-----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, MliGbOh/8TOG+FODEHWFR4vkExgXcLcfn9QQt92OqFT8O505kLzk9N4cMaX6BowK TmgDQht+m/YWoKhHRkKP9w== 0000950148-96-001916.txt : 19960904 0000950148-96-001916.hdr.sgml : 19960904 ACCESSION NUMBER: 0000950148-96-001916 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960903 SROS: NASD 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24780 FILM NUMBER: 96625191 BUSINESS ADDRESS: STREET 1: 6011 BRISTOL PARKWAY 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: 931064579 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-94684 FILM NUMBER: 96625192 BUSINESS ADDRESS: STREET 1: 6011 BRISTOL PARKWAY 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/A 1 AMENDMENT NO. 1 TO FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Amendment No. 1) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ PROTECTION ONE, INC.( COMMISSION FILE NO. 0-24780) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER AND ITS COMMISSION FILE NUMBER) DELAWARE 93-1063818 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6011 BRISTOL PARKWAY, CULVER CITY, CALIFORNIA 90230 (310) 338-6930 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER , INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) PROTECTION ONE ALARM MONITORING, INC.(COMMISSION FILE NO. 33-73002-01) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER AND ITS COMMISSION FILE NUMBER) DELAWARE 93-1064579 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6011 BRISTOL PARKWAY, CULVER CITY, CALIFORNIA 90230 (310) 338-6930 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER , INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) Indicate by check mark whether the registrants (1) have 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 and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 8, 1996, Protection One, Inc. had outstanding 12,738,175 shares of Common Stock, par value $.01 per share. At such date, Protection One Alarm Monitoring, Inc. had outstanding 100 shares of Common Stock, par value $.10 per share. Protection One Alarm Monitoring, Inc. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and therefore is filing this form with the reduced disclosure format provided for therein. 2 PART I FINANCIAL INFORMATION PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) ITEM 1. FINANCIAL STATEMENTS
September 30, June 30, 1995 1996 ---- ----- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 1,256 $ 8,347 Receivables, net 5,806 11,146 Inventories 3,125 3,461 Prepaid expenses 547 1,172 -------- ---------- Total current assets 10,734 24,126 Property and equipment, net 5,307 10,956 Subscriber accounts, intangibles and goodwill, net 162,239 238,898 Deposits 389 449 --------- ---------- $ 178,669 $ 274,429 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 1 $ 94 Accounts payable 2,078 2,462 Accrued salaries, wages and benefits 1,401 1,208 Accrued interest 318 216 Other accruals 210 412 Purchase holdbacks 4,949 12,588 Acquisition transition costs 970 3,779 Other current liabilities 800 646 Deferred revenue 9,166 13,763 --------- --------- Total current liabilities 19,893 35,168 Long-term debt, net of current portion 146,023 206,956 Other liabilities 279 604 Deferred income tax -- 792 --------- --------- Total liabilities 166,195 243,520 --------- --------- Commitments and contingencies (Note 12) Redeemable preferred stock, redemption value $6,127 at September 30, 1995 6,127 -- Stockholders' equity: Common Stock, $.01 par value, 24,000,000 shares authorized, 9,047,638 and 12,736,255 shares issued and outstanding at September 30,1995 and June 30, 1996, respectively 90 127 Additional paid-in capital 41,829 77,453 Accumulated deficit (35,572) (46,671) --------- --------- Total stockholders' equity 6,347 30,909 --------- --------- $ 178,669 $ 274,429 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 3 PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Nine months ended June 30, ------------------------------- 1995 1996 --------- --------- Revenues: (unaudited) Monitoring and service $ 32,622 $ 46,377 Other 6,343 5,418 --------- -------- Total revenues 38,965 51,795 Cost of revenues: Monitoring and service 8,151 12,651 Other 5,734 4,685 --------- -------- Total cost of revenues 13,885 17,336 --------- -------- Gross profit 25,080 34,459 Selling, general and administrative expenses 8,178 10,082 Loss on acquisition terminations 208 -- Acquisition and transition expenses 2,380 3,048 Amortization of subscriber accounts and goodwill 10,858 16,108 --------- -------- Operating income 3,456 5,221 Other expenses: Interest expense, net 6,850 3,052 Amortization of OID and debt issuance costs 2,687 13,159 Loss on sales of subscriber accounts 433 19 --------- -------- Loss before income taxes and extraordinary item (6,514) (11,009) Income tax benefit (expense) 2,432 (90) --------- -------- Loss before extraordinary item and cumulative effect of change in accounting method-net of taxes (4,082) (11,099) Extraordinary item-loss on early extinguishment of debt (8,898) -- Cumulative effect of change in accounting method-net of taxes (1,954) -- --------- -------- Net loss (14,934) (11,099) Preferred stock dividends 791 248 Accretion of redeemable preferred stock 796 -- --------- -------- Loss attributable to common stock $ (16,521) $(11,347) ========= ======== Loss per common share: Before extraordinary item $ (0.66) $ (1.06) Net loss per share $ (1.92) $ (1.06)
The accompanying notes are an integral part of the consolidated financial statements. 2 4 PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Three months ended June 30, ---------------------------------------- 1995 1996 --------- ----------- Revenues: (unaudited) Monitoring and service $ 11,776 $ 16,854 Other 1,909 1,763 --------- -------- Total revenues 13,685 18,617 Cost of revenues: Monitoring and service 2,872 4,460 Other 1,749 1,511 --------- -------- Total cost of revenues 4,621 5,971 --------- -------- Gross profit 9,064 12,646 Selling, general and administrative expenses 2,705 3,526 Loss on acquisition terminations 208 -- Acquisition and transition expenses 693 1,121 Amortization of subscriber accounts and goodwill 4,020 6,046 --------- -------- Operating income 1,438 1,953 Other expenses: Interest expense, net 1,777 1,196 Amortization of OID and debt issuance costs 2,066 4,527 Loss on sales of subscriber accounts 433 --------- -------- Loss before income taxes and extraordinary items (2,838) (3,770) Income tax benefit (expense) 1,052 (90) --------- -------- Loss before extraordinary item (1,786) (3,860) Extraordinary item-loss on early extinguishment of debt 8,898 -- --------- -------- Net loss (10,684) (3,860) Preferred stock dividends 177 -- --------- -------- Loss attributable to common stock $ (10,861) $ (3,860) ========= ========= Loss per common share: Before extraordinary item $ (0.22) $ (0.31) Net loss per share $ (1.23) $ (0.31)
The accompanying notes are an integral part of the consolidated financial statements. 3 5 PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
Nine months ended June 30, --------------------------------- 1995 1996 ---------- -------- (unaudited) Cash flows from operating activities: Net loss $ (14,934) $ (11,099) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Cumulative effect of change in accounting method 1,955 -- Depreciation 745 1,250 Amortization of subscriber accounts and goodwill 10,858 16,108 Amortization of debt issuance costs 756 924 Amortization of OID 1,931 12,235 Loss on sale of subscriber accounts 433 -- Income tax benefit (2,432) -- Extraordinary loss on early retirement of debt 8,898 -- Provision for doubtful accounts 1,238 1,518 Changes in assets and liabilities, net of effects of acquisitions: Receivables (2,292) (5,359) Inventories (3) 528 Prepaid expenses and deposits (831) (505) Accounts payable (904) 681 Accrued liabilities (2,546) (389) Deferred revenue (239) 663 --------- --------- Net cash provided by operating activities 2,633 16,555 --------- --------- Cash flows from investing activities: Purchases of property and equipment (1,946) (4,706) Net proceeds on sale of subscriber accounts 1,323 -- Acquisitions, net of cash received (47,459) (72,275) Payments on purchase holdbacks (3,059) (133) Deferred acquisition payments (1,996) (1,438) Acquisition transition costs (1,777) (2,272) Payment of other liabilities (72) -- --------- --------- Net cash used in investing activities (54,986) (80,824) --------- --------- Cash flows from financing activities: Payments on long-term debt (118,678) (23,828) Proceeds from long-term debt 164,428 72,619 Debt and equity issuance costs (6,420) (666) Payments on stockholder notes 47 -- Issuance of common stock and warrants 20,164 23,483 Redemption and conversion of redeemable preferred stock (2,125) -- Note redemption premiums and costs (2,627) -- Cash dividends paid (2,648) (248) --------- --------- Net cash provided by financing activities 52,141 71,360 --------- --------- Net increase (decrease) in cash and cash equivalents (212) 7,091 Cash and cash equivalents: Beginning of period 1,057 1,256 --------- --------- End of period $ 845 $ 8,347 ========= ========= Interest paid during the period $ 9,266 $ 3,181 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 4 6 PROTECTION ONE, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. THE COMPANY; INTERIM FINANCIAL INFORMATION: The accompanying financial statements of Protection One, Inc. ("POI") and its subsidiaries (the "Company") include the accounts of POI, POI's wholly-owned subsidiary, Protection One Alarm Monitoring, Inc. ("Monitoring"), and Monitoring's former wholly-owned subsidiary, Protection One Alarm Services, Inc. ("Services"), and Monitoring's current wholly-owned subsidiaries (See Note 14). On May 13, 1996, Services was merged into Monitoring. The assets, results of operations and stockholder's equity of Monitoring comprise substantially all of the assets, results of operations and stockholders' equity of the Company on a consolidated basis. See Note 13 for separate consolidated financial information of Monitoring. Results of operations of purchased companies are consolidated in all periods after the date of acquisition. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q which mandates adherence to Rule 10-01 of Regulation S-X. Accordingly, these statements do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of the Company, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results of operations for the nine month and three month periods ended June 30, 1996 are not necessarily indicative of the results to be expected for the full fiscal year. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended September 30, 1995 included in the Company's Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission. 2. CHANGE IN ACCOUNTING METHOD: In the third quarter of fiscal 1995, the Company changed its method of accounting for certain subscriber account acquisition and transition costs, effective as of October 1, 1994. Under the new method, the Company's personnel and related support costs and duplicative costs incurred solely in support of acquiring and transitioning subscriber accounts are expensed as incurred. The new method is consistent with the guidelines adopted by the Emerging Issues Task Force of the Financial Accounting Standards Board in Issue 95-3, Recognition of Liabilities in Conjunction with Purchase Business Combinations. The consolidated financial statements for the year ended September 30, 1995 reflect the change in accounting method as of October 1, 1994. The effect of the change on such year was to increase the loss before cumulative effect of the accounting change, net loss and loss attributable to Common Stock by approximately $1.5 million or $0.17 per share. The cumulative effect of the change as of October 1, 1994 was approximately $1.95 million or $0.23 per share, net of income taxes of approximately $1.2 million, and is reported separately in the consolidated statement of operations for the year ended September 30, 1995. 3. RECEIVABLES: Receivables, which consist primarily of trade accounts receivable of $15,580 at June 30, 1996 and $8,309 at September 30, 1995, have been reduced by allowances for doubtful accounts of $4,434 and $2,503, respectively. Included in receivables and deferred revenue at June 30, 1996 and September 30, 5 7 1995 are July 1996 and October 1995 invoices billed in advance of the periods in which services are provided totaling $6,321 and $4,667, respectively. The provisions for doubtful accounts for the three months ended June 30, 1996 and June 30, 1995 were $478 and $342, respectively. The provisions for doubtful accounts for the nine months ended June 30, 1996 and June 30, 1995 were $1,518 and $1,238, respectively. 4. SUBSCRIBER ACCOUNTS, INTANGIBLES AND GOODWILL: Subscriber accounts, intangibles and goodwill (at cost) consist of the following (dollar amounts in thousands):
September 30, June 30, 1995 1996 ---- ---- Acquired subscriber accounts $ 184,463 $ 276,058 Debt issuance costs 7,405 8,645 Goodwill and other 1,641 2,495 ---------- ---------- 193,509 287,198 Less accumulated amortization (31,270) (48,300) ---------- ---------- $ 162,239 $ 238,898 ========== ==========
Reconciliation of acquired subscriber accounts (dollar amounts in thousands):
Nine Months Year Ended Ended September 30, June 30, 1995 1996 ---- ---- Balance, beginning of period $ 122,330 $ 184,463 Cumulative effect of change in accounting method (3,802) -- Acquisition of subscriber accounts 70,106 95,506 Charges against acquisition holdbacks (2,026) (3,911) Sale of subscriber accounts (2,145) -- ---------- ---------- Balance, end of period $ 184,463 $ 276,058 =========== ==========
5. PURCHASE HOLDBACKS: In conjunction with certain purchases of subscriber accounts, the Company withholds a portion of the purchase price as a reserve to offset qualifying attrition of the acquired subscriber accounts for a specified period as provided for in the purchase agreements, and as a reserve for purchase price settlements of assets acquired and liabilities assumed. Reconciliation of purchase holdbacks (dollar amounts in thousands):
Nine Months Year Ended Ended September 30, June 30, 1995 1996 ---- ---- Balance, beginning of period $ 4,250 $ 4,949 Purchase holdback additions 6,349 11,682 Charges against subscriber accounts (2,025) (3,911) Cash paid to sellers (3,625) (132) -------- -------- Balance, end of period $ 4,949 $ 12,588 ======== ========
6 8 6. LOSS PER COMMON SHARE: The computation of fully diluted net loss per common share for each of the periods presented was antidilutive; as such, no presentation of fully diluted loss per share has been included in the consolidated statements of operations. The weighted average shares outstanding used in the computation of the net loss attributable to common shares are as follows:
Nine Months Ended Three Months Ended June 30, June 30, -------------------------- --------------------------- 1995 1996 1995 1996 ---- ---- ---- ---- Common Stock 8,604,864 10,749,983 8,799,931 12,330,317
7. CHANGES IN STOCKHOLDERS' EQUITY: During the nine month period ended June 30, 1996, the Company issued 2.5 million shares of common stock generating net proceeds of $23.1 million. Concurrently with the issuance of common stock, the Company converted 6,127 shares of Series H Preferred Stock to 680,777 shares of common stock at $9 per share. Additionally, warrants and options for 72,332 shares of common stock were exercised generating proceeds of $.05 million. In April, 1996, the Company issued 7,623 shares of common stock under its Employee Stock Purchase Plan ("ESPP"). In connection with the acquisition in late June, 1996 of Metrol Security Services, Inc., the Company issued 417,885 shares of common stock as a portion of the purchase price paid. Also during the period, additional paid in capital was reduced by $.8 million and $.2 million for costs related to the secondary offering and dividends on preferred stock dividends, respectively. 8. DIVIDEND RESTRICTIONS: The Company's Credit Agreement governing its Revolving Credit Facility and the Indenture governing its Discount Notes place certain restrictions on POI's and Monitoring's ability to make dividend payments, distributions and other asset transfers in respect of such company's capital stock and assets. At June 30, 1996, under provisions of the Credit Agreement (the most restrictive agreement), no amounts were available for such dividend payments, distributions or other transfers by either POI or Monitoring. 9. STOCK WARRANTS AND OPTIONS: Performance Warrants to purchase 500,472 shares of Common Stock at an exercise price of $0.167 per share were issued to certain officers of the Company on September 16, 1991 and were to be earned upon attainment of a certain return on investment objectives and were to vest over a five year period of employment after the date of issuance. Such objectives were not achieved as of June 29, 1994, when the Board of Directors and the officers modified the earnings and vesting criteria such that vesting occurred on that date for all Performance Warrants. The modified Performance Warrant agreements provide that the officers will not exercise more than 40%, and 70% of the Warrants prior to September 16, 1995 and 1996, respectively. In the event the Company is acquired, such restriction on exercise by officers would be released. 7 9 On November 3, 1993, the Company issued 50,000 units (the "Units") with each Unit consisting of one, $1,000 face value, 12% Series A Senior Subordinated Note and 28 detachable Warrants (total of 1,400,000 warrants) to purchase shares of the Company's Common Stock. Each warrant, when exercised, will entitle the holder to receive six-tenths of a share of the Company's Common Stock at an exercise price of $0.167 per share, subject to adjustment. The outstanding warrants are exercisable and will automatically expire on November 1, 2003. In June 1994, the Board of Directors adopted, and the stockholders of the Company approved, the 1994 Stock Option Plan (the "Plan"). The Plan provides for the award of incentive stock options to directors, officers and key employees. Three hundred fifty four thousand (354,000) shares were reserved for issuance under the Plan, subject to such adjustment as may be necessary to reflect changes in the number or kind of shares of Common Stock or other securities of POI. In November 1995, the Board of Directors adopted, and in January 1996, the shareholders of the Company approved, amending the Option Plan to increase the number of shares for which options may be granted reserved from 354,000 shares to 944,000 shares. The Option Plan provides for the granting of options that qualify as incentive stock options under the Internal Revenue Code and options that do not so qualify. During the year ended September 30, 1995, the Company granted options to purchase an aggregate of 273,600 shares of common stock including 132,000 shares to officers of the Company. The Company granted options for an additional 19,200 shares during fiscal 1996. Each option has a term of 10 years and vests 20% on each of the third through seventh anniversaries of the commencement of the participant's employment with the Company. During the nine months ended June 30, 1996, the Company granted options to purchase 590,000 shares of common stock including options for 400,000 shares granted to officers of the Company. Each option has a term of 10 years and vests 20% on each of the first through fifth anniversaries of the grant of the option. The purchase price of the shares issuable pursuant to the options is equal to or greater than the fair market value of the shares at the date of issue. In connection with the issuance of the Senior Subordinated Discount Notes in May of 1995, the Company issued warrants to purchase 531,200 shares of common stock at an exercise price of $6.60 per share. The outstanding warrants are exercisable and will automatically expire on May 17, 2005. A summary of warrant and option activity is as follows:
Warrants and Options Price Range ----------- --------------- Outstanding September 30, 1994 1,572,429 $0.167 - 3.633 Granted 804,800 5.875 - 9.125 Exercised (256,799) 0.167 - 6.50 Surrendered (14,400) 6.50 Outstanding September 30, 1995 2,106,030 0.167 - 9.125 Granted 609,200 8.00 - 15.00 Exercised (72,332) 0.167 - 6.50 Surrendered (14,760) 6.50 - 8.00 --------- Outstanding at June 30, 1996 2,628,138 0.167 - 15.00 ========= Exercisable: September 30, 1995 1,907,310 0.167 - 6.50 June 30, 1996 1,705,957 0.167 - 6.50
8 10 10. INCOME TAXES: For the nine months ended June 30, 1996, the Company experienced a net decrease in its net deferred tax asset valuation allowance of $3.1 million. At June 30, 1996, the Company had $33.4 million in NOL carryforwards for regular tax purposes and $26.7 million for alternative minimum tax ("AMT NOL") purposes which expire in the years 2006-2010. Included in these NOL carryforward amounts are $1.5 million in NOL carry forwards that were acquired in the Metrol Security corporate stock acquisition. This $1.5 million acquired NOL carryforward begins to expire in 1999. These carryforwards are available, subject to certain restrictions, to reduce taxable income, and alternative minimum taxable income in future periods. As a result of various prior issuances of preferred and common stock, or if there are future substantial changes in the Company's ownership, there may be annual limitations on the amounts of NOL and AMT NOL, as well as credits, that can be used to reduce the Company's taxable income, and alternative minimum taxable income. The Company has utilized $7.1 million in net operating loss carryforwards for the nine months ended June 30, 1996 which results in the effective tax rate being lower than the expected statutory rate.
September 30, June 30, 1995 1996 ---- ---- Deferred tax assets: Accounts receivable, due to allowance for doubtful accounts $ 1,000 $ 1,772 Acquisition reserves and holdbacks 2,365 5,465 Performance warrants 1,800 1,800 Net operating loss carryforwards 15,688 13,340 Original issue discount amortization 2,174 6,936 Other 37 56 Less valuation allowance (3,573) (506) -------- -------- Total deferred tax assets 19,491 28,863 Deferred tax liabilities: Differences in depreciation and amortization (19,491) (29,655) -------- -------- Net deferred tax liabilities $ 0 $ 792 ======== ========
The valuation allowance of $0.5 million at June 30, 1996 reflects uncertainties regarding the utilization of state income tax NOL carryforwards on the Company's tax returns prior to their dates of expiration. In June 1996, the Company acquired all of the outstanding shares of Metrol Security Services, Inc. (See Note 4) For financial reporting purposes, the assets acquired and the liabilities assumed were valued at fair market value as of the date of purchase. For income tax reporting purposes, the acquisition was treated as a non-taxable stock purchase with acquired assets and liabilities retaining their historical tax basis. The deferred tax liability resulting from the acquisition basis difference, together with the Company's existing deferred tax liability exceeded the Company's deferred tax assets at the date of purchase. The taxable temporary differences creating the Company's deferred tax liabilities are expected to reverse prior to expiration of the Company's NOLs reducing the requirement for the Company's previously established deferred tax asset valuation allowance which then affects the amount of the Metrol acquisition cost that is allocated to subscriber accounts. 11. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions: Nine months ended June 30, 1995 1996 ---- ---- Subscriber accounts acquired $ 63,161 $ 95,506 Inventory 30 786 Accounts receivable, net 10 1,588 Plant, property and equipment 37 1,884 Other assets acquired 4 1,674 --------- --------- Total assets acquired 63,242 101,438 --------- --------- Cash paid to seller 44,992 72,757 Stock issued to seller -- 6,843 Acquisition expenses 500 646 Purchase holdback 5,559 8,682 Acquisition reserve 2,888 4,781 Deferred revenue acquired 3,117 3,934 Other liabilities assumed 6,186 3,795 --------- --------- Total purchase price $ 63,242 $ 101,438 ========= =========
9 11 Cash paid to sellers, payments for acquisition expenses and payments on liabilities assumed in conjunction with acquisitions are included in cash used in investing activities in the period paid. Deferred revenue, which represents advance billings to subscribers, is recognized as revenue in the period in which the related service is provided. Such amounts are considered a non-cash component of operations and are reflected as a reduction in cash provided by operating activities. The following reflects increases (decreases) in assets and accumulated deficit, and decreases (increases) in liabilities and stockholders' equity accounts resulting from non-cash investing and financing activities which occurred in the nine months ended June 30, 1995 (dollar amounts in thousands):
Class B Redeemable Common Additional Purchase Preferred Common & Preferred Paid-in Accumulated Intangibles Holdbacks Stock Stock Stock Capital Deficit ------------- --------- ----- ----- ----- ------- ------- Accretion to redemption value of preferred stock $ (15) $ 15 Charge-off of purchase holdbacks $(1,675) $1,675 Accelerated accretion upon conversion of preferred stock (782) 782 Reclassification of IPO costs (1,305) $ 1,305 Conversion of Class B Common and preferred 12,897 $(56) $ 85 (12,927) ------- ------ -------- ---- ---- -------- ---- $(2,980) $1,675 $ 12,100 $(56) $ 85 $ (11,622) $797 ======= ====== ======== ==== ==== ======== ====
The following reflects increases (decreases) in assets, and decreases (increases) in liabilities and additional paid-in capital resulting from non-cash investing and financing activities which occurred in the nine months ended June 30, 1996 (dollar amounts in thousands):
Series H Purchase Common Additional Paid Preferred Intangibles Holdbacks Stock in Capital Stock ----------- --------- ------ -------------- ---------- Charge off of purchase holdbacks $( 3,911) $3,911 -- -- -- Conversion of Series H Preferred -- -- $ (7) $ (6,120) $ 6,127 Common shares issued for Metrol 6,843 (4) (6,839) Reclassification of stock offering costs (539) -- -- 539 -- -------- ------ ------ -------- ------- $ 2,393 $3,911 $ (11) $(12,420) $ 6,127 ======== ====== ====== ======== =======
12. COMMITMENT AND CONTINGENCIES: The Company is a party to claims and matters of litigation incidental to the normal course of business. The ultimate outcome of these matters cannot presently be determined; however, in the opinion of management of the Company, the resolution of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. 13. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION: POI and Services have fully and unconditionally guaranteed the 13 5/8% Senior Subordinated Discount Notes of Monitoring due 2005 ("Discount Notes") on a joint and several basis. POI has no independent operations and the consolidated revenues and costs of operations of POI are substantially reflected in the accounts of Monitoring. Prior to the merger of Services into Monitoring, the operations of Monitoring and Services were significantly interconnected and Monitoring and Services share common management, 10 12 13. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION (CONTINUED): employees and facilities and serve a common customer base. Separate summarized financial information of Services is not presented because management believes that such separate summarized financial information is not material to investors. The summarized consolidated financial information of Monitoring and its former subsidiary Services (see Note 1 above) is presented below (dollar amounts in thousands).
September 30, June 30, 1995 1996 ---- ---- Summarized Balance Sheet Assets Current assets $ 10,734 $ 24,126 Subscriber accounts and intangibles, net 162,239 238,898 Other non-current assets 5,695 11,405 Liabilities and Stockholders' Equity Deferred revenue $ 9,166 $ 13,763 Other current liabilities 10,727 21,405 Long-term debt, net of current portion 146,023 206,956 Other long-term liabilities 279 604 Redeemable preferred stock 6,127 Stockholders' equity 6,347 30,909
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 1995 1996 1995 1996 ---- ---- ---- ---- Summarized Statements of Operations Revenues $ 13,685 $ 18,617 $ 38,965 $ 51,795 Gross Profit 9,064 12,646 25,080 34,459 Loss before extraordinary item and cumulative effect of change in accounting method, net of taxes (1,786) (3,860) (4,082) (11,099) Net loss (10,684) (3,860) (14,934) (11,099)
14. ACQUISITION: On June 28, 1996 the Company acquired all of the outstanding stock of Metrol Security Services, Inc. ("Metrol"), sells, installs, services and monitors security alarm systems and provides guard and patrol services to residential and commercial subscribers in Arizona and New Mexico. The purchase price was allocated to the assets and subscriber accounts acquired and the liabilities assumed on the basis of fair values at June 28, 1996 as follows (in thousands): Subscriber accounts acquired $30,294 Inventories 754 Receivables, net 1,711 Property and Equipment 1,884 Other assets acquired 622 ------- $35,265 ======= Cash paid to seller $21,296 Stock issued to seller 6,843 Acquisition costs 88 Purchase holdback 3,000 Acquisition transition costs 500 Deferred revenue 1,730 Other liabilities assumed 1,808 ------- $35,265 =======
The following unaudited pro forma condensed consolidated results of operations present information as if the acquisition had occurred as of the beginning of each of the nine month periods ended June 30, 1995. The pro forma information is presented after giving effect to certain adjustments for the amortization of subscriber accounts, interest expense and the disposition of Metrol's guard operations. Certain of Metrol's expenses were estimated based on annual amounts incurred. Management believes the estimates provide a reasonable approximation of actual results. The pro forma information is provided for informational purposes only. It is based on historical information and is not necessarily indicative of future results of operations.
Pro forma for the nine months ended June 30, 1995 June 30, 1996 Revenue 46,139 60,651 Net loss before extraordinary item and cumulative effect of change in accounting method (6,255) (9,877) Net loss before extraordinary item, and cumulative effect of change in accounting method per share (0.87) (0.91) Net loss (14,281) (9,877) Net loss per share (1.76) (0.91)
11 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW For an overview of the Company's accounting policies and specific discussions of, among other things, a change in the method of accounting for certain acquisition and transition expenses, a change in statement of operations presentation format and the impact of SFAS 121 on the Company's financial statements, see the Company's Form 10-K, as amended, for the fiscal year ended September 30, 1995. Acquisition and Dealer Program Activity. As described in this Form 10-Q, a significant portion of the Company's growth has been generated by the acquisition of portfolios of subscriber accounts from other alarm companies. Because the Company typically acquires only the subscriber accounts (and not the accounts receivable or other assets) of the sellers, the Company focuses its pre- acquisition review and analysis on the quality and stability of the subscriber accounts to verify the monthly recurring revenue ("MRR") represented by such accounts. If the subscriber accounts to be purchased pass such due diligence scrutiny, the Company then applies its monitoring costs to such MRR as a basis for determining the purchase price to be paid by the Company. To protect the Company against the loss of acquired accounts, the Company typically seeks to obtain from the seller a guarantee against the subscriber account cancellation for a period following the acquisition and the right to retain a portion of the acquisition price (a "purchase price holdback") against the MRR lost due to subscriber account cancellations during the specified period. During the nine months ended June 30, 1996 the Company added (through acquisitions of 27 portfolios of subscriber accounts and through its Dealer Program) an aggregate of approximately 77,000 subscriber accounts for a total purchase price of approximately $95.5 million. The MRR of the acquired accounts ranged from approximately $10.00 to $60.00, with an average of $28.56, and the average purchase price holdback was approximately 12% of the initial purchase price. Approximately 80% of the acquired subscriber accounts were residential. Subscriber Attrition. Subscriber attrition has a direct impact on the Company's results of operations, since it affects both the Company's revenues and its amortization expense. Attrition can be measured in terms of canceled subscriber accounts and in terms of decreased MRR resulting from canceled subscriber accounts. Gross subscriber attrition is defined by the Company for a particular period as a quotient, the numerator of which is equal to the number of subscribers who disconnect service during such period and the denominator of which is the average of the number of subscribers at each month end during such period. Net MRR attrition is defined by the Company for a particular period as a quotient, the numerator of which is an amount equal to gross MRR lost as the result of canceled subscriber accounts or services during such period, net of (i) MRR generated during such period by the sale of additional services and increases in rates to existing subscribers, (ii) MRR generated during such period from the connection of subscribers who move into premises previously occupied by subscribers and in which existing systems are installed and from conversion of accounts that were previously monitored by other companies to the Company's monitoring service (i.e., "reconnects" and "conversions"); and (iii) MRR attributable to canceled accounts that, by virtue of a purchase holdback are "put" back to the seller of such accounts during such period (i.e., "guaranteed accounts"); and the denominator of which is the average month-end MRR in effect during such period. While the Company reduces the gross MRR lost during a period by the amount of guaranteed accounts provided for in purchase agreements with sellers, in some cases the Company may not collect all or any of the reimbursement due it from the seller. 12 14 The following table sets forth the Company's gross subscriber attrition and net MRR attrition for the periods indicated:
Twelve Months Ended ------------------- 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 ------- ------- -------- ------- ------- Gross subscriber attrition . . . . . . . 18.6% 19.3% 20.3% 20.5% 19.9% Net MRR attrition . . . . . . . . . . . 6.2 6.6 6.6 7.9 7.1
Because the Company determines payments to sellers under purchase price holdbacks subsequent to the periods to which such holdbacks apply, and because holdbacks are not allocated to specific guaranteed accounts or specific fiscal periods, the Company reduces gross MRR lost during a period by the amount of guaranteed accounts provided for in purchase agreements with sellers. However, in some cases, the Company has not retained the full amount of such holdback to which the Company is contractually entitled. If guaranteed accounts for which the Company was not compensated by the seller were taken into account in calculating net MRR attrition, net MRR attrition would have been higher in each period presented in the table above. Generally, net MRR attrition is less than actual "net account attrition," which the Company defines as canceled subscriber accounts net of reconnects, conversions and guaranteed accounts. Estimated net account attrition is the basis upon which the Company determines the period over which it amortizes its investment in subscriber accounts. The Company amortizes such investment over 10 years based on current estimates. If actual subscriber account attrition were to exceed such estimated attrition, the Company could be required to amortize its investment in subscriber accounts over a shorter period, thus increasing amortization expense in the period in which such adjustment is made and in future periods. Since a significant portion of the subscriber accounts acquired by the Company since its formation were purchased recently, there can be no assurance that the actual attrition rates for such accounts will not be greater than the rate assumed by the Company. The table below sets forth the change in the Company's subscriber base over the periods indicated:
Twelve Months Ended June 30, ---------------------------- 1995 1996 ---- ---- Number of subscribers: Beginning of period . . . . . . . . . . . . . . . . 76,112 131,166 Additions through portfolio acquisitions and Dealer Program, net of sales of subscriber accounts . 68,891 80,967 Installations by Company personnel . . . . . . . . 1,644 984 Reconnects and conversions . . . . . . . . . . . . 3,465 4,243 Gross subscriber attrition . . . . . . . . . . . . (18,946) (29,228) -------- -------- End of period . . . . . . . . . . . . . . . . 131,166 188,132 ======= =======
Joint Ventures and Alliances. To evaluate other potential sources of subscriber growth, the Company has initiated an analysis of companies that may have an interest in entering the residential security alarm market. In addition, certain companies in industries facing deregulation (such as the telecommunications and electric utility industries) have expressed to the Company an interest in offering security alarm services to develop more comprehensive relationships with their customers. As of the date of this Form 10-Q, the Company is discussing with certain of such companies, and intends to continue to explore, possible joint ventures, co-marketing arrangements and other strategic alliances as a method of enhancing its subscriber growth and reducing its cost of generating new subscribers. As of the date of this Form 10-Q, the Company has not entered into any agreement or arrangement for any such joint venture or other alliance. 13 15 Recent Developments On June 28, 1996, the Company acquired Metrol Security Services, Inc. (together with its subsidiaries, "Metrol"), for $30.7 million, including the repayment of $15.7 million of Metrol's debt. To finance the acquisition, the Company issued 417,885 shares of Common Stock to Metrol's stockholders and borrowed $24.0 million under the Revolving Credit Facility. Metrol, previously the 28th largest security alarm company in the United States, had approximately 18,500 subscribers (approximately 5,500 of which subscribed to Metrol's alarm response service), and provide other ancillary security services, including guard services, a national accounts program, an integrated system division and a probation monitoring operation. The acquired subscriber accounts (approximately 70% of which are residential) represent approximately $500,000 of MRR and $50,000 of recurring alarm response revenues. Approximately 95% of the acquired Metrol subscribers are located in Phoenix and Tucson, Arizona; the remainder are in Albuquerque and Santa Fe, New Mexico. As a result of the Metrol acquisition, the Company believes that, based upon number of subscribers, it has enhanced its position as the largest residential security alarm monitoring company in Arizona. On June 27, 1996, the Credit Agreement was amended to increase the maximum amount of borrowings available under the Revolving Credit Facility to $100 million, to reduce the interest rate payable on such borrowings, to extend the term of the Revolving Credit Facility to January 3, 2000 and to make certain other changes favorable to the Company. RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of total revenues for the periods indicated.
Three months ended June 30, Nine months ended June 30, ------------------------------- ---------------------------------- 1995 1996 1995 1996 --------------- ----------- ------------ --------- Revenues: Monitoring and Service 86.1% 90.5% 83.7% 89.5% Other 13.9 9.5 16.3 10.5 ----- ----- ----- ----- Total revenues 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- Cost of revenues: Monitoring and Service 21.0% 24.0% 20.9% 24.4% Other 12.8 8.1 14.7 9.0 ----- ----- ----- ----- Total cost of revenues 33.8 32.1 35.6 33.4 ----- ----- ----- ----- Gross profit 66.2 67.9 64.4 66.6 Selling, general and administrative expenses 19.8 18.9 21.0 19.5 Loss on acquisition terminations 1.5 -- 0.5 -- Acquisition and transition expenses 5.0 6.0 6.1 5.9 Amortization of subscriber accounts & goodwill 29.4 32.5 27.9 31.1 ----- ----- ----- ----- Operating income 10.5% 10.5% 8.9% 10.1% ===== ===== ===== =====
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995 Revenues. Revenues for the nine months ended June 30, 1996 increased by approximately $12.8 million, or 32.9%, to $51.8 million from $39.0 million in the comparable period in 1995. Monitoring and service revenues increased by approximately $13.8 million, or 42.2%, a substantial majority of which resulted from the addition of subscribers through the acquisition of portfolios of subscriber accounts and purchases of subscriber accounts from independent alarm dealers with whom the Company has exclusive purchase agreements (the "Dealer Program"). The Company's subscriber base increased by 43.4% to approximately 188,000 subscribers at the end of the third quarter of fiscal 1996 as compared to approximately 131,000 subscribers at the end of the third quarter of fiscal 1995. The sale of enhanced services and new subscribers generated by Company personnel comprised the remainder of revenue growth. Other revenues, consisting primarily of revenues generated by the Company's patrol and alarm response, installation and lock businesses, decreased by $0.9 million, or 14.6%, to $5.4 million. Such 14 16 decrease was caused primarily by a decline in installation revenues of 36.9%, or approximately $1.1 million. The decline in installation revenues (and the decline in installation expense described below) resulted from the Company's continued emphasis on growth through acquisitions and the Dealer Program, rather than through the sale of new alarm systems by Company personnel. Cost of revenues. Cost of revenues for the nine months ended June 30, 1996 increased by approximately $3.5 million, or 24.9%, to $17.3 million. Cost of revenues as a percentage of total revenues declined to 33.4% for the three quarters of fiscal 1996 from 35.6% for the comparable period in fiscal 1995. Monitoring and service expenses increased by approximately $4.5 million, or 55.2%, primarily due to increased activity at the Company's central monitoring station and field service branches due to a substantially larger subscriber base. Monitoring and service expenses as a percentage of monitoring and service revenues increased to 27.3% for the nine months ended June 30, 1996 from 25.0% during the comparable period in fiscal 1995. Such increase reflects a higher level of staffing at the Company's central monitoring station as well as a lower MRR per subscriber in the nine months ended June 30, 1996, due primarily to the acquisition of portfolios of subscriber accounts that had a lower average MRR per subscriber than the Company's average at that time. Other expenses decreased by approximately $1.0 million, or 18.3%, to approximately $4.7 million for the nine months ended June 30, 1996 from $5.7 million for the first nine months of fiscal 1995. The decrease primarily was caused by a 38.1% decrease ($0.9 million) in installation expense. Gross profit. Gross profit for the nine months ended June 30, 1996 was approximately $34.5 million, which represents an increase of approximately $9.4 million, or 37.4%, over the $25.1 million of gross profit recognized in the comparable period in fiscal 1995. Gross profit as a percentage of total revenues was 66.6% for the nine months ended June 30, 1996 compared to 64.4% for the comparable period in fiscal 1995. This increase was caused primarily by an increase in monitoring and service revenues as a percentage of total revenues to 89.5% in the nine months ended June 30, 1996 compared to 83.7% in the comparable period in fiscal 1995. Gross profit from other revenues increased slightly to approximately $0.7 million for the first nine months of fiscal 1996 from $0.6 million for the comparable period in fiscal 1995. Selling, general and administrative expenses. Selling, general and administrative expenses rose to approximately $10.1 million in the first nine months of fiscal 1996, which represents an increase of approximately $1.9 million, or 23.3%, over selling, general and administrative expenses in the comparable period in fiscal 1995. Such figure as a percentage of total revenues declined from 21.0% in the nine months ended June 30, 1995 to 19.5% in the comparable period in fiscal 1996, due primarily to the growth rate in revenues exceeding that of selling general and administrative expenses. Sales and marketing expenses declined due to the Company's continued emphasis on growth through acquisitions and the Dealer Program, rather than through sales of new alarm systems by Company personnel. The increase in general and administrative expenses was caused by increases in corporate and branch management and overhead expenses incurred to supervise a larger employee base associated with a larger subscriber base. Advertising and marketing expenses are expensed as incurred and comprised less than 1% of revenues in each of the nine month periods ended June 30, 1995 and 1996. The provision for doubtful accounts increased to approximately $1.5 million for the nine months ended June 30, 1996 from approximately $1.2 million for the comparable period in fiscal 1995. Acquisition and transition expenses. Acquisition and transition expenses for the nine months ended June 30, 1996 totaled approximately $3.0 million compared to $2.4 million for the comparable period in fiscal 1995. Such increase reflects the Company's increased acquisition and Dealer Program activity during the nine months ended June 30, 1996. Such expenses will fluctuate from quarter to quarter based primarily on the amount of the Company's acquisition activity and its ability to require sellers to bear certain of such acquisition-related expenses. Amortization of subscriber accounts and goodwill. Amortization expense during the nine months ended June 30, 1996 increased by approximately $5.2 million, or 48.4%, to $16.1 million. This increase is the 15 17 result of the addition to the Company's intangible asset reflecting the acquisition of portfolios of subscriber accounts and the purchase of subscriber accounts through the Dealer Program. Operating income. Operating income for the nine months ended June 30, 1996 was approximately $5.2 million, compared to approximately $3.5 million in the comparable period in fiscal 1995. Operating income as a percentage of total revenues was 10.1% in the first nine months of fiscal 1996, compared to 8.9% in the comparable period in fiscal 1995. The increase in such figure over the comparable period in fiscal 1995 reflects the increase in gross profit as a percentage of total revenues and the achievement of economies of scale. Interest expense, net and amortization of debt issuance costs and OID. Interest expense, net and amortization of debt issuance costs and OID increased by $6.7 million, or 70.0%, to $16.2 million in the nine months ended June 30, 1996, reflecting the Company's use of debt to finance a substantial portion of its subscriber account growth. Because the Company refinanced its cash interest-paying subordinated debt in May of 1995 with non-cash interest-paying subordinated debt (see"- Liquidity and Capital Resources"), amortization of debt issuance costs and original issue discount ("OID") increased during the nine months ended June 30, 1996 to approximately $13.2 million. Balance sheet data. At June 30, 1996, the Company's working capital deficit was $11.0 million, as compared to a working capital deficit of $9.2 million at September 30, 1995. The increase in the working capital deficit was caused primarily by increases in purchase holdbacks, deferred revenue and acquisition transition costs of $15.0 million offset by increases in cash, accounts receivable, inventories and prepaid expenses of $13.4. Subscriber accounts and intangibles, net increased to $238.9 million at June 30, 1996 from $162.2 million at September 30, 1995. This increase of $76.7 million, or 47.3%, was caused by the addition of new subscribers, net of amortization expense. Total stockholders' equity increased to approximately $30.9 million at June 30, 1996 from $6.3 million at September 30, 1995. The increase in such figure reflects the Company's public offering of 2.5 million shares of Common Stock (resulting in approximately $23.1 million of net proceeds) and the conversion of the Company's Series H Redeemable Preferred Stock to Common Stock in February 1996 (approximately $6.1 million) and the issuance of 417,885 shares of Common Stock as a portion of the purchase price payment for the Metrol Security Services acquisition (resulting in an increase to shareholder's equity of approximately $6.8 million) partially offset by approximately $11.3 million of losses in the first nine months of fiscal 1996. THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995 Revenues. Revenues for the three months ended June 30, 1996 (the "third quarter of fiscal 1996") increased by approximately $4.9 million, or 36.0%, to $18.6 million from $13.7 million in the comparable period in 1995. Monitoring and service revenues increased by approximately $5.1 million, or 43.1%, a substantial majority of which resulted from the addition of subscribers through the acquisition of portfolios of subscriber accounts and the Dealer Program. The Company's subscriber base increased by 43.4% to approximately 188,000 subscribers at the end of the third quarter of fiscal 1996 as compared to approximately 131,000 subscribers at the end of the third quarter of fiscal 1995. The sale of enhanced services and new subscribers generated by Company personnel comprised the remainder of revenue growth. Other revenues decreased by $0.2 million, or 7.6%, to $1.8 million. Such decrease was caused primarily by a decline in installation revenues of 22.9%, or approximately $0.2 million. Cost of revenues. Cost of revenues for the third quarter of fiscal 1996 increased by approximately $1.4 million, or 29.2%, to $6.0 million. Cost of revenues as a percentage of total revenues declined to 32.1% for the third quarter of fiscal 1996 from 33.8% for the comparable period in fiscal 1995. Monitoring and service expenses increased by approximately $1.6 million, or 55.3%, primarily due to increased activity at the Company's central monitoring station and field service branches. Monitoring and service expenses as a percentage of monitoring and service revenues increased to 26.5% for the third quarter of fiscal 1996 from 24.4% during the comparable period in fiscal 1995. Such increase reflects both a higher level of 16 18 staffing at the Company's central monitoring station, and the acquisition of portfolios of subscriber accounts that had a lower average MRR per subscriber than the Company's average at the time. Other expenses decreased by approximately $0.2 million, or 13.6%, to approximately $1.5 million for the third quarter in fiscal 1996 from $1.7 million for the third quarter of fiscal 1995. The decrease primarily was caused by a 29.1% decrease ($0.2 million) in installation expense. Gross profit. Gross profit for the third quarter of fiscal 1996 was approximately $12.6 million, which represents an increase of approximately $3.6 million, or 39.5%, over the $9.1 million of gross profit recognized in the comparable period in fiscal 1995. Gross profit as a percentage of total revenues was 67.9% for the third quarter of fiscal 1996 compared to 66.2% for the comparable period in fiscal 1995. This increase was caused primarily by an increase in monitoring and service revenues as a percentage of total revenues to 90.5% in the third quarter of fiscal 1996 compared to 86.1% in the comparable period in 1995. Gross profit from other revenues increased to approximately $0.3 million for the third quarter of fiscal 1996 from $0.2 million for the comparable period in fiscal 1995. Selling, general and administrative expenses. Selling, general and administrative expenses rose to approximately $3.5 million in the third quarter of fiscal 1996, which represents an increase of approximately $0.8 million, or 30.3%, over selling, general and administrative expenses in the comparable period in fiscal 1995. Such figure as a percentage of total revenues declined from 19.8% in the third quarter of fiscal 1995 to 18.9% in the third quarter of fiscal 1996. The increase in selling, general and administrative expenses was caused by increases in corporate and branch management and overhead expenses incurred to supervise a larger employee base associated with a larger subscriber base. Advertising and marketing expenses comprised less than 1% of revenues in each of the quarters ending June 30, 1995 and 1996. The provision for doubtful accounts increased to approximately $0.5 million for the third quarter of fiscal 1996 from $0.3 million for the comparable period in fiscal 1995. Acquisition and transition expenses. Acquisition and transition expenses for the third quarter of fiscal 1996 totaled approximately $1.1 million compared to $0.7 million for the comparable period in fiscal 1995. Such increase was caused by significant acquisition activity in the third quarter of fiscal 1996, as well as the assimilation of several large portfolios of subscriber accounts acquired at the end of the second quarter of fiscal 1996. Amortization of subscriber accounts and goodwill. Amortization expense for the third quarter of fiscal 1996 increased by approximately $2.0 million, or 50.4% to $6.0 million. This increase is the result of the addition of subscriber accounts through the acquisition of portfolios of subscriber accounts and the Dealer Program. Operating income. Operating income for the third quarter of fiscal 1996 was approximately $2.0 million, compared to approximately $1.4 million in the comparable period in fiscal 1995. Operating income as a percentage of total revenues was 10.5% in the third quarter of fiscal 1996, compared to 10.5% in the comparable period in fiscal 1995. Increases in acquisition, transition and amortization expenses as a percentage of total revenues reflect the Company's increased acquisition and Dealer Program activity. Interest expense, net, and amortization of debt issuance costs and OID. These amounts increased by $1.9 million, or 48.9%, to $5.7 million in the third quarter of fiscal 1996, reflecting the Company's use of debt to finance a substantial portion of its subscriber account growth. See "Liquidity and Capital Resources" below. 17 19 LIQUIDITY AND CAPITAL RESOURCES General. Since September 1991, the Company has financed its operations and growth from a combination of long-term debt, including the proceeds of the $50.0 million principal amount of Senior Subordinated Notes issued in November 1993 and the $166.0 million principal amount ($105.2 million net proceeds) of Discount Notes issued in May 1995, short-term borrowings under its Revolving Credit Facility, sales of stock and, to a lesser extent, cash flows from operations. In February 1996, the Company completed a public offering of 4.0 million shares of Common Stock (2.5 million shares of which were sold by the Company and 1.5 million shares of which were sold by two selling stockholders). Net proceeds from such offering were approximately $23.1 million, all of which were used to reduce borrowings under the Revolving Credit Facility. The Company believes that, based on the amount of net cash provided by operating activities in fiscal 1994 and 1995 and the nine months ended June 30, 1996, cash flows from operations will be sufficient to fund the Company's interest payments on its debt and capital expenditures, which are the Company's principal uses of cash other than the purchases of subscriber accounts from the Company's dealers and acquisitions of portfolios of subscriber accounts. On a long-term basis, the Company has several material commitments. Borrowings under the Revolving Credit Facility were approximately $80.9 million at June 30, 1996 and could be as high as $100.0 million through January 3, 2000, the current maturity date of the Revolving Credit Facility. Although the Company believes that it will be able to obtain further extensions of the maturity date of the Revolving Credit Facility from time to time, or will be able to refinance the Revolving Credit Facility prior to its maturity date, there can be no assurance that the Company will be able to do so. The Discount Notes require the Company to begin to make interest payments on such obligations on December 31, 1998. Based on an interest rate of 13 5/8%, such payment will be approximately $11.3 million semiannually, or $22.6 million on an annual basis. As a result, a substantial portion of the Company's cash flows from operations will be required to make interest payments on the Discount Notes, and there can be no assurance that the Company's cash flow from operations will be sufficient to meet such obligation, or that there will be sufficient funds available to the Company after such interest payments to meet other debt, capital expenditure and operational obligations. The $166.0 million principal amount of Discount Notes matures on June 30, 2005. There can be no assurance that the Company will have the cash necessary to repay the Discount Notes at maturity or will be able to refinance such obligations. The Company maintains a $2.0 million letter of credit sub-facility under its Revolving Credit Facility, and has extended an approximately $1.2 million letter of credit to a seller, scheduled payments under which are approximately $0.4 million during each of fiscal 1997, 1998 and 1999. The Company intends to use the remaining cash flows from operations, together with borrowings under the Revolving Credit Facility, to finance the addition of subscriber accounts. Although the Company anticipates that it will continue to acquire portfolios of subscriber accounts, the Company cannot estimate the number, size or timing of such acquisitions. Depending on such factors, additional funds beyond those currently available to the Company under the Revolving Credit Agreement may be required to continue the acquisition program and to finance the Dealer Program. In this regard, in August 1996, the Company filed a shelf registration statement with the Securities and Exchange Commission to register for sale to the public up to $150 million aggregate principal amount of senior and subordinated debt securities. There can be no assurance that any such public offering will be completed or that the Company will be able to obtain such financing on acceptable terms or at all. As noted above, the Company has had, and expects to continue to have, a working capital deficit. There are two principal categories of current liabilities that cause the Company to have a working capital deficit: (i) "purchase holdbacks," which represent the portion of the aggregate acquisition cost of subscriber accounts retained by the Company to offset lost MRR arising from the cancellation of acquired accounts; and (ii) "deferred revenue," which represents billings and cash collections received by the Company from its subscriber base in advance of performance of services. For the nine months ended June 30, 1996, the Company's net cash provided by operating activities was $16.6 million, compared to $2.6 million for the comparable period in fiscal 1995. The increase in net cash provided by operations of approximately $14.0 million was a result of higher earnings before interest, 18 20 taxes, depreciation and amortization and lower cash interest payments. The decline in cash interest payments was due to the refinancing of cash interest paying debt with the Discount Notes as described above. For the first nine months of fiscal 1996, the Company's net cash used in investing activities was $80.8 million, compared to $55.0 million during the first nine months of fiscal 1995, primarily as a result of the acquisition of portfolios of subscriber accounts. During the first nine months of fiscal 1996, the Company's net cash provided by financing activities was $71.4 million, compared to $52.1 million in the comparable period in fiscal 1995. Financing activities reflect the Company's borrowings under its Revolving Credit Facility and proceeds from the Company's secondary stock offering in February 1996. Restrictions on Dividends. POI has never paid any cash dividends on the Common Stock and does not intend to pay cash dividends in the foreseeable future. Both the Revolving Credit Facility and the Indenture governing the Discount Notes restrict POI's ability to declare or pay any dividend on, or make any other distribution in respect of, POI's capital stock. Capital Expenditures. During the nine months ended June 30, 1996, the Company made approximately $4.7 million of capital expenditures, of which $3.0 million were made for the routine replacement and required upgrading and expansion of vehicles, computers, phone switches and other capital items, and the remainder were made for the upgrading of its monitoring and administrative hardware and software. The Company believes the installation of the new computer software will create efficiencies Company-wide, and particularly in the customer service, data entry and field service functions. The implementation of the new software is scheduled to be completed in fiscal 1997. In addition, the Company anticipates making capital expenditures totaling $500,000 in fiscal 1997 and 1998 to expand the capacity of the central monitoring station to approximately 500,000 subscribers. The Company believes cash flows from operations, together with borrowing under the Revolving Credit Facility, will be sufficient to fund the Company's capital expenditures in the remainder of fiscal 1996 and fiscal 1997. 19 21 PART II OTHER INFORMATION ITEM 5. In February 1996, POI entered into one-year consulting agreement with Dr. Ben Enis pursuant to which Dr. Enis advises the Company with respect to advertising and marketing matters and is compensated for such services at the rate of $7,500 per month. ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K. (a) Exhibits
Exhibit Number Exhibit Description - ------ ----------------------------------------------------------------------------------------------------------------------- 2.1 Agreement to Purchase and Sell Stock dated as of May 23, 1996, among Metrol Security Services, Inc. ("Metrol"), the persons named therein as the "Shareholders" (the "Shareholders"), Protection One Alarm Monitoring, Inc. ("Monitoring") and Protection One, Inc. ("POI"). (1) 2.2 Amendment No. 1 to Agreement dated as of June 28, 1996, among Metrol, the Shareholders, Monitoring, and POI. (2) 2.3 Escrow Agreement dated May 31, 1996, among Metrol, the Shareholders, Monitoring, POI and First National Bank of Denver, N.A. as the Escrow Agent. (3) 10.1 Registration Rights Agreement dated as of June 28, 1996, among POI and the Shareholders. (4) 10.2 Amended and Restated Credit Agreement dated as of June 7, 1996, among Monitoring, Heller Financial, Inc. ("Heller") and the other Lenders named therein and Heller as Agent for such Lenders. (5) 10.3 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and James M. Mackenzie, Jr. (5) 10.4 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and John W. Hesse. (5) 10.5 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and John E. Mack, III. (5) 10.6 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and Thomas K. Rankin. (5) 10.7 Consulting Agreement dated as of February 19, 1996 between POI and Dr. Ben Enis. (5) 27.1 Financial Data Schedule for Protection One, Inc. (5) 27.2 Financial Data Schedule for Protection One Alarm Monitoring, Inc. (5) (1) Incorporated by reference to Exhibit 2.1 to Registration Statement on Form S-3 (Commission File No. 333-5849) filed by POI with the Securities and Exchange Commission (the "Commission") on June 12, 1996 (the "June 1996 Form S-3"). (2) Incorporated by reference to Exhibit 2.2 to the June 1996 Form S-3. (3) Incorporated by reference to Exhibit 2.3 to the Current Report on Form 8-K filed by POI and Monitoring with the Commission reporting an event dated June 7, 1996 (the "June 1996 Form 8-K"). (4) Incorporated by reference to Exhibit 99.1 to the June 1996 Form 8-K. (5) Previously filed.
20 22 ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K (CONT.). (b) Reports on Form 8-K. The following reports on Form 8-K have been filed during the quarter for which this report is filed: 1. Current Report on Form 8-K dated May 23, 1996, filed by POI and Monitoring with the Commission on May 24, 1996, and reporting in response to Item 2 the entering into by POI and Monitoring of the agreement to purchase all of the capital stock of Metrol filed as an exhibit to this report. 2. Current Report on Form 8-K dated June 7, 1996, filed by POI and Monitoring with the Commission on July 2, 1996, as amended, reporting in response to Item 2 Monitoring's acquisition of all of the outstanding capital stock of Metrol and in response to Item 5 the entering into by POI and Monitoring of the Amended and Restated Credit Agreement filed as an exhibit to this report. Such report as amended also included the consolidated financial statements of Metrol and its subsidiaries and pro forma financial information with respect to the Metrol acquisition. 21 23 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. September 3, 1996 PROTECTION ONE, INC. PROTECTION ONE ALARM MONITORING, INC. By: /s/ John W. Hesse -------------------------- John W. Hesse Executive Vice President and Chief Financial Officer
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