-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KJvMyKhZiSt70HLHfSfsZYZ/eCcZuOHan1BV+s8qSpoXq/djE9Eeny0JPO+qyhf3 ifDtf9OMnP1xJqQQbrdeOQ== 0001042645-98-000101.txt : 19980518 0001042645-98-000101.hdr.sgml : 19980518 ACCESSION NUMBER: 0001042645-98-000101 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALARMGUARD HOLDINGS INC CENTRAL INDEX KEY: 0000319250 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS RETAIL [5900] IRS NUMBER: 330318116 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08138 FILM NUMBER: 98623592 BUSINESS ADDRESS: STREET 1: 125 FRONTAGE ROAD STREET 2: STE 1880 CITY: ORANGE STATE: CT ZIP: 06477 BUSINESS PHONE: 6192311818 MAIL ADDRESS: STREET 1: 125 FRONTAGE ROAD STREET 2: STE 1880 CITY: ORANGE STATE: CT ZIP: 06477 FORMER COMPANY: FORMER CONFORMED NAME: TRITON GROUP LTD DATE OF NAME CHANGE: 19950328 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 1O-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarter ended March 31, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-8138 Alarmguard Holdings, Inc. Incorporated In Delaware IRS Identification No: 33-0318116 Principal Executive Offices: Telephone (203) 795-9000 125 Frontage Road Orange, Connecticut 06477 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of Alarmguard Holdings, Inc.'s common stock, $.0001 par value, outstanding as of April 30, 1998 was 5,593,948. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements ALARMGUARD HOLDINGS, INC. Condensed Consolidated Balance Sheets (In thousands) March 31 December 31 1998 1997 (unaudited) ASSETS: Current assets: Cash and cash equivalents $13,311 $698 Restricted cash 2,608 1,931 Accounts receivable, net 8,442 5,558 Inventories 3,817 3,065 Other current assets 474 343 Total current assets 28,652 11,595 Property and equipment, net 3,252 2,133 Customer installation costs, net 9,169 8,868 Customer contracts and intangibles, net 79,757 43,027 Other investments 2,097 2,245 Other assets 1,692 1,982 Total assets $124,619 $69,850 ALARMGUARD HOLDINGS, INC. Condensed Consolidated Balance Sheets (continued) (In thousands) March 31 December 31 1998 1997 (unaudited) LIABILITIES AND STOCKHOLDERS' DEFICIENCY: Current liabilities: Accounts payable $2,105 $2,659 Accrued expenses 7,994 5,675 Current portion of notes payable 505 2,462 Deferred revenue 9,456 6,231 Other current liabilities 5,306 4,061 Total current liabilities 25,366 21,088 Notes payable, less current portion 696 549 Credit facility 63,500 46,700 Subordinated debt 3,756 4,389 Other liabilities 325 321 Cumulative Convertible Preferred Stock, Redeemable at $1,000 par value: Series A, 5% dividends, 35,700 shares issued and outstanding at March 31, 1998 33,835 - Series B, 5,000 shares issued and outstanding at March 31, 1998 4,738 - Stockholders' deficiency: Common Stock, $.0001 par value, 25,000,000 shares authorized, 5,593,396 shares issued and outstanding at March 31, 1998 and December 31, 1997 1 1 Additional paid in capital 35,019 35,286 Accumulated deficit (42,617) (38,484) Total stockholders' deficiency (7,597) (3,197) Total liabilities and stockholders' deficiency $124,619 $69,850 See accompanying notes to condensed consolidated financial statements. ALARMGUARD HOLDINGS, INC. Condensed Consolidated Statements of Operations (Unaudited, in thousands, except per share data) For The Three Months Ended March 31 1998 1997 Revenue $10,913 $6,597 Cost of revenue 5,008 2,673 Gross profit 5,905 3,924 Selling, general and administrative expense 4,440 3,203 Acquisition integration expense 328 - Amortization and depreciation expense 3,524 2,371 Total operating expense 8,292 5,574 Operating loss (2,387) (1,650) Other income (expense): Interest expense, net (1,435) (844) Other, net 35 - Net loss (3,787) (2,494) Dividend requirement on preferred stock (346) (171) Loss applicable to common shares $(4,133) $(2,665) Basic and diluted loss per common share $(0.74) $(0.87) Weighted average number of basic and diluted common shares 5,593 2,877 See accompanying notes to condensed consolidated financial statements. ALARMGUARD HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) For The Three Months Ended March 31 1998 1997 Operating activities: Net loss $(3,787) $(2,494) Adjustments to reconcile net loss to net cash used in operating activities: Amortization and depreciation 3,524 2,371 Accretion on preferred stock 73 - Customer installation costs incurred (1,205) (1,154) Changes in operating assets and liabilities, net of effects of acquisitions 424 632 Net cash used in operating activities (971) (645) Investing activities: Acquisition of businesses, net of cash acquired (36,992) - Increase in restricted cash (677) - Purchases of property and equipment (540) (50) Net cash used in investing activities (38,209) (50) Financing activities: Net proceeds from issuance of preferred stock 37,800 - Proceeds from term loan 17,600 800 Proceeds from bridge loan - 500 Payments of term loan (800) - Financing fees paid (346) - Payments of other notes payable (2,341) (513) Payments of capital leases (120) - Net cash provided by financing activities 51,793 787 Increase in cash and cash equivalents 12,613 92 Cash and cash equivalents at beginning of period 698 230 Cash and cash equivalents at end of period $13,311 $322 Cash paid for interest $1,222 $855 See accompanying notes to condensed consolidated financial statements. ALARMGUARD HOLDINGS, INC. Notes To Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation Alarmguard Holdings, Inc. ("Alarmguard" or the "Company") is the successor-in-interest to Security Systems Holdings, Inc. ("SSH") and Triton Group Ltd. ("Triton"), following the merger ("Merger") of SSH and Triton on April 15, 1997. Alarmguard, through its wholly-owned subsidiaries, sells and installs burglar and fire alarm systems and provides monitoring and security system repair and maintenance services to homeowners and businesses, principally in the Northeast and Mid-Atlantic regions of the United States. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. The condensed consolidated balance sheet as of December 31, 1997 has been derived from the audited consolidated balance sheet as of that date. The unaudited interim financial information of Alarmguard should be read in conjunction with the audited consolidated financial statements of Alarmguard as of and for the year ended December 31, 1997. 2. Acquisitions On February 2, 1998, Alarmguard purchased all of the issued and outstanding shares of capital stock of Detect, Inc. ("Pelletier"), a company located in Danbury, Connecticut, with approximately 7,200 subscribers and Monthly Recurring Revenue ("MRR") of approximately $0.2 million, for a total purchase price of approximately $10.4 million. The total purchase price consisted of $9.5 million paid at closing, the assumption of $0.5 million of notes payable and $0.4 million representing an amount due to the sellers of Pelletier based on certain post closing adjustments. The acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price was preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. In connection with this acquisition, the Company received current assets of $0.6 million, property and equipment of $0.2 million, customer contracts of $10.8 million and other intangibles of $0.4 million and assumed current liabilities of $1.6 million. During the first quarter of 1998, Alarmguard also acquired certain operating assets of Security System Inc. ("Sentry"), of Malden, Massachusetts and Protech Security, Inc. of New York for an aggregate of $24.5 million in cash and $3.1 million representing an amount due to the sellers based on certain post closing adjustments. The acquisitions added approximately $0.6 million of MRR and approximately 20,000 customers. The acquisitions were accounted for under the purchase method of accounting and, accordingly, the purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values at the respective dates of acquisition. In connection with the acquisitions, Alarmguard received current assets of $1.2 million, customer contracts of $27.4 million, other intangibles of $0.4 million and property and equipment of $0.6 million and assumed current liabilities of $2.0 million. Accrued expenses at March 31, 1998 include $2.2 million of estimated costs expected to be incurred as a result of the 1997 and 1998 acquisitions. The results of operations of the acquired companies have been included in the consolidated statements of operations from the respective dates of acquisitions. The following unaudited pro forma information shows the results of the Company's operations as though the acquisitions consummated during the first three months of 1998 had been made as of January 1, l998 and January 1, 1997, and the acquisitions consummated during the fiscal year of 1997 had been made as of January 1, 1997 (in thousands, except per share data): For The Three Months Ended March 31, 1998 1997 Pro forma revenue $12,798 $11,979 Pro forma net loss $(5,865) $(6,814) Pro forma basic and diluted per share: $(1.05) $(1.22) Shares used in computations 5,593 5,593 The pro forma results are not necessarily indicative of the actual results of operations that would have been obtained had the acquisitions taken place at the beginning of the respective periods or the results that may occur in the future and do not give effect to cost savings which are expected to occur as a result of the consolidation of the acquired companies. 3. Inventories Inventories consist principally of alarm components and supplies which are carried at the lower of cost or market value. 4. Customer Installation Costs During each of the three months ended March 31, 1998 and 1997, Alarmguard incurred approximately $1.2 million of customer installation costs primarily attributable to the operations of its dealer and direct marketing programs. Alarmguard added approximately 2,100 and 2,000 customers, respectively, through its dealer and direct marketing programs during these periods. 5. Customer Contracts and Intangibles Customer contracts and intangibles (at cost) consist of the following (in thousands): March 31, December 31, 1998 1997 Acquired customer contracts $88,063 $49,807 Covenants not to compete 13,713 12,944 Goodwill 2,493 2,493 104,269 65,244 Less accumulated amortization (24,512) (22,217) $79,757 $43,027 6. Other Investments Other investments are comprised of certain assets held by Triton at the time of the Merger in April 1997, which are in the process of being liquidated (in thousands). March 31, December 31, 1998 1997 Ridgewood Hotels, Inc. Series A Preferred Stock $2,009 $2,009 Other 88 236 $2,097 $2,245 Alarmguard owns 450,000 shares of Series A Preferred Stock of Ridgewood Hotels, Inc. ("Ridgewood") with a face value of $3.6 million. Alarmguard currently receives a 10% quarterly dividend of $90,000 on this investment and the preferred stock is redeemable at any time by Ridgewood at its face value plus accrued dividends. The preferred stock is convertible by Alarmguard at any time into 1,350,000 Ridgewood common shares, which would represent approximately 47% of the Ridgewood common shares then outstanding, or 40% fully diluted. Alarmguard accounts for the Ridgewood investment using the cost method of accounting. 7. Long Term Debt On February 3, 1998, in connection with the offering of Convertible Preferred Stock (see Note 10), Alarmguard, Inc. (the "Borrower"), a wholly owned subsidiary of the Company, increased the availability under the Third Amended and Restated Term Loan and Acquisition Credit Agreement (the "Credit Facility") from $60 million to $90 million. The Credit Facility provides for interest only advances until January 31, 2000 and amortization thereafter. Borrowings under the Credit Facility are secured by substantially all of the properties and assets of the Borrower including accounts receivable, inventory, leasehold interests, customer contracts and the capital stock of all of the subsidiaries of the Company. Interest on the Credit Facility accrues and is payable at the option of the Borrower at either prime plus 1-1/2% or LIBOR plus 2.75% (approximately 8.7% at March 31, 1998), however the Company has fixed the interest rate on $40.0 million of its outstanding borrowings at 8.84% for three years through an interest rate swap agreement. At March 31, 1998, outstanding borrowings under the Credit Facility were $63.5 million. 8. Stock Options On March 10, 1998, the Board of Directors issued 365,000 additional stock options to the senior management of Alarmguard which vest over a four-year period from the date of grant. The exercise price for all options granted was $10.00 per share, the quoted market value of the common stock on the date of grant. 9. Commitments and Contingencies The Company experiences routine litigation in the normal course of its business. Management does not believe that any pending or threatened litigation will have a material adverse effect on the financial condition or results of operations of the Company. 10. Sale of Cumulative Convertible Preferred Stock On February 3, 1998, the Company completed an offering of 40,000 shares of Cumulative Convertible Preferred Stock (35,000 shares of Series A Preferred and 5,000 shares of Series B Preferred) are redeemable at $1,000 per share, five years from the date of issuance, yielding gross proceeds totaling $40 million. The Company issued 700 additional shares of the Series A Preferred Stock in exchange for $0.7 million of the Company's subordinated debt. Net proceeds of the offering, after the payment of investment banking fees and legal expenses, amounted to approximately $37.8 million. The costs incurred for completing the February 1998 offering are being amortized to the dividend requirement on Preferred Stock over the five-year life of the security with the unamortized balance reflected as a reduction of the Preferred Stock's carrying value. The Series A Preferred Stock pays quarterly cash dividends at 5% per annum. Under the terms of the securities, holders of the Series A and Series B Preferred Stock have the right to convert their shares at any time, into 4,972,434 shares of the Company's common stock at the conversion price of $8.25 per share and $7.75 per share, respectively, subject to certain anti- dilution provisions. The holders of the newly issued preferred stock have the right to elect two additional members to the Company's Board of Directors. The net proceeds from the offering and the increased credit facility discussed in Note 7 are intended to finance acquisitions and expand the Company's Dealer and Direct Marketing Programs. 11. Earnings per Share The 1997 calculation of basic and diluted loss per common share excludes the dividend requirement on preferred stock as a result of the conversion of the Preferred Stock and related accrued dividends into Alarmguard Common Stock at the time of the Merger. All dilutive securities (stock options, warrants and convertible preferred stock) have been excluded from the diluted loss per common share calculation as such instruments are antidilutive. 12. Recent FASB Pronouncements In 1998, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Company will adopt SFAS No. 131 effective for year end financial reporting in 1998 and expects no material impact upon adoption. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain matters in this section constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of Alarmguard Holdings, Inc. (the "Company" or "Alarmguard") to be materially different from historical results or from any results expressed or implied by such forward looking statements. These factors are discussed under the caption "Risk Factors" in a Registration Statement on Form S-4 (File No. 333-23307) filed with the Securities and Exchange Commission on March 14, 1997. General Overview For an overview of the Company's accounting policies, see the Company's audited consolidated financial statements as of and for the year ended December 31, 1997. Alarmguard sells and installs burglar and fire alarm systems and provides security monitoring services and security system repair and maintenance services to homeowners and businesses, principally in the Northeast and Mid-Atlantic regions of the United States. Alarmguard provides its security alarm systems and services primarily under its trademark "Alarmguard". As of March 31, 1998, Alarmguard had approximately $2.9 million of Monthly Recurring Revenue ("MRR") and approximately 92,000 subscribers. On April 15, 1997, SSH completed a merger with Triton pursuant to an Agreement and Plan of Merger dated December 23, 1996, as amended March 6, 1997. The combined company was renamed Alarmguard Holdings, Inc., the common shares of which are listed for trading on the American Stock Exchange under the symbol "AGD". Alarmguard's objective is to provide residential and commercial security services to an increasing number of subscribers. Alarmguard's growth strategy is to enhance its position in the security alarm monitoring industry in the Northeastern and Mid-Atlantic United States by increasing the number and density of subscribers for whom it provides services. Alarmguard is pursuing this strategy through a balanced growth plan involving: (1) incorporating acquisitions of portfolios of subscriber accounts in existing and contiguous markets; (2) internal growth through direct marketing to obtain new subscribers (the "Direct Marketing Program"); (3) acquiring credit-approved monitoring contracts from Alarmguard authorized dealers (the "Dealer Program"); (4) growth of Alarmguard's core business through referrals and traditional local marketing; and (5) acquisition of new multi-locational commercial subscribers from its National Accounts Program. Alarmguard believes that increasing the number and density of its subscribers will help it to achieve economies of scale and enhance results of operations. During the three months ended March 31, 1998, Alarmguard acquired three companies in the security alarm installation and monitoring business for an aggregate of $37.5 million in cash, notes payable and amounts due to sellers based on certain post closing adjustments. The acquisitions added approximately $0.8 million of MRR and approximately 27,000 subscribers. Key Operating Measures The Company employs three internal measurements to assess the performance of its operations: Adjusted EBITDA, MRR and Gross MRR Attrition. Adjusted EBITDA. Adjusted EBITDA is derived by adding Dealer and Direct Marketing Program and acquisition integration expenses incurred, net of Dealer and Direct Marketing Program revenues earned, to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). This calculation provides a basis for comparison of Alarmguard's results to those of other security alarm companies that grow through the acquisition of subscriber accounts rather than those that grow both internally and through acquisitions. An amount similar to Adjusted EBITDA is used by lenders in extending credit to Alarmguard. Adjusted EBITDA does not represent cash flows from operations as defined by generally accepted accounting principals and should not be construed as an alternative to net income. Adjusted EBITDA was $1.9 million for the three months ended March 31, 1998 compared to $1.3 million for the three months ended March 31, 1997, a 51% increase. For The Three Months Ended March 31 1998 1997 (in thousands) EBITDA $1,137 $721 Less Dealer and Direct Marketing Program revenue (348) (353) Plus Dealer and Direct Marketing Program expense 784 889 Plus acquisition integration expense 328 - Adjusted EBITDA $1,901 $1,257 Monthly Recurring Revenue. MRR represents revenue that a company in the security alarm industry is entitled to receive under contracts (monitoring, leasing, and maintenance) in effect at the end of such period. MRR is a term commonly used in the security alarm industry as a measure of the size of a company. It does not measure profitability or performance, and does not include any allowance for future subscriber attrition or uncollectible accounts receivable. Gross MRR Attrition. Gross MRR attrition has an adverse effect on the Company's financial position and results of operations, since it affects the Company's recurring revenues. Gross MRR attrition, generally expressed on an annualized basis, can be measured in terms of decreased MRR resulting from canceled subscriber accounts. Gross MRR attrition is defined by the Company for a particular period as a quotient, the numerator of which is equal to gross MRR lost as the result of canceled subscriber accounts during such period and the denominator of which is the average month end MRR during such 12 month period. The following table sets forth the Company's MRR additions, cancellations, and gross MRR attrition for the periods indicated (in thousands): Three Months Twelve Months Ended March 31, Ended December 31, MRR 1998 1997 Beginning of period $2,087 $1,392 Dealer and Direct Marketing Program additions 55 193 Acquisition additions 777 586 Other additions (1) 47 134 Canceled MRR (2) (72) (218) End of period $2,894 $2,087 Gross MRR attrition (3) 11.9% 11.8% ____________________ (1) MRR primarily generated through traditional non-investment sales programs. (2) Includes canceled MRR of subscribers who have moved from homes or businesses in which an existing alarm system has already been installed. (3) Calculated on a trailing twelve-month basis. Results of Operations Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Revenue. Revenues for the three months ended March 31, 1998 were $10.9 million, an increase of $4.3 million, or 65.4%, over the comparable period in 1997. This increase was primarily the result of a 63.2% increase of recurring revenue to $6.8 million from $4.2 million and a 68.8% increase in installation revenue to $3.4 million from $2.0 million. A significant portion of the revenue growth was related to acquisition activity in 1997 and 1998. Gross Profit. Gross profit increased to $5.9 million, or 54.1% of total revenue, for the first quarter of 1998 compared to $3.9 million, or 59.5% of total revenue, in the first quarter of 1997. The decrease in gross profit as a percentage of total revenue was primarily the result of several larger commercial installations in the traditional business which had lower gross profit margins than the Company's traditional business as well as lower per-unit revenue for installations through the Direct Marketing Program. Selling, General and Administrative. Selling, general and administrative expense for the first quarter of 1998 increased approximately $1.2 million, or 38.6%, over the comparable period in 1997. The increase was primarily the result of the acquisitions as well as increased staffing requirements at the corporate level required to facilitate the Company's growth plan and additional expenses of operating as a public company, costs which were not incurred during the first quarter of 1997. As a percent of total revenue, selling, general and administrative expense for the first quarter of 1998 decreased to 40.7% from 48.6% in the comparable 1997 period, reflecting economies of scale resulting from incremental revenue growth. Acquisition Integration Expenses. During the first three months of 1998, the Company incurred $328,000 of costs associated with the integration of acquired subscriber accounts into the Company's system. These costs were not material in the first quarter of 1997. Management expects to continue to incur such costs in the future, principally relating to the acquisition and integration of subscriber account portfolios acquired in the first quarter of 1998 and future acquisitions. Amortization and Depreciation. Amortization and depreciation for the first quarter of 1998 increased by approximately $1.2 million, or 48.6%, compared to the same period in 1997. This increase was primarily the result of the acquisition activity in 1997 and 1998. Operating Loss. The operating loss for the first quarter of 1998 increased to approximately $2.4 million from $1.7 million in the comparable 1997 period. As a percent of total revenue, the operating loss decreased to 21.9% for the first quarter of 1998 compared to 25.0% for the same period in 1997. This improvement reflects the increased profitability derived from incremental revenues. Interest Expense. Interest expense, net of interest income, for the three months ended March 31, 1998 was $1.4 million, compared to $0.8 million in the comparable period in 1997. This increase is primarily the result of an increased outstanding balance under the Company's credit facility in the first quarter of 1998 compared to the first quarter of 1997, reflecting the Company's growth through acquisitions combined with subscriber additions through the Dealer and Direct Marketing Programs. Dividend Requirement on Preferred Stock. The dividend requirement on preferred stock during the first quarter of 1998 reflects the 5% per annum dividend on the Cumulative Convertible Preferred Stock issued in February 1998. In the comparable period in the prior year, this amount reflects the dividends accrued on the Redeemable Preferred Stock of the predecessor company that were converted to Common Stock of the Company in connection with the Triton Merger in April 1997. The costs incurred for completing the February 1998 offering are being amortized to the dividend requirement on Preferred Stock over the five-year life of the security with the unamortized balance reflected as a reduction of the Preferred Stock's carrying value. Liquidity and Capital Resources Capital Resources. The Company has financed its operations and growth since May 1992 with a combination of borrowings under credit facilities, issuance of subordinated debentures, sale of common and preferred stock, the 1997 Merger with Triton, and internally generated cash flows. The Company's principal uses of cash have been for the acquisition of subscriber accounts, costs associated with the Dealer and Direct Marketing Programs and interest payments on borrowings under the Credit Facility. A substantial portion of the Company's future operating cash flow will be used to fund the Dealer and Direct Marketing Programs and to service borrowings under the Credit Facility and other company debt. There can be no assurance that the Company will continue to have the ability to meet its borrowing requirements to fund its acquisition strategies and Dealer and Direct Marketing Programs. In February 1998, the Company completed an offering of 40,000 shares of Cumulative Convertible Preferred Stock (35,000 shares of Series A and 5,000 shares of Series B) at $1,000 per share yielding gross proceeds totaling $40 million. Concurrently, the Company issued 700 additional shares of the Series A Preferred Stock in exchange for $0.7 million of the company's subordinated debt. The Series A Preferred Stock pays quarterly dividends at 5% per annum. Under the terms of the securities, holders of the Series A and Series B Preferred Stock have the right to convert their shares at any time, into shares of the Company's Common Stock at the conversion price of $8.25 per share and $7.75 per share, respectively, subject to certain anti-dilution provisions. Concurrent with the offering, the Company increased its credit facility from $60 million to $90 million. The proceeds from the offering and borrowings from the expanded Credit Facility are being used to finance acquisitions and expand the company's Dealer and Direct Marketing Programs. As of March 31, 1998, the Company had $13.3 million in cash. This represents the net proceeds from the Preferred Stock offering that were not used to fund first quarter acquisitions and operations. Additionally, the Company had $63.5 million outstanding under its Credit Facility with approximately $1.6 million of availability at the end of the quarter. The Company's ability to borrow under the Credit Facility is limited by certain representations and financial covenants. The Credit Facility is a non-amortizing loan which converts to a five-year amortizing term loan on April 30, 2000. Borrowings under the Credit Facility are secured by substantially all of the properties and assets of the Borrower including accounts receivable, inventory, leasehold interests, customer contracts and the capital stock of all of the subsidiaries of the Company. Alarmguard has subordinated debentures of $3.9 million bearing interest at 15%, which are due in April 1999. In connection with the subordinated debt, Alarmguard issued warrants to purchase 215,939 shares of Alarmguard Common Stock at an exercise price of $11.11 per share, the value of which was accounted for as a discount to the subordinated debt and is being amortized over the two year life of the underlying debt instrument. The Company also has a total of $3.8 million due to sellers of previous acquisitions, a portion of which is secured by various notes. A portion of the amounts due to sellers requires the Company to make periodic principal and interest payments. The Company intends to continue to use its existing cash balances, cash flows from operations, the liquidation of its other investments and borrowings under the credit facility to finance the addition of subscriber accounts, primarily through acquisitions and the Dealer and Direct Marketing Programs. Additionally, the Company, depending on future needs and the cost and availability of various financing alternatives, may from time to time seek additional debt or equity financing in the public or private markets in order to continue to support the growth of subscriber accounts. There can be no assurance that the Company will be able to obtain such capital on acceptable terms or at all. If cash flows from operations, combined with borrowings under the credit facility and other borrowings are insufficient to fund the Company's growth strategies, management would curtail the Dealer and Direct Marketing Programs and implement a cost reduction strategy to the extent necessary to satisfy its obligations. Liquidity. During the first three months of 1998 and 1997, the Company's net cash used in operating activities was approximately $1.0 million and $0.6 million, respectively. The increase was primarily the result of the increased interest costs and acquisition integration expenses, partially offset by improved operating margins due to incremental revenue growth and resulting economies of scale. For the first quarter of 1998 and 1997, the Company's net cash used in investing activities was approximately $38.2 million and $50,000, respectively. This significant increase reflects the acquisitions in the first quarter of 1998. Net cash provided by financing activities was approximately $51.8 million in the first quarter of 1998 as compared to $0.8 million in the year ago period. The increase reflects the cash generated from the Preferred Stock offering and increased borrowings under the credit facility discussed above. The Company incurred net losses of approximately $3.8 million and $2.5 million for the first quarter of 1998 and 1997, respectively. The Company expects to incur losses for the foreseeable future, the result of its continuing growth strategy. Recent FASB Pronouncements. In 1998, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Company will adopt SFAS No. 131 effective for year end financial reporting in 1998 and expects no material impact upon adoption. The Company continues to review "Year 2000" issues. Based on its review to date, it does not anticipate incurring any significant costs associated with this issue. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed with this quarterly report on Form l0-Q: Exhibits Number Exhibit 27 Financial data schedule (b) Reports on Form 8-K The Company filed a current report on Form 8-K dated April 1, 1998, in which the Company reported under Item 2. Acquisition or Disposition of Assets, the acquisition of certain assets of Security Systems, Inc. (dba "Sentry") completed on March 17, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALARMGUARD HOLDINGS, INC. DATE: May 15, 1998 By: /s/ David Heidecorn ------------------------- David Heidecorn Principal Financial Officer EX-27 2
5 1,000 3-MOS MAR-31-1998 MAR-31-1998 15,919 0 10,349 1,907 3,817 28,652 24,512 12,091 124,619 25,366 0 40,700 0 1 (7,598) 124,619 1,210 10,913 1,210 5,008 8,257 243 1,435 (3,787) 0 (3,787) 0 0 0 (3,787) (0.74) (0.74)
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