-----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, Fw9uLrFjRZwlzFfKjDWApTwCwn9l9Nf4iCrpICScro6jkdNf4SUXXCzxoZjDbW5e UeIFGUr68YIqm0DYorcMgA== 0000950134-98-008500.txt : 19981109 0000950134-98-008500.hdr.sgml : 19981109 ACCESSION NUMBER: 0000950134-98-008500 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTION ONE INC CENTRAL INDEX KEY: 0000916230 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 931063818 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12181-01 FILM NUMBER: 98739564 BUSINESS ADDRESS: STREET 1: 6011 BRISTOL PKWY CITY: CULVER CITY STATE: CA ZIP: 90230 BUSINESS PHONE: 3103386930 MAIL ADDRESS: STREET 1: 3900 SW MURRAY BLVD CITY: BEAVERTON STATE: OR ZIP: 97005 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTION ONE ALARM MONITORING INC CENTRAL INDEX KEY: 0000916310 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 931065479 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12181 FILM NUMBER: 98739565 BUSINESS ADDRESS: STREET 1: 6011 BRISTOL PKWY CITY: CULVER CITY STATE: CA ZIP: 90230 BUSINESS PHONE: 3103386930 MAIL ADDRESS: STREET 1: 3900 SW MURRAY BLVD CITY: BEAVERTON STATE: OR ZIP: 97005 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1998 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 SEPTEMBER 30, 1998 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 ITS CHARTER) AS SPECIFIED IN ITS CHARTER) Delaware Delaware -------- -------- (State or Other Jurisdiction (State or Other Jurisdiction of Incorporation or Organization) Of Incorporation or Organization) 93-1063818 93-1064579 ---------- ---------- (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 (Address of Principal Executive Offices, Including Zip Code) Offices, Including Zip Code) (310) 342-6300 (310) 342-6300 -------------- -------------- (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 October 23, 1998, Protection One, Inc. had outstanding 126,825,441 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. 2 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, 1998 1997 ---------------------- --------------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................. $ 15,415 $ 75,556 Marketable securities..................... 16,801 5,701 Receivables, net.......................... 29,849 20,302 Inventories............................... 5,664 556 Prepaid expenses.......................... 2,855 367 Tax receivable, parent................... 31,100 25,200 Deferred tax assets, current -- 45,078 Other..................................... 8,677 3,120 ---------- ---------- Total current assets............................ 110,361 175,880 Property and equipment, net..................... 38,083 14,934 Subscriber accounts and intangibles, net........ 954,670 538,318 Goodwill and trademarks, net.................... 1,214,518 682,180 Deferred tax assets............................. 89,554 26,158 Other........................................... 17,484 9,174 ---------- ---------- Total assets $2,424,670 $1,446,644 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................... $ 9,902 $ 6,235 Accrued liabilities....................... 103,227 83,200 Purchase holdbacks........................ 38,937 11,444 Acquisition transition costs.............. 19,203 7,469 Current portion of long-term debt......... 44,357 21,217 Borrowing from parent.................... 294,799 -- Capital leases............................ 492 490 Deferred revenue.......................... 50,843 33,900 ---------- ---------- Total current liabilities....................... 561,760 163,955 Long-term debt, net of current portion.......... 480,961 337,159 Capital leases, net of current portion.......... 281 604 Deferred tax liability.......................... 29,646 10,325 Other........................................... 2,177 626 ---------- ---------- Total Long-term liabilities $ 513,065 $ 348,714 ========== ========== Stockholders' equity: Preferred stock, $.10 par value, 5,000,000 Authorized, none outstanding.............. -- -- Common Stock, $.01 par value, 150,000,000 shares Authorized, 126,609,781 and 83,362,938 shares Issued and outstanding, respectively.............................. 1,266 834 Additional paid-in capital.................... 1,390,527 983,082 Unrealized gain (loss) on marketable securities (1,959) -- Accumulated deficit.......................... (39,989) (49,941) ---------- ---------- Total stockholders' equity........... 1,349,845 933,975 ---------- ---------- $2,424,670 $1,446,644 Total liabilities and stockholders equity ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 2 3 PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Dollar and share amounts in thousands, except for per share amounts)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1998 1997 -------------- ------------- (UNAUDITED) Revenues: Monitoring and related services..... $ 254,750 $ 83,896 Installation and other.............. 22,347 12,832 --------- -------- Total revenues................. 277,097 96,728 Cost of revenues: Monitoring and related services..... 71,914 25,647 Installation and other.............. 16,113 2,977 --------- -------- Total cost of revenues......... 88,027 28,624 --------- -------- Gross profit................... 189,070 68,104 Selling, general and administrative 61,301 46,579 expense................................. Acquisition and transition expenses....... 7,327 -- Amortization of intangibles and depreciation expenses.................. 82,787 26,040 --------- -------- Operating income (loss)........ 37,655 (4,515) Other (income) expense: Interest expense, net............... 21,297 24,599 Interest expense to parent, net..... 16,033 -- Other..................................... (21,288) 326 --------- -------- Income (loss) before income taxes and extraordinary gain...................... 21,613 (29,440) Income tax (expense) benefit.............. (13,251) 11,776 --------- -------- Net income (loss) before extraordinary 8,362 (17,664) gain.................................... Extraordinary gain, net of taxes.......... 1,591 -- --------- -------- Net income (loss).................... $ 9,953 $(17,664) ========= ======== Other comprehensive income: Unrealized loss on marketable securities (net of tax effect of $1,306)........... (1,959) -- ---------- -------- Comprehensive income (loss)......... $ 7,994 $(17,664) ========= ======== Earnings per common share (basic and fully diluted): Income (loss) before extraordinary gain per common share............. $ 0.08 $ (0.26) Extraordinary gain per common share. 0.02 -- --------- -------- Net income (loss) per common share.. $ 0.10 $ (0.26) ========= ======== Weighted average shares outstanding. 102,445 68,673
The accompanying notes are an integral part of these consolidated financial statements. 3 4 PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Dollar and share amounts in thousands, except for per share amounts)
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1998 1997 ------------ ----------- (UNAUDITED) Revenues: Monitoring and related services..... $ 96,527 $ 28,192 Installation and other.............. 6,734 4,622 -------- -------- Total revenues................. 103,261 32,814 Cost of revenues: Monitoring and related services..... 27,159 9,992 Installation and other.............. 5,396 955 -------- -------- Total cost of revenues......... 32,555 10,947 -------- -------- Gross profit................... 70,706 21,867 Selling, general and administrative expense 21,609 15,664 Acquisition and transition expenses....... 2,843 -- Amortization of intangibles and depreciation expenses................... 32,464 9,131 -------- -------- Operating income (loss)........ 13,790 (2,928) Other (income) expense: Interest expense, net............... 7,874 8,374 Interest expense to parent, net..... 4,554 -- Other............................... (7,874) (8) -------- -------- Income (loss) before income taxes and extraordinary gain...................... 9,236 (11,294) Income tax (expense) benefit.............. (6,443) 4,517 -------- -------- Net income (loss).................. $ 2,793 $ (6,777) ======== ======== Other comprehensive income: Unrealized loss on marketable securities (net of tax effect of $1,306)............. (1,959) -- -------- -------- Comprehensive income (loss)............... $ 834 $ (6,777) ======== ======== Earnings per common share (basic and fully diluted): Net income (loss) per common share.. $ 0.02 $ (0.10) ======== ========= Weighted average shares outstanding. 127,345 68,673
The accompanying notes are an integral part of these consolidated financial statements. 4 5 PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1998 1997 ------------ ----------- (UNAUDITED) Cash flow from operating activities: Net income (loss)................................... $ 9,953 $(17,664) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary gain.............................. (1,591) -- Gain on Guardian stock exchange transaction................................... (3,000) -- Deferred income tax expense..................... 12,817 -- Accretion of discount note interest............. 4,634 -- Amortization and depreciation................... 82,787 26,040 Provision for doubtful accounts................. 4,027 1,881 Changes in assets and liabilities, net of effects of acquisitions: Receivables..................................... (3,550) (4,574) Inventories..................................... (1,411) 382 Prepaid expenses and other...................... (7,354) 372 Accounts payable................................ (4,051) 2,944 Accrued expense................................. (8,940) 7,472 Deferred revenue................................ (1,787) 1,691 Deferred income tax liability................... -- 768 Other liabilities............................... -- 1,108 ---------- -------- Net cash provided by operating activities... 82,534 20,420 ---------- -------- Cash flows from investing activities: Purchase/placement of installed security systems......................................... (228,352) (28,498) Purchase of property and equipment.............. (18,933) (1,597) Purchase of marketable securities............... (14,365) -- Acquisition of alarm companies, net of cash..... (554,230) -- Investment in Guardian.......................... (4,131) -- ---------- -------- Net cash used in investing activities..... (820,011) (30,095) ---------- -------- Cash flows from financing activities: Proceeds from equity offering................... 402,322 -- Proceeds from long-term debt.................... 247,160 -- Payments on long-term debt...................... (86,205) (1,786) Cash funding from parent........................ 113,239 13,968 Stock options and warrants exercised............ 820 -- ---------- -------- Net cash provided by financing activities... 677,336 12,182 ---------- -------- Net (decrease) increase in cash and cash equivalents............................. (60,141) 2,507 Cash and cash equivalents: Beginning of period............................. 75,556 262 ---------- -------- End of period................................... $ 15,415 $ 2,769 ========== ======== Interest paid during the period......................... $ 7,316 $ -- ========== ======== Taxes paid during the period............................ $ 42 $ -- ========== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 PROTECTION ONE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (DOLLAR AMOUNT IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. BASIS OF CONSOLIDATION AND INTERIM FINANCIAL INFORMATION: Protection One, Inc., a Delaware corporation ("Protection One" or "the Company") is principally engaged in the business of providing security alarm monitoring services, which include sales, installation and related servicing of security alarm systems for residential and small business subscribers in North America and Europe. The accompanying unaudited consolidated financial statements include the accounts of Protection One and its wholly owned subsidiaries. As a result of the November 24, 1997 reverse purchase merger (the "Combination") between Protection One and the former Western Resources Security Business ("WRSB"), the historical operating results presented for the quarter and nine months ended September 30, 1997 are those of WRSB. As of September 30, 1998, Protection One is an approximately 85% owned subsidiary of Westar Capital, Inc. ("Westar Capital"), a wholly owned subsidiary of Western Resources, Inc. ("Western Resources"). 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. 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 December 31, 1997 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 1998. Certain prior period amounts were reclassified to conform to the 1998 presentation. Such reclassifications did not affect previously reported net losses. In the opinion of management of the Company, all adjustments, consisting only of normal and recurring adjustments considered necessary for a fair presentation, have been included. The results of operations for the three month and nine month periods ended September 30, 1998 are not necessarily indicative of the results to be expected for the full year. 2. MARKETABLE SECURITIES: As of September 30, 1998, the company maintained marketable equity securities valued at approximately $16.8 million. Management has determined that such securities are "Available-for-Sale" securities in accordance with SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities". Accordingly, any unrealized gains and losses are reported as a component of Other Comprehensive Income in accordance with SFAS 130 "Reporting Comprehensive Income". For the six months ended June 30, 1998, unrealized gains and losses were immaterial and, as a result, no presentation of Other Comprehensive Income was made in the unaudited interim Consolidated Financial Statements for that period. For the three months ended September 30, 1998, unrealized losses have been reported as a component of Other Comprehensive Income in the accompanying unaudited interim Consolidated Financial Statements. Marketable equity securities are valued as follows: September 30, 1998 ------------------ Cost $ 20,066 Unrealized loss (3,265) ---------- Aggregate fair value $ 16,801 ========== 6 7 3. PROPERTY AND EQUIPMENT: Property and equipment are summarized as follows:
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- Office equipment $ 7,525 $ 5,690 Furniture and fixtures 5,533 4,009 Data processing and telecommunication 20,773 4,634 Other 18,500 3,777 -------- -------- 52,331 18,110 Less accumulated depreciation and amortization (14,248) (3,176) -------- -------- $ 38,083 $ 14,934 ======== ========
Included in furniture and fixtures at September 30, 1998 and December 31, 1997, are $510 and $452, respectively, of assets under capital leases. Substantially all property and equipment are depreciated over estimated useful lives ranging from five to ten years. 4. SUBSCRIBER ACCOUNTS: Subscriber accounts (at cost) consist of the following:
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- Acquired subscriber accounts $1,042,404 $ 566,811 Less accumulated amortization (87,734) (28,493) ---------- ---------- $ 954,670 $ 538,318 ========== ==========
Reconciliation of activity for acquired subscriber accounts is as follows:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- Balance, beginning of period $ 566,811 $ 270,038 Acquisition of subscriber accounts 483,398 296,822 Charges against acquisition holdbacks (7,805) (49) ---------- ---------- Balance, end of period $1,042,404 $ 566,811 ========== ==========
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. As of September 30, 1998 and December 31, 1997, purchase holdbacks were $38,937 and $11,444 respectively. 5. FINANCING: LONG TERM FINANCING: Long-term debt is comprised of the following:
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- Senior Unsecured Notes $ 250,000 $ -- Senior Subordinated Discount Notes 127,190 191,926 Convertible Senior Subordinated Notes 103,500 103,500 Samco financing 44,628 62,950 Less current portion (44,357) (21,217) --------- --------- $ 480,961 $ 337,159 ========= =========
Senior Unsecured Notes On August 17, 1998, the Company completed an offering of Senior Unsecured Notes, (the "Senior Unsecured Notes") in the amount of $250 million bearing an interest rate of 7 3/8% due in 2005. Substantially all of the proceeds from the offering ($233 million) were used to repay borrowings under the Company's senior credit facility with Westar Capital. 7 8 Senior Subordinated Discount Notes The Senior Subordinated Discount Notes are unsecured subordinated obligations of the Company's wholly owned subsidiary, Protection One Alarm Monitoring, Inc. ("Monitoring") (the "Discount Notes") limited to $166 million aggregate principal amount at maturity, and will mature on June 30, 2005. In connection with the Combination, the notes were restated to fair market value for book purposes reflecting a current market yield of approximately 6.4%. This resulted in bond premium being recorded to reflect the increase in value of the notes as a result of the decline in interest rates since the note issuance. The revaluation has no impact on the expected cash flow to existing noteholders. Although for federal income tax purposes a significant amount of original issue discount, taxable as ordinary income, will be recognized by a holder as such discount accrues from the issue date, no interest will be payable prior to December 31, 1998. From and after June 30, 1998, cash interest on the notes will accrue at the rate of 13 5/8% per annum, payable in cash semiannually on June 30 and December 31, of each year, commencing December 31, 1998. On June 29, 1998, pursuant to the indenture governing the Discount Notes, the Company redeemed 35% of the Discount Notes with the proceeds from an underwritten public equity offering. The redemption price of approximately $65.0 million, was lower than the corresponding amount recorded on the Company's balance sheet, resulted in an extraordinary gain, net of taxes, of approximately $1.6 million. Convertible Senior Subordinated Notes The Convertible Senior Subordinated Notes are unsecured subordinated obligations of Monitoring and rank equal to the Senior Subordinated Discount Notes. The Convertible Notes mature on September 15, 2003, and previously were convertible, at any time, into Common Stock at a price of $17.95 per share, subject to adjustment. Subsequent to the Combination, the Convertible Notes maintain a conversion price of approximately $11.19 per share. Interest on the Convertible Notes accrues at the rate of 6 3/4% per annum, payable in cash semiannually on March 15 and September 15 of each year, and commenced on March 15, 1997. The Convertible Notes are redeemable, at the Company's option, in whole or in part, at any time or from time to time, on or after September 19, 1999, and prior to maturity, upon not less than 30 days prior notice at certain specified redemption prices plus accrued and unpaid interest. Samco Financing Rights to certain of the Company's security alarm monitoring contracts (the "Contracts") were previously sold to investors by Westinghouse Security (a predecessor to the Company for accounting purposes). For financial reporting purposes, the transaction was treated as a financing arrangement and the proceeds received were recorded as long-term debt. Generally, principal and interest payments on the debt consist of 65% of the monitoring revenue under the contracts. Subject to minimum requirements, the Company has the right but not the obligation to repurchase the Contracts at a fair market value price. During February 1998, the Company exercised its rights and retired one of the three outstanding tranches at a purchase price of approximately $15.2 million, and retired a second tranche in August, 1998, at a purchase price of approximately $7.1 million. SHORT TERM FINANCING: Borrowing from Parent On April 1, 1998, the Company entered into a $600 million senior credit facility with Westar Capital to refinance promissory notes and to replace a previous credit facility. The facility size was reduced to $242.8 million pursuant to Westar Capital's contribution of approximately $357.2 million of equity capital to the Company in June 1998 (see footnote 8 "Changes in Securities"). Westar Capital and the Company agreed to increase the size of the facility to $292.8 million on June 29, 1998 and subsequently increased the size of facility to $322.8 million on July 30, 1998 and $472.8 million on August 6, 1998. As of September 30, 1998, Protection One had $294.8 million in borrowings payable to Westar Capital, which bears interest at a floating rate based on LIBOR, currently ranging from 6.5% to 6.75%. 8 9 6. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARY: On September 30, 1998, Protection One entered into an agreement to exchange all of its common and preferred stock investment in Guardian International, Inc. for a new series of redeemable preferred stock issued by Guardian, which carries a current annual dividend rate of 7%. The exchange transaction has resulted in the recognition by Protection One of a non-recurring $3 million gain reflected in "Other Income", the amount of which is primarily due to the net present value of the new securities received being greater than that of the old securities exchanged. In connection with the exchange, Protection One will utilize the cost method in place of the equity method of accounting for its investment in Guardian, since the new redeemable preferred carries no voting rights and the Company does not exercise significant influence over the activities of Guardian. During the third quarter, prior to the exchange transaction, Protection One recognized its equity portion of Guardian's earnings. For the nine months ended September 30, 1998, the amount included in Protection One's earnings is a loss of $0.4 million. 7. MERGERS AND ACQUISITIONS: During the nine months ended September 30, 1998, Protection One made three significant acquisitions. The Company acquired Network Multi-Family Security Corporation, which had 200,000 subscribers for approximately $180 million, the assets of Multimedia Security Services, Inc. with 147,000 subscribers, for approximately $233 million and the stock of Compagnie Europeene de Telesecurite, with 60,000 subscribers, for approximately $140 million. The chart below shows cash, on a net basis, paid for the three significant acquisitions and all other acquisitions that occurred during the nine months ended September 30, 1998. Assets acquired $ 826,545 Liabilities assumed (270,746) ---------- Cash paid $ 555,799 Less: cash acquired (1,569) ---------- Net cash paid $ 554,230 ========== 8. CHANGES IN SECURITIES: A registration statement on Form S-3 (No. 333-50383) covering an aggregate of $400 million of Common Stock of Protection One and debt securities of Monitoring was declared effective on May 11, 1998. On June 8, 1998 Protection One sold 6,850,000 shares of its Common Stock at a price to public of $9.50 per share, for aggregate proceeds of approximately $65.1 million, in a firm commitment underwritten offering (the "Public Offering") lead by an underwriting group (the "Underwriters"). On June 29, 1998 Protection One sold an additional 667,144 shares of its Common Stock at the same price, for aggregate proceeds of approximately $6.3 million, to the Underwriters pursuant to their exercise of an over-allotment option. On June 8, 1998, concurrent with the Public Offering, Protection One sold 30,650,000 shares of its Common Stock to Westar Capital, at a price of $9.50 per share, for aggregate proceeds of approximately $291.2 million, in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") pursuant to Section 4(2) of such Act. On June 29, 1998, POI sold an additional 4,957,500 shares of its Common Stock to Westar Capital, pursuant to the exercise of an option granted to Westar Capital, in connection with the Private Offering, which sale was also exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of such Securities Act. 9. SUBSEQUENT EVENTS: In October, 1998, the Company announced that it had entered into an agreement to acquire Lifeline Systems, Inc., the leading provider of personal emergency response service ("PERS") in North America for approximately $174 million or $29.74 per share in cash and common stock of a newly formed holding company for Protection One, based on the number of shares of currently outstanding Lifeline shares. Under the terms of the agreement approved by the Board of Directors of Protection One and Lifeline, each Lifeline share will be converted into the right to receive either, (a) $14.50 and a certain number of shares of the holding company common stock based on the average closing 9 10 price of Protection One's common stock prior to the consummation of the transaction and adjusted for a variable exchange rate or, (b) at the stockholders option, additional shares of the holding company's common stock in lieu of all or a portion of such cash. Based on the closing price of Protection One common stock on October 16, 1998, each share of Lifeline common stock would have converted to the right to receive shares of the holding company common stock worth approximately $15.24. The acquisition will be accounted for as a purchase and is intended to qualify as a tax-free reorganization to the extent of the holding company common stock received in the transaction. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless otherwise indicated or the context otherwise requires, reference to "Protection One" or "the Company" are to Protection One, Inc., a Delaware corporation, and its direct and indirect, wholly owned subsidiaries; "POI" means solely Protection One, Inc., excluding its subsidiaries; "Monitoring" means Protection One Alarm Monitoring, Inc., a direct, wholly owned subsidiary of Protection One, Inc.; "WestSec" means WestSec, Inc., a Kansas corporation and wholly owned subsidiary of Monitoring; "Westar" means Westar Security, Inc. a Kansas corporation and wholly owned subsidiary of POI. POI's sole assets are, and POI operates solely through, its investments in Monitoring and Westar and its other wholly owned subsidiaries. "Combination" means the transaction consummated on November 24, 1997 in which the Company combined with WestSec and Westar. Certain matters discussed in this Item 2 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 statement includes such words 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 POI's prospectus supplement dated June 2, 1998, which information is incorporated herein by reference. OVERVIEW Protection One is a leading provider of security alarm monitoring and related services in the United States, with approximately 1.5 million subscribers as of September 1998. The Company has grown rapidly by participating in both the expansion and the consolidation of the security alarm monitoring industry. Protection One's revenues consist primarily of recurring payments for monitoring and related services. Protection One monitors digital signals communicated by security systems installed at subscribers' premises. Security systems are designed to detect burglaries, fires and other events. Through a network of approximately 65 service branches, the Company provides repair of security systems and, in select markets, armed response to verify that an actual emergency, rather than a false alarm, has occurred. The Company provides its services to the residential, commercial and wholesale segments of the alarm monitoring market. The Company believes the residential segment, which represents in excess of 80% of its customer base, is the most attractive because of its growth prospects, gross margins and size. Of the Company's customer base, approximately 62% reside in single-family households and approximately 18% reside in multi-family complexes such as apartments and condominiums. Commercial subscribers represent 12% of the customer base and subscribers served by independent alarm dealers that subcontract monitoring services to the Company represent 7% of the customer base. Protection One intends to grow its presence in each of these key market segments, although the residential market remains the most important for the Company's growth strategy. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 GENERAL. Results for the nine months ended September 30, 1998 (the "first three quarters of fiscal 1998") reflect the operations of Protection One following the Combination, and include 42 subsequent acquisitions comprising over 680,000 subscribers that were completed at various times throughout the nine months ended September 30, 1998. Results for the comparable periods in 1997 reflect the Company's operations prior to the Combination and such acquisitions. During 1997, the Company's results reflect the operations of Westar and WestSec only. The Company's subscriber base more than tripled from 0.4 million subscribers at September 30, 1997 to 1.5 million subscribers at September 30, 1998. REVENUES for the first three quarters of fiscal 1998 increased by approximately $180.4 million, or 186.5%, to $277.1 million from $96.7 million for the comparable period in 1997 (the "first three quarters of fiscal 1997"). Monitoring and related services revenues increased by approximately $170.9 million, or 203.6%. Substantially all of the increase is due to the Combination, subsequent acquisition activity and growth generated through the Company's dealer program. Installation and other revenues increased by $9.5 million, or 74.2% to $22.3 million from $12.8 million, reflecting additional installation revenues from several acquisitions, offset by a reduction in Westar and WestSec installation activities. The decline in Westar and WestSec installation revenues reflects the Company's 11 12 conversion of substantially all sales and installation activities previously conducted by an internal sales force to the Company's dealer program. The Company intends, however, to maintain certain acquired installation activities associated with servicing its existing commercial customer base. COST OF REVENUES for the first three quarters of fiscal 1998 increased by approximately $59.4 million, or 207.5%, to $88.0 million from $28.6 million. Cost of revenues as a percentage of total revenue increased to 31.8% for the first three quarters of fiscal 1998 from 29.6% for the comparable period in 1997. Monitoring and related services expenses increased by approximately $46.3 million, or 180.4%, primarily due to the Combination and growth experienced in the first three quarters of fiscal 1998. Monitoring and related services expenses as a percentage of monitoring and related services revenues decreased to 28.2% for the three quarters of fiscal 1998 from 30.6% in the comparable period in 1997, due to the economies of scale achieved with a larger subscriber base when compared to the same period in 1997. Other cost of revenues increased by $13.1 million, or 441.3%, reflecting primarily additional commercial installation activities from acquired operations. GROSS PROFIT for the first three quarters of fiscal 1998 was approximately $189.1 million, representing an increase of $121.0 million, or 177.6%, over $68.1 million of gross profit recognized in the comparable period in fiscal 1997. Such increase is attributable primarily to subscriber growth. Gross profit as a percentage of total revenues was 68.2% for the first three quarters of fiscal 1998 compared to 70.4% for the comparable period in 1997. The decline in gross profit as a percentage of revenues is due to a decline in the profitability of other revenues offset by a slightly higher gross margin on monitoring and related services. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("S,G&A") rose to $61.3 million in the first three quarters of fiscal 1998, an increase of approximately $14.7 million, or 31.6%, over S,G&A in the comparable period in 1997. Substantially all of the increase is due to the increased corporate and branch infrastructure resulting from the Combination and growth activities in the first three quarters of fiscal 1998. Such figure as a percentage of total revenues decreased from 48.2% in the first three quarters of fiscal 1997 to 22.1% in the first three quarters of fiscal 1998. The substantial decline in S,G&A as a percentage of total revenues reflects the significant reduction in Westar and WestSec installation activities, as well as the integration of branch operations and corporate administrative functions pursuant to the Combination and acquisitions. ACQUISITION AND TRANSITION EXPENSES for the first three quarters of fiscal 1998 totaled $7.3 million, as compared to no expenses in the comparable period in 1997. Prior to the Combination, the Company did not maintain departments dedicated to the integration of new and acquired subscribers. For the remainder of fiscal 1998, the Company expects to increase expenditures in these departments to provide a high level of support for the increasing size and productivity of the Company's dealer program. AMORTIZATION OF INTANGIBLES AND DEPRECIATION EXPENSE was $82.8 million for the first three quarters of fiscal 1998, an increase of $56.7 million, or 217.9% over $26.0 million in the comparable period in 1997. The increase is due primarily to the amortization of additions to subscriber intangibles and goodwill arising from the Combination, acquisition activity and growth generated by the Company's dealer program during the first three quarters of 1998. OTHER INCOME (EXPENSE) totaled $(16.0) million of expense in the first three quarters of 1998, as compared to $(24.9) million of expense in the comparable period in 1997. Interest expense increased to $(37.3) million during the period, reflecting additional borrowings made to fund the Company's growth activities in the first three quarters of fiscal 1998. Interest expense was reduced by other income of $21.3 million during the nine months ended September 30, 1998, reflecting a non-recurring gain on repurchase of certain contracts and the recognition of a non-recurring gain on the exchange of investment securities. See Footnote 6- "Investment in Unconsolidated Subsidiary." The Company is unable to estimate the extent, if any, of any future non-recurring income or expense that may occur from time to time. BALANCE SHEET DATA. At September 30, 1998, the Company's working capital deficit was $111.8 million (excluding short-term debt and current maturities of long-term debt) compared to a working capital surplus of $33.6 million at December 31, 1997. This increase in the working capital deficit of $145.4 million is primarily due to a decrease in cash and cash equivalents of $60.1 million, and increases in purchase holdbacks of $27.5 million, deferred revenues of $16.9 million, accrued liabilities of $20.0 million and acquisition transition costs of $11.7 million. Goodwill and trademarks and subscriber accounts and intangibles, net increased to $2.2 billion at September 30, 1998 from $1.2 billion at December 31, 1997. This increase of approximately $964.7 million, or 79.0% reflects the addition of approximately 680,000 subscribers in the first three quarters of fiscal 1998. Total stockholders' equity increased approximately $415.9 million to $1.3 billion from $934.0 million. The increase in 12 13 such figure reflects the issuance of approximately $400 million of common stock in a concurrent public offering and private placement. Further increases in total stockholder's equity arose from the Company's issuance of $4.9 million of common stock in connection with an acquisition and $10.0 million of net income generated during the period. THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 REVENUES for the third quarter of fiscal 1998 increased by approximately $70.4 million, or 214.7%, to $103.3 million from $32.8 million for the comparable period in 1997 (the "third quarter of fiscal 1997"). Monitoring and related services revenues increased by approximately $68.3 million, or 242.4%. Substantially all of the increase is due to the Combination, subsequent acquisition activity and growth generated through the Company's dealer program. Installation and other revenues increased by $2.1 million, or 45.7% to $6.7 million from $4.6 million, reflecting primarily additional commercial installation revenues from several acquisitions, offset by a reduction in Westar and WestSec residential installation activities. COST OF REVENUES for the third quarter of fiscal 1998 increased by approximately $21.6 million, or 197.4%, to $32.5 million from $10.9 million. Cost of revenues as a percentage of total revenues decreased to 31.5% for the third quarter of fiscal 1998 from 33.4% for the comparable period in 1997. Monitoring and related services expenses increased by approximately $17.2 million, or 171.8%, primarily due to the Combination and growth experienced in the first three quarters of fiscal 1998. Monitoring and related services expenses as a percentage of monitoring and related services revenues decreased to 28.1% for the third quarter of fiscal 1998 from 35.4% in the comparable period in 1997, due to economies of scale achieved with a larger subscriber base. Other cost of revenues increased by $4.4 million, or 464.9%, reflecting primarily additional commercial installation activities. GROSS PROFIT for the third quarter of fiscal 1998 was approximately $70.7 million, representing an increase of $48.8 million, or 223.3%, over $21.9 million of gross profit recognized in the comparable period in fiscal 1997. Such increase is due to the growth factors noted in "-- General" above. Gross profit as a percentage of total revenues was 68.5% for the third quarter of fiscal 1998 compared to 66.6% for the comparable period in 1997. The increase in gross profit as a percentage of revenues reflects the higher monitoring and related services gross margin, offset by the lower gross margin associated with other revenues. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("S,G&A") rose to $21.6 million in the third quarter of fiscal 1998, an increase of approximately $5.9 million, or 38.0%, over S,G&A in the comparable period in 1997. Such figure as a percentage of total revenues decreased from 47.7% in the third quarter of fiscal 1997 to 20.9% in the third quarter of fiscal 1998. The substantial decline in S,G&A as a percentage of total revenues reflects the significant reduction in Westar and WestSec residential installation activities, as well as the integration of branch operations and corporate administrative functions pursuant to the Combination and acquisitions that occurred in the first three quarters of fiscal 1998. ACQUISITION AND TRANSITION EXPENSES for the third quarter of fiscal 1998 totaled $2.8 million, as compared to no expenses in the comparable period in 1997. The Company expects acquisition and transition expenses to increase in future periods due to the Company's efforts to integrate acquisitions and to support the national expansion of its Dealer Program. AMORTIZATION OF INTANGIBLES AND DEPRECIATION EXPENSE was $32.5 million for the third quarter of fiscal 1998, an increase of $23.3 million, or 255.5% over $9.1 million in the comparable period in 1997. The increase is due primarily to the Combination, acquisition activity and purchases of subscriber accounts through the Company's dealer program. OTHER INCOME (EXPENSE) totaled $(4.5) million of expense in the third quarter of 1998, as compared to $(8.4) million of expense in the comparable period in 1997. Interest expense increased to $(12.4) million during the period, reflecting additional borrowings made to fund the Company's growth. Interest expense was reduced by other income of $7.9 million during the third quarter of 1998, reflecting a non-recurring gain on repurchase of certain contracts and the recognition of a non-recurring gain on the exchange of investment securities. See Footnote 6- "Investment in Unconsolidated Subsidiary." The Company is unable to estimate the extent , if any, of any future non-recurring income or expense that may occur from time to time. 13 14 LIQUIDITY AND CAPITAL RESOURCES GENERAL. The Company has financed its operations and growth with advances from Westar Capital, a wholly owned subsidiary of, Western Resources, Inc. ("Western Resources") supplemented by operating cash flows and the public portion of the Equity Offerings. RECENT DEVELOPMENTS. On August 7, 1998, Protection One acquired 65.6% of the outstanding shares of a leading French security alarm company, Compagnie Europeenne de Telesecurite ("CET") at a purchase price of 450FFR per share, for a total of approximately $94 million. CET has approximately 60,000 subscribers and 36 branch offices located primarily in France, as well as Belgium, Germany, the Netherlands and Switzerland. CET has current annualized revenues of approximately $75 million, which along with its subscriber count, makes it one of the largest alarm companies in France and continental Europe. Protection One intends to complete, in October 1998, a public tender offer for the remaining shares of CET, in accordance with French law, also at 450FFR per share. On August 17, 1998, the Company completed an offering of Senior Unsecured Notes, (the "Senior Unsecured Notes") in the amount of $250 million bearing an interest rate of 7 3/8% due in 2005. Proceeds from the offering were used to reduce borrowings under the Company's revolving credit facility by approximately $233 million. In October, 1998, the Company announced that it had entered into an agreement to acquire Lifeline Systems, Inc., the leading provider of personal emergency response service ("PERS") in North America for approximately $174 million or $29.74 per share in cash and common stock of a newly formed holding company for Protection One, based on the number of shares of currently outstanding Lifeline shares. Under the terms of the agreement approved by the Board of Directors of Protection One and Lifeline, each Lifeline share will be converted into the right to receive $14.50 and a certain number of shares of the holding company common stock based on the average closing price of Protection One's common stock prior to the consummation of the transaction and adjusted for a variable exchange rate. Based on the closing price of Protection One common stock on October 16, 1998, each share of Lifeline common stock would have converted to the right to receive shares of the holding company common stock worth approximately $15.24. The acquisition will be accounted for as a purchase and is intended to qualify as a tax-free reorganization to the extent of the holding company common stock received in the transaction. MATERIAL COMMITMENTS. The Company has several long-term commitments. The 6 3/4% Senior Subordinated Convertible Notes, which total $103.5 million in aggregate principal amount, mature on September 15, 2003, and the Company must make a payment of $107.9 million on September 30, 2005, at the maturity of the 13 5/8% Senior Subordinated Discount Notes ("the Discount Notes"). Cash interest payable on the Convertible Notes and Discount Notes will total $14.3 million in 1998 and $21.7 million thereafter until maturity. (See Note 5 of Notes to Consolidated Financial Statements, for further information regarding the Convertible Notes and Discount Notes.) the Company will be required to make cash interest payments totaling $18.4 million annually on the Senior Unsecured Notes and is required to redeem such notes on August 15, 2005. In addition, Protection One assumed, as part of the Combination, approximately $60 million of the WestSec indebtedness from agreements entered into by WSS, of which approximately $26 million is payable in 1998 and $34 million in 1999. Under the agreements, Protection One monitors and services the subscriber accounts for which certain rights were transferred to a third party. Protection One has the right, but not the obligation, to purchase the rights to the contracts as the underlying third party notes mature. The Company made payments of approximately $15.2 million in February 1998 and $ 7.1 million in August 1998 to repurchase a portion of such contracts leading to the non-recurring income discussed above. As discussed above, Westar Capital extended two promissory notes to the Company to enable it to fund the 1998 Acquisitions. The 6 11/16% promissory notes had an aggregate principal amount of $458.9 million at March 31, 1998 and were due on June 1, 1998. As of April 1, 1998, the Company converted its promissory notes into a $600 million senior credit facility with Westar Capital ("the Senior Credit Facility.") The Company may borrow, subject to certain financial covenants and restrictions, at varying interest rates ranging from LIBOR plus 1.125% to the Prime Rate plus 1.125%. The commitment under the Senior Credit Facility was reduced to $242.8 million in June 1998, reflecting Westar Capital's participation in the Equity Offerings. In July 1998, the commitment under the Senior Credit Facility was increased to $322.8 million pursuant to two amendments and in August 1998 it was further increased to $472.8 million. The Senior Credit Facility matures on March 30, 1999. The Company generated $82.5 million of net cash provided by operating activities for the nine months ended September 30, 1998, compared to the $20.4 million net cash provided by operating activities in the nine months ended September 30, 1997. The increase in net cash provided by operating activities reflects the Company's substantial growth from the Combination and during the first three quarters of fiscal 1998. 14 15 The Company used $820.0 million of net cash in investing activities compared to the use of $30.1 million for the comparable period in 1997. Investing activities during the nine months ended September 30, 1998 included the acquisitions of Comsec, Multimedia in the first quarter, and CET in the third quarter, as well as several other portfolios of subscriber accounts in the second and third quarters and dealer program purchases. The Company generated $677.3 million of net cash through financing activities for the nine months ended September 30, 1998 compared to generating $12.2 million for the nine months ended September 30, 1997. The Company received cash funding of approximately $113.2 million from Westar Capital and reduced other indebtedness by approximately $86.2 million. The indentures governing the Senior Unsecured Notes, Discount Notes and Convertible Notes contain certain restrictions on the transfer of Company funds, including dividends, loans and advances made by the Company. The Company believes such restrictions have not had and will not have a significant impact on the Company's ability to meet its cash obligations. CAPITAL EXPENDITURES. The Company anticipates making capital expenditures in 1998 of approximately $24.0 million, including $5.0 million to upgrade branch operations, $12.5 for integration activities, and $5.0 million for service center improvements and other capital items. The Company has spent $18.9 million in capital expenditures during the first three quarters of fiscal 1998 and anticipates an additional $5 million of expenditures in the fourth quarter of fiscal 1998. TAX MATTERS. As a result of the Combination, Protection One will be consolidated into future federal income tax returns filed by its parent, WRI. The two parties have entered into a tax sharing agreement, whereby WRI will make cash payments to the Company for current tax benefits utilized for income tax return purposes and will require cash payments from the Company for current tax expenses incurred for income tax return purposes. If and when the Company, or its parent, generates income for tax return purposes, over time it will proportionately utilize net operating loss carryforwards existing at November 24, 1997 in amounts up to approximately $50 million. Currently, the deferred tax assets related to the net operating loss carryforwards are fully reserved due to uncertainty as to their future realizability. However, when net operating loss carryforwards are utilized, the relief of the corresponding reserve will not create a net income benefit, but, as required by generally accepted accounting principles, will reduce the Company's goodwill balances. The net financial statement impact of this treatment will cause the Company to recognize deferred tax expense it might otherwise not recognize. YEAR 2000 ISSUE GENERAL. The Company is proceeding with its formal program to address the effect of the of the Year 2000 issue on its information systems and operations. Protection One faces the Year 2000 issue because many computer systems and applications were originally programmed with abbreviated dates that eliminate the first two digits of the year, assuming that such digits are always "19". On January 1, 2000, computer systems and applications so programmed may incorrectly recognize the date as January 1, 1900, returning incorrect results from calculations and processes using these dates. Some computer systems and applications may cease processing completely due to the date abbreviation. Calculations using dates beyond December 31, 1999 may affect computer applications before January 1, 2000. The Company has established a formal Year 2000 readiness program to investigate and correct Year 2000 problems in its primary information systems. All business units are participating in this formal program, using a standardized methodology. STATE OF READINESS. The goal of the Company's Year 2000 Readiness Program is to identify and assess all computer programs, computer hardware and embedded systems critical to the Company's business and operational needs that could be potentially affected by the Year 2000 date change, to repair or replace such systems found to be incompatible with Year 2000 dates, and develop and implement predetermined actions to be used as contingencies in the event any critical business function fails unexpectedly or is interrupted. The program is directed by a written policy which provides guidance and methodology for the departments and business units to follow. Due to varying degrees of exposure of departments and business units to the Year 2000 issue, some are further along in the readiness process than others. All departments have completed the awareness, inventory and assessment phases 15 16 (Identification and Assessment Phase). The majority of the Company's current efforts are in the remediation and testing phase. Development of contingency plans are scheduled to commence in January 1999 and conclude in June 1999. Overall, based on manhours as a measure of work effort, management believes the readiness effort is approximately 20% complete. Protection One's Year 2000 Readiness Program addresses commercial computer software, including mainframe, client/server and desktop software, internally developed computer software, including mainframe, client/server and desktop software; computer hardware, including mainframe, client/server and desktop, network, communications, and peripherals; devices using embedded computer chips, including controls, sensors, facilities equipment, heating, ventilating and air conditioning (HVAC) equipment; and relationships with third-party vendors and suppliers. The Company's Year 2000 policy requires testing as a method for verifying the Year 2000 readiness of an item. For those items which are impossible to test, other methods may be used to identify the readiness status, provided adequate contingency plans are established to provide a workaround or backup for the item. The table below summarizes the status of the components of the Year 2000 Readiness Program at September 30, 1998.
Estimated Completion Percentage Phase Date Completion ----------------------------------------------------------------------------------------------- Identification and assessment Oct 1998 100% Remediation and unit testing Business critical process Feb 1999 33% Less critical process Apr 1999 2% Comprehensive testing Guidelines and tools Dec 1998 5% Testing Jun 1999 0% Contingency planning Guidelines and tools Dec 1998 80% Planning Jun 1999 0% Contingency plan testing and resourcing Guidelines and tools Nov 1998 2% Testing and resourcing Aug 1999 0% Mobilization and alert Dec 1999 0%
COSTS. The Company estimates the total costs to update all critical operating systems for Year 2000 readiness will be approximately $3 million. As of September 30, 1998, approximately $537,000 of these costs had been incurred. These costs include labor for both company employees and contract personnel used in the Year 2000 program, and non-labor costs for software tools used in the remediation and testing efforts, replacement software, replacement hardware, replacement embedded devices and other such costs associated with testing and replacement. The costs of the Year 2000 readiness program are substantially all information technology-related (IT). Non-IT systems are highly critical to Protection One's business, but are largely beyond the Company's ability to control. This includes, telephone, electricity, water, transportation and governmental infrastructure. RISKS. Following the identification and assessment phase, Protection One believes that most of its business-critical systems are Year 2000 ready at this time with the remainder to be remediated prior to the end of the first quarter of 1999. Effective contingency plans will be developed and tested prior to January 1, 2000, in an effort to cover all Protection One business-critical systems and processes. Protection One has three major processing sites (Irving, Texas; Beaverton, Oregon and Wichita, Kansas) each of which operates different applications and databases. While some business interruptions are possible, Year 2000 related shutdown of all three major sites is not considered likely. The most reasonably likely worst case scenario is to be found in the area of external services, specifically firms providing electrical power, heating, ventilating and air conditioning, and telecommunications (local and long distance). While the Company believes the total collapse of service providers is highly unlikely, one or more of the following scenarios could occur: (1) temporary disruption or unpredictable provision of nationwide long-distance service; (2) temporary or unpredictable provision of local telephone service; and (3) temporary interruption or unpredictable provision of electrical power. 16 17 CONTINGENCY PLANS. Protection One is developing contingency plans for each of the three most reasonably likely worst case scenarios. Such plans would include (1) backup arrangements with alternative long distance service providers, including wireless services; (2) backup arrangements with alternative local telephone service providers in areas of the country where they exist and also including wireless services; and (3) relocation or transfer of some essential business functions to other Protection One sites which are unaffected. Widespread or long-term instances of any of the three identified most reasonably likely scenarios will nonetheless, result in interruptions to the Company's business processes. Contingency plans will ameliorate, but not eliminate, problems of such magnitude. 17 18 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES. The Registration Statement on Form S-3 (No. 333-50383) covering an aggregate of $400 million of Common Stock of POI and debt securities of Monitoring was declared effective on May 11, 1998. On June 8, 1998 POI sold 6,850,000 shares of its Common Stock at a price to public of $9.50 per share, for aggregate proceeds of approximately $65.1 million, in a firm commitment underwritten offering (the "Public Offering") lead by a group of underwriters (the "Underwriters"). On June 29, 1998 POI sold an additional 667,144 shares of its Common Stock at the same price, for aggregate proceeds of approximately $6.3 million, to the Underwriters pursuant to their exercise of an over-allotment option. On June 8, 1998, concurrent with the Public Offering, POI sold 30,650,000 share of its Common Stock to Westar Capital, (the "Private Placement"), at a price of $9.50 per share, for aggregate proceeds of approximately $291.2 million, in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") pursuant to Section 4(2) of such Act. On June 29, 1998, POI sold an additional 4,957,500 shares of its Common Stock to Westar Capital pursuant to the exercise of an option granted to Westar Capital in connection with the Private Offering, which sale was also exempt from the registration requirements from the registration requirements of the Securities Act pursuant to Section 4(2) of such Act. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS None. ITEM 5. OTHER INFORMATION None. 18 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The following exhibits are filed with this Current Report on Form 10-Q or incorporated by reference. EXHIBIT NUMBER EXHIBIT DESCRIPTION 27.1 Financial Data Schedule 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. PROTECTION ONE, INC. PROTECTION ONE ALARM MONITORING, INC. October 31, 1998 By: /s/ John W. Hesse ------------------- John W. Hesse Executive Vice President and Chief Financial Officer 21 EXHIBIT LIST EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 27.1 Financial Data Schedule. EX-27.1 2 FINANCIAL DATA SCHEDULE
5 0000916230 PROTECTION ONE INC 1,000 9-MOS DEC-31-1998 SEP-30-1998 15,415 16,801 51,871 22,022 5,664 110,361 52,331 14,248 2,424,670 561,760 480,690 0 0 1,266 1,349,845 2,424,670 277,097 277,097 88,027 88,027 (21,288) 4,027 37,330 21,613 (13,251) 8,362 0 1,591 0 9,953 0.10 0.10
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