10-Q/A 1 a2028416z10-qa.txt 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 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 of 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 May 1, 2000, Protection One, Inc. had outstanding 127,029,361 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. EXPLANATORY NOTE The undersigned hereby amend their quarterly report on Form 10-Q for the quarterly period ended March 31, 2000 (filed on May 5, 2000), as follows: (a) Note 5 to the financial statements included in Item 1 of Part I is amended to change the amount of the debt reduction in the first quarter to $407,689, as correctly reflected in the balance sheet as of March 31,2000. (b) The discussion of acquisition expenses in the section including the comparison of operating results for the three months ended March 31, 2000 to March 31, 1999 is amended to change the number of customer accounts acquired in the first quarter from 4,239 customers to 13,729 customers. The correct number of acquired accounts was used for purposes of all attrition calculations. (c) Part II is amended to delete the word "update" when used in the headings appearing therein. PART I ITEM 1. FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 DEBT: During the first quarter of 2000 the Company's outstanding debt decreased by $407,689. The decrease resulted primarily from the $183,025 reduction of the Senior Credit Facility and the extinguishment of debt securities received in the sale of the European operations and related party transactions, as discussed in Note 3. In March 2000, the Company used available cash to pay down an additional $20,000 of the Senior Credit Facility and also purchased an additional $6,000 face value of the Senior Subordinated Discount Notes. The total first quarter extraordinary gain from this extinguishment of debt and the extinguishment of the debt securities received in the transactions with Westar Capital is $31,926, net of tax of $17,191. As of March 31, 2000, and December 31, 1999, total borrowings under the Senior Credit Facility were $37,000 and $225,000, respectively. The remaining availability under this facility as of March 31, 2000, and December 31, 1999 was $78,000 and $25,000, respectively. The Company's ability to borrow under the facility is subject to compliance with certain financial covenants, including a leverage ratio of 5.75 to 1.0 and an interest coverage ratio of 2.10 to 1.0. At March 31, 2000, these ratios were approximately 4.4 to 1.0 and 2.7 to 1.0, respectively. The indentures governing the Company's outstanding senior and subordinated notes contain similar covenants with different calculations relating to the Company's ability to incur indebtedness. The Company is in compliance with all covenants contained in these indentures ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 We separate our business into three reportable segments: North America, Multifamily, and through February 29, 2000, Europe. North America provides security alarm monitoring services, which include sales, installation and related servicing of security alarm systems in the United States and Canada. Multifamily provides security alarm services to apartments, condominiums and other multi-family dwellings. The Europe segment provided security alarm services in Europe and was sold on February 29, 2000. NORTH AMERICA SEGMENT We present the table below for comparison of the North America operating results for the periods presented. Next to each period's results of operations, we provide the relevant percentage of total revenues so that you can make comparisons about the relative change in revenues and expenses.
THREE MONTHS ENDED MARCH 31, ---------------------------------------------------- 2000 1999 ------------------------ -------------------------- Revenues: (DOLLARS IN THOUSANDS) Monitoring and related services.......... $93,167 96.4% $95,247 96.2% Installation and rental.................. 3,511 3.6 3,770 3.8 ------------ ---------- ------------- ----------- Total revenues........................... 96,678 100.0 99,017 100.0 Cost of revenues: Monitoring and related services.......... 28,125 29.1 23,833 24.1 Installation and rental.................. 3,224 3.3 3,561 3.6 ------------ ---------- ------------- ----------- Total cost of revenues................... 31,349 32.4 27,394 27.7 ------------ ---------- ------------- ----------- Gross profit............................. 65,329 67.6 71,623 72.3 Selling, general and administrative expenses................................. 26,261 27.2 21,889 22.1 Acquisition and transition expense......... 4,145 4.3 4,719 4.8 Amortization of intangibles and depreciation expense..................... 50,843 52.6 35,223 35.5 Other charges.............................. 3,050 3.1 2,000 2.0 ------------ ---------- ------------- ----------- Operating income (loss).................... $ (18,970) (19.6)% $7,792 7.9% ============ ========== ============= ===========
2000 COMPARED TO 1999. We had a net decrease of 26,246 customers in the first quarter of 2000 as compared to a net increase of 32,367 customers in the first quarter of 1999. The average customer base for the first quarters of 2000 and 1999 were 1,191,519 and 1,212,231, respectively, or a decrease of 20,712 customers. The decrease in customers is primarily attributable to the significant decrease in the number of accounts being purchased from dealers which has not yet been offset by growth from our other customer acquisition strategies.
THREE MONTHS ENDED MARCH 31, ----------------------------- 2000 1999 -------------- ------------- Beginning Balance, January 1,....................................... 1,204,642 1,196,047 Additions, net of holdback put backs................................ 9,280 66,269 Customer losses, net of holdback put backs.......................... (35,526) (33,902) -------------- ------------- Ending Balance, March 31,........................................... 1,178,396 1,228,414 ============== ============= Annualized quarterly attrition...................................... 11.9% 11.2% ============== =============
MONITORING AND RELATED SERVICE REVENUES decreased approximately $2.3 million in the first quarter of 2000 as compared to the first quarter of 1999 due to the smaller average customer base. The average monthly revenue per account based on the average number of customers for the respective period was $26.06 for 2000 and $26.19 for 1999. Although we have had some price increases during the past year, an increase in customer credits issued in the first quarter of 2000 more than offset the higher monthly rates. We issued additional customer credits to maintain customer goodwill because of billing problems encountered when we implemented a new billing and collections system in our Beaverton monitoring station. We believe these problems have been corrected and therefore expect the level of credits to decrease in the second quarter of 2000. INSTALLATION AND RENTAL REVENUES consist primarily of revenues generated from our internal installations of new alarm systems. These revenues decreased by approximately $0.26 million or 6.9% from the first quarter of 1999. COST OF MONITORING AND RELATED SERVICES REVENUES for the first quarter of 2000 increased by $4.3 million, or 18.0%, to $28.1 million from $23.8 million for the first quarter of 1999. Compensation costs for the monitoring stations increased by approximately $2.7 million due primarily to an increase in personnel from approximately 1,090 to 1,300 employees. The increase in employees is a direct result of our efforts to improve the level of customer service. In addition, telecom costs increased $0.4 million, vehicle costs increased $0.6 million and parts and materials costs increased $0.8 million. COST OF INSTALLATION AND RENTAL REVENUES was $0.34 million or 9.5% less than in the first quarter of 1999. These costs as a percentage of installation and rental revenues were approximately 92% for the first quarter of 2000 as compared to approximately 94% for the first quarter of 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $4.4 million from $21.9 million in the first quarter of 1999 to $26.3 million in the first quarter of 2000. The increase is generally comprised of an increase in bad debt and collection expenses of approximately $2.1 million, and an increase of $1.6 million in subcontract expense primarily for outside information technology support. We attribute these increases to problems encountered in connection with the implementation of our new billing and collection software which started in November 1999. We believe the significant problems have been resolved and that these costs will decrease in the second quarter. ACQUISITION EXPENSES generally decreased due to the reduced level of account acquisitions in the first quarter of 2000 as compared to 1999. In the first quarter of 1999 we acquired nearly 27,000 new accounts, over 90% of which were through the dealer program. In the first quarter of 2000 we acquired 13,729 accounts, approximately 50% of which were through the dealer program. The most significant decrease was third party monitoring expense which dropped from $1.9 million to $0.8 million. This decrease was a direct result of our concentrated effort in late 1999 to move such accounts to our own monitoring stations. The overall decrease was partially offset by increases in costs related to the old dealer program of $1.9 million. AMORTIZATION OF INTANGIBLES AND DEPRECIATION EXPENSE for the first quarter of 2000 increased by $15.6 million, or 44.3%, to $50.8 million from $35.2 million in the first quarter of 1999. As discussed in our 1999 Annual Report on Form 10-K, we changed our amortization method from a 10-year straight line method to a 10-year declining balance method as of the third quarter in 1999. Therefore, the amortization expense for the first quarter of 1999 was calculated using a straight line method whereas the amortization expense for the first quarter of 2000 is calculated using the declining balance method. Subscriber amortization for these periods increased from $26.7 million for the first quarter of 1999 to $32.4 million for the first quarter of 2000. As discussed above, we also changed our estimate of the useful life of goodwill from 40 years to 20 years. As a result, in amortization expense increased $5.0 million from $6.0 million in the first quarter of 1999 to $11.0 million for the first quarter of 2000. Additionally, in the first quarter of 2000 depreciation expense increased $4.8 million from $2.6 million for the first quarter of 1999 to $7.4 million in the first quarter of 2000. This increase is due to accelerated depreciation of the general ledger and accounts receivable systems installed in 1999. We have decided to move to another general ledger and accounts receivable system in 2000 which we believe is better suited to our needs. Depreciation charges for the old system have been accelerated so that no remaining costs will be left unamortized when we move to the new systems later in 2000. OTHER CHARGES for the first quarter of 1999 consisted of officer's severance costs of $2.0 million. For the first quarter of 2000, these charges consist of $1.5 million for officer's severance and $1.55 million for expenses relating to the sale of the European operations. INTEREST EXPENSE, NET for the first quarter was $18.4 million and $17.1 million for 2000 and 1999, respectively. During the first quarter of 1999, borrowings under the Senior Credit Facility rose from $42.4 million to $124.0 million with interest rates as low as 6.2%. During the first quarter of 2000, borrowings under the Senior Credit Facility decreased from $225.0 million to $37.0 million at interest rates ranging from 7.8% to 8.4%. In the first quarter of 1999 we accrued interest charges on the $350 million Senior Subordinated Notes at 8.125%, however, since we have not completed the required exchange offer, the interest rate relating to this debt increased to 8.625% in June 1999. Total debt decreased during the first quarter of 2000 from $1,048.1 million to $702.4 million. MULTIFAMILY SEGMENT We present the table below for comparison of the Multifamily operating results for the periods presented. Next to each period's results of operations, we provide the relevant percentage of total revenues so that you can make comparisons about the relative change in revenues and expenses.
THREE MONTHS ENDED MARCH 31, --------------------------------------------------- 2000 1999 ------------------------- ----------------------- (DOLLARS IN THOUSANDS) Revenues: Monitoring and related services............................ $8,688 85.7% $8,580 85.8% Installation and rental.................................... 1,453 14.3 1,416 14.2 ------------ ----------- ---------- ----------- Total revenues............................................. 10,141 100.0 9,996 100.0 Cost of revenues: Monitoring and related services............................ 1,935 19.1 1,676 16.8 Installation and rental.................................... 1,382 13.6 1,042 10.4 ------------ ----------- ---------- ----------- Total cost of revenues..................................... 3,317 32.7 2,718 27.2 ------------ ----------- ---------- ----------- Gross profit............................................... 6,824 67.3 7,278 72.8 Selling, general and administrative expenses................. 2,702 26.7 2,680 26.8 Amortization of intangibles and depreciation expense......... 3,834 37.8 2,297 23.0 ------------ ----------- ---------- ----------- Operating income............................................. $288 2.8% $2,301 23.0% ============ =========== ========== ===========
2000 COMPARED TO 1999. We increased our customer base a total of 6,719 customers, or 2.3%, from March 31, 1999 to March 31, 2000. The average customer base was 295,982 for the first quarter of 2000 compared to 288,119 for the first quarter of 1999. The change in Multifamily's customer base for the period is shown below.
THREE MONTHS ENDED MARCH 31, ------------------------ 2000 1999 ----------- ----------- Beginning Balance, January 1,....................................... 294,960 285,954 Additions, net of holdback put backs................................ 7,868 7,849 Customer losses, net of holdback put backs.......................... (5,825) (3,519) =========== =========== Ending Balance ..................................................... 297,003 290,284 =========== =========== Annualized quarterly attrition...................................... 7.9% 4.9% =========== ===========
MONITORING AND RELATED SERVICES REVENUES for the first quarter increased by $0.1 million, or 1.2%, to $8.7 million from $8.6 million for the first quarter of 1999. COST OF MONITORING AND RELATED REVENUES for the first quarter of 2000 increased by $0.2 million, or 15.4% to $1.9 million from $1.7 million for the first quarter of 1999. Monitoring and related service expenses as a percentage of monitoring and related service revenues increased to 22.2% from 19.5% during 1999. The percentage increase is primarily related to an increase in salaries as a result of the current competitive labor market. COST OF INSTALLATION AND RENTAL REVENUES increased by $0.4 million or 32.6% to $1.4 million in the first quarter of 2000 from $1.0 million in the first quarter of 1999. Installation and rental cost of revenues increased primarily due to the significant number of installations in 1999 which used less sophisticated monitoring equipment than Multifamily's standard contracts, combined with the increased use in 2000 of wireless systems which is expected to reduce future service costs. AMORTIZATION OF INTANGIBLES AND DEPRECIATION EXPENSE for the first quarter of 2000 increased by $1.9 million, or 102.5% to $3.8 million in 1999 reflecting a change in estimate of goodwill life to 20 years which will increase annual goodwill amortization by approximately $5 million. EUROPE SEGMENT The results of operations for the first quarter of 2000 reflect only those results through February 29, 2000. The operating results for the first quarter of 1999 reflect activity for the three months ended March 31, 1999.
TWO MONTHS ENDED THREE MONTHS ENDED FEBRUARY 29, MARCH 31, -------------------------- ------------------------- 2000 1999 -------------------------- ------------------------- (DOLLARS IN THOUSANDS) Revenues: Monitoring and related services............................ $14,316 51.3% $23,417 59.2% Installation and rental.................................... 13,588 48.7 16,117 40.8 ------------- ----------- ------------ ---------- Total revenues............................................. 27,904 100.0 39,534 100.0 Cost of revenues: Monitoring and related services............................ 3,702 13.3 4,187 10.6 Installation and rental.................................... 5,504 19.7 7,181 18.2 ------------- ----------- ------------ ---------- Total cost of revenues..................................... 9,206 33.0 11,368 28.8 ------------- ----------- ------------ ---------- Gross profit............................................... 18,698 67.0 28,166 71.2 Selling, general and administrative expenses................. 12,081 43.3 15,831 40.0 Acquisition and transition expense........................... 217 0.8 148 0.4 Amortization of intangibles and depreciation expense......... 5,420 19.4 5,486 13.9 ------------- ----------- ------------ ---------- Operating income............................................. $980 3.5% $6,701 16.9% ============= =========== ============ ==========
2000 Compared to 1999. The change in our customer base from January 1, 2000 through February 29, 2000 is shown below:
TWO MONTHS ENDED FEBRUARY 29, ------------ 2000 ----------- Beginning Balance, January 1,....................................... 123,599 Additions, net of holdback put backs................................ 5,718 Customer losses, net of holdback put backs.......................... (2,285) ----------- Ending Balance ..................................................... 127,032 =========== Annualized attrition for two months ended February 29, 2000........ 10.9% ===========
Revenues of approximately $4.5 million in the first two months of 2000 and $9.5 million in the first quarter of 1999 were recognized as revenue as a result of ongoing reductions in the liability under recourse obligations. In relation to this revenue, we also recognized interest expense of approximately $1.0 million and $2.7 million and depreciation expense of approximately $0.8 million and $1.6 million for the respective periods. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Information relating to legal proceedings is set forth in Note 6 of the Notes to Consolidated Financial Statements included in Part I of this report, which information is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The following exhibit is filed with this Current Report on Form 10-Q or incorporated by reference. EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ ------------------- 27.1 Financial Data Schedule. --------- (b) During the quarter ended March 31, 2000, the Company filed five Reports on Form 8-K. A Current Report on Form 8-K dated January 18, 2000, reported the receipt of a waiver on Monitoring's Senior Credit Facility until January 31, 2000. A Current Report on Form 8-K dated January 26, 2000, reported Western Resources reached agreement with its banks to eliminate the cross-default provisions relating to the Company. A Current Report on Form 8-K dated February 1, 2000, reported the receipt of a waiver on Monitoring's Senior Credit Facility until February 29, 2000. A current report on Form 8-K dated February 29, 2000, reported the sale of the Company's European operations and certain investments to Westar Capital. A Current Report on Form 8-K dated March 29, 2000, reported fourth quarter and 1999 year-end earnings. 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. Date: October 26, 2000 PROTECTION ONE, INC. ---------------------- PROTECTION ONE ALARM MONITORING, INC. By: /s/ Anthony D. Somma ---------------------------- Anthony D. Somma Chief Financial Officer