives training that
includes familiarization with substantially every type of alarm system in the
Company's subscriber base. This enables the operator to tell subscribers how to
turn off their systems in the event of a false alarm, thus reducing the
instances in which a field service person must be dispatched. Other
non-emergency administrative signals are generated by low battery status,
deactivation and reactivation of the alarm monitoring system, and test signals,
and are processed automatically by computer.
Subscriber Contracts. The Company's alarm monitoring subscriber
contracts generally have initial terms ranging from one to five years in
duration, and provide for automatic renewal for a fixed period (typically one
year) unless the Company or the subscriber elects to cancel the contract at the
end of its term. The Company maintains an individual file with a signed copy of
the contract for each of its subscribers and a computerized customer data base.
Substantially all of the Company's alarm monitoring agreements for the
Company's residential subscribers (which constitute approximately 80% of the
Company's total accounts) provide for subscriber payments of between $20 and
$40 per month. The Company's commercial subscribers typically pay from $25 to
$45 per month.
In the normal course of its business, the Company experiences customer
cancellations of monitoring and related services as a result of subscribers
relocating, the cancellation of purchased accounts in the process of
assimilation into the Company's operations, unfavorable economic conditions,
dissatisfaction with field maintenance services and other reasons. This
attrition is offset to a certain extent by revenues from the sale of additional
services to existing subscribers, price increases, the reconnection of premises
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11
previously occupied by subscribers, conversions of accounts previously
monitored by other alarm companies and guarantees provided by the sellers of
such accounts. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview -- Subscriber Attrition" included in Item
7.
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ENHANCED SECURITY SERVICES
Additional MRR is generated by the provision of enhanced security
services that the Company offers to both its existing subscribers and in
conjunction with the sales of new systems. These enhanced security services
include:
Extended Service Protection, which covers the normal costs of repair
and maintenance of the system during normal business hours, after the
expiration of the initial warranty period.
Two-Way Voice Communication (Remote Audio Verification), which
consists of the ability, in the event of an alarm activation, to
listen and talk to persons at the monitored premises from the central
monitoring station through speakers and microphones located within the
premises. Among other things, such remote audio verification helps the
Company to determine whether an alarm activation is a false alarm.
Supervised Monitoring Service, which allows the alarm system to send
various types of signals containing information on the use of the
system, such as what users armed or disarmed the system and at what
time of the day. This information is supplied to subscribers for use
in connection with the management of their households or businesses.
Supervised monitoring service can also include a daily automatic test
feature.
Pager Service, which provides the subscriber, at discounted rates,
with standard pager services that also enable the Company to reach the
subscriber in the event of an alarm activation.
Medical Identification Card, which enables medical personnel in the
event of a medical emergency to access a subscriber's medical
information (i.e., allergies, medications and family history),
emergency contacts and doctors by calling the Company's central
monitoring station.
Wireless Back-Up, which permits the alarm system to send signals over
a cellular telephone or dedicated radio system, in the event that
regular telephone service is interrupted.
FIELD REPAIR SERVICES
The Company believes one of the most effective ways of improving
customer retention is the provision of quality, responsive field repair service
by Company employees. Field service personnel are trained by the Company to
provide repair services for the various types of security systems owned by the
Company's subscribers. Field service personnel also inspect installations
performed by the Company's installation subcontractors.
Repair services generate revenues primarily through billable field
service calls and contractual payments under the Company's extended service
program. The increasing density of the Company's subscriber base, as a result
of the Company's continuing effort to infill areas surrounding its branch
operations with new subscribers, permits more efficient scheduling and routing
of field service technicians, and results in economies of scale at the branch
level. The increased efficiency in scheduling and routing also allows the
Company to provide faster field service response and support, which leads to a
higher level of subscriber satisfaction.
ALARM RESPONSE AND PATROL SERVICES; PROPAC(R)
The Company offers its subscribers in southern California and Las
Vegas a patrol and alarm response enhanced service in addition to its other
security services, and employs over 100 alarm response and patrol officers
operating in 25 regular patrol "beats," or designated neighborhoods to provide
such service. These armed officers supplement the Company's alarm monitoring
service by providing "alarm response service" to alarm system activations,
"patrol service" consisting of routine patrol of subscribers' premises
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and neighborhoods and, in a few cases, "special watch" services, such as
picking up mail and newspapers and increased surveillance when the subscriber
is traveling. Alarm response service requires the Company's patrol officers to
observe and report to police or other emergency agencies any potential criminal
activity at a subscriber's home.
The Company has begun to offer a new bundle of services under the
Propac(R) brand name in Las Vegas. Propac consists of alarm monitoring, field
repair and alarm response services billed to the subscriber as a flat monthly
charge regardless of the number of service calls or responses to alarm
activations. The Company believes this service package is attractive to
current and prospective subscribers because it (i) enables the Company to offer
a reliable and timely alarm response service and (ii) eliminates subscriber
uncertainty arising from "per response" charges. The Company intends to expand
the offering of Propac to other areas within its markets over the next several
years.
Patrol officers are dispatched by a 24-hour central radio dispatch
office located in the local dispatch office. An alarm activation signal from a
subscriber to alarm response service is automatically processed by computer at
the central monitoring station in Portland and sent electronically to the local
dispatch office. If the patrol officer dispatched observes potential criminal
activity, the officer will report the activity to the dispatch office, which
will in turn notify local law enforcement. The patrol officer will then
maintain surveillance until law enforcement officers arrive. If a patrol
officer does not detect criminal activity, he will report his conclusion to the
dispatch office, which will cancel police response and thereby reduce the
potential for a false alarm fine.
The Company also offers "dedicated" patrol service to homeowners'
associations in selected markets, for which the Company provides a
Company-marked car for patrol exclusively in such association's neighborhood. A
significant percentage of the homeowners in such associations purchase the
Company's alarm monitoring services.
The Company's patrol officers are subject to extensive pre-employment
screening. Officers are subject to background checks and drug screening before
being hired, and are required to have gun and baton permits and state and city
guard licenses. Officers also must be licensed by the state to carry firearms
and to provide patrol services. The Company's training program includes arrest
procedures, criminal law, weaponless defense, firearms and baton usage, patrol
tactics, and first-aid and CPR. This training program exceeds state-mandated
training requirements. However, the provision of patrol and alarm response
services subjects the Company to greater risks, relating to accidents or
employee behavior, than other types of businesses.
The cost of providing patrol and alarm response services presently
exceeds the revenues generated by such services. However, the Company believes
that its ability to provide these services gives the Company a competitive
advantage in marketing its monitoring services over alarm service companies
that do not have these capabilities. Additionally, the Company believes such
services are an effective impediment to subscriber attrition.
The Company believes that demand for alarm response and patrol
services is likely to increase as a result of a trend on the part of local
police departments to limit their response to alarm activations and other
factors that may lead to a decrease of police presence. Although the Company
currently incurs a loss in its patrol and alarm response operations, the
Company believes further demand for such services would allow the Company to
increase subscriber density in its patrol routes, thereby reducing losses. In
addition, the Company's provision of alarm response and patrol services is a
sales method used to convert subscribers of other alarm monitoring companies
that do not provide such services. To the extent that further demand develops
for alarm response and patrol services, the Company believes its current
presence will enable it to increase its conversions of competitors' subscribers
to the Company's services.
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SALES AND MARKETING
Each of the Company's 13 branch offices includes sales representatives
who sell new systems, equipment add-ons and upgrades and enhanced services to
subscribers. Although the Company does not actively use outbound marketing
methods to sell new security alarm systems, the Company receives in-bound
telephone requests for such systems, primarily as a result of subscriber
referrals, local crime activity and responses to yellow pages advertising. Such
leads are pursued by one of the Company's sales representatives. Alarm sales
are made at the subscriber's home, typically in a single visit by a sales
representative. The Company markets additional services through both its
account sales representatives and through a centralized telephone sales force
in the Company's corporate offices.
The Company believes that the increasing density of the Company's
subscriber base has increased the overall presence and visibility of the
Company. Both in the Dealer Program and in Company sales, new subscribers are
provided with highly visible reflective yard signs placed prominently in front
of their homes or businesses. The presence of these signs develops greater
awareness in a neighborhood and leads to more inbound and referral business.
The Company encourages referrals from existing subscribers through an incentive
program promoted through newsletters, billing inserts and employee contacts.
Alarm response service, which uses marked patrol cars, also increases the
Company's visibility.
COMPETITION
The security alarm industry is highly competitive and highly
fragmented. The Company competes with major firms with substantial financial
resources, including ADT Operations Inc.; the Protection Securities Division of
Honeywell, Inc.; The National Guardian Corporation, a subsidiary of the
Ameritech Corporation; Brinks Home Security Inc., a subsidiary of The Pittston
Company; and Westinghouse Security, currently a division of Westinghouse
Electric Corporation. Other alarm service companies have adopted a strategy
similar to the Company's that entails the aggressive purchase of alarm
monitoring accounts both through acquisitions of account portfolios and through
dealer programs. Some of such competitors have greater financial resources than
the Company, or may be willing to offer higher prices than the Company is
prepared to offer to purchase subscriber accounts.
Competition in the security alarm industry is based primarily on
reliability of equipment, market visibility, services offered, reputation for
quality of service and price. The Company believes it competes effectively with
other national, regional and local security alarm companies in the western
United States because of the Company's reputation for reliable equipment and
services, its concentrated presence in the areas surrounding its branch
offices, its ability to bundle monitoring, maintenance and repair and enhanced
services and its low cost structure.
REGULATORY MATTERS
A number of local governmental authorities have adopted or are
considering various measures aimed at reducing the number of false alarms. Such
measures include (i) subjecting alarm monitoring companies to fines or
penalties for transmitting false alarms, (ii) licensing individual alarm
systems and the revocation of such licenses following a specified number of
false alarms, (iii) imposing fines on alarm subscribers for false alarms, (iv)
imposing limitations on the number of times the police will respond to alarms
at a particular location after a specified number of false alarms, and (v)
requiring further verification of an alarm signal before the police will
respond.
The Company's operations are subject to a variety of other laws,
regulations and licensing requirements of federal, state, and local
authorities. In certain jurisdictions, the Company is required to obtain
licenses or permits, to comply with standards governing employee selection and
training, and to meet certain standards in the conduct of its business. Many
jurisdictions also require certain of the Company's employees to obtain
licenses or permits. Those employees who serve as patrol officers are often
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subject to additional licensing requirements, including firearm licensing and
training requirements in jurisdictions in which they carry firearms.
The alarm industry is also subject to requirements imposed by various
insurance, approval, listing and standards organizations. Depending upon the
type of subscriber served, the type of security service provided, and the
requirements of the applicable local governmental jurisdiction, adherence to
the requirements and standards of such organizations is mandatory in some
instances and voluntary in others.
The Company's advertising and sales practices are regulated by both
the Federal Trade Commission and state consumer protection laws. Such laws and
regulations include restrictions on the manner in which the Company promotes
the sale of its security alarm systems and the obligation of the Company to
provide purchasers of its alarm systems with certain recision rights. From time
to time subscribers have submitted complaints to state and local authorities
regarding the Company's sales and billing practices. Such complaints can result
in regulatory action against the Company, including civil complaints seeking
monetary and injunctive remedies.
The Company's alarm monitoring business utilizes telephone lines and
radio frequencies to transmit alarm signals. The cost of telephone lines, and
the type of equipment which may be used in telephone line transmission, are
currently regulated by both federal and state governments. The operation and
utilization of radio frequencies are regulated by the Federal Communications
Commission and state public utilities commissions.
RISK MANAGEMENT
The nature of the services provided by the Company potentially exposes
it to greater risks of liability for employee acts or omissions, or system
failure, than may be inherent in other businesses. Substantially all of the
Company's alarm monitoring agreements, and other agreements pursuant to which
it sells its products and services contain provisions limiting liability to
subscribers in an attempt to reduce this risk.
The Company's alarm response and patrol services require Company
personnel to respond to emergencies that may entail risk of harm to such
employees and to others. In most cities in which the Company provides such
services, the Company's patrol officers carry firearms, which may increase such
risk. Although the Company conducts extensive screening and training of its
employees, the provision of patrol and alarm response service subjects it to
greater risks related to accidents or employee behavior than other types of
businesses.
The Company carries insurance of various types, including general
liability and errors and omissions insurance. The loss experience of the
Company, and other security service companies, may affect the availability and
cost of such insurance. Certain of the Company's insurance policies, and the
laws of some states, may limit or prohibit insurance coverage for punitive or
certain other types of damages, or liability arising from gross negligence.
EMPLOYEES
At September 30, 1996, the Company employed 814 individuals on a
full-time basis. Currently, none of the Company's employees is represented by a
labor union or covered by a collective bargaining agreement. The Company
believes that its relations with its employees are good.
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ITEM 2. FACILITIES
The Company's executive offices are located at 6011 Bristol Parkway,
Culver City, California, and its central monitoring station and administrative
office are located in the Portland, Oregon metropolitan area at 3900 S.W. Murray
Boulevard, Beaverton, Oregon. The offices at both locations are leased by the
Company. The Culver City lease expires in 1998, but can be renewed by the
Company for an additional term of five years. The Beaverton lease expires in
2005, but can be renewed by the Company for two additional terms of five years
each. The Company also leases office space in Bullhead City, Arizona; Tempe,
Arizona; Las Vegas, Nevada; Albuquerque, New Mexico; Salt Lake City, Utah; Kent,
Washington; Riverside, California; Irvine, California; Bakersfield, California;
San Leandro, California; San Diego, California; Santa Clara, California; and Van
Nuys, California. The leases for these properties expire on various dates
through 2005, and in some cases are renewable at the option of the Company.
ITEM 3. LEGAL PROCEEDINGS
Each of POI and Monitoring experiences routine litigation in the
normal course of its business. Neither of the Registrants believes that any of
such pending litigation will have a material adverse effect on the financial
condition or results of operations of that Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
POI's Common Stock, par value $.01 per share ("Common Stock"), has been
traded on the Nasdaq National Market since September 29, 1994 under the symbol
"ALRM." The following table sets forth the range of high and low closing sales
prices of the Common Stock on the Nasdaq National Market for the periods
indicated.
HIGH LOW
----- ---
September 29-30, 1994 $6 5/8 $6 7/32
Fiscal 1995:
First Quarter 7 4 7/8
Second Quarter 6 7/8 5
Third Quarter 7 4 7/16
Fourth Quarter 9 3/4 6 1/8
Fiscal 1996:
First Quarter 10 1/2 7 9/32
Second Quarter 14 9/16 9
Third Quarter 17 5/16 13 3/8
Fourth Quarter 16 5/8 12 3/8
As of December 17, 1996, there were 37 holders of record of the Common
Stock.
POI has never paid any cash dividends on the Common Stock and does not
intend to pay any cash dividends in the foreseeable future. The Company intends
to retain its cash flows for the operation and expansion of its business.
Monitoring's $100.0 million revolving credit facility (the "Revolving Credit
Facility"), the indenture (the "Discount Note Indenture") pursuant to which
Monitoring's 13 5/8% Senior Subordinated Discount Notes due 2005 (the "Discount
Notes") were issued and the indenture (the "Convertible Note Indenture")
pursuant to which Monitoring's 6 3/4% Convertible Senior Subordinated Notes due
2003 (the "Convertible Notes") were issued restrict POI's ability to declare or
pay any dividend on, or make any other distribution in respect of, POI's capital
stock.
Pursuant to the terms of the credit agreement (the "Credit Agreement")
governing the Revolving Credit Facility, Monitoring is restricted from making
dividend payments on its common stock. The Discount Note Indenture contains
restrictions on dividends paid by Monitoring that are similar to the
restrictions summarized above. During each of fiscal 1994, 1995 and 1996,
Monitoring paid dividends to POI of approximately $0.7 million, $0.7 million and
$0.2 million, respectively.
13 5/8% Senior Subordinated Discount Notes due 2005; Warrants to
Purchase Common Stock. On May 17, 1995, Monitoring and POI issued and sold to
Morgan Stanley & Co. Incorporated and Montgomery Securities (the "Placement
Agents") $166 million aggregate principle amount of 13 5/8% Senior Subordinated
Discount Notes due 2005 (the "Original Discount Notes") and 531,200 warrants to
purchase shares of Common Stock at a price of $6.60 per share (the "1995
Warrants" and together with the Discount Notes, the "Units"). The Discount Notes
are fully and unconditionally guaranteed by POI and, as of October 1996,
Monitoring's subsidiary Security Holdings, Inc. ("Security Holdings"). POI and
Monitoring received gross proceeds from the sale of the Units of approximately
$110 million. The Placement Agents resold the Units to 17 "qualified
institutional buyers" (as such term is defined in Rule 144A under the Securities
Act of 1933, as amended (the "Securities Act"), at prices not disclosed to POI
or Monitoring. In November 1995, the Original Discount Notes were exchanged by
the holders thereof for a like principal amount of 13 5/8% Senior Subordinated
Discount Notes due 2005 also issued by
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Monitoring, the principal terms of which were identical to those of the Original
Discount Notes, which exchange was registered under the Securities Act pursuant
to a Registration Statement on Form S-4 (Registration Statement No. 33-94684)
declared effective by the Securities Exchange Commission on October 11, 1995.
Common Stock. On June 28, 1996, Monitoring acquired all of the
outstanding capital stock of Metrol Security Services, Inc. a Delaware
corporation ("Metrol" and such acquisition the "Metrol Acquisition"), from the
Buckey Family Trust and the 10 other stockholders of Metrol. In consideration of
such acquisition, Monitoring paid approximately $15.7 million of Metrol's bank
and third party indebtedness, paid to the Metrol stockholders an aggregate of
approximately $9.1 million in cash and delivered to the Metrol stockholders an
aggregate of 417,885 shares of Common Stock. Of the cash portion of the purchase
price, $3.0 million was placed in an escrow account to secure the Metrol
stockholders' obligation to indemnify Monitoring against certain liabilities and
obligations relating to Metrol, including certain tax claims. Prior to the
Metrol Acquisition, Metrol and its subsidiaries sold, installed, serviced and
monitored security alarm systems and provided guard and patrol services to
residential and commercial subscribers in Arizona and New Mexico.
On September 30, 1996, Monitoring acquired the security alarm accounts,
accounts receivable, telephone lines and certain other assets of Sequence
Systems, Inc., an Oregon corporation d/b/a Alltec ("Alltec" and such acquisition
the "Alltec Acquisition"). In consideration of the Alltec Acquisition,
Monitoring paid an aggregate of $0.7 million of Alltec's indebtedness, assumed
certain operating obligations of Alltec and delivered to Alltec an aggregate of
167,647 shares of Common Stock; in addition, Monitoring agreed to deliver to
Alltec (i) up to an 24,765 additional shares of Common Stock in October 1997,
depending upon the actual postclosing attrition rate for the acquired accounts,
and (ii) up to 9,500 additional shares of Common Stock if Monitoring acquires
from Alltec prior to January 30, 1997 certain subscriber accounts generated
after the closing of the Alltec Acquisition.
On October 4, 1996, Monitoring acquired all of the outstanding shares
of capital stock of Security Holdings (such acquisition the "Security Holdings
Acquisition"). In consideration of the Security Holdings Acquisition, Monitoring
delivered an aggregate of 482,903 shares of Common Stock to the four
stockholders of Security Holdings. An additional 68,985 shares of Common Stock
have been placed in an escrow account and will be delivered to the former
shareholders of Security Holdings in June 1997 if the actual postclosing
attrition rate of the Security Holdings alarm accounts does not exceed an
assumed rate reflected in the purchase agreement for the acquisition. Prior to
the Security Holdings Acquisition, Security Holdings was engaged in the business
of providing security alarm monitoring services to residential and commercial
subscribers located primarily in Washington and Oregon.
The offer and sale from time to time of the shares of Common Stock
issued and issuable in connection with the above-described acquisitions by the
holders of such shares has been registered under the Securities Act pursuant to
two Registration Statements on Form S-3 (the "Registration Statements"). The
Registration Statement relating to the shares of Common Stock issued in
connection with the Metrol Acquisition (Registration No. 333-05849) was declared
effective by the Securities and Exchange Commission (the "SEC") on July 1, 1996;
the Registration Statement relating to the shares of Common Stock issued and
issuable in connection with the Alltec and Security Holdings Acquisitions
(Registration No. 333-13733) was declared effective by the SEC on October 16,
1996.
Exemptions; Underwriters. The offer, sale and distribution of the Units
and the offer and sale of the shares of Common Stock to the stockholders of
Metrol, the stockholders of Security Holdings and Alltec were not registered
under the Securities Act in reliance on Section 4(2) thereof and Rule 506 (and,
in the case of the distribution of the Units, Rule 144A) thereunder. The Units
were distributed pursuant to an offering memorandum only to persons that were
established pursuant to an investor letter to be qualified institutional buyers,
and the Original Discount Notes were, and the 1995 Warrants are, subject to
legends, stop transfer orders and other restrictions on transfer. Each person to
whom such shares of Common Stock were issued (i) certified to POI that such
person was an "accredited investor" as such term is defined
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in Rule 501 under the Securities Act and was otherwise able to bear the economic
risk of the investment, (ii) was provided with registration statements and
reports of, and access to other information concerning, the Company and (iii)
warranted to POI that the shares were acquired for investment purposes and not
with a view to distribution thereof, and agreed to restrictions on transfer of
such securities pending the registration of such securities as described below.
Except as set forth above with respect to the Units, no underwriter participated
in the offer or sale of any of these securities and no underwriter's fees or
commissions were paid.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
AND SUBSCRIBER DATA)
The selected consolidated financial data for fiscal 1992, 1993, 1994,
1995 and 1996 are derived from the consolidated financial statements of the
Company that have been audited by Coopers & Lybrand L.L.P. The selected
consolidated financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements, and the related notes
thereto, included elsewhere in this Annual Report on Form 10-K.
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA:
Revenues:
Monitoring and service . . . . $12,408 $14,850 $27,109 $46,308 $65,860
Other . . . . . . . . . . . . . 5,190 7,040 7,371 9,574 7,597
------- ------- ------- ------- -------
Total revenues . . . . . . . 17,598 21,890 34,480 55,882 73,457
------- ------- ------- ------- -------
Cost of revenues:
Monitoring and service . . . . 3,784 3,547 6,520 11,795 17,770
Other . . . . . . . . . . . . . 3,013 3,914 5,804 7,424 6,323
------- ------- ------- ------- -------
Total cost of revenues . . . 6,797 7,461 12,324 19,219 24,093
------- ------- ------- ------- -------
Gross profit . . . . . . . . 10,801 14,429 22,156 36,663 49,364
Selling, general and administrative
expenses . . . . . . . . . . . 10,239 12,084 10,380 12,409 14,809
Loss on acquisition terminations -- -- 26 208 --
Performance warrants compensation
expense . . . . . . . . . . . . -- -- 4,504 -- --
Adjustment of purchase accounting
accruals, net . . . . . . . . . -- (742) -- -- --
Acquisition and transition expenses -- -- -- 3,090 4,219
Amortization of subscriber accounts and
goodwill . . . . . . . . . . . 2,525 3,864 8,772 15,460 23,275
------- ------- ------- ------- -------
Operating income (loss) . . . (1,963) (777) (1,526) 5,496 7,061
Interest expense, net(a) . . . . 1,941 1,564 6,932 7,626 4,885
Amortization of debt issuance cost
and OID . . . . . . . . . . . . 49 185 891 6,797 17,812
Loss before income taxes,
extraordinary items and
cumulative
effect of change in accounting
method -- net of taxes . . $(3,953) $(2,526) $(9,349) $(9,432) $(15,744)
Extraordinary item -- loss on early
extinguishment of debt -- net (b) -- (281) (1,174) (8,906) --
Cumulative effect of change in
accounting method -- net (c) . -- -- -- (1,955) --
Net loss . . . . . . . . . . $(3,953) $(2,807) $(7,660) $(16,698) $(15,497)
Loss attributable to common stock $(5,033) $(4,635) $(9,161) $(18,453) $(15,745)
Loss per common share:
Before extraordinary items and
cumulative effect of change in
accounting method . . . . . . $(48.40) $(41.86) $(27.11) $(0.87) $(1.40)
Net loss per share . . . . . . $(48.40) $(44.57) $(31.10) $(2.12) $(1.40)
SEPTEMBER 30,
-------------
1992 1993 1994 1995 1996
-------- -------- --------- -------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) . $(3,112) $(1,632) $(11,505) $(9,159) $(13,193)
Subscriber accounts and intangibles 31,561 37,204 114,620 162,239 257,354
Total assets . . . . . . . . . . . . 39,071 44,472 126,085 178,669 290,075
Long-term debt . . . . . . . . . . . 20,923 23,591 86,842 146,023 225,650
Redeemable preferred stock . . . . . 15,371 22,957 22,210 6,127 --
Total stockholders' equity (deficit) (4,195) (8,796) (6,084) 6,347 28,827
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YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- -------- --------
OTHER DATA:
MRR(d) . . . . . . . . . . . . . . $ 1,015 $ 1,208 $ 2,737 $ 3,924 $ 6,187
Number of subscribers at end of
period . . . . . . . . . . . . . . 35,538 39,527 85,269 129,420 196,531
EBITDA(e) . . . . . . . . . . . . . $ 1,043 $ 3,609 $12,294 $ 22,247 $ 32,181
- -----------------
(a) Includes interest expense to related parties of $1.2 million in fiscal
1992 and $0.3 million in fiscal 1993.
(b) In connection with the early extinguishment of the $50.0 million
principal amount of the Company's 12% Senior Subordinated Notes, the
Company incurred an extraordinary loss of approximately $8.9 million,
net of the effect of taxes of $0.9 million, in fiscal 1995.
(c) For information regarding this change, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview
-- Recent Change in Accounting Method" included in Item 7 and Note 2 of
Notes to Consolidated Financial Statements included in Item 8.
(d) MRR means monthly recurring revenue (excluding revenues from patrol
services) that the Company is entitled to receive under contracts in
effect at the end of the period. MRR is a term commonly used in the
security alarm industry as a measure of the size of a company, but not
as a measure of profitability or performance, and does not include any
allowance for future attrition or allowance for doubtful accounts. The
Company does not have sufficient information as to the attrition of
acquired subscriber accounts to predict the amount of acquired MRR
that will be realized in future periods or the impact of the attrition
of acquired accounts on the Company's overall rate of attrition.
(e) EBITDA does not represent cash flow from operations as defined by
generally accepted accounting principles, should not be construed as
an alternative to net income and is indicative neither of the
Company's operating performance nor of cash flows available to fund
all the Company's cash needs. Items excluded from EBITDA are
significant components in understanding and assessing the Company's
financial performance. Management believes presentation of EBITDA
enhances an understanding of the Company's financial condition,
results of operations and cash flows because EBITDA is used by the
Company to satisfy its debt service obligations and its capital
expenditure and other operational needs as well as to provide funds
for growth. In addition, EBITDA has been used by senior lenders and
subordinated creditors and the investment community to determine the
current borrowing capacity and to estimate the long-term value of
companies with recurring cash flows from operations and net losses.
The following table provides a calculation of EBITDA for each of the
periods presented above:
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
Loss before income taxes,
extraordinary items and cumulative
effect of change in accounting
method-net of taxes (a).......................... $ (3,953) $ (2,526) $ (9,349) $ (9,432) $(15,744)
Plus:
Loss on sales of assets ......................... -- -- -- 505 19
Loss on assets held for sale .................... -- -- -- -- 89
Amortization of debt issuance costs and OID ..... 49 185 891 6,797 17,812
Interest expense, net ........................... 1,941 1,564 6,932 7,626 4,885
Amortization of subscriber accounts
and goodwill .................................... 2,525 3,864 8,772 15,460 23,275
Depreciation expense ............................ 481 522 518 1,083 1,845
Performance warrants compensation expense ....... -- -- 4,504 -- --
Loss on acquisition terminations ................ -- -- 26 208 --
-------- -------- -------- -------- --------
EBITDA ....................................... $ 1,043 $ 3,609 $ 12,294 $ 22,247 $ 32,181
======== ======== ======== ======== ========
--------------
(a) Such amount reflects a reduction of $0.7 million for adjustment of
purchase accounting accruals, net in fiscal 1993.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained below includes statements of the Company's or
management's beliefs, expectations, hopes, goals and plans that are
forward-looking statements subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the
forward-looking statements. For a description of such risks and uncertainties,
see the information set forth and incorporated by reference in the Introductory
Note to this Annual Report on Form 10-K under the caption "Forward-Looking
Statements," which information is incorporated in this Item by reference. As
described in "Introductory Note - Company Structure," POI's sole asset is, and
all of POI's operations are conducted through, POI's investment in Monitoring;
in addition, all of Monitoring's long-term debt has been guaranteed on a full
and unconditional basis by POI. (See Note 8 of Notes to Consolidated Financial
Statements included in Item 8 hereof.) Accordingly, no separate analysis of the
results of operations of Monitoring has been included herein.
OVERVIEW
A majority of the Company's revenues are derived from recurring
payments for the monitoring and servicing of security systems and additional
security services, pursuant to contracts with initial terms ranging from one to
five years. Service revenues are derived from payments under extended service
contracts and for service calls performed on a time and materials basis. The
remainder of the Company's revenues are derived from revenues from the sale and
installation of security systems, add-ons and upgrades. Payment for monitoring
services is typically required in advance. Monitoring and service revenues are
recognized as the service is provided. Installation, add-on and upgrade revenue
is recognized when the required work is completed. All direct installation
costs, which include materials, labor and installation overhead, and selling and
marketing costs are expensed in the period incurred.
Alarm monitoring services generate a significantly higher gross margin
than do the other services provided by the Company. In fact, the cost of
providing patrol and alarm response services exceeds the revenues generated by
patrol services and, while sales and installation services contribute to the
Company's gross profits, the total expenses associated with alarm system
installations (including not only the direct costs of providing such services
but also the expenses associated with the sales and marketing of alarm systems)
also exceed the revenues generated by such services. The Company's strategy,
however, is to provide patrol and alarm response services and to invest in
system sales and installation because the Company believes that such services
and products contribute to the generation and retention of alarm monitoring
subscribers.
Accounting Differences for Account Purchases and New Installations. A
difference between the accounting treatment of the purchase of subscriber
accounts and the accounting treatment of the generation of subscriber accounts
through direct sales by the Company's sales force has a significant impact on
the Company's results of operations. All direct external costs associated with
purchases of subscriber accounts (either through the Dealer Program or through
acquisitions of subscriber account portfolios) are capitalized and amortized
over 10 years on a straight- line basis. Company personnel and related support
and duplicate costs incurred solely in connection with subscriber account
acquisitions and transitions are expensed as incurred. Other acquisition
transition costs that reflect the Company's estimate of costs associated with
incorporating the purchased subscriber accounts into its operations, including
costs incurred by the Company in fulfilling the seller's pre- acquisition
warranty repair service and other obligations to the acquired subscribers are
capitalized and amortized as described above. In contrast, all of the Company's
costs related to the sales, marketing and installation of new alarm monitoring
systems generated by the Company's sales force are expensed in the period in
which incurred.
The Company's purchase activity increased significantly in fiscal 1995
and 1996. In addition, beginning in fiscal 1994, the Company adopted a strategy
of reducing its sales of new systems and related marketing expenditures. As a
result of the difference in the methods by which such activities are
21
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accounted for, the combined effect of these two factors was to improve operating
results during fiscal 1995 and 1996. The Company does not expect to further
reduce sales of new systems by Company personnel and related marketing
expenditures.
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. The
acquisition and transition costs previously capitalized, which under the new
method are expensed as incurred, are the Company personnel and related support
and duplicate costs incurred solely in connection with acquisitions and
transitions.
The new method is consistent with the guidelines published on July 21,
1995 by the Emerging Issue Task Force of the Financial Accounting Standards
Board. See "--Accounting for Account Purchases and New Installations" and Note 2
of Notes to Consolidated Financial Statements included in Item 8.
As a result of the change in accounting policy: (i) in the quarter
ended December 31, 1994, the Company recorded a non-cash, non-recurring charge
of approximately $2.0 million, which amount represents the cumulative effect
(net of income tax benefit of approximately $1.2 million) of the accounting
change on prior years' results of operations; and (ii) the Company's statements
of operations include an expense item captioned "acquisition and transition
expenses". The expense was approximately $3.1 million for fiscal 1995 and $4.2
million for fiscal 1996 (in each case before associated tax benefit). The
foregoing non-recurring charge and expenses are reflected in the financial
information presented in this report. 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.
Acquisition and Dealer Program Activity. As described in this Annual
Report on Form 10-K, 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 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 fiscal 1996, the Company added (through acquisitions of 30
portfolios of subscriber accounts and through its Dealer Program) an aggregate
of approximately 91,000 subscriber accounts for a total purchase price of
approximately $119.6 million (including assumed liabilities of approximately
$27.2 million). The MRR of the acquired accounts ranged from approximately
$10.00 to $40.00, with an average of $31.20. Of the acquisitions completed
during fiscal 1996 by the Company, the substantial majority included purchase
price holdbacks in amounts that ranged from 5% to 20% of the initial purchase
price (and averaged 13% of the initial purchase price) and attrition guarantees
for periods that ranged from six months to 12 months (and averaged 8.8 months).
22
24
Two of the Company's acquisitions during fiscal 1996 involved
portfolios representing MRR that exceeded 5% of the Company's MRR at the time of
the acquisition, as set forth below:
PERCENTAGE OF
NUMBER OF AVERAGE MRR RANGE OF MRR RESIDENTIAL
SELLER ACCOUNTS PER ACCOUNT PER ACCOUNT SUBSCRIBERS
------ -------- ----------- ----------- -----------
InterCap Funds Joint Venture ... 9,975 $27.39 $18.00-45.00 80%
Metrol Security Services ....... 18,500 27.03 $15.00-80.00 70
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. The following table sets forth the
Company's gross subscriber attrition and net MRR attrition for the periods
indicated:
YEAR ENDED SEPTEMBER 30
---------------------------------------
1994 1995 1996
-------- -------- --------
Gross subscriber 19.6% 19.3% 18.3%
attrition
Net MRR attrition 5.3 6.6 7.0
MRR represents the monthly recurring revenue the Company is entitled to
receive under subscriber contracts in effect at the end of the period. Included
in MRR and the number of subscribers are amounts associated with subscribers
with past due balances. It is the policy and practice of the Company that every
effort be made to preserve the revenue stream associated with these contractual
obligations. To this end, the Company actively works to both collect amounts
owed and to retain the subscriber. In certain instances, this collection and
evaluation period may exceed six months in length. When, in the judgment of the
Company's collection personnel, all reasonable efforts have been made to collect
balances due, subscribers are disconnected from the Company's monitoring center
and are included in the calculation of gross subscriber and net MRR attrition.
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
23
25
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 the majority 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. See " -- Results of Operations -- Fiscal 1996
Compared to Fiscal 1995 -- Amortization of subscriber accounts and goodwill" and
Note 7 of Notes to Consolidated Financial Statements included in Item 8.
The table below sets forth the change in the Company's subscriber base
over fiscal years 1994-1996:
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1994 1995 1996
-------- -------- --------
Number of subscribers:
Beginning of period .................................................. 39,527 85,269 129,420
Additions through portfolio acquisitions and Dealer
Program, net of sales of subscriber accounts ....................... 54,211 60,909 91,325
Installations by Company personnel ................................... 1,646 1,502 881
Reconnects and conversions ........................................... 3,060 3,585 4,633
Gross subscriber attrition ........................................... (13,175) (21,845) (29,728)
-------- -------- --------
End of period ..................................................... 85,269 129,420 196,531
======== ======== ========
Impact of SFAS 121. In March of 1995, the Financial Accounting
Standards Board issued SFAS 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," effective for financial
statements for fiscal years beginning after December 15, 1995. This statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company determines the value of its "Subscriber Accounts and
Intangibles, net" based on the undiscounted cash flows from the MRR stream using
the most recent historical attrition rate and aggregate MRR. At September 30,
1996, the undiscounted cash flows from the MRR stream were significantly in
excess of the carrying value of "Subscriber Accounts and Intangibles, net." The
Company does not anticipate a material impact on its financial statements
resulting from the adoption of this standard.
Restrictions on Dividends. POI has never paid any cash dividends on the
Common Stock and does not intend to pay any cash dividends in the foreseeable
future. The Revolving Credit Facility and the Discount Note Indenture restrict
POI's ability to declare or pay any dividend on, or make any other distribution
in respect of, POI's capital stock. See Item 5 for information as to
restrictions on dividends payable by Monitoring.
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RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of total revenues for the periods indicated.
YEAR ENDED SEPTEMBER 30,
------------------------
1994 1995 1996
----- ----- -----
Revenues:
Monitoring and service ...................... 78.6% 82.9% 89.7%
Other ....................................... 21.4 17.1 10.3
----- ----- -----
Total revenues ...................... 100.0% 100.0% 100.0%
----- ----- -----
Cost of revenues:
Monitoring and service ...................... 18.9% 21.1% 24.2%
Other ....................................... 16.8 13.3 8.6
----- ----- -----
Total cost of revenues .............. 35.7 34.4 32.8
----- ----- -----
Gross profit ........................ 64.3 65.6 67.2
Selling, general and administrative expenses .. 30.1 22.2 20.2
Loss on acquisition terminations .............. 0.1 0.4 --
Acquisition and transition expenses ........... -- 5.5 5.7
Performance warrants compensation expense ..... 13.1 -- --
Amortization of subscriber accounts
and goodwill ................................ 25.4 27.7 31.7
----- ----- -----
Operating income (loss) ............. (4.4)% 9.8% 9.6%
===== ===== =====
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues for fiscal 1996 increased by $17.6 million, or 31.5%, to $73.5
million from $55.9 million for fiscal 1995. Monitoring and service revenues
increased by $19.6 million, or 42.2%, substantially all of which resulted from
the addition of approximately 55,000 subscribers from the acquisition of
portfolios of subscriber accounts and approximately 36,000 subscribers from the
Dealer Program. Other revenues declined by 20.6% to $7.6 million in fiscal 1996
from $9.6 million in fiscal 1995. The decline in other revenues reflects a
decrease in installation revenues of $1.4 million and a net decrease in patrol,
alarm response and lock revenues of $0.6 million. The decline in installation
revenues resulted from the Company's continued emphasis on growth through
acquisitions and the Dealer Program, rather than through sales of new alarm
systems by Company personnel.
Cost of revenues for fiscal 1996 increased by $4.9 million, or 25.4%,
to $24.1 million. Cost of revenues as a percentage of total revenues declined to
32.8% during fiscal 1996 from 34.4% during fiscal 1995. Monitoring and service
expenses increased by $6.0 million, or 50.7%, 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 27.0% from 25.5%
during 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
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.
See "-- Overview -- Acquisition and Dealer Program Activity". Other expenses
declined by $1.1 million to $6.3 million in fiscal 1996 from $7.4 million in
fiscal 1995, reflecting the decline in installation activities.
Gross profit for fiscal 1996 was $49.4 million, which represents an
increase of $12.7 million, or 34.6%, over the $36.7 million of gross profit
recognized in fiscal 1995. Such increase was caused primarily by an increase in
monitoring and service activities, which reflected the increase in the Company's
subscriber base from 129,420 at September 30, 1995 to 196,531 at September 30,
1996. Gross profit as a percentage of total revenues was 67.2% for fiscal 1996
compared to 65.6% for fiscal 1995. This increase was caused primarily by an
increase in monitoring and service revenues as a percentage of total revenues.
25
27
Selling, general and administrative expenses rose to $14.8 million in
fiscal 1996, an increase of $2.4 million, or 19.3%, over such expenses in fiscal
1995, but declined as a percentage of total revenues from 22.2% in fiscal 1995
to 20.2% in fiscal 1996. Sales and marketing expense declined 29.5% (or $0.8
million) and general and administrative expenses increased 32.2% (or $3.2
million). Sales and marketing expenses declined due to the Company's continued
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
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 1% of revenues in each of fiscal 1995 and 1996. The
provision for doubtful accounts increased to $2.6 million in fiscal 1996 from
$1.8 million in fiscal 1995, reflecting the 51.8% increase in the Company's
average subscriber base from fiscal 1995 to fiscal 1996.
Acquisition and transition expenses for fiscal 1996 totaled $4.2
million compared to $3.1 million for fiscal 1995. Such expenses will fluctuate
from quarter to quarter based primarily on the Company's acquisition activity
and the extent sellers bear certain of the related expenses.
Amortization of subscriber accounts and goodwill for fiscal 1996
increased by $7.8 million, or 50.6%, to $23.3 million. This increase is the
result of the Company's purchase of approximately 91,000 subscriber accounts
through the acquisition of portfolios of subscriber accounts and the Dealer
Program in fiscal 1996.
Operating income for fiscal 1996 was $7.1 million, compared to
operating income of $5.5 million in fiscal 1995. Operating income as a
percentage of revenue was 9.6% in fiscal 1996, compared to 9.8% in fiscal 1995.
Interest expense, net and amortization of debt issuance costs and OID
increased by $8.3 million, or 57.4%, to $22.7 million in fiscal 1996. This
increase reflects the Company's continued use of debt to finance a substantial
portion of its subscriber account growth, including the issuance of the Discount
Notes in May 1995. See "-- Liquidity and Capital Resources."
Balance sheet data. At September 30, 1996, the Company's working
capital deficit was $13.2 million, as compared to a working capital deficit of
$9.2 million at September 30, 1995. Significant changes in working capital items
include a $6.9 million increase in accounts receivable offset by increases in
purchase holdbacks ($5.0 million), acquisition and transition costs ($3.4
million) and deferred revenue ($4.7 million). Subscriber accounts and
intangibles, net increased to $257.4 million at September 30, 1996 from $162.2
million at September 30, 1995. This increase of $95.1 million, or 58.6%, was
caused by the acquisition of new subscribers, net of amortization expense. Total
stockholders' equity increased to $28.8 million at September 30, 1996 from $6.3
million at September 30, 1995 reflecting the conversion of redeemable preferred
stock to common stock, the issuance of common stock in the Company's February
1996 public offering, the issuance of $6.0 million of common stock in the
acquisition of Metrol Security Services and a loss of $15.7 million for fiscal
1996.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues for fiscal 1995 increased by $21.4 million, or 62.1%, to $55.9
million from $34.5 million for fiscal 1994. Monitoring and service revenues
increased by $19.2 million, or 70.8%, a substantial majority of which resulted
from the addition of approximately 53,000 subscribers from the acquisition of
portfolios of subscriber accounts and approximately 10,000 subscribers from the
Dealer Program. The sale of enhanced services and new subscribers generated by
Company personnel comprised the remainder of revenue growth. Other revenue
increased by 29.9% to approximately $9.6 million in fiscal 1995 from $7.4
million in fiscal 1994. The increase in other revenue was generated by an
increase in lock revenue of $1.4 million, as fiscal 1995 included twelve months
of lock revenues and fiscal 1994 included two months of such revenues and by an
increase in patrol and alarm response revenues of 18.9%, or $0.4 million, offset
26
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by a decline in installation revenues of $1.1 million. The decline in
installation revenues resulted from the Company's increased emphasis on growth
through acquisitions and the Dealer Program, rather than through sales of new
alarm systems by Company personnel. In addition, the Company recognized $1.6
million of other revenue arising from the sales of security alarm equipment
received from a vendor.
Cost of revenues for fiscal 1995 increased by $6.9 million, or 56.0%,
to $19.2 million. Cost of revenues as a percentage of total revenues declined to
34.4% during fiscal 1995 from 35.7% during fiscal 1994. Monitoring and service
expenses increased by $5.3 million, or 80.9%, 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 25.5% from 24.1%
during fiscal 1994. Such increase reflects a higher level of staffing at the
Company's central monitoring station. MRR per subscriber was lower in fiscal
1995, due primarily to the acquisition of portfolios of subscriber accounts that
had a lower average MRR per subscriber than the Company's average. See "--
Overview -- Acquisition and Dealer Program Activity". Other expenses increased
by $1.6 million, or 27.9%, to $7.4 million in fiscal 1995 from $5.8 million in
fiscal 1994. The increase primarily was caused by a 32.8% increase in patrol and
alarm response expenses, or approximately $0.8 million, and an increase in lock
expenses of approximately $0.8 million.
Gross profit for fiscal 1995 was $36.7 million, an increase of $14.5
million, or 65.5%, over the $22.2 million of gross profit in fiscal 1994. Such
increase was caused primarily by an increase in monitoring and service
activities, which paralleled the increase in the Company's subscriber base from
85,269 at September 30, 1994 to 129,420 at September 30, 1995. Gross profit as a
percentage of total revenues was 65.6% for fiscal 1995 compared to 64.3% for
fiscal 1994. This increase was caused primarily by an increase in monitoring and
service revenues as a percentage of total revenues.
Selling, general and administrative expenses rose to $12.4 million in
fiscal 1995, which represents an increase of $2.0 million, or 19.6%, over
selling, general and administrative expenses in fiscal 1994. Such figure as a
percentage of total revenues declined from 30.1% in fiscal 1994 to 22.2% in
fiscal 1995, due primarily to a decline in sales and marketing expense of 34.0%
(or $1.3 million) and an increase of 52.1% (or $3.4 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 overhead expenses incurred to supervise a larger employee
base associated with a larger subscriber base. The percentage increase in
general and administrative expenses from fiscal 1994 to fiscal 1995 was lower
than the 62.1% increase in total revenues between the comparable periods,
reflecting economies of scale and efficiencies realized in the Company's branch
and corporate offices. Advertising and marketing expenses are expensed as
incurred and comprised 1% of revenues in each of fiscal 1994 and 1995. The
provision for doubtful accounts increased to approximately $1.8 million in
fiscal 1995 from $0.8 million in fiscal 1994, reflecting an increase in the
Company's average subscriber base of approximately 72.1% and the Company's
willingness to work with subscribers experiencing credit difficulties in order
to maintain long-term subscriber relationships.
Acquisition and transition expenses for fiscal 1995 totaled $3.1
million, reflecting the Company's change in its method of accounting for certain
expenses, effective as of October 1, 1994. See "-- Overview -- Recent Change in
Accounting Method." Had the Company enacted the change in accounting method on
October 1, 1993, acquisition and transition expenses would have been $2.4
million for fiscal 1994. 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 for fiscal 1995
increased by $6.7 million, or 76.2%, to $15.5 million. This increase is the
result of the Company's purchase of approximately 63,000 subscriber accounts
through the acquisition of portfolios of subscriber accounts and through the
Dealer Program in fiscal 1995.
27
29
Operating income for fiscal 1995 was $5.7 million, compared to an
operating loss of $1.5 million in fiscal 1994. The operating loss in fiscal 1994
included a non-recurring charge for performance warrants compensation expense of
$4.5 million. Operating income as a percentage of revenue was 9.8% in fiscal
1995, compared to 8.7% in fiscal 1994 (excluding the non-recurring charge).
Comparisons of this figure for fiscal 1995 and 1994 are impacted by the change
in accounting method adopted by the Company effective as of the beginning of
fiscal 1995. The increase in such figure over fiscal 1994 reflects the increase
in gross profit and efficiencies realized in branch office and corporate general
and administrative expenses noted above.
Interest expense, net and amortization of debt issuance costs and OID
increased by $6.6 million, or 84.4%, to $14.4 million in fiscal 1995, reflecting
the Company's use of debt to finance a substantial portion of its subscriber
account growth.
Extraordinary item. During fiscal 1995, the Company recorded an
extraordinary charge of $8.9 million (net of a tax benefit of $0.9 million) due
to the loss on early extinguishment of debt. The loss, which arose from the
purchase of the Company's $50.0 million principal amount of 12% Senior
Subordinated Notes issued in November 1993, included the write-off of the
remaining unamortized portions of the OID ($4.1 million) and the capitalized
fees and expenses associated with the November 1993 note offering ($3.0
million), a 5% premium paid in the tender offer for the notes ($2.5 million) and
certain fees incurred in the tender offer.
Balance sheet data. At September 30, 1995, the Company's working
capital deficit was $9.2 million, as compared to a working capital deficit of
$11.5 million at September 30, 1994. The decline in the working capital deficit
was caused primarily by an increase in accounts receivable and inventory and a
decline in accrued interest. Subscriber accounts and intangibles, net increased
to $162.2 million at September 30, 1995 from $114.6 million at September 30,
1994. This increase of $47.6 million, or 41.6%, was caused by the addition of
new subscribers, net of amortization expense. Total stockholders' equity
(deficit) increased to $6.3 million at September 30, 1995 from a deficit of $6.1
million at September 30, 1994. The increase in such figure reflects the
conversion of redeemable preferred stock to common stock and the issuance of
common stock in the Company's initial public offering (the "Initial Public
Offering") completed in October 1994, offset by a loss of $18.5 million for
fiscal 1995.
28
30
LIQUIDITY AND CAPITAL RESOURCES
General. Since September 1991, the Company has financed its operations
and growth from a combination of capital raised through debt and equity
offerings and, to a lesser extent, cash flow from operations. During the fiscal
1994-1996 period, the Company completed three long-term debt offerings,
including the issuances of $50.0 million principal amount of Senior Subordinated
Notes issued in November 1993 (which notes were retired in fiscal 1995), $166.0
million principal amount ($105.2 million net proceeds) of Discount Notes issued
in May 1995 and $103.5 million principal amount of Convertible Notes issued in
September and October 1996; the Company also has utilized borrowings under its
Revolving Credit Facility to fund acquisitions and the Dealer Program. For
additional information with respect to this indebtedness, see Note 8 of Notes to
Consolidated Financial Statements included in Item 8. In September 1994, the
Company raised $18.3 million in net proceeds from its Initial Public Offering of
Common Stock and in February 1996, the Company raised $23.1 million in net
proceeds from another public offering of the Common Stock. The Company intends
to use cash flows from operations, together with borrowings under the Revolving
Credit Facility, to finance the addition of subscriber accounts and capital
expenditures. 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.
On a long-term basis, the Company has several material commitments.
Borrowings under the Revolving Credit Facility were approximately $5.3 million
at September 30, 1996 and could be as high as $100.0 million through the period
ended January 3, 2000, the current maturity date of the Revolving Credit
Facility. While the Company believes 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 Convertible Notes require the Company to make semi-annual cash interest
payments of $3.5 million, or $7.0 million annually. 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 approximately $22.6 million on an
annual basis. As a result, a substantial portion of the Company's operating cash
flows will be required to make interest payments on the Convertible Notes and
the Discount Notes, and there can be no assurance that the Company's cash flow
from operations will be sufficient to meet such obligations, 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 $103.5
million principal amount of the Convertible Notes matures on September 15, 2003,
although they may be converted into the Common Stock at any time prior to such
date. The $166.0 million principal amount of the Discount Notes matures on
September 30, 2005. There can be no assurance that the Company will have the
cash necessary to repay either the Convertible Notes or 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 $0.8 million letter of credit to a seller,
scheduled payments under which are approximately $0.4 million during each of
fiscal 1997 and fiscal 1998.
The Company has had, and expects to continue to have, a working capital
deficit. For fiscal 1994, 1995 and 1996, the Company had a working capital
deficit of $11.5 million, $9.2 million and $13.2 million, respectively. 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.
29
31
For fiscal 1996, the Company's net cash provided by operating
activities was $24.1 million, compared to $8.5 million net cash provided by
operating activities for fiscal 1995. During fiscal 1994, the Company's net cash
provided by operating activities was $7.4 million.
For fiscal 1996, the Company's net cash used in investing activities
was $103.5 million, compared to $63.5 million during fiscal 1995, primarily as a
result of the acquisition of subscriber accounts, including the purchases of
subscriber accounts from InterCap Funds Joint Venture and Metrol Security
Services, as well as the Dealer Program. During fiscal 1994, the Company's net
cash used in investing activities was $66.8 million, primarily as a result of
acquisitions.
During fiscal 1996, the Company's net cash provided by financing
activities was $83.6 million, compared to $55.2 million in fiscal 1995. During
fiscal 1994, the Company's net cash provided by financing activities was $59.1
million. Financing activities are comprised of those debt and equity issuances
discussed above.
The Discount Note Indenture, the Convertible Note Indenture and the
Revolving Credit Facility agreements contain certain restrictions on transfers
of funds, such as dividends, loans and advances, by the Company. The Company
believes that such restrictions have not had and will not have a significant
impact on the Company's ability to meet its cash obligations. The Company does
not anticipate payment of dividends on Common Stock.
Capital Expenditures. The Company anticipates making capital
expenditures in fiscal 1997 of approximately $3.0 million for routine
replacement and upgrading of vehicles, computers and other capital items. In
addition, the Company anticipates making capital expenditures of approximately
$1.0 million to complete a project to upgrade its monitoring and administrative
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 maintenance and repair functions. The Company believes the
complete implementation of the new software will not occur until the end of
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 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
POI's consolidated financial statements and supplementary data,
together with the report of Coopers and Lybrand L.L.P., independent auditors,
are included elsewhere herein. See "Index to Financial Statements" immediately
preceding page F-1. Separate audited financial statements for Monitoring have
not been provided because the Company does not believe such financial statements
are material to investors. See "Introductory Note- Company Structure" and the
introductory note to Item 7 above. The Company includes, however, in the
footnotes to the consolidated financial statements summary financial information
concerning Monitoring. See Note 16 to Notes to Consolidated Financial Statements
included in Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Reference is made to POI's Proxy Statement dated December 30, 1996 (the
"Proxy Statement") and to the information appearing therein under the captions
"I. Election of Directors- Nominees for Election," "Executive Officers;
Executive Compensation and Related Information- Executive Officers" and
"Security Ownership of Management- Section 16(a) Beneficial Ownership Reporting
Compliance."
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information appearing in
the Proxy Statement under the captions "I. Election of Directors- Compensation
of Directors" and "Executive Officers; Executive Compensation and Related
Information- Executive Compensation and Related Information."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information appearing in
the Proxy Statement under the caption "Security Ownership of Management" and
"Security Ownership of Certain Beneficial Owners."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information appearing in
the Proxy Statement under the caption "Certain Relationships and Related
Transactions."
31
33
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS A PART OF THIS FORM 10-K.
A. CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES.
The following consolidated financial statements and schedules are
included in this Annual Report on Form 10-K on the pages listed below.
Page Consolidated Financial Statements
---- ---------------------------------
F-2 Report of Independent Accountants
F-3 Consolidated Balance Sheets as of September 30, 1995 and 1996
F-4 Consolidated Statements of Operations for the years ended September 30, 1994, 1995, and 1996
F-5 Consolidated Statements of Cash Flows for the years ended September 30, 1994, 1995, and 1996
F-6 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended September 30,
1994, 1995, and 1996
F-7 Notes to Consolidated Financial Statements
Page Schedule
---- --------
S-1 Schedule II- Valuation and Qualifying Accounts
B. EXHIBITS.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1 Fifth Amended and Restated Certificate of Incorporation of
Protection One, Inc. ("POI") (incorporated by reference to
Exhibit 3.1 to the Annual Report on Form 10-K for the year
ended September 30, 1994 filed by POI(1), Protection One Alarm
Monitoring, Inc. ("Monitoring")(2) and Protection One Alarm
Services, Inc. ("Services") (the "Fiscal 1994 Form 10-K")).
3.2 Certificate of Designation of the Voting Powers,
Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications,
Limitations and Restrictions of the Series H Preferred Stock
(incorporated by reference to Exhibit 3.2 to the Registration
Statement on Form S-4 (Registration No. 33-94684) originally
filed by POI, Monitoring and Services on July 18, 1995 (the
"1995 Form S-4")).
3.3 By-laws of POI (incorporated by reference to Exhibit 3.1 to
the Quarterly Report on Form 10-Q filed by POI and Monitoring
for the quarter ended March 31, 1996).
__________________________________
1 The Commission File Number of Protection One, Inc. is 0-24780.
2 The Commission File Number of Protection One Alarm Monitoring, Inc. is
33-73002-01.
34
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.4 Certificate of Incorporation of Monitoring, as amended
(incorporated by reference to Exhibit 3.2 to the Registration
Statement on Form S-3 (Registration No. 333-09401) originally
filed by Monitoring, POI, Metrol Security Services, Inc.
("Metrol") and Sonitrol of Arizona, Inc. ("Sonitrol") on
August 1, 1996 (the "August 1996 Form S-3")).
3.5 Bylaws of Monitoring (incorporated by reference to Exhibit
3.2 to the Fiscal 1994 Form 10-K).
4.1 Indenture, dated as of May 17, 1995, among Monitoring, as
Issuer, POI, Services and A-Able Lock & Alarm, Inc.
("A-Able"), as Guarantors, and The First National Bank of
Boston ("FNBB"), as Trustee (incorporated by reference to
Exhibit 4.1 to the 1995 Form S-4).
4.2 First Supplemental Indenture dated as of July 26, 1996, among
Monitoring, POI, Metrol, Sonitrol and State Street Bank and
Trust Company ("SSBTC") as successor trustee to FNBB.
4.3 Second Supplemental Indenture dated as of October 28, 1996,
among Monitoring, POI and Security Holdings, Inc. ("Security
Holdings").
4.4 Subordinated Debt Shelf Indenture dated as of August 29,
1996, among Monitoring as Issuer, POI as Guarantor and SSBTC
as Trustee (incorporated by reference to Exhibit 4.2 to the
August 1996 Form S-3).
4.5 Supplemental Indenture No. 1 dated as of September 20, 1996,
among Monitoring, POI and SSBTC as Trustee (incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K
filed by POI and Monitoring dated September 20, 1996 (the
"September 1996 Form 8-K")).
4.6 Supplemental Indenture No. 2 dated as of October 28, 1996,
among Monitoring, POI, Security Holdings and SSBTC as
Trustee.
4.7 Amended and Restated Credit Agreement dated as of June 7,
1996, among Monitoring, Heller Financial, Inc. ("Heller
Financial") as Agent and the financial institutions signatory
thereto (the "Lenders") (incorporated by reference to Exhibit
10.2 to the Quarterly Report on Form 10-Q filed by POI and
Monitoring for the quarter ended June 30, 1996 (the "June
1996 Form 10-Q")).
4.8 Consent and First Amendment to Credit Agreement dated as of
September 16, 1996, among Monitoring, Heller Financial as
Agent and the Lenders (incorporated by reference to Exhibit
10.1 to the September 1996 Form 8-K).
4.9 Form of Revolving Note executed by Monitoring in favor of
each Lender pursuant to the Amended and Restated Credit
Agreement filed as Exhibit 4.7.
4.10 Amended and Restated Guaranty dated as of June 7, 1996,
executed by POI in favor of Heller Financial as Agent.
4.11 Amended and Restated Stock Pledge Agreement dated as of June
7, 1996, between POI and Heller Financial as Agent.
33
35
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
4.12 Amended and Restated Security Agreement dated as of June 7,
1996, between Monitoring and Heller Financial as Agent.
4.13 Amended and Restated Continuing Security Interest and
Conditional Assignment of Patents, Trademarks, Copyrights and
Licenses dated as of June 7, 1996, between Monitoring and
Heller Financial as Agent.
10.1 Stock Purchase Warrant dated as of September 16, 1991, issued
by POI to Merita Bank Ltd. (formerly Kansallis-Osake-Pankki)
(incorporated by reference to Exhibit 10.25 to the Quarterly
Report on Form 10-Q filed by POI, Monitoring and Services for
the quarter ended March 31, 1994 (the "March 1994 Form
10-Q")).
10.2 Stock Purchase Warrant dated as of September 16, 1991, issued
by POI to Dove Partners, G.P. (incorporated by reference to
Exhibit 10.24 to the March 1994 Form 10-Q).
10.3 Modification Agreement dated as of June 29, 1994, among POI,
Dove Partners, G.P. and SAMCO Partners, G.P. (incorporated by
reference to Exhibit 10.27 to the Registration Statement on
Form S-1 (Registration No. 33-81292) originally filed by POI
on July 8, 1994 (the "1994 Form S-1")).
10.4 Stock Purchase Warrant dated December 31, 1992, issued by POI
to Chemical Bank (incorporated by reference to Exhibit 10.26
to the March 1994 Form 10-Q).
10.5 Agreement Concerning Chemical Warrant and Chemical Shares
dated as of June 27, 1994, between POI and Chemical Bank
(incorporated by reference to Exhibit 10.27 to the March 1994
Form 10-Q).
10.6 Amended and Restated Stockholders' Agreement dated as of
August 15, 1994, among POI and the stockholders of POI named
therein (incorporated by reference to Exhibit 10.42 to the
1994 Form S-1)).
10.7 Warrant Agreement dated as of November 3, 1993, between
Monitoring and United States Trust Company of New York, as
Warrant Agent (incorporated by reference to Exhibit 4.3 to
the Registration Statement on Form S-4 (Registration No.
33-73002) originally filed by POI, Monitoring and certain
former subsidiaries of Monitoring on December 15, 1993 (the
"1993 Form S- 4")).
10.8 Registration Rights Agreement dated as of November 3, 1993,
among Monitoring, POI, certain former subsidiaries of
Monitoring and Bear, Stearns & Co. Inc. (incorporated by
reference to Exhibit 4.4 to the 1993 Form S-4).
10.9 Warrant Agreement dated as of May 17, 1995, between POI and
The First National Bank of Boston, as Warrant Agent
(incorporated by reference to Exhibit 10.40 to the 1995 Form
S-4).
10.10 Common Stock Registration Rights Agreement dated May 17,
1995, among POI, Morgan Stanley & Co. Incorporated and
Montgomery Securities (incorporated by reference to Exhibit
10.41 to the 1995 Form S-4).
34
36
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.11 Amended and Restated Employment Agreement dated as of May 24,
1996, between POI and James M. Mackenzie, Jr. (incorporated
by reference to Exhibit 10.3 to the Quarterly Report on Form
10-Q filed by POI and Monitoring for the quarter ended June
30, 1996, as amended (the "June 1996 Form 10-Q")).*
10.12 Amended and Restated Employment Agreement dated as of May 24,
1996 between POI and John W. Hesse (incorporated by reference
to Exhibit 10.4 to the June 1996 Form 10-Q).*
10.13 Amended and Restated Employment Agreement dated as of May 24,
1996 between POI and John E. Mack, III (incorporated by
reference to Exhibit 10.5 to the June 1996 Form 10-Q).*
10.14 Amended and Restated Employment Agreement dated as of May 24,
1996 between POI and Thomas K. Rankin (incorporated by
reference to Exhibit 10.6 to the June 1996 Form 10-Q).*
10.15 Employment Agreement dated as of November 3, 1993, between
Monitoring and George A. Weinstock (incorporated by reference
to Exhibit 10.13 to the 1993 Form S-4).*
10.16 Non-Competition and Non-Solicitation Agreement dated as of
November 3, 1993, between Monitoring and George A. Weinstock
(incorporated by reference to Exhibit 10.14 to the 1993 Form
S-4)*.
10.17 Common Stock Performance Warrant Agreement dated as of
September 16, 1991 between POI and James M. Mackenzie, Jr.
(incorporated by reference to Exhibit 10.15 to the 1993 Form
S-4).*
10.18 Common Stock Performance Warrant Agreement dated as of
September 16, 1991, between POI and John W. Hesse
(incorporated by reference to Exhibit 10.16 to the 1993 Form
S-4).*
10.19 Common Stock Performance Warrant Agreement dated as of
September 16, 1991, between POI and John E. Mack, III
(incorporated by reference to Exhibit 10.17 to the 1993 Form
S-4).*
10.20 Common Stock Performance Warrant Agreement dated as of
September 16, 1991, between POI and Thomas K. Rankin
(incorporated by reference to Exhibit 10.18 to the 1993 Form
S-4).*
10.21 Form of Amendment to Common Stock Performance Warrant dated
as of June 29, 1994, between POI and each of James M.
Mackenzie, Jr., John W. Hesse, John E. Mack, III and Thomas
K. Rankin (incorporated by reference to Exhibit 10.31 to the
March 1994 Form 10-Q).*
10.22 Consulting Agreement dated as of February 19, 1996 between
POI and Dr. Ben Enis (incorporated by reference to Exhibit
10.7 to the June 1996 Form 10-Q).*
10.23 1994 Stock Option Plan of POI, as amended.*
35
37
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.24 Series F Preferred Stock Repurchase Agreement dated May 10,
1995, between POI and PacifiCorp Financial Services, Inc.
(incorporated by reference to Exhibit 10.39 to the 1995 Form
S-4).
10.25 Notes Registration Rights Agreement dated as of May 17, 1995,
among POI, Monitoring, Morgan Stanley & Co., Incorporated and
Montgomery Securities (incorporated by reference to Exhibit
4.2 to the 1995 Form S-4).
10.26 Agreement for Purchase and Sale of Assets, dated May 25,
1995, between Alert Centre, Inc. and Monitoring (incorporated
by reference to Exhibit 2 to the Current Report on Form 8-K
filed by POI and Monitoring dated May 25, 1995).
10.27 Agreement to Purchase and Sell Stock dated as of May 23,
1996, among Metrol, the persons named therein as the
"Shareholders" (the "Metrol Shareholders"), Monitoring and
POI (incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-3 (Registration No. 33-5849)
originally filed by POI on June 12, 1996 (the "June 1996 Form
S-3")).
10.28 Amendment No. 1 to Agreement dated as of June 28, 1996, among
Metrol, the Metrol Shareholders, Monitoring and POI
(incorporated by reference to Exhibit 2.2 to the June 1996
Form S-3).
10.29 Escrow Agreement dated May 31, 1996, among Metrol, the Metrol
Shareholders, Monitoring, POI and First National Bank of
Denver, N.A. as the Escrow Agent (incorporated by reference
to Exhibit 2.3 to the Current Report on Form 8-K filed by POI
and Monitoring dated June 7, 1996 (the "June 1996 Form
8-K")).
10.30 Registration Rights Agreement dated as of June 28, 1996,
among POI and the Metrol Shareholders (incorporated by
reference to Exhibit 99.1 to the June 1996 Form 8-K).
21.1 Subsidiaries of POI.
23.1 Consent of Coopers & Lybrand, L.L.P.
27 Financial Data Schedule.
99.1 Information included as Item 5(d) of the September 20, 1996
Form 8-K (incorporated by reference to Item 5(d) of the
September 20, 1996 Form 8-K).
- ----------------------
* Each exhibit marked with an asterisk constitutes a management
contract or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of
Form 10-K.
36
38
C. CURRENT REPORTS ON FORM 8-K.
(i) Current Report on Form 8-K filed by POI and Monitoring and
dated September 16, 1996, reporting in response to Item 5 the
commencement of the underwritten public offering of the
Convertible Notes; and
(ii) Current Report on Form 8-K filed by POI and Monitoring dated
September 20, 1996, reporting in response to Item 5 the
consummation of the Convertible Notes offering, the amendment
of the Credit Agreement and the entering into an agreement
with PacifiCorp, and setting forth certain cautionary
statements for purposes of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
37
39
PROTECTION ONE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Accountants ........................................ F-2
Consolidated Balance Sheets as of
September 30, 1995 and 1996 .......................................... F-3
Consolidated Statements of Operations for the years ended
September 30, 1994, 1995 and 1996 .................................... F-4
Consolidated Statements of Cash Flows for the years ended
September 30, 1994, 1995 and 1996 .................................... F-5
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the years ended
September 30, 1994, 1995 and 1996 .................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
Schedule VIII Valuation and Qualifying Accounts .......................... S-1
F-1
40
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Protection One, Inc.
Culver City, California
We have audited the consolidated financial statements and the financial
statement schedule of Protection One, Inc. and Subsidiaries listed in the index
on page F-1 of this Annual Report on Form 10-K. These financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Protection One,
Inc. and Subsidiaries as of September 30, 1996 and 1995, and their consolidated
results of operations and cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
As discussed in Note 2, effective October 1, 1994, the Company changed its
method of accounting for certain subscriber account acquisition and transition
costs.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
December 10, 1996
F-2
41
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
ASSETS
SEPTEMBER 30,
1995 1996
--------- ---------
Current assets:
Cash and cash equivalents .......................... $ 1,256 $ 1,782
Restricted cash .................................... -- 3,680
Receivables, net ................................... 5,806 12,743
Inventories ........................................ 3,125 1,920
Prepaid expenses ................................... 547 1,221
--------- ---------
Total current assets ............................ 10,734 21,346
Property and equipment, net .......................... 5,307 9,952
Subscriber accounts and intangibles, net ............. 162,239 257,354
Assets held for sale ................................. -- 775
Deposits ............................................. 389 648
--------- ---------
$ 178,669 $ 290,075
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 2,078 $ 2,278
Accrued salaries, wages and benefits ............... 1,401 1,495
Other accruals ..................................... 529 1,048
Purchase holdbacks ................................. 4,949 9,942
Acquisition transition costs ....................... 970 4,326
Other current liabilities .......................... 800 1,623
Deferred revenue ................................... 9,166 13,827
--------- ---------
Total current liabilities ....................... 19,893 34,539
Long-term debt, net of current portion ............... 146,023 225,650
Other liabilities .................................... 279 1,059
--------- ---------
Total liabilities ............................... 166,195 261,248
--------- ---------
Commitments and contingencies (Note 14)
Series H cumulative convertible preferred
stock, $.10 par value, 6,127 shares
authorized, issued and outstanding
at September 30, 1995 ............................. 6,127 --
Stockholders' equity:
Common Stock, $.01 par value, 24,000,000
shares authorized, 9,047,638 and
12,914,783 shares issued
and outstanding at
September 30, 1995 and 1996 respectively ......... 90 129
Additional paid-in capital ......................... 41,829 79,767
Accumulated deficit ................................ (35,572) (51,069)
--------- ---------
Total stockholders' equity ...................... 6,347 28,827
--------- ---------
$ 178,669 $ 290,075
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
42
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30,
1994 1995 1996
-------- -------- --------
Revenues:
Monitoring and service ............................ $ 27,109 $ 46,308 $ 65,860
Other.............................................. 7,371 9,574 7,597
-------- -------- --------
Total revenues ................................. 34,480 55,882 73,457
-------- -------- --------
Cost of revenues:
Monitoring and service ............................ 6,520 11,795 17,770
Other ............................................. 5,804 7,424 6,323
-------- -------- --------
Total cost of revenues ......................... 12,324 19,219 24,093
-------- -------- --------
Gross profit ................................... 22,156 36,663 49,364
Selling, general and administrative expenses ........ 10,380 12,409 14,809
Loss on acquisition terminations .................... 26 208 --
Performance warrants compensation expense ........... 4,504 -- --
Acquisition and transition expenses ................. -- 3,090 4,219
Amortization of subscriber accounts and goodwill .... 8,772 15,460 23,275
-------- -------- --------
Operating income (loss) ........................ (1,526) 5,496 7,061
Other expenses:
Interest expense, net ............................. 6,932 7,626 4,885
Amortization of debt issuance costs and OID ....... 891 6,797 17,812
Loss on assets held for sale ...................... -- -- 89
Loss on sales of assets ........................... -- 505 19
-------- -------- --------
Loss before income taxes, extraordinary items
and cumulative effect of change in accounting
method -- net of taxes ....................... (9,349) (9,432) (15,744)
Income tax benefit .................................. 2,863 3,595 247
-------- -------- --------
Loss before extraordinary items and cumulative
effect of change in accounting method --
net of taxes ................................. (6,486) (5,837) (15,497)
Extraordinary items--losses on early extinguishment
of debt--net ...................................... (1,174) (8,906) --
Cumulative effect of change in
accounting method--net ............................ -- (1,955) --
-------- -------- --------
Net loss ....................................... (7,660) (16,698) (15,497)
Preferred stock dividends ........................... 748 958 248
Accretion of redeemable preferred stock ............. 753 797 --
-------- -------- --------
Loss attributable to common stock .............. $ (9,161) $(18,453) $(15,745)
======== ======== ========
Loss per common share:
Before extraordinary items and cumulative effect of
change in accounting method ..................... $ (27.11) $ (0.87) $ (1.40)
Net loss per share ................................ $ (31.10) $ (2.12) $ (1.40)
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
43
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------
Cash flows from operating activities:
Net loss ................................................ $ (7,660) $ (16,698) $ (15,497)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation ......................................... 518 1,083 1,845
Amortization of subscriber accounts and goodwill ..... 8,772 15,460 23,275
Amortization of debt issuance costs .................. 479 1,212 1,212
Amortization of OID ................................. 412 5,585 16,600
Performance warrants earned .......................... 4,504 -- --
Cumulative effect of change in accounting method ..... -- 1,955 --
Loss on sales and abandonments ....................... -- 713 --
Inventory received in settlements of claim ........... -- (1,562) --
Deferred income tax benefit .......................... (2,863) (3,595) (792)
Extraordinary items .................................. 1,174 8,906 --
Provision for doubtful accounts ...................... 789 1,751 2,649
Other ................................................ -- -- (204)
Receivables .......................................... (1,362) (2,795) (8,737)
Inventories .......................................... (355) 89 2,002
Prepaid expenses and deposits ........................ 383 (408) (752)
Accounts payable ..................................... 621 (121) 199
Accrued liabilities .................................. 2,662 (2,247) 1,793
Deferred revenue ..................................... (675) (832) 470
--------- --------- ---------
Net cash provided by operating activities ....... 7,399 8,496 24,063
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment ..................... (1,417) (3,268) (5,420)
Acquisitions, net of cash received ...................... (60,069) (52,249) (89,776)
Acquisition payments held in escrow ..................... (456) 456 (3,680)
Payments on purchase holdbacks .......................... (941) (3,626) (3,532)
Deferred acquisition payments ........................... (469) (2,167) (1,613)
Acquisition transition costs ............................ (3,136) (2,558) (3,111)
Payment of other liabilities ............................ (322) (109)
--------- --------- ---------
Net cash used in investing activities ........... (66,810) (63,521) (107,132)
--------- --------- ---------
Cash flows from financing activities:
Payments on long-term debt .............................. (25,805) (118,699) (111,222)
Proceeds from long-term debt ............................ 88,328 168,005 174,248
Debt and equity issuance costs .......................... (6,444) (6,780) (4,981)
Payments on stockholders' notes receivable .............. 15 47 --
Issuance of preferred and common stock and warrants ..... 5,494 20,219 25,798
Redemption of preferred stock .......................... (1,500) (2,125) --
Note redemption and premium costs ....................... -- (2,627) --
Cash dividends paid on preferred stock .................. (965) (2,816) (248)
--------- --------- ---------
Net cash provided by financing activities ....... 59,123 55,224 83,595
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... (288) 199 526
Cash and cash equivalents:
Beginning of period ..................................... 1,345 1,057 1,256
--------- --------- ---------
End of period ........................................... $ 1,057 $ 1,256 $ 1,782
========= ========= =========
Interest paid during the period ........................... $ 4,563 $ 9,968 $ 4,784
========= ========= =========
Income taxes paid during the period ....................... $ -- $ -- $ 160
========= ========= =========
Supplemental disclosure (see Note 12)
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
44
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLAR AMOUNTS IN THOUSANDS)
CLASS B SERIES A ADDITIONAL STOCKHOLDERS'
COMMON COMMON PREFERRED PAID-IN NOTES ACCUMULATED
STOCK STOCK STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
-------- -------- -------- ----------- --------- ----------- ---------
September 30, 1993 ............................ $ 10 $ 962 $ 7 $ (62) $ (9,713) $ (8,796)
Net loss ...................................... (7,660) (7,660)
Restatement of par value ...................... (9) (895) 904
Issuance of preferred shares .................. 2,358 2,358
Cancellation of preferred shares .............. (122) (122)
Issuance of common shares ..................... $ 18 982 1,000
Issuance of common stock warrants ............. 4,494 4,494
Stock and warrant issuance costs .............. (376) (376)
Accretion of Series C and E
Redeemable Preferred Stock .................. (753) (753)
Payments on stockholders' notes receivable .... 15 15
Dividends on Series F Redeemable
Preferred Stock ............................. (748) (748)
Exercise of stock purchase warrant ............ 1 (1)
Performance warrants .......................... 4,504 4,504
-------- -------- -------- ----------- --------- ----------- ---------
September 30, 1994 ............................ 2 18 67 12,750 (47) (18,874) (6,084)
Net loss ...................................... (16,698) (16,698)
Issuance of common stock and warrants ......... 30 20,120 20,150
Exercise of stock purchase warrants ........... 2 71 73
Stock and warrant issuance costs .............. (2,283) (2,283)
Accretion of Series C and E
Redeemable Preferred Stock .................. (797) (797)
Dividends on Series A, F, and H
Preferred Stock ............................. (876) (876)
Conversion to common stock .................... 56 (18) (67) 12,844 12,815
Payments on stockholders' notes receivable .... 47 47
-------- -------- -------- ----------- --------- ----------- ---------
September 30, 1995 ............................ 90 -- -- 41,829 -- (35,572) 6,347
Net loss ...................................... (15,497) (15,497)
Issuance of common shares ..................... 38 38,913 38,951
Exercise of stock purchase warrants ........... 1 65 66
Stock issuance costs .......................... (792) (792)
Dividends on Series H Preferred Stock ......... (248) (248)
-------- -------- -------- ----------- --------- ----------- ---------
September 30, 1996 ............................ $ 129 $ -- $ -- $ 79,767 $ -- $ (51,069) $ 28,827
======== ======== ======== =========== ========= =========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
45
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation and Business
The consolidated financial statements include the accounts of Protection
One, Inc. (POI) and its wholly-owned subsidiary, Protection One Alarm
Monitoring, Inc. (Monitoring) (together with POI, the Company). Monitoring's
former wholly-owned subsidiary, Protection One Alarm Services, Inc. was merged
into Monitoring in May 1996. The assets, results of operations and stockholders'
equity of Monitoring comprise substantially all of the assets, results of
operations and stockholders' equity of the Company on a consolidated basis.
POI's principal assets and sole operations are in and through its investment in
Monitoring. All significant intercompany balances and transactions have been
eliminated in consolidation. Separate audited financial statements for
Monitoring have not been provided because the Company does not believe such
separate financial statements are material to investors. Summarized financial
information of Monitoring is included in Note 16.
The Company provides security alarm monitoring services and sells, installs
and services security alarm systems for residential and small business
subscribers principally in the western United States.
Revenues
Revenues are recognized when installation of security alarm systems occurs
and when monitoring, extended service protection, patrol and repair services are
provided. The Company does not receive separate connection fees in any aspect of
its business. Subscribers are billed for monitoring, extended service protection
and patrol and alarm response services in advance of the period in which such
services are provided, on a monthly, quarterly or annual basis. Deferred
revenues result from billings in advance of performance of monitoring, extended
service protection and patrol service. Deferred revenues relating to subscriber
accounts acquired are recorded as part of the allocation of the purchase price
and are amortized to income during the period in which service is provided.
Costs of providing service and installations, including inventory, are charged
to income in the period incurred and when the installation occurs. Losses on
contracts for which future costs are anticipated to exceed revenues are accrued
in the period such losses are identified. Costs of services provided to dealers
are expensed as incurred and are included in acquisition and transition
expenses. Contracts for services are generally for an initial non-cancellable
term of one to five years with automatic renewal on an annual basis thereafter
unless terminated by either party. A substantial number of contracts are now on
an automatic renewal basis.
Inventories
Inventories, comprised of alarm systems and parts, are stated at the lower
of average cost or market.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over its estimated useful life. Costs of property and
equipment of purchased businesses are based on estimated replacement costs at
the date of acquisition. When property and equipment is retired or sold, the
cost and the related allowance for depreciation is eliminated from the property
and allowance accounts. Gains or losses from retirements and dispositions of
property and equipment are recognized in the period realized. Repair and
maintenance costs are expensed as incurred.
F-7
46
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Income Taxes
Deferred tax liabilities and assets reflect the tax effect of temporary
differences between the financial statement and tax bases of assets and
liabilities and the availability of net operating losses and tax credits.
Subscriber Accounts and Intangibles
Subscriber accounts acquired and intangible assets are stated at cost. The
cost of acquired subscriber accounts includes the cost of accounts purchased and
the estimated fair value at the date of acquisition of the accounts acquired in
business acquisitions, including an accrual for estimated acquisition transition
costs. 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. Direct and incremental external costs associated with
the acquisition of subscriber accounts are capitalized. If the acquisition is
terminated prior to completion of the purchase transaction the costs are
recorded as a loss in the period of termination. The accrual for transition
costs includes liabilities assumed and incremental external costs related to
customer changeover and transition, warranty obligation costs, employee and
lease termination costs and other related costs. Costs related to sales,
marketing and installation of systems for accounts internally generated are
expensed as incurred.
The cost of subscriber accounts acquired is amortized on a straight-line
basis over a 10 year period. It is the Company's policy to evaluate acquired
subscriber account attrition on a quarterly basis utilizing historical attrition
rates for the subscriber accounts in total and, when necessary, adjust the
remaining useful lives.
The Company periodically estimates future cash flows from the subscriber
accounts. Because the expected cash flows have exceeded the unamortized cost of
the subscriber accounts the Company has not recorded an impairment loss.
Intangible assets include goodwill, which is amortized on a straight-line
basis over the estimated life of 10 years, and debt issuance costs, which are
amortized over the respective lives of associated debt using the interest
method.
Cash and Cash Equivalents
All highly liquid investments purchased with a remaining maturity of three
months or less at the date acquired are cash equivalents. These investments,
consisting of money market funds, are stated at cost, which approximates market.
Restricted Cash
Restricted cash is held in escrow pursuant to an acquisition agreement
pending final determination of the purchase price of the assets acquired by the
Company.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from a
large number of customers, including both residential and commercial, dispersed
across a wide geographic base. The Company extends credit to its customers in
the normal course of business, performs periodic credit evaluations and
maintains allowances for potential credit losses.
F-8
47
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Advertising Costs
The Company expenses advertising costs as incurred. Total advertising
expense was $497, $411 and $374 during the years ended September 30,
1994, 1995 and 1996, respectively.
New Accounting Pronouncements
In March of 1995, the Financial Accounting Standards Board issued SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" effective for financial statements for fiscal years beginning
after December 15, 1995. This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company determines the
value of its subscriber accounts and intangibles, net based on the undiscounted
cash flows from the monthly recurring revenue (MRR) stream using the most recent
historical attrition rate and aggregate MRR. Based on estimates made as of
September 30, 1996, the Company does not anticipate a material impact on the
financial statements of the registrant that will result from the adoption of the
standard.
In October of 1995, the Financial Standards Accounting Board issued SFAS 123
"Accounting for Stock Based Compensation," which is effective for fiscal years
beginning after December 15, 1995. The Company has not made a decision with
regard to adoption of the optional provisions of the new standard.
Loss Per Common Share
The computation of fully diluted net loss per share for the years ended
September 30, 1994, 1995 and 1996 was antidilutive; as such, no presentation of
fully diluted earnings per share has been included in the consolidated
statements of operations. The weighted average shares outstanding used in the
computation of net loss attributable to common shares are as follows:
YEAR ENDED SEPTEMBER 30,
1994 1995 1996
----------- ----------- --------
Common Stock.......................... 129,705 8,695,395 11,250,185
Class B Common Stock.................. 164,880 2,792 --
------- --------- ----------
294,585 8,698,187 11,250,185
======= ========= ==========
Reclassifications
Certain prior period amounts were reclassified to conform to the September
30, 1996 presentation. Such reclassifications did not affect previously reported
net loss.
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 duplicate costs incurred solely in support of
acquiring and transitioning subscriber accounts are expensed as incurred.
Capitalizable costs include the direct costs of accounts purchased and the
estimated fair value at the date of acquisition of the accounts acquired in
business acquisitions, including an accrual for estimated acquisition transition
costs. Such capitalized transition costs include incremental external costs
related to customer changeover and transition, warranty obligation costs,
employee and lease termination costs and other related costs.
F-9
48
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
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 $0.22 per share,
net of income taxes of $1.2 million, and is reported separately in the
consolidated statement of operations for the year ended September 30, 1995.
The following unaudited pro forma amounts reflect the results of operations
as if the change in accounting method had been retroactively applied:
Year Ended September 30,
-----------------------
1994 1995
---- ----
Pro forma:
Loss before extraordinary items $ (7,333) $ (5,837)
Net loss $ (8,508) $(14,743)
Net loss attributable to common stock $(10,008) $(16,498)
Loss per common share:
Before extraordinary item $(29.99) $ (.87)
Net loss per share $(33.97) $(1.90)
Actual:
Net loss per share $(31.10) $(2.12)
3. PUBLIC EQUITY OFFERINGS AND CONVERSION OF PREFERRED STOCK:
Initial Public Offering and Borrowing Under Revolving Credit Facility
On October 6, 1994, POI issued 2,700,000 shares of its common stock (Common
Stock) at $6.50 per share in an initial public offering (IPO). On November 4,
1994, the Company's underwriters exercised their option to purchase an
additional 330,000 shares of Common Stock at $6.50 per share. In conjunction
with the issuance of shares on October 6, 1994, the Company borrowed $3 million
under Monitoring's revolving credit facility to pay accumulated unpaid
dividends, stock conversion inducements and accounts payable.
Conversion of Shares
In conjunction with the IPO, all outstanding shares of POI's Series A, B, C,
E and G Preferred Stock and Class B Common Stock were converted into a total of
5,557,003 shares of Common Stock. At the time of conversion, the Company paid
accumulated unpaid dividends totaling $2,104 to the holders of the Series A, C
and E Preferred Stock and payments totaling $82 to the holders of the Series A
Preferred Stock to induce conversion of the shares into Common Stock. As a
result of the conversion, the Company recorded a charge to additional paid in
capital of $1,043 which reflects: (i) the accrual of dividends on the Series C
and E Redeemable Preferred Stock from September 30, 1994 through October 6, 1994
totaling $15, (ii) the acceleration of accretion to redemption value of the
Series C and E Redeemable Preferred
F-10
49
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Stock totaling $782, (iii) payment of dividends to the holders of the Series A
Preferred Stock totaling $164 and (iv) payments of conversion inducements to the
holders of the Series A Preferred Stock totaling $82.
Secondary Public Offering and Conversion of Shares
On February 6, 1996, POI completed a public offering of 4.0 million shares
of Common Stock (2.5 million shares of which was sold by POI), resulting in net
proceeds to the Company of $23.1 million.
In connection with the secondary public offering, all the outstanding shares
of the Company's Series H preferred stock were converted into an aggregate of
680,777 shares of common stock.
4. EXTRAORDINARY ITEMS:
The extraordinary items all relate to losses on early extinguishment of debt
and include the following components:
YEAR ENDED SEPTEMBER 30,
-------------------------
1994 1995
Unamortized debt issuance costs........... 1,174 $ 3,044
Unamortized OID........................... -- 4,138
Conversion and tender fees and expenses... -- 2,635
------- -------
1,174 9,817
Deferred tax benefit...................... -- (911)
------- -------
$ 1,174 $ 8,906
======= =======
5. RECEIVABLES:
Receivables, which consist primarily of trade accounts receivable of $8,309
at September 30, 1995 and $18,284 at September 30, 1996, have been reduced by
allowances for doubtful accounts of $2,503 and $5,541, respectively. Included in
receivables and deferred revenue at September 30, 1995 and 1996 are October
invoices billed in advance of the periods in which the services are provided
totaling $4,667 and $7,309, respectively. The provisions for doubtful accounts
for the years ended September 30, 1994, 1995, and 1996 were $789, $1,751 and
$2,649, respectively.
6. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
SEPTEMBER 30,
------------------
1995 1996
------- -------
Furniture and fixtures....................... $2,004 $2,668
Data processing.............................. 2,563 6,361
Vehicles..................................... 2,568 4,038
Leasehold improvements....................... 634 927
------- -------
7,769 13,994
Less accumulated depreciation and amortization (2,462) (4,042)
------- -------
$5,307 $9,952
======= =======
F-11
50
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
7. SUBSCRIBER ACCOUNTS AND INTANGIBLES:
Subscriber accounts and intangibles (at cost) consist of the following:
SEPTEMBER 30,
---------------------------
1995 1996
--------- ---------
Acquired subscriber accounts ............... $ 184,463 $ 298,767
Debt issuance costs ........................ 7,405 11,847
Goodwill and other ......................... 1,641 2,497
--------- ---------
193,509 313,111
Less accumulated amortization .............. (31,270) (55,757)
--------- ---------
$ 162,239 $ 257,354
========= =========
Reconciliation of acquired subscriber accounts:
SEPTEMBER 30,
-------------------------
1995 1996
--------- ---------
Balance, beginning of year ..................... $ 122,330 $ 184,463
Cumulative effect of change in
accounting method ............................ (3,802) --
Acquisition of subscriber accounts ............. 70,105 119,629
Charges against acquisition holdbacks .......... (2,025) (5,325)
Sale of subscriber accounts .................... (2,145) --
--------- ---------
Balance, end of year ........................... $ 184,463 $ 298,767
========= =========
Number of subscriber accounts
acquired during the year ..................... 63,611 91,325
========= =========
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. During the year ended September 30,
1995, purchase holdbacks as a percentage of total purchase price ranged from 0%
to 20% and extended for periods of up to 30 months. During the year ended
September 30, 1996, purchase holdbacks as a percentage of total purchase price
ranged from 0% to 20% and extended for periods of up to 12 months.
Reconciliation of purchase holdbacks:
SEPTEMBER 30,
------------------------
1995 1996
-------- --------
Balance, beginning of year ..................... $ 4,250 $ 4,949
Purchase holdbacks additions ................... 6,349 13,850
Charges against subscriber accounts ............ (2,025) (5,325)
Cash payments to sellers ....................... (3,625) (3,532)
-------- --------
Balance, end of year ........................... $ 4,949 $ 9,942
======== ========
8. LONG-TERM DEBT
Long-term debt is comprised of the following:
SEPTEMBER 30,
------------------------
1995 1996
--------- ---------
Notes payable under credit agreements:
Senior Subordinated Discount Notes ............. $ 166,000 $ 166,000
Unamortized original issue discount ............ (52,229) (35,628)
Convertible Senior Subordinated Notes .......... -- 90,000
Revolving credit facility ...................... 32,252 5,278
--------- ---------
$ 146,023 $ 225,650
========= =========
F-12
51
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Senior Subordinated Discount Notes
In May 1995, the Company completed a refinancing plan (the "Refinancing") to
increase its operating and financial flexibility and provide additional funds to
finance the acquisition of subscriber accounts. The principal components of the
Refinancing were:
1. The offering of $166 million principal amount of Monitoring's Senior
Subordinated Discount Notes (the Senior Subordinated Discount Notes) and
warrants to purchase 531,200 shares of Common Stock at $6.60 per share. The
net proceeds of $105.2 million were used to (i) repurchase all $50 million
principal amount of the Series B Notes for an aggregate $52.5 million; (ii)
repay $51.1 million of the Company's borrowings under the Revolving Credit
Facility; (iii) finance the repurchase of 25% of the outstanding shares of
the Series F Preferred Stock from the holder thereof; and (iv) pay accrued
interest on the Series B Notes to the date of repurchase, accrued dividends
on the Series F Preferred Stock to the date of repurchase and certain fees
relating to the extension of the maturity date of the Revolving Credit
Facility.
2. The execution of an amendment to the Revolving Credit Facility in
order to permit the consummation of the Refinancing and to provide for the
extension of the maturity date of the Revolving Credit Facility from
November 1996 to November 1997.
3. The repurchase by POI of 25% of the outstanding shares of Series F
Preferred Stock from the holder thereof for consideration consisting of
approximately $2.0 million in cash and the exchange of the remaining shares
of Series F Preferred Stock for POI's Series H Cumulative Convertible
Preferred Stock.
The Senior Subordinated Discount Notes are unsecured subordinated
obligations of Monitoring, limited to $166 million aggregate principal amount at
maturity, and will mature on June 30, 2005. These notes were sold at a
substantial discount from their principal amount, and will accrete to face value
through June 30, 1998. Although for federal income tax purposes a significant
amount of original issue discount, taxable as ordinary income, will be
recognized by a holder as such discount accrues from the issue date, no interest
will be payable prior to December 31, 1998. From and after June 30, 1998, cash
interest on the notes will accrue at the rate of 13 5/8% per annum, payable in
cash semiannually on June 30 and December 31, of each year, commencing December
31, 1998.
The Senior Subordinated Discount Notes are redeemable, at Monitoring's
option, in whole or in part, at any time or from time to time, on or after June
30, 2000 and prior to maturity, upon not less than 30 nor more than 60 days'
prior notice at certain specified redemption prices plus accrued and unpaid
interest.
The Senior Subordinated Discount Notes are fully, unconditionally and
jointly and severally guaranteed on a senior subordinated basis by POI and a
subsidiary of Monitoring, Security Holdings, Inc. (Security Holdings), purchased
by Monitoring in November 1996. As of September 30, 1996, Monitoring had no
subsidiaries.
The Senior Subordinated Discount Notes contain covenants which, among other
matters, limit the Company and its Subsidiaries' ability to incur indebtedness,
pay dividends, sell assets, make stock distributions or sell shares of certain
subsidiaries.
F-13
52
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Senior Subordinated Notes
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 (the Notes) of Monitoring and 28 detachable Warrants to purchase shares of
Common Stock. The Notes had an aggregate principal amount of $50,000 and were
scheduled to mature on November 1, 2003. Interest was payable semi-annually on
May 1 and November 1, commencing in May 1994. The Notes had optional redemption
provisions and mandatory redemption provisions in the event of change of control
of the Company. A portion of the proceeds from the Units was assigned as the
value attributable to the warrants resulting in a $4,494 original issue discount
(OID) which was being amortized over the maturity period of the Notes using the
effective interest method. The Company recorded discount amortization of $202
and $155 for the years ended September 30, 1994 and 1995, respectively; such
amounts are included in the consolidated statement of operations as a component
of interest expense. The Series B Notes were repaid with the proceeds from the
issuance of the Senior Subordinated Discount Notes.
Convertible Senior Subordinated Notes
In September 1996, Monitoring issued $90.0 million principal amount of
Convertible Senior Subordinated Notes (the "Convertible Notes"). In October
1996, the underwriters exercised an overallotment option, and Monitoring issued
an additional $13.5 million of Convertible Notes. The Convertible Notes are
unsecured subordinated obligations of Monitoring and rank pari passu with the
Senior Subordinated Discount Notes. The Convertible Notes mature on September
15, 2003 and are convertible, at any time, into Common Stock at a price of
$17.95 per share, subject to adjustment.
Interest on the Convertible Notes accrues at the rate of 6.75% per annum,
payable in cash semiannually on March 15 and September 15 of each year,
commencing March 15, 1997. The Convertible Notes are redeemable, at Monitoring's
option, in whole or in part, at any time or from time to time, on or after
September 19, 1999 and prior to maturity, upon not less than 30 days prior
notice at certain specified redemption prices plus accrued and unpaid interest.
The Convertible Notes are fully, unconditionally and jointly and severally
guaranteed on a senior subordinated basis by POI and Security Holdings.
The indenture under which the Convertible Notes were issued contains
covenants which limit the Company and its subsidiaries' ability to incur certain
indebtedness.
Revolving Credit Facility
At September 30, 1996 Monitoring had a $100 million revolving credit
facility (the Revolving Credit Facility) which matures in January 2000.
Borrowings under the Revolving Credit Facility bear interest at the lesser of
the bank's prime rate plus 1.00% (9.25% at September 30, 1996) or LIBOR plus
2.50% (7.93% at September 30, 1996). Borrowings made under the Revolving Credit
Facility are collateralized by substantially all of the Company's assets,
including the stock of Monitoring and the Company's rights and interests in
subscriber contracts and agreements. Availability of funds under the agreement
is subject to certain financial covenants including: (i) maximum senior debt to
annualized earnings before interest, taxes, depreciation and amortization
(EBITDA); (ii) maximum total debt to annualized EBITDA; and (iii) maximum senior
debt to monthly recurring revenues (MRR). At September 30, 1996, borrowings
under the Revolving Credit Facility amounted to $5,278, all of which bear
interest at LIBOR plus 2.50%.
F-14
53
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Annual scheduled maturities of long-term debt are as follows:
Fiscal Year Ending September 30,
1997 .................................. $ --
1998 .................................. --
1999 .................................. --
2000 .................................. 5,278
2001 .................................. --
Thereafter ............................ 256,000
---------
261,278
Less unamortized OID .................... (35,628)
---------
$ 225,650
=========
9. OTHER LIABILITIES:
Other liabilities are comprised of the following:
SEPTEMBER 30,
----------------------
1995 1996
------ ------
Deferred acquisition payments .................. $1,057 $2,297
Other .......................................... 22 385
------ ------
$1,079 $2,682
Classified as follows:
Other current liabilities .................... $ 800 $1,623
Other liabilities ............................ 279 1,059
------ ------
$1,079 $2,682
====== ======
At September 30, 1996 deferred acquisition payments are due as follows:
Fiscal Year Ended September 30,
1997....................................... $1,238
1998....................................... 621
1999....................................... 438
------
$2,297
======
10. 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. 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
Performance Warrants expire in September 2002.
On November 3, 1993, the Company issued 1,400,000 warrants to purchase
840,000 shares of Common Stock as a part of the Units offering. Each warrant,
when exercised, entitles the holder to receive six-tenths (0.6) of one share of
Common Stock at an exercise price of $.167 per share, subject to adjustment. The
outstanding warrants are exercisable and 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 to directors, officers and key employees of qualified and nonqualified
options under the Internal Revenue Code. Nine hundred forty-
F-15
54
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
four thousand (944,000) shares are reserved for issuance under the Plan, subject
to such adjustment as may be necessary to reflect changes in the Common Stock or
other securities of POI.
During the year ended September 30, 1995, the Company granted options to
purchase an aggregate of 288,000 shares of Common Stock including 132,000 shares
granted 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. The purchase price of the shares
issuable pursuant to the options is equal to fair market value of Common Stock
at the date of option grant.
In connection with the issuance of the Senior Subordinated Discount Notes in
May 1995, the Company issued warrants to purchase 531,200 shares of Common Stock
at an exercise price of $6.60 per share, subject to adjustment. The outstanding
warrants are exercisable and expire in May of 2005.
During the year ended September 30, 1996, the Company granted options to
purchase an aggregate of 616,800 shares of Common Stock including 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 later of November
15, 1995 or the commencement of the participant's employment with the Company.
The purchase price of the shares issuable pursuant to the options is equal to
(or greater than) the fair market value of the Common Stock at the date of
option grant.
A summary of warrant and option activity is as follows:
WARRANTS
AND OPTIONS PRICE RANGE
------------ -------------
Outstanding September 30, 1993.................... 833,534 $0.167-$3.663
Granted........................................... 840,000 $0.167
Exercised......................................... (99,841) $0.167
Surrendered....................................... (1,264) $0.167
---------
Outstanding September 30, 1994.................... 1,572,429 $0.167-$3.663
Granted........................................... 819,200 $5.875-$9.125
Exercised......................................... (256,799) $0.167-$6.50
Surrendered....................................... (14,400) $6.50
---------
Outstanding September 30, 1995.................... 2,120,430 $0.167-$9.125
Granted........................................... 616,800 $8.00-$16.75
Exercised......................................... (74,252) $0.167-$6.50
Surrendered....................................... (17,760) $6.50-$8.00
---------
Outstanding September 30, 1996.................... 2,645,218 $0.167-$16.75
Exercisable:
September 30, 1994.............................. 1,572,429 $0.167-$3.663
September 30, 1995.............................. 1,907,310 $0.167-$6.50
September 30, 1996.............................. 1,886,818 $0.167-$6.50
11. INCOME TAXES:
For the years ended September 30, 1995 and 1996, the Company recognized
federal and state deferred tax benefits of $3,595 and $247, respectively. Such
benefits were recognized because valuation allowances were reduced as a result
of utilization of net operating losses (NOL) to offset temporary differences
that generate deferred tax liabilities during the carryforward period. At
September 30, 1996, the Company had $32.1 million in NOL carryforwards for
regular federal tax purposes and $24.8 million for alternative minimum tax (AMT
NOL) purposes which expire in the years 2006-2010. The Company also has certain
general business and job credit carryforwards. These carryforwards are
available, subject to certain restrictions, to reduce taxable income,
alternative minimum taxable income and income taxes payable in future years. As
a result of the issuance of warrants in conjunction with the Company's
refinancing plan, as well as various prior issuances of preferred and common
stock and stock warrants, there are annual
F-16
55
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
limitations on the amount of NOL and AMT NOL carryforwards, as well as tax
credits, that can be used to reduce taxable income, alternative minimum taxable
income and income tax payable. Future substantial changes in the Company's
ownership could create additional limitations.
The components of deferred tax assets and liabilities are
AT SEPTEMBER 30,
--------------------
1995 1996
-------- --------
Deferred tax assets:
Accounts receivable, due to allowances for doubtful
accounts .......................................... $ 1,000 $ 2,214
Acquisition reserves and holdbacks ................... 2,365 5,701
Performance warrants ................................. 1,800 1,662
Net operating loss carryforwards ..................... 15,688 12,814
OID amortization ..................................... 2,174 8,634
Other ................................................ 37 139
Less valuation allowance ............................. (3,573) (1,907)
-------- --------
Total deferred tax assets .................... 19,491 29,257
Deferred tax liabilities:
Differences in depreciation and amortization ......... (19,491) (29,257)
-------- --------
Net deferred tax liabilities ................. $ -- $ --
======== ========
The valuation allowances at September 30, 1995 and September 30, 1996
reflect current estimates of limitations on utilization of NOL carryforwards for
Federal and state income tax purposes. The valuation allowance at September 30,
1995 of $3,573 reflects a $2,953 increase over the valuation allowance at
September 30, 1994. The decrease in valuation allowance of $1,666 from September
30, 1995 to September 30, 1996 reflects amounts which were eliminated in
connection with the acquisition of Metrol Security Services, Inc. (see Note 17.)
The income tax benefit is comprised of the following:
YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
------ ------ ------
Current
Federal ........................... $ -- $ -- $ (463)
State ............................. -- -- (82)
------ ------ ------
Total current ............. -- -- (545)
------ ------ ------
Deferred
Federal ........................... 2,663 4,594 674
State ............................. 200 1,120 118
------ ------ ------
Total deferred ............ 2,863 5,714 792
------ ------ ------
Total income tax benefit ............ $2,863 $5,714 $ 247
====== ====== ======
The differences between the income tax benefit at the Company's effective
tax rate and at the statutory rate are as follows:
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1994 1995 1996
--------- --------- ---------
Computed "expected" tax benefit ......... $ 3,178 $ 7,620 $ 5,408
State income tax benefit, net ........... 537 1,336 948
Other ................................... (8) (289) (188)
Loss for which no tax benefits
were provided ........................ (844) (2,953) (5,921)
--------- --------- ---------
Total income tax benefit ................ $ 2,863 $ 5,714 $ 247
========= ========= =========
Income tax benefits included in
the statement of operations are as
follows:
Continuing operations ................... $ 2,863 $ 3,595 $ 247
Extraordinary items-loss on early
extinguishment of debt ................ -- 911 --
Cumulative effect of change in
accounting method .................... -- 1,208 --
--------- --------- ---------
$ 2,863 $ 5,714 $ 247
========= ========= =========
F-17
56
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
The tax benefit of the extraordinary item and change in accounting
method resulted from recognition of the benefit of the related NOL carryforward
to the extent of available deferred tax credits. Such credits permitted full
recognition of the benefit related to the change in accounting method and
limited the benefit of the extraordinary item to $911.
12. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1994 1995 1996
--------- --------- ---------
Subscriber accounts acquired ......... $ 81,525 $ 70,105 $ 119,629
Goodwill ............................. 1,641 -- 792
Cash acquired ........................ 240 -- 31
Other assets acquired ................ 2,584 113 4,983
--------- --------- ---------
Total assets acquired ...... $ 85,990 $ 70,218 $ 125,435
========= ========= =========
Cash paid to seller .................. $ 58,404 $ 49,361 $ 88,330
Stock issued to seller ............... 2,358 -- 8,960
Acquisition expenses ................. 1,905 1,451 943
Deferred revenue assumed ............. 4,567 3,213 3,676
Other assumed liabilities ............ 18,756 16,193 23,526
--------- --------- ---------
Purchase price and assumed
liabilities .......................... $ 85,990 $ 70,218 $ 125,435
========= ========= =========
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 payments by subscribers, is recognized as revenues 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.
The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1994:
REDEEMABLE ADDITIONAL
SUBSCRIBER PURCHASE COMMON PREFERRED PREFERRED PAID-IN ACCUMULATED
ACCOUNTS HOLDBACKS STOCK STOCK STOCK CAPITAL DEFICIT
---------- --------- ------ ----------- --------- ---------- -----------
Restatement of par value...... $9 $895 $(904)
Charge-off of purchase
holdbacks................... $(1,059) $1,059
Cancellation of Series G
preferred stock............... (122) 122
Exercise of stock purchase
warrants.................... (1) 1
Accretion to redemption value
of preferred stock............ $(753) $753
------- ------- ----- ------ ------- ------- ----
$(1,181) $1,059 $8 $(753) $895 $(781) $753
======= ======= ===== ====== ======= ======= ====
F-18
57
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1995:
CLASS B
COMMON
REDEEMABLE AND ADDITIONAL
SUBSCRIBER PURCHASE COMMON PREFERRED PREFERRED PAID-IN
ACCOUNTS HOLDBACKS STOCK STOCK STOCK CAPITAL
---------- --------- ------- ----------- --------- --------
Accretion to redemption value of
preferred stock....................... $ (15) $ 15
Charge-off of purchase holdbacks........ $(2,025) $2,025
Accelerated accretion upon conversion of
preferred stock....................... (782) 782
Reclassification of IPO costs........... (1,305) 1,305
Conversion of Class B common and
preferred stock......................... $(56) 12,897 $85 (12,926)
------- ------- ----- ------ --- -------
$(3,330) $2,025 $(56) $12,100 $85 $(10,824)
======= ======= ===== ======= === ========
In 1995 the Company received inventory from a supplier in settlement of a
claim. The estimated fair value of the inventory was determined through a
subsequent sale to an independent third party. In connection with such
settlement, the Company recorded revenue of approximately $1.6 million, which is
reflected in other revenues in the Company's statement of operations.
The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1996:
ADDITIONAL SERIES H
PURCHASE COMMON PAID-IN PREFERRED
INTANGIBLES HOLDBACKS STOCK CAPITAL STOCK
----------- --------- ------ --------- ---------
Charge-off of purchase holdbacks........ $(5,325) $5,325
Conversion of Series H Preferred........ $(7) $(6,120) $6,127
Common shares issued for Metrol......... 6,843 (4) (6,839)
Common shares issued for Alltec......... 2,117 (2) (2,115)
Reclassification of stock offering costs (792) 792
-------- ----- --- -------- ------
$2,843 $5,325 $(13) $(14,282) $6,127
====== ====== ===== ======== ======
13. EMPLOYEE BENEFIT PLANS:
401(k) Plan
The Company maintains a tax-qualified, defined contribution plan designed to
meet the requirements of Section 401(k) of the Internal Revenue Code (the
"401(k) Plan"). The Company at its election also may make contributions to the
401(k) Plan, which contributions are allocated among participants based upon the
respective contributions made by the participants through salary reductions
during the applicable plan year. The Company's matching contribution may be made
in Common Stock, in cash or in a combination of both stock and cash; the Company
made $40 of such contributions to the plan during the three year period ended
September 30, 1996.
F-19
58
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Employee Stock Purchase Plan
POI's Employee Stock Purchase Plan is designed to qualify as an "employee
stock purchase plan" within the meaning of Section 423 of the Internal Revenue
Code, and allows eligible employees to acquire shares of Common Stock at
periodic intervals through their accumulated payroll deductions. A total of
650,000 shares of Common Stock have been reserved for issuance under the
Employee Stock Purchase Plan, which is administered by the Compensation
Committee.
The purchase price of shares of Common Stock purchased under the Employee
Stock Purchase Plan during any purchase period is the lower of (i) 85% of the
fair market value of the Common Stock on the first day of that purchase period
or (ii) 85% of the fair market value of the Common Stock on the purchase date.
Termination of a participant's employment for any reason (including death,
disability or retirement) cancels participation in the Employee Stock Purchase
Plan immediately. The Employee Stock Purchase Plan will in all events terminate
upon the earliest to occur of (i) the last business day in September 2005, (ii)
the date on which all shares available for issuance under the plan have been
sold or (iii) the date on which all purchase rights are exercised in connection
with an acquisition of the Company or all or substantially all of its assets.
14. COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities for lease terms maturing through 2005.
Future minimum lease payments under noncancelable operating leases are as
follows:
Year ending September 30,
1997............................ $ 1,641
1998............................ 1,431
1999............................ 1,102
2000............................ 969
Thereafter...................... 2,799
--------
$ 7,942
========
Total rent expense for the years ended September 30, 1994, 1995 and 1996 was
$787, $1,261 and $1,101, respectively.
The Company is a party to claims and matters of litigation incidental to the
normal course of its 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.
The Company has entered into employment agreements with five of its
officers. The term of the employment agreements with three of the officers is
continually extended so as to cause each such agreement to have a remaining term
of three years; the other two agreements expire in September and November 1998.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and other accrued
liabilities, the carrying amounts approximate fair market value due to their
short maturities. The Company's Revolving Credit Facility, which bears a
floating
F-20
59
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
market rate of interest, and the Series H Redeemable Preferred Stock are carried
at amounts which approximate fair market value.
At September 30, 1996, the Senior Subordinated Discount Notes have an
estimated fair value of approximately $153,550 based on their quoted market
price as compared to their carrying value of $130,372.
At September 30, 1996, the Convertible Senior Subordinated Notes have an
estimated fair value of approximately $90,000 based on their quoted market price
as compared to their carrying value of $90,000.
The estimated fair values may not be representative of actual values of the
financial instruments that could have been realized at year end or may be
realized in the future.
16. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION:
The assets, results of operations and stockholders' equity of Monitoring
comprise substantially all of the assets, results of operations and
stockholders' equity of the Company on a consolidated basis. POI's principal
assets and sole operations are in and through its investment in Monitoring. All
significant intercompany balances and transactions have been eliminated in
consolidation. Separate audited financial statements for Monitoring have not
been provided because the Company does not believe such separate financial
statements are material to investors.
The summarized consolidated financial information of Monitoring is
presented below.
At September 30,
---------------------
1995 1996
-------- --------
Summarized Balance Sheet
Assets
Current assets .................................... $ 10,733 $ 21,345
Subscriber accounts and intangibles, net .......... $162,239 $257,354
Other non-current assets .......................... $ 5,696 $ 11,375
Liabilities and Stockholders' Equity
Deferred revenue .................................. $ 9,166 $ 13,827
Other current liabilities ......................... $ 10,727 $ 20,712
Long-term debt, net of current portion ............ $146,023 $225,650
Other long term liabilities ....................... $ 279 $ 1,059
Shareholders' equity .............................. $ 12,473 $ 28,826
<CAPTION
Year Ended September 30,
----------------------------------
1994 1995 1996
-------- -------- --------
Summarized Statements of Operations
Revenues ............................. $34,480 $ 55,882 $ 73,457
Gross profit ......................... $22,156 $ 36,663 $ 49,364
Loss before extraordinary items
and cumulative effect
of change in accounting method ..... $(6,492) $ (5,839) $(15,497)
Net loss ............................. $(7,666) $(16,700) $(15,497)
F-21
60
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
17. METROL SECURITY SERVICES, INC. ACQUISITION:
On June 28, 1996 the Company acquired all of the outstanding stock of
Metrol Security Services, Inc. ("Metrol"). Metrol sells, installs, services and
monitors security alarm systems and provides guard and patrol services to
residential and commercial subscribers in Arizona and New Mexico.
The following unaudited pro forma condensed consolidated results of
operations present information as if the acquisition had occurred as of the
beginning of each period presented. The pro forma information is presented after
giving effect to certain adjustments for the amortization of subscriber
accounts, interest expense and the disposition of Metrol's guard operations.
Certain of Metrol's expenses were estimated based on annual amounts incurred.
Management believes the estimates provide a reasonable approximation of actual
results. The pro forma information is provided for informational purposes only.
It is based on historical information and is not necessarily indicative of
future results of operations.
PRO FORMA FOR THE YEAR
ENDED SEPTEMBER 30,
---------------------
1995 1996
-------- --------
Revenues ............................................. $ 67,093 $ 82,313
Net loss before extraordinary item and
cumulative effect of change in accounting method ... (8,328) (14,275)
Net loss ............................................. (16,355) (14,275)
Net loss before extraordinary item and cumulative
effect of change in accounting method, per share ... $ (1.11) $ (1.26)
Net loss per common share ............................ $ (1.99) $ (1.26)
18. SUBSEQUENT EVENTS:
On October 4, 1996, Monitoring purchased all of the outstanding shares of
capital stock of Security Holdings in exchange for an aggregate of 551,888
shares of Common Stock. Of such shares, 68,985 shares have been placed in an
escrow account and will be delivered to the former shareholders of Security
Holdings in June 1997 if the actual postclosing attrition rate of Security
Holding's alarm accounts does not exceed the assumed rate reflected in the
purchase agreement.
Pursuant to the acquisition, Security Holdings became Monitoring's wholly
owned subsidiary and a guarantor of both the Senior Subordinated Discount Notes
and the Convertible Senior Subordinated Notes.
On December 18, 1996, the Company announced that it entered into a
definitive agreement to acquire substantially all of the assets of Phillips
Electronics, Inc. for an aggregate purchase price of $14.5 million. The Company
will issue to Phillips Electronics, Inc. $2.0 million of Common Stock to fund a
portion of the purchase price. The Company anticipates closing the acquisition
in early January, 1997.
F-22
61
PROTECTION ONE, INC. AND SUBSIDIARIES
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(A) DEDUCTIONS(B) OF PERIOD
----------- -------------- -------------- -------------- -------------- --------------
YEAR ENDED SEPTEMBER 30, 1994
Allowances deducted from assets
for doubtful accounts $610 $789 $994 ($1,211) $1,182
============== ============== ============== ============== ==============
YEAR ENDED SEPTEMBER 30, 1995
Allowances deducted from assets
for doubtful accounts $1,182 $1,751 -- ($430) $2,503
============== ============== ============== ============== ==============
YEAR ENDED SEPTEMBER 30, 1996
Allowances deducted from assets
for doubtful accounts $2,503 $2,649 $1,218 ($829) $5,541
============== ============== ============== ============== ==============
(a) Allowances recorded on receivables purchased in conjunction with
acquisition of customer accounts.
(b) Results from write-offs of accounts receivable.
S-1
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each of the registrants has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PROTECTION ONE, INC.
PROTECTION ONE ALARM MONITORING, INC.
By: /s/ John W. Hesse
-----------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
Date: December 30, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of each of the
registrants and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James M. Mackenzie, Jr. President, Chief Executive Officer and December 30, 1996
--------------------------- Director
James M. Mackenzie, Jr.
/s/ John W. Hesse Executive Vice President, December 30, 1996
---------------------- Chief Financial Officer
John W. Hesse (principal financial officer)
and Secretary
/s/ Robert M. Chefitz Director December 30, 1996
-------------------------
Robert M. Chefitz
/s/ Ben Enis Director December 30, 1996
----------------
Ben Enis
/s/ James Q. Wilson Director December 30, 1996
---------------------
James Q. Wilson
63
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ------------
3.1 Fifth Amended and Restated Certificate of Incorporation of Protection One, Inc. ("POI")
(incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K for the year
ended September 30, 1994 filed by POI(1), Protection One Alarm Monitoring, Inc.
("Monitoring")(2) and Protection One Alarm Services, Inc. ("Services") (the "Fiscal 1994
Form 10-K")).
3.2 Certificate of Designation of the Voting Powers, Designations, Preferences and Relative,
Participating, Optional or Other Special Rights, and Qualifications, Limitations and
Restrictions of the Series H Preferred Stock (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-4 (Registration No. 33-94684) originally filed by
POI, Monitoring and Services on July 18, 1995 (the "1995 Form S-4")).
3.3 By-laws of POI (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form
10-Q filed by POI and Monitoring for the quarter ended March 31, 1996).
3.4 Certificate of Incorporation of Monitoring, as amended (incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-3 (Registration No. 333-09401)
originally filed by Monitoring, POI, Metrol Security Services, Inc. ("Metrol") and
Sonitrol of Arizona, Inc. ("Sonitrol") on August 1, 1996 (the "August 1996 Form S-3")).
3.5 Bylaws of Monitoring (incorporated by reference to Exhibit 3.2 to the Fiscal 1994
Form 10-K).
4.1 Indenture, dated as of May 17, 1995, among Monitoring, as Issuer, POI, Services and A-Able
Lock & Alarm, Inc. ("A-Able"), as Guarantors, and The First National Bank of Boston
("FNBB"), as Trustee (incorporated by reference to Exhibit 4.1 to the 1995 Form S-4).
4.2 First Supplemental Indenture dated as of July 26, 1996, among Monitoring, POI, Metrol,
Sonitrol and State Street Bank and Trust Company ("SSBTC") as successor trustee to FNBB.
4.3 Second Supplemental Indenture dated as of October 28, 1996, among Monitoring, POI and
Security Holdings, Inc. ("Security Holdings").
4.4 Subordinated Debt Shelf Indenture dated as of August 29, 1996, among Monitoring as Issuer,
POI as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.2 to the
August 1996 Form S-3).
__________________________________
(1) The Commission File Number of Protection One, Inc. is 0-24780.
(2) The Commission File Number of Protection One Alarm Monitoring,
Inc. is 33-73002-01.
64
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4.5 Supplemental Indenture No. 1 dated as of September 20, 1996, among Monitoring, POI and
SSBTC as Trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form
8-K filed by POI and Monitoring dated September 20, 1996 (the "September 1996 Form 8-K")).
4.6 Supplemental Indenture No. 2 dated as of October 28, 1996, among Monitoring, POI, Security
Holdings and SSBTC as Trustee.
4.7 Amended and Restated Credit Agreement dated as of June 7, 1996, among Monitoring, Heller
Financial, Inc. ("Heller Financial") as Agent and the financial institutions signatory
thereto (the "Lenders") (incorporated by reference to Exhibit 10.2 to the Quarterly Report
on Form 10-Q filed by POI and Monitoring for the quarter ended June 30, 1996 (the "June
1996 Form 10-Q")).
4.8 Consent and First Amendment to Credit Agreement dated as of September 16, 1996, among
Monitoring, Heller Financial as Agent and the Lenders (incorporated by reference to
Exhibit 10.1 to the September 1996 Form 8-K).
4.9 Form of Revolving Note executed by Monitoring in favor of each Lender pursuant to the
Amended and Restated Credit Agreement filed as Exhibit 4.7.
4.10 Amended and Restated Guaranty dated as of June 7, 1996, executed by POI in favor of Heller
Financial as Agent.
4.11 Amended and Restated Stock Pledge Agreement dated as of June 7, 1996, between POI and
Heller Financial as Agent.
4.12 Amended and Restated Security Agreement dated as of June 7, 1996, between Monitoring and
Heller Financial as Agent.
4.13 Amended and Restated Continuing Security Interest and Conditional Assignment of Patents,
Trademarks, Copyrights and Licenses dated as of June 7, 1996, between Monitoring and
Heller Financial as Agent.
10.1 Stock Purchase Warrant dated as of September 16, 1991, issued by POI to Merita Bank Ltd.
(formerly Kansallis-Osake-Pankki) (incorporated by reference to Exhibit 10.25 to the
Quarterly Report on Form 10-Q filed by POI, Monitoring and Services for the quarter ended
March 31, 1994 (the "March 1994 Form 10-Q")).
10.2 Stock Purchase Warrant dated as of September 16, 1991, issued by POI to Dove Partners,
G.P. (incorporated by reference to Exhibit 10.24 to the March 1994 Form 10-Q).
65
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- ------ ------------------- ------------
10.3 Modification Agreement dated as of June 29, 1994, among POI, Dove Partners, G.P. and SAMCO
Partners, G.P. (incorporated by reference to Exhibit 10.27 to the Registration Statement
on Form S-1 (Registration No. 33-81292) originally filed by POI on July 8, 1994 (the "1994
Form S-1")).
10.4 Stock Purchase Warrant dated December 31, 1992, issued by POI to Chemical Bank
(incorporated by reference to Exhibit 10.26 to the March 1994 Form 10-Q).
10.5 Agreement Concerning Chemical Warrant and Chemical Shares dated as of June 27, 1994,
between POI and Chemical Bank (incorporated by reference to Exhibit 10.27 to the March
1994 Form 10-Q).
10.6 Amended and Restated Stockholders' Agreement dated as of August 15, 1994, among POI and
the stockholders of POI named therein (incorporated by reference to Exhibit 10.42 to the
1994 Form S-1)).
10.7 Warrant Agreement dated as of November 3, 1993, between Monitoring and United States Trust
Company of New York, as Warrant Agent (incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-4 (Registration No. 33-73002) originally filed by POI,
Monitoring and certain former subsidiaries of Monitoring on December 15, 1993 (the "1993
Form S-4")).
10.8 Registration Rights Agreement dated as of November 3, 1993, among Monitoring, POI, certain
former subsidiaries of Monitoring and Bear, Stearns & Co. Inc. (incorporated by reference
to Exhibit 4.4 to the 1993 Form S-4).
10.9 Warrant Agreement dated as of May 17, 1995, between POI and The First National Bank of
Boston, as Warrant Agent (incorporated by reference to Exhibit 10.40 to the 1995
Form S-4).
10.10 Common Stock Registration Rights Agreement dated May 17, 1995, among POI, Morgan Stanley &
Co. Incorporated and Montgomery Securities (incorporated by reference to Exhibit 10.41 to
the 1995 Form S-4).
10.11 Amended and Restated Employment Agreement dated as of May 24, 1996, between POI and James
M. Mackenzie, Jr. (incorporated by reference to Exhibit 10.3 to the Quarterly Report on
Form 10-Q filed by POI and Monitoring for the quarter ended June 30, 1996, as amended (the
"June 1996 Form 10-Q")).*
10.12 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and John W.
Hesse (incorporated by reference to Exhibit 10.4 to the June 1996 Form 10-Q).*
66
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- ------ ------------------- ------------
10.13 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and John E.
Mack, III (incorporated by reference to Exhibit 10.5 to the June 1996 Form 10-Q).*
10.14 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and Thomas
K. Rankin (incorporated by reference to Exhibit 10.6 to the June 1996 Form 10-Q).*
10.15 Employment Agreement dated as of November 3, 1993, between Monitoring and George A.
Weinstock (incorporated by reference to Exhibit 10.13 to the 1993 Form S-4).*
10.16 Non-Competition and Non-Solicitation Agreement dated as of November 3, 1993, between
Monitoring and George A. Weinstock (incorporated by reference to Exhibit 10.14 to the 1993
Form S-4)*.
10.17 Common Stock Performance Warrant Agreement dated as of September 16, 1991 between POI and
James M. Mackenzie, Jr. (incorporated by reference to Exhibit 10.15 to the 1993 Form S-
4).*
10.18 Common Stock Performance Warrant Agreement dated as of September 16, 1991, between POI and
John W. Hesse (incorporated by reference to Exhibit 10.16 to the 1993 Form S-4).*
10.19 Common Stock Performance Warrant Agreement dated as of September 16, 1991, between POI and
John E. Mack, III (incorporated by reference to Exhibit 10.17 to the 1993 Form S-4).*
10.20 Common Stock Performance Warrant Agreement dated as of September 16, 1991, between POI and
Thomas K. Rankin (incorporated by reference to Exhibit 10.18 to the 1993 Form S-4).*
10.21 Form of Amendment to Common Stock Performance Warrant dated as of June 29, 1994, between
POI and each of James M. Mackenzie, Jr., John W. Hesse, John E. Mack, III and Thomas K.
Rankin (incorporated by reference to Exhibit 10.31 to the March 1994 Form 10-Q).*
10.22 Consulting Agreement dated as of February 19, 1996 between POI and Dr. Ben Enis
(incorporated by reference to Exhibit 10.7 to the June 1996 Form 10-Q).*
10.23 1994 Stock Option Plan of POI, as amended.*
10.24 Series F Preferred Stock Repurchase Agreement dated May 10, 1995, between POI and
PacifiCorp Financial Services, Inc. (incorporated by reference to Exhibit 10.39 to the
1995 Form S-4).
67
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- ------ ------------------- ------------
10.25 Notes Registration Rights Agreement dated as of May 17, 1995, among POI, Monitoring,
Morgan Stanley & Co., Incorporated and Montgomery Securities (incorporated by reference to
Exhibit 4.2 to the 1995 Form S-4).
10.26 Agreement for Purchase and Sale of Assets, dated May 25, 1995, between Alert Centre, Inc.
and Monitoring (incorporated by reference to Exhibit 2 to the Current Report on Form 8-K
filed by POI and Monitoring dated May 25, 1995).
10.27 Agreement to Purchase and Sell Stock dated as of May 23, 1996, among Metrol, the persons
named therein as the "Shareholders" (the "Metrol Shareholders"), Monitoring and POI
(incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-3
(Registration No. 33-5849) originally filed by POI on June 12, 1996 (the "June 1996 Form
S-3")).
10.28 Amendment No. 1 to Agreement dated as of June 28, 1996, among Metrol, the Metrol
Shareholders, Monitoring and POI (incorporated by reference to Exhibit 2.2 to the June
1996 Form S-3).
10.29 Escrow Agreement dated May 31, 1996, among Metrol, the Metrol Shareholders, Monitoring,
POI and First National Bank of Denver, N.A. as the Escrow Agent (incorporated by reference
to Exhibit 2.3 to the Current Report on Form 8-K filed by POI and Monitoring dated June 7,
1996 (the "June 1996 Form 8-K")).
10.30 Registration Rights Agreement dated as of June 28, 1996, among POI and the Metrol
Shareholders (incorporated by reference to Exhibit 99.1 to the June 1996 Form 8-K).
21.1 Subsidiaries of POI.
23.1 Consent of Coopers & Lybrand, L.L.P.
27 Financial Data Schedule.
99.1 Information included as Item 5(d) of the September 20, 1996 Form 8-K (incorporated by
reference to Item 5(d) of the September 20, 1996 Form 8-K).
______________________
* Each exhibit marked with an asterisk constitutes a management
contract or compensatory plan or arrangement required to be filed
as an exhibit to this report pursuant to Item 14(c) of Form 10-K.