-----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, OsPNifRUwqLt3FGLOGMbGcSEtYZLFMKETBdPxPDa1rfWj8QBc6LknV3rUXsob+VY yqwrPkK5eUag8yTfTQ8QqQ== 0001042645-98-000227.txt : 19981118 0001042645-98-000227.hdr.sgml : 19981118 ACCESSION NUMBER: 0001042645-98-000227 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981117 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/A SEC ACT: SEC FILE NUMBER: 001-08138 FILM NUMBER: 98754088 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/A 1 ALARMGUARD HOLDINGS, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 1O-Q/A [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarter ended June 30, 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, CT 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 August 10, 1998 was 5,593,948. Items 1 and 2 of the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1998 are amended to reflect an imputed non-cash dividend on the convertible preferred stock as discussed in Note 10. The non-cash dividend is reflected in the accompanying condensed consolidated balance sheet at March 31, 1998 as a charge against accumulated deficit with a corresponding increase in additional paid in capital. The non-cash dividend is also included in the dividend requirement on preferred stock in the condensed consolidated statement of operations for the six months ended June 30, 1998. - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements ALARMGUARD HOLDINGS, INC. Condensed Consolidated Balance Sheets (In thousands) June 30, December 31, 1998 1997 ------------------ ------------------ (unaudited) ASSETS: Current assets: Cash and cash equivalents $8,844 $698 Restricted cash 2,608 1,931 Accounts receivable, net 6,839 5,558 Inventories 4,273 3,065 Other current assets 351 343 ------------------ ------------------ Total current assets 22,915 11,595 Property and equipment, net 3,578 2,133 Customer installation costs, net 10,115 8,868 Customer contracts and intangibles, net 79,406 43,027 Other investments 2,097 2,245 Other assets 1,730 1,982 ------------------ ------------------ Total assets $119,841 $69,850 ================== ================== See accompanying notes to condensed consolidated financial statements. 2 ALARMGUARD HOLDINGS, INC. Condensed Consolidated Balance Sheets (continued) (In thousands) June 30, December 31, 1998 1997 -------------- -------------- (unaudited) LIABILITIES AND STOCKHOLDERS' DEFICIENCY: Current liabilities: Accounts payable $2,457 $2,659 Accrued expenses 7,173 5,675 Current portion of notes payable 505 2,462 Deferred revenue 8,901 6,231 Other current liabilities 5,496 4,061 -------------- -------------- Total current liabilities 24,532 21,088 Notes payable, less current portion 380 549 Credit facility 64,700 46,700 Subordinated debt 3,900 4,389 Other liabilities 231 321 Cumulative Convertible Preferred Stock, $1,000 par value: Series A, 5% dividends, 35,700 shares issued and outstanding at June 30, 1998 33,931 - Series B, 5,000 shares issued and outstanding at June 30, 1998 4,752 - Stockholders' deficiency: Common Stock, $.0001 par value, 25,000,000 shares authorized, 5,593,948 and 5,593,396 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively 1 1 Additional paid in capital 44,045 35,286 Accumulated deficit (56,631) (38,484) -------------- ------------- Total stockholders' deficiency (12,585) (3,197) ------------ ------------- Total liabilities and stockholders' deficiency $119,841 $69,850 ============= ============= See accompanying notes to condensed consolidated financial statements. 3 ALARMGUARD HOLDINGS, INC. Condensed Consolidated Statements of Operations (Unaudited, in thousands, except per share data)
Three Months Six Months Ended June 30, Ended June 30, ----------------------------------- ----------------------------------- 1998 1997 1998 1997 ---------------- ---------------- -------------- --------------- Revenue $13,125 $8,387 $24,038 $14,984 Cost of revenue 5,764 3,568 10,772 6,241 ---------------- ---------------- -------------- --------------- Gross profit 7,361 4,819 13,266 8,743 Sales and marketing expense 1,511 1,179 2,779 2,195 General and administrative expense 3,824 2,817 6,996 5,004 Acquisition integration expense 379 - 707 - Amortization and depreciation expense 4,533 3,093 8,057 5,464 ---------------- ---------------- -------------- --------------- Total operating expense 10,247 7,089 18,539 12,663 ---------------- ---------------- -------------- --------------- Operating loss (2,886) (2,270) (5,273) (3,920) Other income (expense): Interest expense, net (1,665) (1,151) (3,100) (1,995) Other, net 116 (12) 151 (12) ---------------- ---------------- --------------- --------------- Net loss before extraordinary item (4,435) (3,433) (8,222) (5,927) Extraordinary loss from early extinguishment of debt - (813) - (813) ---------------- ---------------- --------------- --------------- Net loss (4,435) (4,246) (8,222) (6,740) Dividend requirement on preferred stock, including imputed non-cash dividend of $9,024 recorded in February 1998 (See Note 10) (555) (29) (9,925) (200) ---------------- ---------------- --------------- --------------- Loss applicable to common shares $(4,990) $(4,275) $(18,147) $(6,940) ================ ================ =============== =============== Basic and diluted loss per common share: Net loss before extraordinary item $(0.79) $(0.71) $(1.47) $(1.55) Extraordinary loss - (0.17) - (0.21) ---------------- ---------------- --------------- --------------- Net loss (0.79) (0.88) (1.47) (1.76) Loss from dividend requirement (0.10) (0.01) (1.77) (0.05) ---------------- ---------------- --------------- --------------- Net loss per common share $(0.89) $(0.89) $(3.24) $(1.81) ================ ================ =============== =============== Weighted average number of basic and diluted common shares 5,594 4,802 5,594 3,840 ================ ================ =============== ===============
See accompanying notes to condensed consolidated financial statements. 4 ALARMGUARD HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) Six Months Ended June 30, ---------------------------- 1998 1997 ------------ ------------- Operating activities: Net loss $(8,222) $(6,740) Adjustments to reconcile net loss to net cash used in operating activities: Amortization and depreciation 8,057 5,464 Amortization of sub debt warrants 211 Customer installation costs incurred (2,965) (2,209) Changes in operating assets and liabilities, net of effects of acquisitions 724 863 ------------ ------------- Net cash used in operating activities (2,195) (2,622) Investing activities: Acquisition of businesses, net of cash acquired (39,647) (4,645) Increase in restricted cash (677) (1,931) Purchases of property and equipment (1,105) (149) ------------ ------------- Net cash used in investing activities (41,429) (6,725) Financing activities: Net proceeds from issuance of preferred stock 37,800 - Proceeds from term loan 18,800 44,200 Proceeds from issuance of subordinated debt - 4,300 Payments of term loan (800) (31,836) Payments of subordinated debt - (4,951) Payment of cash dividend on preferred stock (718) - Financing fees paid (439) (1,040) Payments of other notes payable and capital leases (2,873) (1,139) ------------ ------------- Net cash provided by financing activities 51,770 9,534 Increase in cash and cash equivalents 8,146 187 Cash and cash equivalents at beginning of period 698 230 ------------ ------------- Cash and cash equivalents at end of period $8,844 $417 ============ ============= Cash paid for interest $3,049 $1,952 ============ ============= See accompanying notes to condensed consolidated financial statements. 5 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 and six month periods ended June 30, 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 included in the Company's Form 10-K for the year then ended. 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 six months of 1998, Alarmguard also acquired certain operating assets of Security Systems, Inc. ("Sentry"), of Malden, Massachusetts and four additional companies in the security alarm installation and monitoring business for an aggregate of $25.8 million in cash and $3.3 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 22,000 6 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 $1.3 million, customer contracts of $28.8 million, other intangibles of $0.5 million, and property and equipment of $0.6 million and assumed current liabilities of $2.1 million. The following unaudited pro forma information shows the results of the Company's operations as though the acquisitions consummated during the first six 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 Six Months Ended June 30, ----------------------------- 1998 1997 ------------ -------------- Pro forma revenue $26,168 $24,739 ============ ============== Pro forma loss before extraordinary item $(10,448) $(14,747) ============ ============== Pro forma net loss $(10,448) $(15,560) ============ ============== Pro forma basic and diluted net loss per share before extraordinary item $(1.87) $(2.64) ============ ============== Pro forma basic and diluted net loss per share $(1.87) $(2.78) ============ ============== Shares used in computations 5,594 5,594 ============ ============== 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 the six months ended June 30, 1998 and 1997, Alarmguard incurred approximately $3.0 million and $2.2 million, respectively, of customer installation costs primarily attributable to the operations of its dealer and direct marketing programs. Alarmguard added approximately 5,500 and 3,200 customers, respectively, through its dealer and direct marketing programs during these periods. 7 5. Customer Contracts and Intangibles Customer contracts and intangibles (at cost) consist of the following (in thousands): June 30, 1998 December 31, 1997 --------------------- -------------------- Acquired customer contracts $91,071 $49,807 Covenants not to compete 13,754 12,944 Goodwill 2,493 2,493 --------------------- -------------------- 107,318 65,244 Less accumulated amortization (27,912) (22,217) --------------------- -------------------- $79,406 $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). June 30, 1998 December 31, 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 8.66% at June 30, 1998). The Company has fixed the interest rate on $40.0 million of its outstanding borrowings at 8.84% for three years through 8 an interest rate swap agreement. At June 30, 1998, outstanding borrowings under the Credit Facility were $64.7 million. On July 31, 1998, the Company repaid $3.9 million of subordinated debt through a new $3.9 million term loan which was provided by certain banks under the Credit Facility. The new term loan has no impact on availability under the Credit Facility. The term loan accrues interest at 30 day LIBOR plus 4.10% (which represented approximately 9.75% on July 31, 1998) and is due and payable on January 31, 2005. The subordinated debt was issued in April 1997, bore interest at 15% and was due in April 1999. 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. On July 1, 1998, the Company issued 70,000 stock options to the Directors of the Company pursuant to the Directors Stock Option Plan. These options vest over a three-year period and have an exercise price of $9.625 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) which 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 elected two 9 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. In connection with the sale of the Preferred Stock, the Company imputed a one-time non-cash dividend of approximately $9.0 million ($1.61 per common share) as a result of the conversion prices of the two series of Preferred Stock being less than the quoted market price of the Company's Common Stock at the date of issuance, as required by EITF D-60: Accounting for the Issuance of Convertible Preferred Stock and Debt Securities with a Non-detachable Conversion Feature. Such amount was recognized upon issuance of the Preferred Stock as a charge against accumulated deficit, with a corresponding offsetting increase in additional paid in capital. The imputed non-cash dividend is also included in the dividend requirement on Preferred Stock in the condensed consolidated statement of operations for the six months ended June 30, 1998. 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. In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. 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. 10 General Overview 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 June 30, 1998, Alarmguard had approximately $3.0 million of Monthly Recurring Revenue ("MRR") and approximately 95,000 subscribers. 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) addition of new commercial subscribers through 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 six months ended June 30, 1998, Alarmguard acquired six companies in the security alarm installation and monitoring business for an aggregate of $39.0 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 29,000 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 costs 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 only through the acquisition of subscriber accounts. 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 principles and should not be construed as an alternative to net income. Adjusted EBITDA for the three months ended June 11 30, 1998 increased to $2.5 million from $1.4 million for the comparable 1997 period, a 74.8% increase. For the six months ended June 30, 1998, Adjusted EBITDA was $4.4 million compared to $2.7 million in the prior year. For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------- ------------------- 1998 1997 1998 1997 --------- --------- --------- -------- (in thousands) EBITDA $1,647 $823 $2,784 $1,544 Less Dealer and Direct Marketing Program revenue (431) (316) (779) (669) Plus Dealer and Direct Marketing Program expense 917 930 1,701 1,819 Plus acquisition integration expense 379 - 707 - --------- --------- -------- -------- Adjusted EBITDA $2,512 $1,437 $4,413 $2,694 ========= ========= ======== ======== 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): Six Months Twelve Months MRR Ended June 30, Ended December 31, 1998 1997 ------------------ -------------------- Beginning of period $2,087 $1,392 Dealer and Direct Marketing Program additions 153 193 Acquisition additions 817 586 Other additions (1) 110 134 Canceled MRR (2) (162) (218) ------------------ -------------------- End of period $3,005 $2,087 ================== ==================== Gross MRR attrition (3) 11.7% 11.8% ================== ==================== 12 - -------------------- (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 June 30, 1998 Compared to Three Months Ended June 30, 1997 Revenue. Revenues for the three months ended June 30, 1998 were $13.1 million, an increase of $4.7 million, or 56.5%, over the comparable period in 1997. This increase was primarily the result of a 66.1% increase of recurring revenue to $8.6 million from $5.2 million and a 39.8% increase in installation revenue to $3.7 million from $2.6 million. A significant portion of the revenue growth was related to acquisition activity in 1997 and 1998. Gross Profit. Gross profit increased to $7.4 million, or 56.1% of total revenue, for the quarter ended June 30, 1998 compared to $4.8 million, or 57.5% of total revenue, in the comparable 1997 period. The decrease in gross profit as a percentage of total revenue was primarily the result of lower margin installations in the current quarter. Sales and Marketing. Sales and marketing expense for the three months ended June 30, 1998 increased approximately $0.3 million or 28.2% over the comparable period in 1997. As a percent of total revenue, sales and marketing expense for the three months ended June 30, 1998 decreased to 11.5% from 14.1% in the comparable 1997 period, reflecting economies of scale resulting from incremental revenue growth. General and Administrative. General and administrative expense for the quarter ended June 30, 1998 increased approximately $1.0 million, or 35.7%, 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. As a percent of total revenue, general and administrative expense for the three months ended June 30, 1998 decreased to 29.1% from 33.6% in the comparable 1997 period, again reflecting economies of scale resulting from incremental revenue growth. Acquisition Integration Expenses. During the three months ended June 30, 1998, the Company incurred $0.4 million of costs associated with the integration of acquired subscriber accounts into the Company's system. These costs were not material in the comparable period 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 six months of 1998 and future acquisitions. 13 Amortization and Depreciation. Amortization and depreciation for the quarter ended June 30, 1998 increased by approximately $1.4 million, or 46.6%, 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 three months ended June 30, 1998 increased to $2.9 million from $2.3 million in the comparable 1997 period. As a percent of total revenue, the operating loss for the quarter decreased to 22.0% in 1998 compared to 27.1% for the same period in 1997, reflecting economies of scale as discussed above. Interest Expense. Interest expense, net of interest income, for the quarter ended June 30, 1998 was $1.7 million, compared to $1.2 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 1998 compared to the comparable period 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 quarter ended June 30, 1998 reflects the 5% per annum cash dividend on the Cumulative Convertible Preferred Stock issued in February 1998, and amortization of the costs incurred for completing the offering of Cumulative Convertible Preferred Stock issued in February 1998. The costs incurred for completing the February 1998 offering, approximately $2.2 million, 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. 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. Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997 Revenue. Revenues for the six months ended June 30, 1998 were $24.0 million, an increase of $9.1 million, or 60.4%, over the comparable period in 1997. This increase was primarily the result of a 64.9% increase of recurring revenue to $15.4 million from $9.4 million and a 52.5% increase in installation revenue to $7.1 million from $4.7 million. A significant portion of the revenue growth was related to acquisition activity in 1997 and 1998. Gross Profit. Gross profit increased to $13.3 million, or 55.2% of total revenue, for the six months ended June 30, 1998 compared to $8.7 million, or 58.3% of total revenue, in the comparable 1997 period. The decrease in gross profit as a percentage of total revenue was primarily the result of lower margin installations in the current period. Sales and Marketing. Sales and marketing expense for the six months ended June 30, 1998 was $2.8 million compared to $2.2 million for the comparable 1997 period. As a percent of total revenue, sales and marketing expense for the six-month period decreased to 11.6% from 14.6% in the prior year, reflecting economies of scale from increased revenues. 14 General and Administrative. General and administrative expense for the six months ended June 30, 1998 increased approximately $2.0 million, or 39.8%, over the comparable period in 1997. As a percent of total revenue, general and administrative expense for the six-month period decreased to 29.1% from 33.4% in the comparable 1997 period, reflecting economies of scale resulting from incremental revenue growth. Acquisition Integration Expenses. During the six months ended June 30, 1998, the Company incurred $0.7 million of costs associated with the integration of acquired subscriber accounts into the Company's system. These costs were not material in 1997. Amortization and Depreciation. Amortization and depreciation for the six months ended June 30, 1998 increased by approximately $2.6 million, or 47.5%, compared to the same period in 1997. The increase was primarily the result of the acquisition activity in 1997 and 1998. Operating Loss. The operating loss for the six months ended June 30, 1998 increased to $5.3 million from $3.9 million in the comparable 1997 period. As a percent of total revenue, the operating loss for the quarter decreased to 21.9% in the current year compared to 26.2% for the same period in 1997. This improvement again reflects the increased profitability derived from incremental revenues. Interest Expense. Interest expense, net of interest income, for the six months ended June 30, 1998 was $3.1 million, compared to $2.0 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 1998 compared to 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 six months ended June 30, 1998 reflects the 5% per annum cash dividend on the Cumulative Convertible Preferred Stock issued in February 1998, amortization of the costs incurred for completing the offering of Cumulative Convertible Preferred Stock issued in February 1998, and an imputed one-time non-cash dividend of approximately $9.0 million as a result of the conversion prices of the two series of Preferred Stock being less than the quoted market price of the Company's Common Stock at the date of issuance. 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. 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. 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 15 1997 Merger with Triton, and internally generated cash flows. The Company's principal uses of cash have been 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 acquisition of subscriber accounts, 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 and 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 June 30, 1998, the Company had $8.8 million in unrestricted cash. Additionally, the Company had $64.7 million outstanding under its Credit Facility with approximately $2.5 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 5 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. At June 30, 1998, Alarmguard had subordinated debentures of $3.9 million bearing interest at 15%, which were to be due in April 1999. On July 31, 1998, the Company repaid this amount through a new $3.9 million term loan which was provided by certain banks under the Credit Facility. In connection with the issuance of the subordinated debt in 1997, 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 was being amortized over the two year life of the underlying debt instrument prior to the repayment of the subordinated debt on July 31, 1998. 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 cash balances, 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 16 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 six months of 1998 and 1997, the Company's net cash used in operating activities was approximately $2.2 million and $2.6 million, respectively. Improved operating margins due to incremental revenue growth and resulting economies of scale more than offset increased interest costs and acquisition integration expenses. For the first six months of 1998 and 1997, the Company's net cash used in investing activities was approximately $41.4 million and $6.7 million, respectively. This significant increase reflects the acquisitions completed primarily in the first quarter of 1998. Net cash provided by financing activities was approximately $51.8 million in the six months ended June 30, 1998 as compared to $9.5 million in the comparable 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 losses applicable to common shares of approximately $9.1 million and $6.9 million for the six months ended June 30, 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. In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. 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. 17 PART II - OTHER INFORMATION Item 2. Changes in Securities. On June 25, 1998, all publicly traded warrants of the Registrant expired pursuant to the term of the warrant. Such warrants were formerly traded on the American Stock exchange under the symbol AGD.WT. On that date the Company cancelled all of the outstanding warrants. Item 4. Submission of Matters to a Vote of Security Holders. (a) The Registrant's annual shareholder meeting was held on June 30, 1998. (b) Management's nominees for directors as listed in the proxy statement were both elected at the annual meeting and there was no solicitation in opposition thereto. The results are as follows: David Heidecorn For: 4,832,520 Withhold: 154,079 Thomas W. Janes For: 4,832,535 Withhold: 154,064 (c) The stockholders of the Company approved Management's proposal to ratify the sale of 35,700 shares of Series A Preferred Stock at $1,000 per share and 5,000 shares of Series B Preferred Stock at $1,000 per share. The results are as follows: For: 3,883,586 Against: 202,209 Abstain: 2,248 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/A dated May 29, 1998 with respect to its acquisition of certain assets of Security Systems, Inc. (dba "Sentry") which included audited financial statements of Sentry and pro forma financial information. 18 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: November 13, 1998 By: /s/ David Heidecorn David Heidecorn Principal Financial Officer EX-27 2 FINANCIA DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JUN-30-1998 11,452 0 8,400 1,561 4,273 22,915 26,837 13,144 119,841 24,532 0 40,700 0 1 (12,586) 119,841 2,722 24,038 2,722 10,772 18,388 667 3,100 (8,222) 0 (8,222) 0 0 0 (8,222) (3.24) (3.24)
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