1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
0-24780 33-73002-01
------- -----------
(Commission File Number) (Commission File Number)
PROTECTION ONE, INC. PROTECTION ONE ALARM MONITORING, INC.
-------------------- -------------------------------------
(EXACT NAME OF REGISTRANT (EXACT NAME OF REGISTRANT
AS SPECIFIED IN CHARTER) AS SPECIFIED IN CHARTER)
Delaware Delaware
-------- --------
(State or Other Jurisdiction (State or Other Jurisdiction
of Incorporation or Organization) of Incorporation or Organization)
93-1063818 93-1065479
---------- ----------
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
6011 Bristol Parkway, 6011 Bristol Parkway,
Culver City, California 90230 Culver City, California 90230
----------------------------- -----------------------------
(Address of Principal Executive Offices, (Address of Principal Executive Offices,
Including Zip Code) Including Zip Code)
(310) 338-6930 (310) 338-6930
-------------- --------------
(Registrant's Telephone Number, (Registrant's Telephone Number,
Including Area Code) Including Area Code)
Indicate by check mark whether each of the registrants (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that such registrants were required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of February 10, 1997, Protection One, Inc. had outstanding
13,715,079 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 H(1)(a) and (b) for Form 10-Q and is therefore
filing this form with the reduced disclosure format set forth therein.
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PART I
ITEM 1. FINANCIAL STATEMENTS
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
September 30, December 31,
1996 1996
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 1,782 $ 598
Restricted cash . . . . . . . . . . . . . . . . . . . . 3,680 3,595
Receivables, net . . . . . . . . . . . . . . . . . . . 12,743 14,914
Inventories . . . . . . . . . . . . . . . . . . . . . . 1,920 1,833
Prepaid expenses . . . . . . . . . . . . . . . . . . . 1,221 1,839
Deferred tax asset . . . . . . . . . . . . . . . . . . -- 841
------------ ----------
Total current assets . . . . . . . . . . . . . . . 21,346 23,620
Property and equipment, net . . . . . . . . . . . . . . . . . 9,952 10,535
Subscriber accounts and intangibles, net . . . . . . . . . . 257,354 275,746
Assets held for sale . . . . . . . . . . . . . . . . . . . . 775 -
Deposits............... . . . . . . . . . . . . . . . . . . . 648 576
------------ ----------
$ 290,075 $ 310,477
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 2,278 $ 1,963
Accrued salaries, wages and benefits . . . . . . . . . 1,495 1,611
Other accruals . . . . . . . . . . . . . . . . . . . . 1,048 2,018
Purchase holdbacks . . . . . . . . . . . . . . . . . . 9,942 11,490
Acquisition transition costs . . . . . . . . . . . . . 4,326 5,214
Other current liabilities . . . . . . . . . . . . . . . 1,623 897
Deferred revenue . . . . . . . . . . . . . . . . . . . 13,827 15,178
------------ ----------
Total current liabilities . . . . . . . . . . . . 34,539 38,371
Long-term debt, net of current portion . . . . . . . . . . . 225,650 238,539
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 1,059 599
------------ ----------
Total liabilities . . . . . . . . . . . . . . . . 261,248 277,509
------------ ----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common Stock, $.01 par value, 24,000,000 shares authorized,
12,914,783 and 13,494,893 shares issued and outstanding,
at September 30, 1996 and December 31, 1996, respectively 129 135
Additional paid-in capital . . . . . . . . . . . . . . . . . 79,767 87,078
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (51,069) (54,245)
----------- ----------
Total stockholders' equity . . . . . . . . . . . . 28,827 32,968
------------ ----------
$ 290,075 $ 310,477
============ ==========
The accompanying notes are an integral part
of the consolidated financial statements.
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3
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Three months ended December 31,
------------------------------------
1995 1996
------------ ----------
(unaudited)
Revenues:
Monitoring and related services . . . . . . . . . . . . $ 14,534 $ 21,916
Other......... . . . . . . . . . . . . . . . . . . . . 977 745
------------ ----------
Total revenues . . . . . . . . . . . . . . . . . . 15,511 22,661
Cost of revenues:
Monitoring and related services . . . . . . . . . . . . 4,176 6,071
Other......... . . . . . . . . . . . . . . . . . . . . 665 623
------------ ----------
Total cost of revenues . . . . . . . . . . . . . . 4,841 6,694
------------ ----------
Gross profit . . . . . . . . . . . . . . . . . . . 10,670 15,967
Selling, general and administrative expenses . . . . . . . . 3,313 4,499
Acquisition and transition expenses . . . . . . . . . . . . . 755 1,254
Amortization of intangibles and depreciation expense . . . . 5,160 8,318
------------ ----------
Operating income . . . . . . . . . . . . . . . . . 1,442 1,896
Other expenses:
Interest expense, net . . . . . . . . . . . . . . . . . 934 1,887
Amortization of OID and debt issuance costs . . . . . . 4,247 4,919
Loss on assets held for sale . . . . . . . . . . . . . -- 123
------------ ----------
Loss before income taxes . . . . . . . . . . . . . (3,739) (5,033)
Income tax benefit . . . . . . . . . . . . . . . . . . . . . -- 1,857
------------ ----------
Net loss................... . . . . . . . . . . . . . . (3,739) (3,176)
Preferred stock dividends . . . . . . . . . . . . . . . . . . 168 --
------------ ----------
Loss attributable to common stock . . . . . . . . . . . $ (3,907) $ (3,176)
============ ==========
Net loss per common share . . . . . . . . . . . . . . . $ (0.43) $ (0.24)
The accompanying notes are an integral part
of the consolidated financial statements.
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4
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
Three months ended December 31,
------------------------------------
1995 1996
------------ ----------
(unaudited)
Cash flow from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,739) $ (3,176)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . 382 578
Amortization of intangibles . . . . . . . . . . . . . 4,778 7,740
Amortization of OID and debt issuance costs . . . . . . 4,247 4,919
Deferred tax benefit . . . . . . . . . . . . . . . . . -- (2,009)
Provision for doubtful accounts . . . . . . . . . . . . 414 826
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables . . . . . . . . . . . . . . . . . . . . . . (2,243) (2,548)
Inventories . . . . . . . . . . . . . . . . . . . . . . 156 116
Prepaid expenses and deposits . . . . . . . . . . . . . (516) (522)
Accounts payable . . . . . . . . . . . . . . . . . . . (54) (315)
Accrued liabilities . . . . . . . . . . . . . . . . . . 114 874
Deferred revenue . . . . . . . . . . . . . . . . . . . 367 621
------------ ----------
Net cash provided by operating activities . . . . 3,906 7,104
------------ ----------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . (830) (1,143)
Sales of assets previously held for sale . . . . . . . -- 187
Acquisitions, net of cash received . . . . . . . . . . (16,508) (13,295)
Payments on purchase holdbacks . . . . . . . . . . . . (50) (75)
Deferred acquisition payments . . . . . . . . . . . . . (134) (936)
Acquisition transition costs . . . . . . . . . . . . . (587) (736)
Payment of other liabilities . . . . . . . . . . . . . -- --
------------ ----------
Net cash used in investing activities . . . . . . (18,109) (15,998)
------------ ----------
Cash flows from financing activities:
Payments on long-term debt . . . . . . . . . . . . . . (6) (7,500)
Proceeds from long-term debt . . . . . . . . . . . . . 14,254 15,873
Debt and equity issuance costs . . . . . . . . . . . . (173) (753)
Issuance of preferred and common stock and warrants . . 23 5
------------ ----------
Net cash provided by financing activities . . . . 14,098 7,625
------------ ----------
Net decrease in cash and cash equivalents . . . . (105) (1,269)
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . 1,256 5,462
------------ ----------
End of period . . . . . . . . . . . . . . . . . . . . . $ 1,151 $ 4,193
============ ==========
Interest paid during the period . . . . . . . . . . . . . . $ 814 $ 361
============ ==========
Taxes paid during current year (see Note 7) . . . . . . . . $ -- $ 362
============ ==========
The accompanying notes are an integral part
of the consolidated financial statements.
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5
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollar amounts in thousands)
1. BASIS OF CONSOLIDATION AND INTERIM FINANCIAL INFORMATION:
The accompanying unaudited consolidated financial statements include
the accounts of Protection One, Inc. ("POI"), its wholly owned subsidiary
Protection One Alarm Monitoring, Inc. ("Monitoring"), and Monitoring's wholly
owned subsidiary, Security Holdings, Inc. ("SHI" and together with POI and
Monitoring, the "Company"). The assets, results of operations and stockholders'
equity of Monitoring comprise substantially all 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 financial statements for Monitoring and
SHI have not been provided because the Company does not believe such separate
financial statements are material to investors. Summarized consolidated
financial information of Monitoring and its subsidiary, SHI, is included in Note
9. The Company's unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q which
mandates adherence to Rule 10-01 of Regulation S-X. Accordingly, certain
information and footnote disclosures normally included in financial statements
presented in accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
September 30, 1996 included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on December 31, 1996. In the
opinion of management of the Company, all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation have been
included. The results of operations for the three month period ending December
31, 1996 are not necessarily indicative of the results to be expected for the
full year.
2. RECEIVABLES:
Receivables, which consist primarily of trade accounts receivable of
$22,054 at December 31, 1996 and $18,284 at September 30, 1996 have been
reduced by allowances for doubtful accounts of $7,140 and $5,541, respectively.
Included in receivables and deferred revenue at December 31, 1996 and September
30, 1996 are invoices billed in advance of the periods in which services are
provided totaling $8,742 and $7,309, respectively. The provisions for doubtful
accounts for the three months ended December 31, 1996 and December 31, 1995
were $0.8 million and $0.4 million, respectively.
3. SUBSCRIBER ACCOUNTS AND INTANGIBLES:
Subscriber accounts and intangibles (at cost) consist of the
following:
September 30, December 31,
1996 1996
------------- ------------
Acquired subscriber accounts . . . . . . . . . . . $ 298,767 $ 323,348
Debt issuance costs . . . . . . . . . . . . . . . 11,847 12,600
Goodwill and other . . . . . . . . . . . . . . . . 2,497 3,697
----------- ---------
313,111 339,645
Less accumulated amortization . . . . . . . . . . (55,757) (63,899)
----------- ---------
$ 257,354 $ 275,746
=========== =========
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PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
3. SUBSCRIBER ACCOUNTS AND INTANGIBLES (CONT.):
Reconciliation of acquired subscriber accounts:
Three Months
Year Ended Ended
September 30, December 31,
1996 1996
------------- ------------
Balance, beginning of period . . . . . . . . . . . $ 184,463 $ 298,767
Acquisition of subscriber accounts . . . . . . . . 119,629 25,478
Charges against acquisition holdbacks . . . . . . (5,325) (897)
----------- ---------
Balance, end of period . . . . . . . . . . . . . . $ 298,767 $ 323,348
=========== =========
In conjunction with certain purchases of subscriber accounts, the Company
withholds a portion of the purchase price as a reserve to offset qualifying
attrition of the acquired subscriber accounts for a specified period as
provided for in the purchase agreements, and as a reserve for purchase price
settlements of assets acquired and liabilities assumed.
Reconciliation of purchase holdbacks:
Three Months
Year Ended Ended
September 30, December 31,
1996 1996
------------- ------------
Balance, beginning of period . . . . . . . . . . . $ 4,949 $ 9,942
Purchase holdback additions . . . . . . . . . . . 13,850 2,520
Charges against subscriber accounts . . . . . . . (5,325) (897)
Cash paid to sellers . . . . . . . . . . . . . . . (3,532) (75)
----------- ---------
Balance, end of period . . . . . . . . . . . . . . $ 9,942 $ 11,490
=========== =========
4. LOSS PER COMMON SHARE:
The computation of fully diluted net loss per share for the three months
ended December 31, 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 the net loss attributable to common shares are as follows:
Three Months Ended
December 31,
-----------------------------------
1995 1996
----------- -----------
Common Stock . . . . . . . . . . . . . . . . . . . 9,100,892 13,448,981
5. DIVIDEND RESTRICTIONS:
The Company's Amended and Restated Credit Agreement (the "Credit
Agreement") governing its revolving credit facility (the "Revolving Credit
Facility") and the Indenture governing Monitoring's 13 5/8% Senior Subordinated
Discount Notes due 2005 (the "Discount Notes") place certain restrictions on
POI's, Monitoring's and SHI's ability to make dividend payments, distributions
and other asset transfers in respect of such company's capital stock. At
December 31, 1996, under provisions of the Credit Agreement (the most
restrictive agreement), no amounts were available for such dividend payments,
distributions or other transfers by POI or Monitoring.
5
7
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
6. INCOME TAXES:
For the three months ended December 31, 1996, the Company experienced a
net increase in its net deferred tax asset valuation allowance of $1.2 million.
At December 31, 1996, the Company had $30.1 million in NOL carryforwards for
regular tax purposes and $24.4 million for alternative minimum tax ("AMT NOL")
purposes, which expire in the years 2006-2010. 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 limitations on the amount of regular
tax NOL and AMT NOL carryforwards, 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
Company has utilized $2.0 million in net operating loss carryforwards for the
three months ended December 31, 1996 which results in the effective tax rate
being lower than the expected statutory rate.
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below:
September 30, December 31,
1996 1996
------------ ------------
Deferred tax assets:
Allowances for doubtful accounts . . . . . . . . . $ 2,214 $ 2,807
Acquisition transition costs and purchase holdbacks 5,701 6,675
Performance warrants . . . . . . . . . . . . . . . 1,662 1,736
Net operating loss carryforwards . . . . . . . . . 12,814 12,029
OID amortization . . . . . . . . . . . . . . . . . 8,634 10,392
Other . . . . . . . . . . . . . . . . . . . . . . 139 62
Less valuation allowance . . . . . . . . . . . . . (1,907) (3,187)
----------- ---------
Total deferred tax assets . . . . . . . . . . 29,257 30,514
Deferred tax liabilities:
Differences in depreciation and amortization . (29,257) (29,673)
----------- ---------
Net deferred tax assets . . . . . . . . . . . $ -- $ 841
=========== =========
The valuation allowance at September 30, 1996 and December 31, 1996
reflect current estimates of limitations on utilization of NOL carryforwards
for Federal and state income tax purposes.
In October, 1996, the Company acquired all of the outstanding shares
of Security Holdings, Inc. For financial reporting purposes, the assets
acquired and the liabilities assumed were valued at fair market value as of the
date of purchase. For income tax reporting purposes, the acquisition was
treated as a non-taxable stock purchase with acquired assets and liabilities
retaining their historical tax basis.
The deferred tax liability resulting from the acquisition basis
difference exceeded the Company's existing net deferred tax asset (before
reduction for valuation allowance) at the date of acquisition. Consequently,
the existing deferred tax asset valuation allowance was eliminated. This
resulted in a reduction to the goodwill and deferred tax liability account
balances that were recognized as a result of the acquisition. For the quarter
ended December 31, 1996, the Company generated (subsequent to the acquisition)
additional deferred tax assets which exceeded the Company's net deferred tax
liability. To the extent these additional deferred tax assets offset the net
deferred tax liability that was required to be recognized on the acquisition, a
deferred income tax benefit was recognized on the Company's income statement.
Due to uncertainties regarding the future utilization of the excess deferred
tax assets (i.e., the portion exceeding the deferred tax liability), a
valuation allowance was recorded.
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PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
7. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions:
Three months ended December 31,
----------------------------------
1995 1996
----------- ---------
Subscriber accounts acquired . . . . . . . . . . . . . $ 22,459 $ 24,659
Goodwill . . . . . . . . . . . . . . . . . . . . . . . -- 1,168
Inventories . . . . . . . . . . . . . . . . . . . . . . -- 29
Accounts receivable, net . . . . . . . . . . . . . . . -- 212
Property and equipment . . . . . . . . . . . . . . . . -- 18
Other assets acquired . . . . . . . . . . . . . . . . . 156 25
----------- ---------
Total assets acquired . . . . . . . . . . . . . . 22,615 26,111
----------- ---------
Cash paid to seller . . . . . . . . . . . . . . . . . . 16,326 12,983
Stock issued to seller . . . . . . . . . . . . . . . . -- 7,313
Acquisition expenses . . . . . . . . . . . . . . . . . 172 261
Purchase holdbacks . . . . . . . . . . . . . . . . . . 2,018 1,549
Acquisition transition reserves . . . . . . . . . . . . 1,024 1,624
Deferred revenue acquired . . . . . . . . . . . . . . . 1,205 730
Other liabilities assumed . . . . . . . . . . . . . . . 1,870 1,651
----------- ---------
Purchase price and assumed liabilities . . . . . . $ 22,615 $ 26,111
=========== =========
Cash paid to sellers, payments for acquisition expenses and payments
on liabilities assumed in conjunction with acquisitions are included in cash
used in investing activities in the period paid. Deferred revenue, which
represents advance billings to subscribers, is recognized as revenue in the
period in which the related service is provided. Such amounts are considered a
non-cash component of operations and are reflected as a reduction in cash
provided by operating activities.
The following reflects decreases in assets and increases in
liabilities and capital stock resulting from non-cash investing and financing
activities which occurred in the three months ended December 31, 1995:
Purchase
Intangibles Holdbacks
----------------- ------------------
Charge off of holdbacks..... $ (830) $ 830
----------------- ------------------
$ (830) $ 830
================= ==================
The following reflects increase (decreases) in assets and increases in
liabilities and capital stock resulting from non-cash investing and financing
activities which occurred in three months ended December 31, 1996:
Assets Additional
Other Held Purchase Common Paid-In
Receivables For Sale Intangibles Holdbacks Stock Capital
----------- -------- ----------- --------- ----- -----------
Chargeoff of purchase
holdbacks..................... ($897) $897
Common shares issued for
Security Holdings............... 7,313 ($6) ($7,307)
Sale of guard and patrol
operations.................... $ 588 $(588)
----- ----- ------ ---- --- -------
$(588) $(588) $6,416 $897 ($6) ($7,307)
===== ===== ====== ==== === =======
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PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
8. COMMITMENTS AND CONTINGENCIES:
The Company is a party to claims and matters of litigation incidental
to the normal course of business. The ultimate outcome of these matters cannot
presently be determined; however, in the opinion of management of the Company,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations and cash
flows.
9. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION:
POI and SHI have fully and unconditionally guaranteed the Discount
Notes and the $103.5 million principal amount of 6 3/4% Convertible Senior
Subordinated Notes due 2003 (the "Convertible Notes") on a joint and several
basis. 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, and
Monitoring has determined to merge SHI into Monitoring in the near future. All
significant intercompany balances and transactions have been eliminated in
consolidation. Separate audited financial statements for Monitoring and separate
summarized financial information for SHI have not been provided because the
Company does not believe such separate financial statements and separate
summarized financial information are material to investors. Summarized
consolidated financial information of Monitoring, and its subsidiary, SHI, is
presented below.
September 30, December 31,
1996 1996
------------ ------------
(unaudited) (unaudited)
Summarized Balance Sheet
Assets
Current assets........................... $ 21,345 $ 23,619
Subscriber accounts and intangibles,
net.................................... $ 257,354 $ 257,746
Other non-current assets................. $ 11,375 $ 11,111
Liabilities and Stockholders' Equity
Deferred revenue.......................... $ 13,827 $ 15,178
Other current liabilities................. $ 20,712 $ 23,193
Long-term debt, net of current portion.... $ 225,650 $ 238,539
Other long-term liabilities............... $ 1,059 $ 599
Stockholders' equity...................... $ 28,826 $ 32,967
Three Months
Year Ended Ended
September 30, December 31,
1996 1996
------------ -------------
Summarized Statements of Operations
Revenue......................................... $ 73,457 $ 22,661
G ross Profit................................... $ 49,364 $ 15,967
Net Income (Loss)............................... $ (15,497) $ (3,176)
10. SUBSEQUENT EVENT - PHILLIPS ELECTRONICS ACQUISITION:
On January 3, 1997, Protection One acquired substantially all the assets
of Phillips Electronics, Inc. for an aggregate purchase price of approximately
$14.5 million. The Company issued to Phillips Electronics 203,562 shares of
Common Stock as a portion of the purchase price (approximately $2.0 million).
Phillips Electronics has approximately 12,000 subscribers (representing in
excess of $275,000 of MRR), substantially all of whom are located in the
greater Portland metropolitan area.
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10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed in this section 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 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 included in Item 5(d) on the
Current Report on Form 8-K filed by Protection One, Inc. and Protection One
Alarm Monitoring, Inc. dated September 20, 1996, which information is
incorporated herein by reference. 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. Accordingly, no separate analysis of results of
operations of Monitoring has been included herein.
OVERVIEW
For an overview of the Company's accounting policies and specific
discussions of, among other things, a change in the method of accounting for
certain acquisition and transition expenses and the impact of SFAS 121 on the
Company's financial statements, see the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996.
Acquisition and Dealer Program Activity. A significant portion of the
Company's growth has been generated by the purchase of subscriber accounts
through the Company's Dealer Program and through the acquisition of portfolios
of subscriber accounts from other alarm companies. The Company's Dealer
Program consists of exclusive purchase agreements with independent alarm
companies specializing in the sale and installation of new alarm systems.
Dealer Program participants 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 purchase of the accounts from the dealer, to facilitate customer
satisfaction and quality control. In addition, the Company requires dealers to
evaluate the credit history of prospective new subscribers.
The Company also purchases portfolios of subscriber accounts. Because
the Company typically acquires only the subscriber accounts (and not the
accounts receivable or other assets) of the sellers, the Company focuses its
pre-acquisition review and analysis on the quality and stability of the
subscriber accounts to verify the monthly recurring revenue ("MRR") represented
by such accounts. If the subscriber accounts to be purchased pass such due
diligence scrutiny, the Company then applies its monitoring costs to such MRR
as a basis for determining the purchase price to be paid by the Company. To
protect the Company against the loss of acquired accounts, the Company
typically seeks to obtain from the seller a guarantee against the subscriber
account cancellation for a period following the acquisition and the right to
retain a portion of the acquisition price (a "purchase price holdback") against
the MRR lost due to subscriber account cancellations during the specified
period. The Company obtains a similar purchase price holdback in its purchases
through the Dealer Program.
During the three months ended December 31, 1996 (the "first quarter of
fiscal 1997"), the Company added (through its Dealer Program and acquisitions
of four portfolios of subscriber accounts) an aggregate of approximately 21,500
subscriber accounts for a total purchase price of approximately $25.5 million
(including assumed liabilities of approximately $2.4 million). The MRR of the
acquired accounts ranged from approximately $15 to $60, with an average of
$28.50. Of the four acquisitions completed during the first quarter of fiscal
1997 by the Company, all included purchase price holdbacks in amounts that
ranged from 10% to 20% of the initial purchase price (and averaged 14.4% of the
initial purchase price) and attrition guarantees for periods that ranged from 4
months to 12 months (and averaged 8.5 months).
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
9
11
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 sellers.
The following table sets forth the Company's gross subscriber
attrition and net MRR attrition for the periods indicated:
TWELVE MONTHS ENDED
--------------------------------------------------------------
12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
---------- --------- --------- -------- -----------
Gross subscriber
attrition . . . . . . 20.3% 20.5% 19.9% 18.3% 16.6%
Net MRR attrition . . 6.6 7.9 7.1 7.0 6.5
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 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 customer. In certain instances, the 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 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. There can be no assurance that the
actual attrition rates for such accounts will not be greater than the rate
assumed by the Company.
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12
The table below sets forth the change in the Company's subscriber base over
the periods indicated below:
TWELVE MONTHS
ENDED DECEMBER 31,
----------------------------
1995 1996
------- -------
Number of subscribers:
Beginning of period . . . . . . . . . . . . . . 98,804 141,633
Additions through portfolio acquisitions and
Dealer Program, net of sales of subscriber
accounts. . . . . . . . . . . . . . . . . . . 62,943 94,299
Installations by Company personnel . . . . . . 1,356 686
Reconnects and conversions . . . . . . . . . . 3,658 4,768
Gross subscriber attrition . . . . . . . . . . (25,128) (30,129)
------- -------
End of period . . . . . . . . . . . . . . . 141,633 211,257
======= =======
Change in Presentation Format. The Company has recently made changes
to its presentation of income statement information. First, the Company has
reclassified revenues and cost of revenues associated with its alarm response
and patrol operations from the "other" category to "monitoring and related
services." The "other" category now reflects solely results from the Company's
installation, lock and other operations. The Company made this change to better
reflect its efforts to sell a bundle of monitoring, field service and alarm
response services to both existing and new subscribers. Second, the Company has
reclassified depreciation expense from monitoring and service cost of revenues,
other cost of revenues and the selling, general and administrative expenses
category, and included depreciation expense in a line item entitled
"amortization of intangibles and depreciation expense." The Company made this
change to allow readers to more easily calculate the aggregate amount of
non-cash charges in the income statement. Finally, the Company has reclassified
customer service expense from monitoring and service cost of revenues to
selling, general and administrative expenses. This change reflects the
Company's move to centralize all customer service functions into a single
facility in Chatsworth, California. Customer service personnel formerly
dedicated to the support of monitoring and related services will now be
responsible for the Company's entire customer service efforts. Results for the
three months ended December 31, 1995 have been modified to reflect these
changes and make such period comparable to the three months ended December 31,
1996.
The table below displays selected income statement data for fiscal years
1994-1996 after giving effect to the changes described above:
Year Ended September 30,
-----------------------------------------
1994 1995 1996
--------- -------- --------
Revenues:
Monitoring and related services................ $29,297 $48,909 $68,778
Other.......................................... 5,183 6,973 4,680
-------- -------- --------
Total revenues.............................. 34,480 55,882 73,457
Cost of revenues:
Monitoring and related services................ 8,355 13,627 19,065
Other.......................................... 3,225 3,887 2,513
-------- -------- --------
Total cost of revenues....................... 11,579 17,514 21,578
-------- -------- --------
Gross profit....................................... 22,901 38,368 51,879
Selling, general and administrative expenses....... 10,607 13,031 15,478
Loss on acquisition termination.................... 26 208 --
Performance warrants compensation expense.......... 4,504 -- --
Acquisition and transition expense................. -- 3,090 4,219
Amortization of intangibles and depreciation
expense.......................................... 9,290 16,543 25,121
-------- -------- --------
Operating income (loss)....................... $ (1,526) $ 5,496 $ 7,061
======== ======== ========
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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.
Three Months Ended
December 31,
1995 1996
------ ------
Revenues:
Monitoring and related services . . . . . . . 93.7% 96.7%
Other . . . . . . . . . . . . . . . . . . . . 6.3 3.3
------ ------
Total revenues . . . . . . . . . . . 100.0% 100.0%
------ ------
Cost of revenues:
Monitoring and related services . . . . . . 26.9% 26.8%
Other . . . . . . . . . . . . . . . . . . . 4.3 2.7
------ ------
Total cost of revenues . . . . . . . 31.2 29.5
------ ------
Gross profit . . . . . . . . . . . . 68.8 70.5
Selling, general and administrative expense . . 21.4 19.9
Acquisition and transition expenses . . . . . . 4.9 5.5
Amortization of intangibles and depreciation
expense . . . . . . . . . . . . . . . . . . 33.2 36.7
------ ------
Operating income (loss) . . . . . . . 9.3% 8.4%
====== ======
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1995
Revenues for the three months ended December 31, 1996 increased by
approximately $7.2 million, or 46.1%, to $22.7 million from $15.5 million in
the comparable period in 1995. Monitoring and related services revenues
increased by approximately $7.4 million, or 50.8%, a substantial majority of
which increase resulted from the addition of subscribers through the Dealer
Program and the acquisition of portfolios of subscriber accounts. The
Company's subscriber base increased by 49.2% to approximately 211,200
subscribers at the end of the first quarter of fiscal 1997 as compared to
141,600 subscribers at the end of the first quarter of fiscal 1996. The sale
of enhanced services and new subscribers generated by Company personnel
comprised the remainder of revenue growth. Other revenues, consisting primarily
of revenues generated by the Company's installation and lock businesses,
decreased by $0.2 million, or 23.8%, to $0.7 million. Such decrease was caused
by a decline in installation revenues of 38.6%, or approximately $0.2 million.
The decline in installation revenues resulted from the Company's increased
emphasis on growth through the Dealer Program and acquisitions, rather than
through the sale of new alarm systems by Company personnel.
Cost of revenues for the first quarter of fiscal 1997 increased by
approximately $1.9 million, or 38.3%, to $6.7 million. Cost of revenues as a
percentage of total revenues declined to 29.5% for the first quarter of fiscal
1997 from 31.2% for the comparable period in fiscal 1996. Monitoring and
related services expenses increased by approximately $1.9 million, or 45.4%,
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 related services expenses as a percentage of monitoring and
related services revenues decreased to 27.7% for the first quarter of fiscal
1997 from 28.7% during the comparable period in fiscal 1996. Such decrease was
generated by efficiencies realized in the monitoring center and by greater
service technician productivity. Other expenses decreased by approximately
$0.04 million, or 6.3%, to approximately $0.6 million for the first quarter in
fiscal 1997 from $0.7 million for the first quarter of fiscal 1996. The
decrease primarily was caused by a 7.5% decrease ($0.03 million) in
installation expense.
Gross profit for the first quarter of fiscal 1997 was approximately
$16.0 million, representing an increase of approximately $5.3 million, or
49.6%, over the $10.7 million of gross profit recognized in the comparable
period in fiscal 1996. Such increase was caused primarily by an increase in
monitoring and related services activities, which paralleled the increase in
the Company's subscriber base noted above. Gross profit as a percentage of
total revenues was 70.5% for the first quarter of fiscal 1997 compared to 68.8%
for the comparable period in fiscal 1996. This increase was caused primarily by
an increase in monitoring and related services revenues as a percentage of
total revenues (approximately 96.7% for the first quarter of fiscal 1997
compared to 93.7% for the first quarter of fiscal 1996.). Gross profit from
other revenues declined to approximately $0.1 million for the first quarter of
fiscal 1997 from $0.3 million for the comparable period in fiscal 1995. Such
decline was caused primarily by a decrease in the gross profit from reduced
installation activities.
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14
Selling, general and administrative expenses rose to approximately
$4.5 million in the first quarter of fiscal 1997, which represents an increase
of approximately $1.2 million, or 35.8%, over selling, general and
administrative expenses in the comparable period in fiscal 1996. The majority
of the increase reflects higher general and administrative expenses arising
from the Company's growth, including the addition of two branch offices. Such
figure as a percentage of total revenues declined from 21.4% in the first
quarter of fiscal 1996 to 19.9% in the first quarter of fiscal 1997.
Advertising and marketing expenses are expensed as incurred and comprised less
than 1% of revenues in each of the quarters ending December 31, 1995 and 1996.
The provision for doubtful accounts increased to approximately $0.8 million for
the first quarter of fiscal 1997 from $0.4 million for the comparable period in
fiscal 1996.
Acquisition and transition expenses for the first quarter of fiscal
1997 totaled $1.3 million compared to $0.8 million for the comparable period in
fiscal 1996. Such expenses will fluctuate from quarter to quarter based
primarily on the amount of the Company's acquisition and Dealer Program
activity and its ability to require sellers to bear certain of such
acquisition-related expenses.
Amortization of intangibles and depreciation expense for the first
quarter of fiscal 1997 increased by approximately $3.2 million, or 61.2%, to
$8.3 million. This increase is primarily the result of the addition of
subscriber accounts through the acquisition of portfolios of subscriber
accounts and through the Dealer Program.
Operating income for the first quarter of fiscal 1997 was
approximately $1.9 million, compared to approximately $1.4 million in the
comparable period in fiscal 1996. Operating income as a percentage of total
revenues was 8.4% in the first quarter of fiscal 1997, compared to 9.3% in the
comparable period in fiscal 1996. The decrease in such figure over the
comparable period in fiscal 1996 reflects substantial increases in operating
expenses and amortization expense, offset by improvement in the Company's gross
profit and higher revenues.
Interest expense, net and amortization of debt issuance costs and OID.
These amounts increased by $1.6 million, or 31.4%, to $6.8 million in the first
quarter of fiscal 1997, reflecting the Company's use of debt to finance a
substantial portion of its subscriber account growth.
Balance sheet data. At December 31, 1996, the Company's working
capital deficit was $14.8 million, as compared to a working capital deficit of
$13.2 million at September 30, 1996. The increase in the working capital
deficit was caused primarily by increases in deferred revenues and other
liabilities of $3.7 million offset by increases in accounts receivable.
Subscriber accounts and intangibles, net increased to $275.8 million at
December 31, 1996 from $257.4 million at September 30, 1996. This increase of
$18.4 million, or 7.1%, was caused by the addition of new subscribers, net of
amortization expense. Total stockholders' equity increased to approximately
$33.0 million at December 31, 1996 from $28.8 million at September 30, 1996.
The increase in such figure reflects the issuance of shares of the Company's
Common Stock as a portion of the purchase price of Security Holdings, Inc.
(approximately $7.3 million), offset by the Company's $3.2 million loss for the
first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
General. Since its formation in 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 proceeds of the $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 the Convertible Notes issued in September
and October of 1996; the Company also has utilized borrowings under its
Revolving Credit Facility to fund acquisitions and the Dealer Program. 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, the 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.
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15
On a long-term basis, the Company has several material commitments.
Borrowings under the Revolving Credit Facility were approximately $0.2 million
at December 31, 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. 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 cash flows from operations 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 obligation, or that there will be
sufficient funds available to the Company after such interest payments to meet
other debt, capital expenditure and operational obligations. The $103.5
principal amount of the Convertible Notes matures on September 15, 2003,
although they may be converted into Common Stock at any time prior to such
date. The $166.0 million principal amount of Discount Notes matures on June
30, 2005. There can be no assurance that the Company will have the cash
necessary to repay 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 1998 and 1999.
The Company has had, and expects to continue to have, a working
capital deficit. At December 31, 1996, the Company had a working capital
deficit of $14.8 million. There are two principal categories of current
liabilities that cause the Company to have a working capital deficit: (i)
"purchase holdbacks," which represent the portion of the aggregate acquisition
cost of subscriber accounts retained by the Company to offset lost MRR arising
from the cancellation of acquired accounts; and (ii) "deferred revenue," which
represents billings and cash collections received by the Company from its
subscriber base in advance of performance of services. Both purchase holdbacks
and deferred revenues are recorded as a current liability on the Company's
balance sheet.
For the first three months ended December 31, 1996, the Company's net
cash provided by operating activities was $7.1 million, compared to $3.9
million net cash provided by operating activities for the three months ended
December 31, 1995.
For the three months ended December 31, 1996, the Company's net cash
used in investing activities was $16.0 million, compared to $18.1 million
during the three months ended December 31, 1995. Investing activities during
the first quarter of fiscal 1997 included purchases through the Dealer Program,
as well as the acquisition of portfolios of subscriber accounts, including the
purchase of Security Holdings, Inc.
During the three months ended December 31, 1996, the Company's net
cash provided by financing activities was $7.6 million, compared to $14.1
million in the three months ended December 31, 1995. The Company's primary
financing activity during the three months ended December 31, 1996 was the
issuance of $13.5 million of Convertible Notes pursuant to the underwriters'
exercise of an over-allotment option.
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, and such dividends are
currently prohibited by the Company's Credit Agreement and Discount Note
indenture.
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16
Capital Expenditures. The Company anticipates making capital
expenditures in the remainder of 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 $1.5 million to complete a project to upgrade its monitoring and
administrative hardware and software. The Company believes the installation of
the new computer software will create efficiencies Company-wide, and
particularly in the customer service, data entry and field maintenance and
repair functions. The Company believes the complete implementation of the new
software will not occur until the end of fiscal 1997. 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.
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17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Amendment of Certificate of Incorporation. The Fifth Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
of Protection One, Inc. ("POI") was further amended effective upon the filing
of a Certificate of Amendment of Certificate of Incorporation with the
Secretary of State of Delaware on February 6, 1997, to increase the number of
authorized shares of Common Stock from 24,000,000 shares to 40,000,000 shares.
The aggregate number of shares of all classes of stock that POI now has the
authority to issue is 45,000,000 consisting of 40,000,000 authorized shares of
Common Stock and 5,000,000 authorized shares of a class designated Preferred
Stock, par value $.10 per share. The amendment to the Certificate of
Incorporation was approved by the stockholders of POI at the annual meeting of
stockholders held on January 29, 1997. The Certificate of Incorporation of POI
as so amended is filed as Exhibit 3.1 hereto.
The information set forth under the caption "Approval of Proposed
Amendment to Certificate of Incorporation" on pages 17-18 of POI's definitive
Proxy Statement dated December 30, 1996 for the annual meeting of stockholders
held on January 29, 1997 is incorporated herein by this reference. A copy of
the pertinent pages of such Proxy Statement is filed as Exhibit 99.1 hereto.
Issuances of Securities. POI and Protection One Alarm Monitoring,
Inc. ("Monitoring") reported in their Annual Report on Form 10-K for the year
ended September 30, 1996 (the "1996 Form 10-K") that on October 4, 1996, POI
issued 482,903 shares of Common Stock to the four former stockholders of
Security Holdings, Inc., a Washington corporation ("Security Holdings"), and
deposited an additional 68,895 shares of Common Stock into an escrow account,
in exchange for such stockholders' delivery to Monitoring of all the
outstanding capital stock of Security Holdings, in a transaction exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) thereof. For addition information
with respect to this transaction and the subsequent registration for resale of
such shares, reference is made to the 1996 Form 10-K.
Pursuant to an Asset Purchase Agreement dated as of December 17, 1996
(the "Purchase Agreement"), on January 3, 1997, Monitoring purchased the
security alarm accounts, equipment, telephone line and certain other assets of
Phillips Electronics, Inc., a Washington corporation ("Phillips"). In
consideration of the acquisition, Monitoring (i) assumed certain operating
obligations of Phillips, (ii) paid to Phillips approximately $12.5 million in
cash, 11.6% of which was deposited in escrow for 90 days pending certain
purchase price adjustments, (iii) delivered to Phillips 203,562 shares of
Common Stock (the "Shares") newly issued by POI, which number was derived by
dividing $2,000,000 by an average of the closing price of the Common Stock on
the NASDAQ National Market during the period of the 10 most recent trading days
ending on the second trading day prior to the acquisition. As provided for in
the Purchase Agreement, POI filed a registration statement on Form S-3
(Registration No. 333-181159) under the Securities Act to afford Phillips the
opportunity to resell the Shares in a public transaction. On January 2, 1997,
the Registration Statement was declared effective by the Securities and
Exchange Commission (the "Commission").
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18
PART II
OTHER INFORMATION
The offer and sale of the Shares was not registered under the
Securities Act in reliance on Section 4(2) thereof and Rule 506 thereunder.
Phillips certified to POI that Phillips was an "accredited investor" as such
term is defined in Rule 501 under the Securities Act and was otherwise able to
bear the economic risk of the investment, and was provided with registration
statements and reports of, and access to other information concerning POI and
its subsidiaries. No underwriter participated in the offer or sale of any of
these securities and no underwriter's fees or commissions were paid.
On October 3, 1996, POI issued 2,200 shares of Common Stock, valued at
the date of contribution at $27,500, to the Protection One Employee Savings
Plan as an employer matching contribution to such 401(k) plan. As the
contribution did not constitute a "sale" as defined by Section 2(3) of the
Securities Act, registration of the transaction under such statute was not
required.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits. The following exhibits are filed with this Current Report
on Form 10-Q:
Exhibit
Number Exhibit
- ------- -------
2.1 Asset Purchase Agreement dated as of December 17, 1996,
among Protection One Alarm Monitoring, Inc. and, inter
alia, Phillips Electronics, Inc. (incorporated by reference
to Exhibit 2.1 to the Registration Statement on Form S-3
(Registration No. 333-18159) originally filed by POI
with the Commission on December 18, 1996).
3.1 Fifth Restated Certificate of Incorporation of Protection
One, Inc., as amended.
10.1 1994 Stock Option Plan of Protection One, Inc., as
amended.
27.1 Financial Data Schedule.
99.1 Information included under the caption "approval of
Proposed Amendment to Certificate of Incorporation" on
pages 17-18 of Protection One, Inc.'s definitive Proxy
Statement dated December 30, 1996 for the annual meeting
of stockholders held January 29, 1997 (incorporated by
reference from said Proxy Statement (Commission File No.
0- 24780)).
99.2 Information included as Item 5(d) of the Current Report on
Form 8-K dated September 20, 1996, filed by POI and
Monitoring.
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19
Reports on Form 8-K. During the quarter for which this Current Report
on Form 10-Q is filed, a Current Report on Form 8-K dated October 30, 1996 was
filed by POI and Monitoring with the Commission, reporting the issuance of
press release concerning alarm accounts and subscribers added during the
quarter ended September 30, 1996.
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20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
February 10, 1997
PROTECTION ONE, INC.
PROTECTION ONE ALARM MONITORING, INC.
By: /s/ JOHN W. HESSE
-----------------------------------
John W. Hesse
Executive Vice President
and Chief Financial Officer
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