-----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, Wrrezlp9YY5tPUqZClo+zpZ2YBProRgXyBwXZNUOMXEYwOn2v3auVCmHvEzYk6Oh Q7mLVKQLkTOeN2fTVlQ7JA== 0000950148-96-001883.txt : 19960828 0000950148-96-001883.hdr.sgml : 19960828 ACCESSION NUMBER: 0000950148-96-001883 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960607 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960827 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24780 FILM NUMBER: 96621574 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-94684 FILM NUMBER: 96621575 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 8-K/A 1 AMENDMENT #2 TO FORM 8-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A (AMENDMENT NO. 2) CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): June 7, 1996 Commission File Number: 0-24780 Commission File Number: 33-73002-01 PROTECTION ONE, INC. PROTECTION ONE ALARM MONITORING, INC. 6011 Bristol Parkway 6011 Bristol Parkway Culver City, California 90230 Culver City, California 90230 (Exact name of registrant as (Exact name of registrant as specified in its charter) specified in its charter) Delaware Delaware (State or other jurisdiction (State or other jurisdiction of incorporation or organization) of incorporation or organization) 93-1063818 93-0164579 (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) 338-6930 (310) 338-6930 (Registrant's telephone number, (Registrant's telephone number, including area code) including area code) ================================================================================ 2 The information provided in this Current Report on Form 8-K/A supplements the information provided in the Current Report on Form 8-K of Protection One, Inc. and Protection One Alarm Monitoring, Inc. (together the "Company") dated June 7, 1996 as filed with the Securities and Exchange Commission (the "Commission") on July 2, 1996, as amended by a Current Report on Form 8-K/A also filed by the Company with the Commission on that date. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. The following financial statements, pro forma financial information and exhibits are filed as part of this Report: (a) Financial Statements of Business Acquired The consolidated financial statements of Metrol Security Services, Inc. and its subsidiaries listed on page F-1 hereof. (b) Pro Forma Financial Information The pro forma financial statements of Protection One, Inc. and its subsidiaries listed on page PFF-1 hereof. (c) Exhibits 5.1 Consent of KPMG Peat Marwick dated August 1, 1996. (Registration Statement on Form S-3 (Commission File No. 333-09401)). 5.2 Consent of KPMG Peat Marwick dated August 1, 1996 (Registration Statement on Form S-3 (Commission File No. 333-5849)). 5.3 Consent of KPMG Peat Marwick dated August 1, 1996 (Registration Statement on Form S-8 (Commission File No. 333-2828)). 5.4 Consent of KPMG Peat Marwick dated August 1, 1996 (Registration Statement on Form S-8 (Commission File No. 333-2892)). 5.5 Consent of KPMG Peat Marwick dated August 1, 1996 (Registration Statement on Form S-3 (Commission File No. 33-99220)). 5.6 Consent of KPMG Peat Marwick dated August 1, 1996 (Registration Statement on Form S-8 (Commission File No. 33-97542)). 5.7 Consent of KPMG Peat Marwick dated August 1, 1996 (Registration Statement on Form S-8 (Commission File No. 33-95702)). 5.8 Consent of KPMG Peat Marwick dated August 1, 1996 (Post-Effective Amendment No. 1 on Form S-3 to Registration Statement on Form S-1 (Commission File No. 33-83494)). 2 3 INDEX TO FINANCIAL STATEMENTS METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Page No. -------- Consolidated Balance Sheet as of March 31, 1996 (unaudited) F-2 Consolidated Statement of Operations for the three months F-3 ended March 31, 1996 (unaudited) Consolidated Statement of Cash Flows for the three months F-4 ended March 31, 1996 (unaudited) Independent Auditors' Report dated March 29, 1996 F-5 Consolidated Balance Sheets as of December 31, 1995 and 1994 F-6 Consolidated Statements of Operations for the years ended F-7 December 31, 1995 and 1994 Consolidated Statements of Stockholders' Deficiency for F-8 the years ended December 31, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended F-9 December 31, 1995 and 1994 Notes to Consolidated Financial Statements F-11 Independent Auditors' Report dated February 10, 1995 F-22 Consolidated and Combined Balance Sheets as of F-23 December 31, 1994 and 1993 Consolidated and Combined Statements of Operations for the F-24 years ended December 31, 1994 and 1993 Consolidated and Combined Statements of Stockholders' Deficiency F-25 for the years ended December 31, 1994 and 1993 Consolidated and Combined Statements of Cash Flows for the F-26 years ended December 31, 1994 and 1993 Notes to Consolidated and Combined Financial Statements F-28 F-1 4 METROL SECURITY SERVICES, INC. CONSOLIDATED BALANCE SHEET MARCH 31, 1996 ASSETS (UNAUDITED) Current assets Cash & cash equivalents $ 315,321 Short-term investments 52,500 Accounts receivable, net of allowance for doubtful accounts of $364,000 2,232,871 Advances and other receivables 192,817 Inventories 761,131 Prepaids & deposits 259,999 ----------- Total current assets 3,814,639 Property & equipment 1,945,805 Intangible assets 11,191,533 ----------- Total assets $16,951,977 =========== LIABILITIES & EQUITY Current liabilities Accounts payable $ 676,859 Dividends payable 112,500 Accrued interest 165,690 Accrued liabilities 353,021 Deferred revenues 1,843,798 Current portion capital leases 107,853 Current portion notes payable 973,203 ----------- Total current liabilities 4,232,924 Capital leases 7,461 Notes payable 14,344,377 Deferred tax liability 1,124,746 ----------- Total liabilities 19,709,508 ----------- Stockholders' equity Common stock 2,876 Preferred stock 500 Add'l paid in capital 4,821,100 Retained earnings (deficit) (7,582,007) ----------- Total equity (deficit) (2,757,531) ----------- Total liabilities & equity $16,951,977 =========== F-2 5 METROL SECURITY SERVICES, INC. CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED) Revenues: Monitoring and service $1,865,072 Installation 805,361 Guard and patrol 1,075,896 ---------- Total revenues 3,746,329 ---------- Cost of revenues: Monitoring and service 679,487 Installation 555,089 Guard and patrol 876,569 ---------- Total costs of revenues 2,111,145 ---------- Gross margin 1,635,184 ---------- Selling and marketing expenses 283,908 General and administrative expenses 574,746 Other (income) expense, net (17,453) Depreciation and amortization 718,620 ---------- Earnings from operations 75,363 ---------- Interest expense, net 363,114 ---------- Net loss before income tax benefit (287,751) Deferred income tax benefit 66,150 ---------- Net loss $ (221,601) ==========
F-3 6 METROL SECURITY SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED) Cash flow from operating activities: Net loss $(221,601) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 718,620 Provision for uncollectible accounts 49,598 Gain on sale of assets (242) Changes in assets and liabilities: (Increase) decrease in accounts receivable 482,482 (Increase) decrease in employee advances (24,460) (Increase) decrease in inventories (69,043) (Increase) decrease in prepaids and deposits 58,058 Increase (decrease) in accounts payable (275,136) Increase (decrease) in accrued liabilities (132,798) Increase (decrease) in deferred revenues 83,877 Increase (decrease) in deferred tax liabilities (66,150) --------- Net cash provided by operating activities 603,205 --------- Cash flow from investing activities: Acquisition assets acquired (8,596) Proceeds from sale of assets 995 Purchase of equipment (115,935) --------- Net cash used in investing activities (123,536) --------- Cash flow from financing activities: Payments on notes payable (38,419) Payments on capital leases (25,269) Additional debt acquired with acquisition 8,499 Dividends paid (112,500) --------- Net cash used in financing activities (167,689) --------- Net increase in cash and equivalents 311,980 Cash and equivalents, beginning of year 3,341 --------- Cash and equivalents, end of period $ 315,321 =========
F-4 7 INDEPENDENT AUDITORS' REPORT The Board of Directors Metrol Security Services, Inc.: We have audited the accompanying consolidated balance sheets of Metrol Security Services, Inc. and subsidiaries (Company) as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Metrol Security Services, Inc. and subsidiaries as of December 31, 1995 and 1994 and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP March 29, 1996 F-5 8 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1995 and 1994
ASSETS 1995 1994 ------ ------------ ------------ Current assets (note 5): Cash and cash equivalents (note 6) $ 3,341 613,493 Short-term investments (note 6) 52,500 52,500 Trade accounts receivable, net of allowance for uncollectible accounts of $330,000 in 1995 and $108,000 in 1994 2,764,951 1,192,890 Employee advances and other receivables (note 13) 168,357 12,003 Inventories 692,088 416,232 Prepaid expenses and deposits 318,057 234,021 ------------ ------------ Total current assets 3,999,294 2,521,139 Property and equipment, net of accumulated depreciation and amortization (notes 2 and 5) 2,016,013 2,087,325 Intangible assets, net of accumulated amortization (note 3) 11,716,167 2,583,256 ------------ ------------ Total assets $ 17,731,474 7,191,720 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY ---------------------------------------- Current liabilities: Trade accounts payable $ 951,995 415,957 Dividends payable 112,500 24,456 Accrued interest 204,938 34,658 Accrued liabilities 446,571 397,916 Deferred revenues 1,759,921 980,257 Current portion of capital lease obligations (note 4) 107,853 109,294 Current portion of notes payable and notes payable to affiliates (notes 5 and 6) 973,203 651,393 ------------ ------------ Total current liabilities 4,556,981 2,613,931 Capital lease obligations, excluding current portion (note 4) 32,730 140,583 Notes payable, excluding current portion (notes 5 and 6) 14,374,297 5,754,336 Deferred tax liability 1,190,896 -- ------------ ------------ Total liabilities 20,154,904 8,508,850 ------------ ------------ Commitments and subsequent events (notes 4, 5, 9, 11, 12 and 13) Stockholders' deficiency (note 8): Common stock - 2,000,000 shares authorized, 287,634 shares issued and outstanding 2,876 2,876 Preferred stock - 100,000 shares authorized, 50,000 shares issued and outstanding 500 500 Additional paid-in capital 4,821,100 4,821,100 Accumulated deficit (7,247,906) (6,141,606) ------------ ------------ Net stockholders' deficiency (2,423,430) (1,317,130) ------------ ------------ Total liabilities and stockholders' deficiency $ 17,731,474 7,191,720 ============ ============
See accompanying notes to consolidated financial statements. F-6 9 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1995 and 1994
1995 1994 ------------ ------------ Revenue: Monitoring and service $ 6,995,051 5,046,496 Installation 3,756,653 2,612,661 Guard and patrol 4,935,724 2,961,481 ------------ ------------ 15,687,428 10,620,638 ------------ ------------ Cost of revenue: Monitoring and service 2,215,126 1,597,758 Installation 2,631,244 1,970,533 Guard and patrol 4,287,567 2,408,028 ------------ ------------ 9,133,937 5,976,319 ------------ ------------ Gross margin 6,553,491 4,644,319 ------------ ------------ Selling and marketing expenses 1,143,711 773,848 General and administrative expenses 2,371,780 1,615,576 Professional fees 218,567 208,239 Other expense, net (13,119) 111,625 Depreciation and amortization 2,692,316 1,402,559 ------------ ------------ Earnings from operations 140,236 532,472 Interest income (4,140) (6,188) Interest expense 1,249,126 926,609 ------------ ------------ Net loss before income tax benefit (1,104,750) (387,949) Deferred income tax benefit 448,450 -- ------------ ------------ Net loss $ (656,300) (387,949) ============ ============ Loss per share common stock (note 8) $ (3.85) (3.26) ============ ============
See accompanying notes to consolidated financial statements. F-7 10 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Deficiency Years ended December 31, 1995 and 1994
COMMON STOCK PREFERRED STOCK --------------------------------------- --------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------ ------------------ ------------------ ------------------ Balances at December 31, 1993 116,451 $ 116,451 -- $ -- Purchase 1,545 treasury shares -- -- -- -- Retire treasury shares (51,545) (51,545) -- -- Net loss -- -- -- -- ---------- ---------- ---------- ---------- Balances at December 1, 1994 64,906 $ 64,906 -- $ -- ========== ========== ========== ========== Issuance of Company's common shares (note 8) 287,634 $ 2,876 -- $ -- Issuance of preferred shares -- -- 50,000 500 Dividends declared ($.4891 per preferred share) -- -- -- -- Net loss -- -- -- -- ---------- ---------- ---------- ---------- Balances at December 31, 1994 287,634 2,876 50,000 500 Dividends declared ($9.00 per preferred share) -- -- -- -- Net loss -- -- -- -- ---------- ---------- ---------- ---------- Balances at December 31, 1995 287,634 $ 2,876 50,000 $ 500 ========== ========== ========== ==========
ADDITIONAL NET PAID-IN ACCUMULATED TREASURY STOCKHOLDERS' CAPITAL DEFICIT STOCK DEFICIENCY ------------------- ------------------ ------------------ ------------------ Balances at December 31, 1993 262,116 (5,674,295) (285,754) (5,581,482) Purchase 1,545 treasury shares -- -- (144,843) (144,843) Retire treasury shares (262,116) (116,936) 430,597 -- Net loss -- (138,591) -- (138,591) ---------- ---------- ---------- ---------- Balances at December 1, 1994 -- (5,929,822) -- (5,864,916) ========== ========== ========== ========== Issuance of Company's common shares (note 8) -- (5,867,792) -- (5,864,916) Issuance of preferred shares 4,821,100 -- -- 4,821,600 Dividends declared ($.4891 per preferred share) -- (24,456) -- (24,456) Net loss -- (249,358) -- (249,358) ---------- ---------- ---------- ---------- Balances at December 31, 1994 4,821,100 (6,141,606) -- (1,317,130) Dividends declared ($9.00 per preferred share) -- (450,000) -- (450,000) Net loss -- (656,300) -- (656,300) ---------- ---------- ---------- ---------- Balances at December 31, 1995 4,821,100 (7,247,906) -- (2,423,430) ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. F-8 11 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1995 and 1994
1995 1994 ----------- ----------- Cash flows from operating activities: Net loss $ (656,300) (387,949) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,692,316 1,402,559 Provision for uncollectible accounts 250,372 102,498 Gain on sale of equipment (1,604) (13,088) Write-off of loan fees -- 144,288 Change in assets and liabilities: (Increase) decrease in trade accounts receivable (1,822,433) 119,185 Increase in employee advances and other receivables (156,354) (1,481) Increase in inventories (275,856) (41,912) Increase in prepaid expenses and deposits (84,036) (58,275) Increase (decrease) in trade accounts payable 536,038 (202,119) Increase (decrease) in accrued interest and liabilities 218,935 (85,157) Increase (decrease) in deferred revenues 779,664 (83,756) Decrease in deferred tax liabilities (448,450) -- ----------- ---------- Net cash provided by operating activities 1,032,292 894,793 ----------- ---------- Cash flows from investing activities: Purchase of equipment (426,441) (320,730) Proceeds from sale of equipment 24,664 31,651 Purchases of assets from other companies (8,383,145) (286,450) Acquisition costs (539,883) -- ----------- ---------- Net cash used in investing activities (9,324,805) (575,529) ----------- ---------- Cash flows from financing activities: Payments on capital lease obligations (109,294) (99,233) Payments on notes payable (580,225) (9,383,228) Payments on notes payable to affiliates -- (515,000) Proceeds from issuance of long-term debt 8,795,500 6,000,000 Purchase of treasury stock -- (144,843) Proceeds from issuance of preferred stock -- 5,000,000 Debt issuance costs (61,664) (576,685) Stock issuance costs -- (178,400) Dividends paid (361,956) -- ----------- ---------- Net cash provided by financing activities 7,682,361 102,611 ----------- ---------- Net (decrease) increase in cash and cash equivalents (610,152) 421,875 Cash and cash equivalents, beginning of year 613,493 191,618 ----------- ---------- Cash and cash equivalents, end of year $ 3,341 613,493 =========== ==========
(Continued) F-9 12 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Years ended December 31, 1995 and 1994
1995 1994 ----------- ----------- Supplemental disclosure of cash flow information: Cash paid for interest $ 1,078,846 1,093,850 =========== =========== Supplemental disclosure of noncash investing and financing activities: Equipment acquired under capital lease arrangements $ -- 165,935 =========== =========== Accrued preferred stock dividends $ 112,500 24,456 =========== =========== The Company acquired selected assets from other companies. In conjunction with these acquisitions, assets were acquired and liabilities incurred as follows: Estimated fair value of assets acquired $ 8,586,961 669,222 Cash payments for assets acquired (8,082,899) (286,450) ----------- ----------- Liabilities incurred $ 504,062 382,772 =========== ===========
See accompanying notes to consolidated financial statements. F-10 13 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1995 and 1994 (1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Metrol Security Services, Inc. was formed on December 1, 1994 and has two wholly-owned subsidiaries (Sonitrol of Arizona, Inc. and Electronic Security Services, Inc.) (the Company). The Company is the successor of Sonitrol of Arizona, Inc. and Electronic Security Services, Inc. (collectively, the Predecessor). Effective December 1, 1994, the stock of the Predecessor was contributed to the Company. This contribution of stock has been accounted for in a manner similar to a pooling of interests as combinations of entities under common control. On April 1, 1995, Sonitrol of Arizona, Inc. (SOA) acquired the corporate entities of GTMP Holding Co. (GTMP), and GTMT Holding Co. (GTMT). The subsidiaries of GTMP and GTMT were merged into their respective holding companies with the exception of Dictoguard/Dictograph, Inc., GTMT's New Mexico subsidiary. SOA is now comprised of three wholly-owned subsidiaries (GTMP, GTMT and Dictoguard/Dictograph, Inc.) of which GTMP and GTMT are inactive. SOA has accounted for the acquisition as a purchase of stock. NATURE OF OPERATIONS SOA and its subsidiary Dictoguard/Dictograph, Inc. (NM) provide installation, service and monitoring of electronic alarm systems to commercial and residential customers. SOA is a franchised Arizona dealer for Sonitrol products (audio) and SOA and NM are franchise dealers for Dictograph products (digital) in Arizona and New Mexico. SOA also markets digital electronic alarm systems under the Metrol name and, to a lesser extent, installs and services close circuit television and access control systems. Electronic Security Services, Inc. (ESS) provides guard and patrol services in Arizona and NM provides guard and patrol services in New Mexico. PRINCIPLES OF CONSOLIDATION AND PRESENTATION The accompanying consolidated financial statements present the financial condition of the Company as of December 31, 1995 and 1994 and the results of their operations for the years then ended. All significant intercompany balances and transactions have been eliminated in consolidation of the Company. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, money market funds and certificates of deposit with original maturities at the date of purchase of three months or less. SHORT-TERM INVESTMENTS Short-term investments include certificates of deposit with original maturities of one year or less and are stated at cost which approximates market. F-11 14 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). Work-in-process inventories of $220,215 at December 31, 1995 are comprised of costs incurred on uncompleted installations which are stated at actual cost of equipment, labor and other direct costs. PROPERTY AND EQUIPMENT Property and equipment are stated at cost or for capital leases at the present value of minimum lease payments at the inception of the lease. All assets are depreciated or amortized using the straight-line method over the shorter of the lease term, if applicable, or estimated useful lives of the assets. REVENUE Revenue from the installation of electronic alarm systems is recognized upon equipment installation and acceptance by the customer or for large projects, on the percentage-of-completion method based on costs incurred to date to total estimated costs which are included in trade accounts receivable due to its immateriality. Revenue from monitoring service is recognized on a straight-line basis over the term of the service contract. Revenue from guard and patrol services is recognized when the services are rendered. Deferred revenues represent amounts billed in advance to customers for monitoring service and system installation. INTANGIBLE ASSETS Intangible assets represent an allocation of the costs in excess of the estimated fair market value of tangible assets acquired as of the acquisition date and deferred financing fees related to the acquisition, and are amortized using the straight-line method over the estimated economic lives of the respective assets. INCOME TAXES The Predecessor was an S Corporation for federal income tax purposes prior to December 1, 1994. As an S Corporation, the taxable income or loss was included in the individual tax returns of the stockholders. Therefore, no provision or benefit was made for income taxes for the period from January 1, 1994 through November 30, 1994. On December 1, 1994, the Predecessor terminated its S Corporation election concurrent with the contribution of the stock to the Company and the Company became subject to federal and state income taxes. Accordingly, the Company adopted the asset and liability method of accounting for income taxes as prescribed by Statement of Financial Accounting Standards No. 109. F-12 15 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. IMPAIRMENT OF ASSETS The Company accounts for long-lived assets under the Statement of Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets." Effective January 1, 1995, the Company adopted the provision of this Statement, under which impairment of goodwill and other long-lived assets would be recognized if the expected future net cash flows (undiscounted and without interest charges) of the related businesses are less than the carrying amounts of the assets. No impairment existed in 1995. FAIR VALUE OF FINANCIAL INSTRUMENTS RECEIVABLES, PAYABLES AND ACCRUED EXPENSES Fair value is considered to be equal to the carrying value of the accounts receivable, accounts payable and accrued expenses as they are generally short-term in nature and the related amounts approximate fair value or are receivable or payable on demand. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS The fair value of the Company's long-term debt and capital lease obligations are estimated based on the current rates offered to the Company for debt of the same remaining maturities. INTEREST RATE CAP AGREEMENTS Interest rate cap agreements used to establish a maximum rate for certain long-term debt are carried at amortized costs which approximate market. The agreements are in effect for three years and expire in 1997 and 1998. The Company is exposed to credit losses in the event of nonperformance by the counterparties to its agreements but has no off-balance sheet credit risk of accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the agreements. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-13 16 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued ADVERTISING COSTS The Company expenses all advertising costs as incurred to selling and marketing expense. LOSS PER SHARE OF COMMON STOCK Loss per share of common stock is computed using the weighted average number of common shares of stock outstanding during the years presented and does not include the effect of common share equivalents (convertible preferred stock) because their effect would be anti-dilutive. The weighted average number of common shares used in the computation were 287,634 and 126,421 in 1995 and 1994, respectively. In 1995 and 1994, the net loss for purposes of the loss per share calculation has been increased by $450,000 and $24,456, respectively, for dividends on the Company's preferred stock to arrive at the loss per share of common stock. Accordingly, the net loss applicable to common shareholders was $1,106,300 and $412,405 in 1995 and 1994, respectively. (2) PROPERTY AND EQUIPMENT Property and equipment consist of the following:
ESTIMATED USEFUL LIVES (IN YEARS) 1995 1994 ----------------- ------------------ ------------------ Alarm system equipment 5-10 $ 3,043,580 2,870,348 Central station monitoring equipment 5-10 1,040,332 1,015,657 Office furniture, fixtures and equipment 2-5 841,884 676,102 Vehicles 3-5 601,884 446,878 Leasehold improvements 10 602,814 576,223 Repair parts 3 118,448 118,448 Building 55,052 -- Land 10,000 -- ------------------ ------------------ 6,313,994 5,703,656 Less: accumulated depreciation and amortization (4,297,981) (3,616,331) ------------------ ------------------ $ 2,016,013 2,087,325 ================== ==================
Included in central station monitoring equipment and vehicles in 1995 is approximately $384,139 and $234,209 in cost and accumulated amortization, respectively, related to capital leases. F-14 17 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (3) INTANGIBLE ASSETS Intangible assets consist of the following:
ESTIMATED USEFUL LIVES (IN YEARS) 1995 1994 ----------------- ------------------ ------------------ Monitored alarm accounts 8-10 $ 13,063,541 6,370,957 Guard and patrol accounts 5-8 321,531 321,531 Covenants not to compete 2-5 3,178,532 459,282 Franchise fee 40 66,000 25,000 Deferred financing fees 7 638,519 576,855 Goodwill 8 1,639,346 -- ------------------ ------------------ 18,907,469 7,753,625 Less: accumulated amortization (7,191,302) (5,170,369) ------------------ ------------------ $ 11,716,167 2,583,256 ================== ==================
(4) LEASES The Company is obligated under various capital leases for equipment and vehicles that expire at various dates through 1998. Additionally, the Company leases its principal operating facilities from related parties under operating leases with terms expiring in 2002 with renewal options. Rent expense under these operating leases was approximately $140,400 in 1995 and 1994. Future minimum lease payments under noncancelable operating leases and the present value of future minimum capital lease payments as of December 31, 1995 are as follows:
CAPITAL OPERATING LEASES LEASES ------------------ ------------------ 1996 $ 117,142 179,245 1997 29,564 171,900 1998 4,684 144,855 1999 -- 140,400 2000 -- 140,400 Thereafter -- 152,100 ------------------ ------------------ Total minimum lease payments 151,390 $ 928,900 ================== Less amount representing interest (at rates ranging from 9% to 14.8%) 10,807 ------------------ Present value of future minimum lease payments 140,583 Less current portion of capital lease obligations 107,853 ------------------ Capital lease obligations, excluding current portion $ 32,730 ==================
F-15 18 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (5) NOTES PAYABLE AND NOTES PAYABLE TO AFFILIATES Notes payable and notes payable to affiliates consist of the following:
1995 1994 ----------- ----------- Credit facility with bank, $2,495,500, bearing interest at the prime rate plus 1.75% (8.5% at December 31, 1995), and $12,000,000 bearing interest at the applicable LIBOR rate plus 3.75% (5.81% - 5.94%) matures January 2002, secured by the assets and capital stock of the Company $14,495,500 6,000,000 Notes payable to an individual in connection with an acquisition, principal payments of $5,000 due monthly through October 1996, unsecured 50,000 110,000 Note payable in connection with an acquisition, bearing interest at 8%, principal payments of $2,677 including interest due monthly through January 2002, unsecured 154,336 189,494 Note payable in connection with an acquisition, non-interest bearing, unsecured, paid in June 1995 -- 106,235 Note payable in connection with an acquisition, bearing interest at 7%, due September 1, 1996 upon final settlement 500,000 -- Vehicle loans payable to bank assumed from an acquisition, bearing interest at 8.6%, maturing August 1997 104,841 -- Mortgage payable assumed from an acquisition, bearing interest at 9%, principal balance paid March 1996 38,761 -- Note payable in connection with an acquisition, non-interest bearing, due May 1996, unsecured 4,062 -- ----------- ----------- 15,347,500 6,405,729 Less current portion of notes payable 973,203 651,393 ----------- ----------- Notes payable excluding current portion $14,374,297 5,754,336 =========== ===========
F-16 19 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The aggregate maturities of the notes payable subsequent to December 31, 1995 are as follows: 1996 $ 973,203 1997 1,628,709 1998 1,798,506 1999 2,084,413 2000 2,370,487 Thereafter 6,492,182 ----------------- $ 15,347,500 =================
The credit facility with the bank allows SOA to borrow up to $15,000,000 and SOA or ESS to borrow up to $500,000. The aggregate principal amount outstanding at any time is limited based on factors that include permitted acquisition expenditures, loss prevention program advances and recurring monthly revenue, as defined. The interest rate for any portion of the outstanding principal balance of a note which is not a LIBOR portion is at the prime rate plus 1.75% or 1.00% depending upon the ratio of bank debt to net operating income, as defined. The rate of interest for any LIBOR portion is at the LIBOR rate plus 3.75% or 2.5%, depending upon the ratio of bank debt to net operating income, as defined. However, the interest rate is decreased by 25 basis points when cash advances reach $10,000,000. The credit facility required an initial $170,000 facility fee and also requires a .5% commitment fee on the unused portion of the facility. All borrowings outstanding as of December 31, 1996 and June 30, 1997 will be converted into 5 year and 4.5 year term loans, respectively. The credit facility contains various covenants including the requirement that the Company maintain specific interest, debt, and current asset ratios. The credit facility also limits capital expenditures and the payment of dividends. The Company was not in compliance with all covenants at December 31, 1995, however, the lender waived all instances of noncompliance. On December 16, 1994 and May 8, 1995, the Company executed interest rate protection agreements with the bank that caps the interest rate to be paid on $4,500,000 and $2,500,000, respectively, of the indebtedness. The Company paid $54,000 and $10,250 for these agreements, which expire December 19, 1997 and May 10, 1998, respectively. (6) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
DECEMBER 31, 1995 --------------------------------------- CARRYING FAIR VALUE AMOUNT (UNAUDITED) ------------------ ------------------ Cash, cash equivalents and short-term investments $ 55,841 55,841 Long-term debt and capital lease obligations 15,488,083 15,488,083 Interest rate caps 44,150 44,150
F-17 20 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (7) INCOME TAXES The Predecessor was an S Corporation for federal income tax purposes and was not subject to federal and state income taxes. At December 1, 1994, the S Corporation election was terminated and the Company became subject to federal and state income taxes. No income tax expense or benefit was recorded for the cumulative temporary differences as of the date of termination. No current income tax expense was recorded for the period December 1, 1994 through December 31, 1995 due to net operating losses. For the year ended December 31, 1995, the Company recognized federal and state deferred tax benefits of $448,450. Such benefits were recognized because valuation allowances were reduced as a result of utilization of such net operating losses to offset temporary differences that generate deferred tax liabilities during the carryforward period. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are as follows:
1995 1994 --------- --------- Deferred tax assets: Net operating loss carryforward $ 500,244 458,664 Allowance for bad debts 132,000 43,200 Accrued expenses 26,728 25,095 Differences in amortization for book and tax intangibles 187,410 1,291 ---------- --------- Gross deferred tax assets 846,382 528,250 Less valuation allowance -- (454,563) ---------- --------- Net deferred tax assets $ 846,382 73,687 ========== ========= Deferred tax liabilities: Property and equipment depreciation $ 67,460 73,687 Change in tax reporting method of a subsidiary 51,468 -- Difference in book and tax basis of acquired intangibles 1,918,350 -- ---------- --------- Total deferred tax liabilities 2,037,278 73,687 ---------- --------- Net deferred tax liabilities $1,190,896 -- ========== =========
A valuation allowance has not been provided because of the significant offsetting of deferred tax liabilities. The net change in the total valuation allowance for the year ended December 31, 1995 was a decrease of $454,563. During the year ended December 31, 1995, the Company acquired G.T.M.T., Inc., G.T.M.P. Holding Company Inc. and Dictoguard Inc. For financial reporting purposes, the assets acquired and liabilities assumed were valued at fair market value as of the date of purchase. For income tax purposes, the acquisitions were treated as stock purchases with the acquired assets and liabilities retaining their historical tax basis. The net basis increase for financial reporting purposes of approximately $5.3 million has no federal and state income tax basis and is not deductible for tax purposes. The deferred tax liability resulting from the acquisition basis difference, together with the Company's deferred tax liability, exceeded the Company's deferred tax assets at the date of purchase. At December 31, 1995, the Company has federal net operating loss carryforwards of approximately $1,500,000 which begin to expire in 1999. (8) STOCKHOLDERS' DEFICIENCY At December 31, 1995, the capital of the Company consisted of 2,000,000 shares of authorized $.01 par value common stock and 100,000 shares of authorized $.01 par value preferred stock. 287,634 shares of common stock and 50,000 shares of preferred stock were issued and outstanding. F-18 21 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The Company's preferred stock is convertible into common stock at the option of the stockholder. The conversion rate is equal to the original purchase price of the stock, as defined, divided by $20 per share. The preferred stock has voting rights equal to the number of common shares they are convertible into and is entitled to per annum cumulative dividends of nine percent of the original purchase price per share. The liquidation preference for the preferred stock is the greater of the original purchase price plus accrued dividends or the calculated value to be paid per share assuming conversion of the preferred stock into common stock. During 1994, the shareholder of the Predecessor exchanged all of the outstanding stock of the Predecessor for 287,634 shares of the Company's common stock. (9) PROFIT SHARING PLAN The Company has a qualified 401(k) profit sharing plan (the Plan) covering certain employees twenty years of age and over who have completed one year of service. Company matching and profit sharing contributions to the Plan are at the discretion of the Board of Directors, but are limited to amounts deductible under the Internal Revenue Code. The Company presently matches 25% of employee contributions up to 8% of the employee's salary. For the years ended December 31, 1995 and 1994, Company or Predecessor matching contributions to the Plan totaled $15,168 and $15,430, respectively. No profit sharing contribution was made during 1995 or 1994. (10) ACQUISITIONS During 1995 and 1994, the Company acquired certain operating assets from various alarm companies as follows:
PURCHASE ACQUISITION DATE COMPANY PRICE ----------------------------------- -------------------------------------------- ------------------ August 29, 1994 Affiliated Security Systems, Inc. $ 269,494 October 14, 1994 Ahwatukee Security, Inc. 292,254 March 31, 1995 G.T.M.T., Inc., G.T.M.P. Holding 8,309,002 Company Inc. and Dictoguard Inc. April 1, 1995 ABS Security Systems 55,132 September 8, 1995 P.M.S. International Corporation 222,827
F-19 22 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The acquisitions were accounted for by the purchase method of accounting and, accordingly, the purchase price was allocated to tangible and intangible assets based on their fair values as determined by management. The results of operations of the alarm accounts acquired are included in the Company's results of operations since the date of each acquisition. The total purchase price was allocated as follows:
1995 1994 ----------------- ----------------- Assets acquired $ 1,376,376 6,550 Liabilities assumed (1,056,415) -- Monitored alarm accounts 5,554,500 515,198 Covenants not to compete 2,712,500 40,000 ----------------- ----------------- $ 8,586,961 561,748 ================= =================
The Company capitalized an additional $601,549 of intangible assets related to the acquisitions that occurred in 1995. The Company recorded goodwill and a deferred tax liability of $2,116,800 for the difference in the book and tax basis of the alarm accounts at the time of acquisition. The results of operations of the acquired companies have been combined with the results of the Company as of their respective dates of acquisition. Had the 1995 business combinations occurred prior to January 1, 1995, the Company's net sales, net loss and net loss per share of common stock for the year ended December 31, 1995 would have been $17.2 million, $1.3 million and $6.32, respectively. Had the 1994 business combinations occurred prior to January 1, 1994, the Company's net sales, net loss and net loss per share of common stock for the year ended December 31, 1994 would have been $11.5 million, $230,248 and $2.01, respectively. (11) COMMITMENTS The Company operates under long-term franchise agreements with Sonitrol through the year 2019. The agreements allow the Company to market and sell Sonitrol products and services under the Sonitrol name in exchange for royalty fees of $3.30 per customer per month of service. Royalty fee expense, a component of cost of sales, was $68,958 and $69,570 for the years ended December 31, 1995 and 1994, respectively. F-20 23 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (12) LITIGATION In April of 1993, a minority shareholder objected to the merger of the Predecessor and made a claim for the fair value of his stock and other allegations. The claim was settled through arbitration in November of 1994 resulting in the minority shareholder being awarded $53,200 as the value of his stock in the Predecessor. In December of 1994, the minority shareholder filed a claim which restates the prior allegations. In March 1996, a judge granted the Company's motion to dismiss the restated allegations. The Company is involved in certain other legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without a material effect on the Company's financial position or results of operations. (13) SUBSEQUENT EVENTS On February 9, 1996, the Company's president and majority shareholder and his wife were involved in a fatal automobile accident in Mexico. The Company is the beneficiary of a $1,000,000 key man life insurance policy. Included in employee receivables at December 31, 1995 is $132,000 due from the Company's president, which has been paid from the proceeds of the sale of the Company to Protection One. In April 1996, the Company purchased additional alarm accounts relating to the G.T.M.T., Inc., G.T.M.P. Holding Company Inc. and Dictoguard Inc. acquisition. The Company paid $343,300 for the purchased accounts. On June 27, 1996, the Company sold its stock to Protection One Alarm Monitoring, Inc. for approximately $26 million. The purchase price will be paid 80% in cash and 20% in common stock of Protection One. F-21 24 Independent Auditors' Report The Board of Directors Metrol Security Services, Inc.: We have audited the accompanying consolidated balance sheet of Metrol Security Services, Inc. and subsidiaries (Company) as of December 31, 1994 and the related consolidated statements of operations, stockholders' deficiency and cash flows for the year ended December 31, 1994, and the combined balance sheet of Sonitrol of Arizona, Inc. and Electronic Security Services, Inc. (Predecessor) as of December 31, 1993, and the related combined statements of operations, stockholders' deficiency and cash flows for the year then ended. These consolidated and combined financial statements are the responsibility of the Company's and the Predecessor's management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Metrol Security Services, Inc. and subsidiaries as of December 31, 1994 and the results of their operations and their cash flows for the year ended December 31, 1994, in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned combined Predecessor financial statements present fairly, in all material respects, the financial position of Sonitrol of Arizona, Inc., and Electronic Security Services, Inc. as of December 31, 1993 and the results of their operations and their cash flows for the year ended December 31, 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP February 10, 1995, except as to note 12 which is as of April 4, 1995 F-22 25 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Consolidated and Combined Balance Sheets December 31, 1994 and 1993
ASSETS 1994 1993 ---- ---- Current assets: Cash and cash equivalents $ 613,493 191,618 Short-term investments 52,500 52,500 Trade accounts receivable, net of allowance for uncollectible accounts of $108,000 in 1994 and $81,000 in 1993 1,192,890 1,414,573 Employee advances 12,003 10,520 Inventories 416,232 374,320 Prepaid expenses and deposits 234,021 175,746 ----------- ----------- Total current assets 2,521,139 2,219,277 Property and equipment, net of accumulated depreciation and amortization (note 2) 2,087,325 2,214,781 Intangible assets, net of accumulated amortization (note 3) 2,583,256 2,288,643 ----------- ----------- Total assets $ 7,191,720 6,722,701 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Trade accounts payable $ 415,957 618,078 Dividends payable 24,456 -- Accrued interest 34,658 201,899 Accrued liabilities 397,916 315,832 Deferred revenues 980,257 1,064,013 Current portion of capital lease obligations (note 4) 109,294 67,510 Current portion of notes payable and notes payable to affiliates (note 5) 651,393 373,200 ----------- ----------- Total current liabilities 2,613,931 2,640,532 Capital lease obligations, excluding current portion (note 4) 140,583 115,666 Notes payable, excluding current portion (note 5) 5,754,336 9,047,985 Notes payable to affiliates, excluding current portion (note 5) -- 500,000 ----------- ----------- Total liabilities 8,508,850 12,304,183 ----------- ----------- Commitments and subsequent events (notes 5, 10, 11 and 12) Stockholders' deficiency (note 7): Common stock 2,876 116,451 Preferred stock 500 -- Additional paid-in capital 4,821,100 262,116 Accumulated deficit (6,141,606) (5,674,295) ----------- ----------- (1,317,130) (5,295,728) Less treasury stock, at cost, 50,000 shares -- (285,754) ----------- ----------- Net stockholders' deficiency (1,317,130) (5,581,482) ----------- ----------- Total liabilities and stockholders' deficiency $ 7,191,720 6,722,701 =========== ===========
See accompanying notes to consolidated and combined financial statements. F-23 26 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Consolidated and Combined Statements of Operations Years ended December 31, 1994 and 1993
1994 1993 ---- ---- Revenue: Monitoring and service $ 5,046,496 4,730,621 Installation 2,612,661 2,693,864 Guard and patrol 2,961,481 2,331,780 ------------ ------------ 10,620,638 9,756,265 ------------ ------------ Cost of revenue: Monitoring and service 1,597,758 1,651,654 Installation 1,970,533 1,955,756 Guard and patrol 2,408,028 1,941,700 ------------ ------------ 5,976,319 5,549,110 ------------ ------------ Gross margin 4,644,319 4,207,155 ------------ ------------ Selling and marketing expenses 773,848 820,436 General and administrative expenses 1,615,576 1,452,700 Professional fees 208,239 221,658 Other expense, net 111,625 31,762 Depreciation and amortization 1,402,559 1,308,688 ------------ ------------ Earnings from operations 532,472 371,911 Interest income (6,188) (11,052) Interest expense 926,609 885,316 ------------ ------------ Net loss $ (387,949) (502,353) ============ ============ Loss per share common stock (note 7) $ (3.26) (4.24) ============ ============
See accompanying notes to consolidated and combined financial statements. F-24 27 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Consolidated and Combined Statements of Stockholders' Deficiency Years ended December 31 ,1994 and 1993
Common stock Preferred stock Additional ------------ --------------- paid-in Accumulated Shares Amount Shares Amount capital deficit ------ ------ ------ ------ ------- ------- Balances at December 31, 1992 120,495 $ 120,495 -- $ -- $ 267,819 $(5,171,942) Merger of SOT into SAZ (note 7) (4,044) (4,044) -- -- (5,703) -- Net loss -- -- -- -- -- (502,353) ------- ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1993 116,451 116,451 -- -- 262,116 (5,674,295) Purchase 1,545 common shares -- -- -- -- -- -- Retire treasury shares (51,545) (51,545) -- -- (262,116) (116,936) Net loss -- -- -- -- -- (138,591) ------- ----------- ----------- ----------- ----------- ----------- Balances at December 1, 1994 64,906 $ 64,906 -- $ -- $ -- $(5,929,822) ======= =========== =========== =========== =========== =========== Issuance of Company's common shares (note 7) 287,634 $ 2,876 -- $ -- $ -- $ (5,867,792) Issuance of preferred shares -- -- 50,000 500 4,821,100 -- Dividends declared ($48.91 per preferred share) -- -- -- -- -- (24,456) Net loss -- -- -- -- -- (249,358) ------- ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1994 287,634 $ 2,876 50,000 $ 500 $ 4,821,100 $(6,141,606) ======= =========== =========== =========== =========== =========== Net Treasury stockholders' stock deficiency ----- ---------- Balances at December 31, 1992 $ (295,501) $(5,079,129) Merger of SOT into SAZ (note 7) 9,747 -- Net loss -- (502,353) ----------- ----------- Balances at December 31, 1993 (285,754) (5,581,482) Purchase 1,545 common shares (144,843) (144,843) Retire treasury shares 430,597 -- Net loss -- (138,591) ----------- ----------- Balances at December 1, 1994 $ -- $(5,864,916) =========== =========== Issuance of Company's common shares (note 7) $ -- $(5,864,916) Issuance of preferred shares -- 4,821,600 Dividends declared ($48.91 per preferred share) -- (24,456) Net loss -- (249,358) ----------- ----------- Balances at December 31, 1994 $ -- $(1,317,130) =========== ===========
See accompanying notes to consolidated and combined financial statements. F-25 28 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Consolidated and Combined Statements of Cash Flows Years ended December 31, 1994 and 1993
1994 1993 ---- ---- Cash flows from operating activities: Net loss $ (387,949) (502,353) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,402,559 1,308,688 Provision for uncollectible accounts 102,498 93,410 Gain on sale of equipment (13,088) -- Write-off of loan fees 144,288 -- Change in assets and liabilities: Decrease in short-term investments -- 250,000 (Increase) decrease in trade accounts receivable 119,185 (89,181) Increase in employee advances (1,481) (163) (Increase) decrease in inventories (41,912) 128,592 (Increase) decrease in prepaid expenses and deposits (58,275) 102,052 Increase (decrease) in trade accounts payable (202,119) 140,405 Increase (decrease) in accrued liabilities (85,157) 126,986 Decrease in deferred revenues (83,756) (197,643) ----------- ----------- Net cash provided by operating activities 894,793 1,360,793 ----------- ----------- Cash flows from investing activities: Purchase of equipment (320,730) (856,761) Proceeds from sale of equipment 31,651 -- Purchases of assets from other companies (286,450) -- ----------- ----------- Net cash used in investing activities (575,529) (856,761) ----------- ----------- Cash flows from financing activities: Payments on notes payable (9,383,228) (397,805) Payments on notes payable to affiliates (515,000) (15,000) Payments on capital lease obligations (99,233) (68,829) Proceeds from issuance of long-term debt 6,000,000 -- Purchase of treasury stock (144,843) -- Proceeds from issuance of preferred stock 5,000,000 -- Debt issuance costs (576,685) -- Stock issuance costs (178,400) -- ----------- ----------- Net cash provided by (used in) financing activities 102,611 (481,634) ----------- ----------- Net increase in cash and cash equivalents 421,875 22,398 Cash and cash equivalents, beginning of year 191,618 169,220 ----------- ----------- Cash and cash equivalents, end of year $ 613,493 191,618 =========== ===========
(Continued) F-26 29 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Consolidated and Combined Statements of Cash Flows, Continued Years ended December 31, 1994 and 1993
1994 1993 ---- ---- Supplemental disclosure of cash flow information: Cash paid for interest $ 1,093,850 879,768 =========== =========== Supplemental disclosure of noncash investing and financing activities: Equipment acquired under capital lease arrangements $ 165,935 115,922 =========== =========== Accrued preferred stock dividends $ 24,456 -- =========== =========== In 1994, the Company acquired selected assets from other companies. In conjunction with these acquisitions, assets were acquired and liabilities incurred as follows: Estimated fair value of assets acquired $ 669,222 -- Cash payments for assets acquired (286,450) -- ----------- ----------- Liabilities incurred $ 382,772 -- =========== ===========
See accompanying notes to consolidated and combined financial statements. F-27 30 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Notes to Consolidated and Combined Financial Statements December 31, 1994 and 1993 (1) Nature of Operations and Summary of Significant Accounting Policies (a) Organization Metrol Security Services, Inc. was formed on December 1, 1994, and has two wholly-owned subsidiaries (Sonitrol of Arizona, Inc. and Electronic Security Services, Inc.) (the Company). The Company is the successor to Sonitrol of Arizona, Inc. and Electronic Security Services, Inc. (collectively, the Predecessor). Effective December 1, 1994, the stock of the Predecessor was contributed to the Company. This contribution of stock has been accounted for in a manner similar to a pooling of interests as combinations of entities under common control. (b) Nature of Operations Sonitrol of Arizona, Inc. (SOA) provides installation, service, and monitoring of electronic alarm systems to commercial and residential customers and is a franchised Arizona dealer for Sonitrol products. SOA also installs, services and monitors digital alarm systems under the Metrol name and, to a lesser extent, distributes closed circuit television and access control systems. Electronic Security Services, Inc. (ESS) provides patrol and guard services. (c) Principles of Consolidation and Presentation The accompanying consolidated financial statements present the financial condition of the Company as of December 31, 1994 and the results of their operations for the year ended December 31, 1994. The accompanying combined financial statements present the financial condition of the Predecessor as of December 31, 1993 and the results of their operations for the year ended December 31, 1993. All significant intercompany balances and transactions have been eliminated in consolidation of the Company and in the combination of the Predecessor. (d) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, money market funds and certificates of deposit with original maturities at the date of purchase of three months or less. (e) Short-term Investments Short-term investments include certificates of deposit with original maturities of one year or less and are stated at cost. (f) Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). Work-in-process inventories of $99,456 at December 31, 1994 are comprised of costs incurred on uncompleted installations which are stated at actual cost of equipment, labor and other direct costs. (Continued) F-28 31 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Notes to Consolidated and Combined Financial Statements (g) Property and Equipment Property and equipment are stated at cost or for capital leases at the present value of minimum lease payments at the inception of the lease and are depreciated or amortized using the straight-line method over the shorter of the lease term or estimated useful lives of the assets. (h) Revenue Revenue from the installation of electronic alarm systems is recognized upon equipment installation and acceptance by the customer or for large projects, on the percentage-of-completion method based on costs incurred to date to total estimated costs. Revenue from monitoring service is recognized on a straight-line basis over the term of the service contract. Revenue from guard and patrol services is recognized when the services are rendered. Deferred revenues represent amounts billed in advance to customers for monitoring service and system installation. (i) Intangible Assets Intangible assets represent an allocation of the costs in excess of the estimated fair market value of tangible assets acquired as of the acquisition date and deferred financing fees related to the acquisition, and are amortized using the straight-line method over the estimated economic lives of the respective assets. (j) Income Taxes The Predecessor was an S Corporation for federal income tax purposes prior to December 1, 1994. As an S Corporation, the taxable income or loss was included in the individual tax returns of the stockholders. Therefore, no provision or benefit was made for income taxes for the year ended December 31, 1993 and the period from January 1, 1994 through November 30, 1994. On December 1, 1994, the Predecessor terminated its S Corporation election concurrent with the contribution of the stock to the Company and the Company became subject to federal and state income taxes. Accordingly, the Company adopted the asset and liability method of accounting for income taxes as prescribed by Statement of Financial Accounting Standards No. 109. Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (Continued) F-29 32 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Notes to Consolidated and Combined Financial Statements (k) Loss Per Share of Common Stock Loss per share of common stock is computed using the weighted average number of common shares of stock outstanding during the years presented and does not include the effect of common share equivalents (convertible preferred stock) because their effect would be anti-dilutive. The weighted average number of common shares used in the computation were 126,421 and 118,473 in 1994 and 1993, respectively. In 1994, the net loss for purposes of the loss per share calculation has been increased by $24,456 for dividends on the Company's preferred stock to arrive at the loss per share of common stock. Accordingly, the net loss applicable to common shareholders was $412,405 and $502,353 in 1994 and 1993, respectively. (l) Reclassifications Certain 1993 amounts have been reclassified to conform to the 1994 presentation. (2) Property and Equipment Property and equipment consist of the following:
Estimated useful lives (in years) 1994 1993 ---------------- ---- ---- Alarm system equipment 5-10 $ 2,870,348 2,682,536 Central station monitoring equipment 5-10 1,015,657 997,307 Office furniture, fixtures and equipment 2-5 676,102 590,104 Vehicles 3-5 446,878 368,367 Leasehold improvements 10 576,223 569,123 Repair parts 3 118,448 118,448 ------------ ----------- 5,703,656 5,325,885 Less: accumulated depreciation and amortization (3,616,331) (3,111,104) ---------- ---------- $ 2,087,325 2,214,781 ========== ==========
Included in central station monitoring equipment and vehicles in 1994 is approximately $404,000 and $153,000 in cost and accumulated amortization, respectively, related to capital leases. (Continued) F-30 33 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Notes to Consolidated and Combined Financial Statements (3) Intangible Assets Intangible assets consist of the following:
Estimated useful lives (in years) 1994 1993 ---------------- ---- ---- Monitored alarm accounts 8-10 $ 6,370,957 5,983,231 Guard and patrol accounts 5-8 321,531 86,586 Covenants not to compete 2-5 459,282 419,282 Franchise fee 40 25,000 25,000 Deferred financing fees 7 576,855 374,738 ------------ ---------- 7,753,625 6,888,837 Less: accumulated amortization (5,170,369) (4,600,194) ------------ ---------- $ 2,583,256 2,288,643 ============ ==========
(4) Leases The Company is obligated under various capital leases for equipment and vehicles that expire at various dates through 1998. Additionally, the Company leases its principal operating facilities from related parties under operating leases with terms expiring in 2002 with renewal options. Rent expense under these operating leases was approximately $140,400 in 1994 and 1993. Future minimum lease payments under noncancelable operating leases and the present value of future minimum capital lease payments as of December 31, 1994 are as follows:
Capital Operating leases leases ------ ------ 1995 $ 130,484 140,400 1996 117,142 140,400 1997 29,564 140,400 1998 4,685 140,400 1999 - 140,400 Thereafter - 292,500 --------- --------- Total minimum lease payments 281,875 $ 994,500 ========= Less amount representing interest (at rates ranging from 9% to 14.8%) 31,998 --------- Present value of future minimum lease payments 249,877 Less current portion of capital lease obligations 109,294 --------- Capital lease obligations, excluding current portion $ 140,583 =========
(Continued) F-31 34 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Notes to Consolidated and Combined Financial Statements (5) Notes Payable and Notes Payable to Affiliates Notes payable and notes payable to affiliates consist of the following:
1994 1993 ---- ---- Note payable to bank, bearing interest at bank's base rate plus 1%, secured by the assets and capital stock of the Predecessor $ -- 9,358,136 Credit facility with bank, bearing interest at the prime rate plus 1% (8.5% at December 31, 1994), matures January 2002, secured by the assets and capital stock of the Company 6,000,000 -- Notes payable to an individual in connection with an acquisition, principal payments of $5,000 due monthly through October 1996, unsecured (note 11) 110,000 48,049 Note payable in connection with an acquisition, bearing interest at 8%, principal payments of $2,677 including interest due monthly through January 2002, unsecured 189,494 -- Note payable in connection with an acquisition, non-interest bearing, principal due June 1995, unsecured 106,235 -- ---------- ---------- Notes payable 6,405,729 9,406,185 ---------- ---------- Note payable to a majority stockholder, bearing interest at bank's base rate plus 1%, with interest payable quarterly, unsecured, subordinated -- 500,000 Note payable to a majority stockholder, bearing interest at 6%, interest payable quarterly, matured April 1994, unsecured -- 15,000 ---------- ---------- Notes payable to affiliates -- 515,000 ---------- ---------- Less current portion of notes payable and notes payable to affiliates 651,393 373,200 ---------- ---------- Notes payable and notes payable to affiliates excluding current portion $5,754,336 9,547,985 ========== ==========
(Continued) F-32 35 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Notes to Consolidated and Combined Financial Statements The aggregate maturates of the notes payable subsequent to December 31, 1994 are as follows: 1995 $ 651,393 1996 1,220,520 1997 462,223 1998 499,268 1999 513,937 Thereafter 3,058,388 ----------- $ 6,405,729 ===========
The credit facility with the bank allows SOA to borrow up to $15,000,000 and SOA or ESS to borrow up to $500,000. The aggregate principal amount outstanding at any time is limited based on factors that include permitted acquisition expenditures, loss prevention program advances and recurring monthly revenue, as defined. Cash advances bear interest at the prime rate plus 1.25% or 1.00% depending upon the ratio of bank debt to net operating income, as defined. However, the interest rate is decreased by 25 basis points when cash advances reach $10,000,000. The credit facility required a $170,000 facility fee and also requires a .5% commitment fee on the unused portion of the facility. All borrowings outstanding as of December 31, 1996 and June 30, 1997 will be converted into 5 year and 4.5 year term loans, respectively. The credit facility contains various covenants including the requirement that the Company maintain specific interest, debt, and current asset ratios. The credit facility also limits capital expenditures and the payment of dividends. The Company was in compliance with all covenants at December 31, 1994. On December 16, 1994, the Company executed an interest rate protection agreement with the bank that caps the interest rate to be paid on $4,500,000 of the indebtedness. The Company paid $54,000 for this agreement, which expires December 19, 1997. The Company paid interest of approximately $51,239 and $37,300 to a majority stockholder in 1994 and 1993, respectively. (6) Income Taxes The Predecessor was an S Corporation for federal income tax purposes and was not subject to federal and state income taxes. At December 1, 1994, the S Corporation election was terminated and the Company became subject to federal and state income taxes. No income tax expense or benefit was recorded for the cumulative temporary differences as of the date of termination. No income tax expense was recorded for the period December 1, 1994 through December 31, 1994 due to net operating losses. (Continued) F-33 36 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Notes to Consolidated and Combined Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1994 are as follows: Deferred tax assets: Net operating loss carryforward $ 458,664 Allowance for bad debts 43,200 Accrued expenses 26,386 --------- Gross deferred tax assets 528,250 Less valuation allowance (454,563) Net deferred tax assets $ 73,687 ========= Deferred tax liabilities: Property and equipment depreciation $ 73,687 =========
A valuation allowance has been provided because management has not determined that it is more likely than not that the deferred tax asset will be realized. The net change in the total valuation allowance for the year ended December 31, 1994 was an increase of $454,563. At December 31, 1994, the Company has federal net operating loss carryforwards of approximately $1,300,000 which begin to expire in 1999. (7) Stockholders' Deficiency At December 31, 1994, the capital of the Company consisted of 2,000,000 shares of authorized $.01 par value common stock and 100,000 shares of authorized $.01 par value preferred stock. 287,634 shares of common stock and 50,000 shares of preferred stock were issued and outstanding. The Company's preferred stock is convertible into common stock at the option of the stockholder. The conversion rate is equal to the original purchase price of the stock, as defined, divided by $20 per share. The preferred stock has voting rights equal to the number of common shares they are convertible into and is entitled to per annum cumulative dividends of nine percent of the original purchase price per share. The liquidation preference for the preferred stock is the greater of the original purchase price plus accrued dividends or the calculated value to be paid per share assuming conversion of the preferred stock into common stock. At December 31, 1993, the capital of SOA consisted of 1,000,000 shares of authorized $1 par value common stock and 250,000 shares of authorized 7.5%, cumulative, redeemable preferred stock with a $1 par value. 115,451 shares of common stock were issued and outstanding at December 31, 1993. No preferred stock was outstanding. (Continued) F-34 37 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Notes to Consolidated and Combined Financial Statements At December 31, 1993, the capital of ESS consisted of 100,000 shares of authorized $1 par value common stock with 1,000 shares issued and outstanding. During 1993, a merger of the Predecessor resulted in a decrease in combined stock of $4,044, a decrease in combined additional paid-in capital of $5,703 and a decrease in combined treasury stock of $9,747. During 1994, the shareholder of the Predecessor exchanged all of the outstanding stock of the Predecessor for 287,634 shares of the Company's common stock. (8) Profit Sharing Plan The Company has a qualified 401(k) profit sharing plan (the Plan) covering certain employees twenty years of age and over who have completed one year of service. Company matching and profit sharing contributions to the Plan are at the discretion of the Board of Directors, but are limited to amounts deductible under the Internal Revenue Code. The Company presently matches 25% of employee contributions up to 8% of the employee's salary. For the years ended December 31, 1994 and 1993, Company or Predecessor matching contributions to the Plan totaled $15,430 and $15,976, respectively. No profit sharing contribution was made during 1994 or 1993. (9) Acquisitions During 1994, the Company acquired certain operating assets from various alarm companies as follows:
Acquisition Date Company Purchase Price ---------------- ------- -------------- August 29, 1994 Affiliated Security Systems, Inc. $ 269,494 October 14, 1994 Ahwatukee Security, Inc. 292,254
The acquisitions were accounted for by the purchase method of accounting and, accordingly, the purchase price was allocated to tangible and intangible assets based on their fair values as determined by management. The results of operations of the alarm accounts acquired are included in the Company's results of operations since the date of each acquisition. The total purchase price was allocated as follows: Property and equipment $ 6,550 Monitored alarm accounts 515,198 Covenants not to compete 40,000 -------- $561,748 ========
(Continued) F-35 38 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Notes to Consolidated and Combined Financial Statements In addition, the Company capitalized an additional $107,474 of intangible assets related to an acquisition that occurred in 1990. The assets arose from an adjustment to the original purchase price. The results of operations of the acquired companies have been combined with the results of the Company as of their respective dates of acquisition. Had the 1994 business combinations occurred prior to January 1, 1994, the Company's net sales, net loss and net loss per share of common stock for the year ended December 31, 1994 would have been $11.5 million, $230,248 and $2.01, respectively. (10) Commitments The Company operates under long-term franchise agreements with Sonitrol through the year 2019. The agreements allow it to market and sell Sonitrol products and services under the Sonitrol name in exchange for royalty fees of $3.30 per customer per month of service. Royalty fee expense, a component of cost of sales, was $69,570 and $64,731 for the years ended December 31, 1994 and 1993, respectively. (11) Litigation In September 1992, an action was filed against the Predecessor claiming breach of contract and other allegations relating to the Predecessor's acquisition of certain alarm accounts. The action was settled in December 1994 through arbitration. The Company paid $50,000 at the settlement date and has recorded the remaining amount due of $110,000 in notes payable (note 5). The additional amount payable as a result of the settlement of this claim was recorded as an increase in intangible assets recorded in connection with the acquisition. In April of 1993, a minority shareholder objected to the merger of the Predecessor and made a claim for the fair value of his stock and other allegations. The claim was settled through arbitration in November of 1994 resulting in the minority shareholder being awarded $53,200 as the value of his stock in the Predecessor. In December of 1994, the minority shareholder filed a claim which restates the prior allegations. Management believes that the litigation and claims will be resolved in the Company's favor. The Company is involved in certain other legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without a material effect on the Company's financial position or results of operations. (12) Subsequent Events On March 31, 1995, the Company purchased the stock of G.T.M.T., Inc., G.T.M.P. Holding Company, Inc., and Dictoguard, Inc. for $6,000,000. The purchase price is subject to certain adjustments for decreases in recurring monthly revenues and changes in guard and patrol revenue. The Company also paid $2,700,000 to certain individuals for non-compete covenants. The stock purchase and non-compete covenants were financed with the Company's credit facility. (Continued) F-36 39 METROL SECURITY SERVICES, INC. AND SUBSIDIARIES (Company) SONITROL OF ARIZONA, INC. AND ELECTRONIC SECURITY SERVICES, INC. (Predecessor) Notes to Consolidated and Combined Financial Statements On April 4, 1995, the Company and the bank entered into a Credit Modification Agreement (agreement) due to the acquisitions which occurred March 31, 1995. The agreement increases the principal amount that may be outstanding at any one time and increases the amount of quarterly installments on the first term loan. Cash advances bear interest at the prime rate plus 1.75%, 1.25% or 1.00% depending on the ratio of bank debt to net operating income, as defined. The agreement also modified various covenants by increasing the amount of capital expenditures that may be incurred each year and adjusting various debt and operating income ratios. F-37 40 PROTECTION ONE, INC. AND SUBSIDIARIES, METROL SECURITY SERVICES, INC. AND SUBSIDIARIES PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) Explanatory Note Protection One Alarm Monitoring, Inc., a wholly owned subsidiary of Protection One, Inc. (the Company), acquired all the issued and outstanding common and preferred stock of Metrol Security Services, Inc. and Subsidiaries on June 28, 1996 (the Acquisition). The Acquisition was financed with borrowing's from the Company's revolving credit facility and through issuance of 417,885 shares of the Company's common stock. The acquisition was accounted for using the purchase method of accounting. The accompanying unaudited pro forma combined statements of operations for the year ended September 30, 1995 and the nine months ended June 30, 1996 were prepared as if the Acquisition had occurred at October 1, 1994. The pro forma combined statement of operations for the year ended September 30, 1995 includes the statement of operations for Metrol Security Services, Inc. and Subsidiaries for the year ended December 31, 1995. The Company intends to dispose of the Guard Operations of Metrol Security Services, Inc. and Subsidiaries on or about September 30, 1996, and therefore revenues and expenses related to the Guard Operations have been excluded from the pro forma combined statements of operations for the year ended September 30, 1995 and the nine months ended June 30, 1996. In the opinion of management of Protection One, Inc. all adjustments necessary to present fairly the accompanying unaudited pro forma combined financial statements have been prepared based upon the terms and structure of the Acquisition. These unaudited pro forma combined financial statements are not necessarily indicative of what results of operations would have been had the Acquisition occurred at the beginning of the respective periods nor do they purport to indicate the results of operations of future periods for the Company. These pro forma combined financial statements should be read in conjunction with the accompanying notes and the historical consolidated financial statements and notes thereto of Protection One, Inc. and Subsidiaries and Metrol Security Services, Inc. and Subsidiaries. F-37 41 PRO FORMA COMBINED STATEMENT OF OPERATIONS For the Year Ended September 30, 1995 (Unaudited) (Dollar amounts in thousands, except for per share amounts)
Historical ------------------------------ Protection Metrol Security Pro Forma Pro Forma One, Inc. Services, Inc. Adjustment (a) Combined ----------- --------------- -------------- ----------- Revenues: Monitoring and service $ 46,308 $ 6,995 $ $ 53,303 Other 9,574 8,693 (4,477)(b) 13,790 ----------- -------- --------- ---------- Total revenues 55,882 15,688 (4,477) 67,093 Cost of Revenues: Monitoring and Service 11,795 2,215 14,010 Other 7,424 6,919 (4,027)(b) 10,316 ----------- -------- --------- ---------- Total cost of revenues 19,219 9,134 (4,027) 24,326 ----------- -------- --------- ---------- Gross profit 36,663 6,554 (450) 42,767 Selling, general and administrative expenses 12,409 3,721 (385)(b) 16,427 682 (c) Loss on acquisition terminations 208 208 Acquisition and transition expense 3,090 3,090 Amortization of subscriber accounts and goodwill 15,460 2,692 1,794 (d) 19,264 (682)(c) ----------- -------- --------- ---------- Operating income (loss) 5,496 141 (1,859) 3,778 Other (income) expenses: Interest expense, net 7,626 1,245 1,059 (e) 9,930 Amortization of debt issuance cost and OID 6,797 6,797 Loss on sales of subscriber accounts 505 505 ----------- -------- --------- ---------- Loss before income taxes, extraordinary items and cumulative effect of change in accounting method - net of taxes (9,432) (1,104) (2,918) (13,454) Income tax benefit 3,595 448 1,085 (f) 5,126 ----------- -------- --------- ---------- Loss before extraordinary items and cumulative effect of change in accounting method - net of taxes $ (5,837) $ (656) $ (1,835) $ (8,328) =========== ======== ========= ========== Loss per common share: Before extraordinary items and cumulative effect of change in accounting method $ (0.87) $ (1.11)(g) Net loss per share $ (2.12) $ (1.99)(h) Weighted average common shares outstanding 8,698,187 417,885 9,116,072
The accompanying notes are an integral part of the pro forma combined statement of operations. F-38 42 NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) For the Year Ended September 30, 1995 (a) See Explanatory Note at the beginning of the Pro Forma Combined Financial Statements. (b) To exclude Guard Operations from revenues, cost of revenues and selling, general and administrative expenses as the Company intends to dispose of the Guard Operations within 90 days of the closing date. (c) To reclassify depreciation from amortization of subscriber accounts and goodwill for Metrol to selling, general and administrative expenses. (d) To reflect amortization, on a straight line basis over 10 years, of the cost of allocated purchase price cost of acquired subscriber accounts, including adjustment for deferred income taxes. (e) To reflect an increase in interest expense, at the rate of 9.5%, on borrowings used to complete the Acquisition. (f) To recognize income tax benefit based upon the Pro Forma Combined tax rate. (g) Loss per common share before extraordinary item and cumulative effect of change in accounting method include the effects of preferred stock dividends and accretion of redeemable preferred stock as noted below.
Metrol Security Protection Services, Pro Forma Pro Forma One, Inc. Inc. Adjustments Combined ---------- -------- ----------- --------- Loss from continuing operations $ (5,837) $(951) $(1,540) $ (8,328) Extraordinary items - losses on early extinguishment of debt, net (8,906) 2,834(f) (6,072) Cumulative effect of change in accounting method, net (1,955) (1,955) -------- ----- ------- -------- Net loss (16,698) (951) 1,294 (16,355) Preferred stock dividends (958) (958) Accretion of redeemable preferred stock (797) (797) -------- ----- ------- -------- Loss attributable to common stock $(18,453) $(951) $ 1,294 $(18,110) ======== ===== ======= ========
F-39 43 PRO FORMA COMBINED STATEMENT OF OPERATIONS For the Nine Month Period Ended June 30, 1996 (Unaudited) (Dollar amounts in thousands, except for per share amounts)
Historical ------------------------------ Protection Metrol Security Pro Forma Pro Forma One, Inc. Services, Inc. Adjustment (a) Combined ----------- --------------- -------------- ----------- Revenues: Monitoring and service $ 46,377 $ 5,621 $ $ 51,996 Other 5,418 6,172 (2,937)(b) 8,653 ---------- -------- --------- ----------- Total revenues 51,795 11,793 (2,937) 60,651 Cost of Revenues: Monitoring and Service 12,651 2,000 14,651 Other 4,685 4,754 (2,241)(b) 7,198 ---------- -------- --------- ----------- Total cost of revenues 17,336 6,754 (2,241) 21,849 ---------- -------- --------- ----------- Gross profit 34,459 5,039 (696) 38,802 Selling, general and administrative expenses 10,082 3,090 (361)(b) 13,322 511 (c) Loss on acquisition terminations 238 (348)(g) (110) Acquisition and transition expense 3,048 3,048 Amortization of subscriber accounts and goodwill 16,108 2,902 243 (d) 18,742 (511)(c) ----------- -------- --------- ----------- Operating income (loss) 5,221 (1,171) (230) 3,800 Other (income) expenses: Interest expense, net 3,052 1,199 376 (e) 4,627 Amortization of debt issuance cost and OID 13,159 13,159 Loss on sales of subscriber accounts 19 19 ----------- -------- --------- ----------- Loss before income taxes, extraordinary items and cumulative effect of change in accounting method - net of taxes (11,009) (2,390) (760) (14,005) Income tax benefit (90) 873 578 (f) 1,381 ----------- -------- --------- ----------- Loss before extraordinary items and cumulative effect of change in accounting method - net of taxes $ (11,099) $ (1,497) $ (28) $ (12,624) =========== ======== ========= =========== Loss per common share: Before extraordinary items and cumulative effect of change in accounting method $ (1.06) $ (1.20)(h) Net loss per share $ (1.06) $ (1.20)(h) Weighted average common shares outstanding 10,749,983 10,749,983
The accompanying notes are an integral part of the pro forma combined statement of operations. F-40 44 NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) For the Nine Month Period Ended June 30, 1996 (a) See Explanatory Note at the beginning of the Pro Forma Combined Financial Statements. (b) To exclude Guard Operations from revenues, cost of revenues and selling, general and administrative expenses as the Company intends to dispose of the Guard Operations within 90 days of the closing date. (c) To reclassify depreciation from amortization of subscriber accounts and goodwill for Metrol to general and administrative expenses. (d) To reflect amortization, on a straight line basis over 10 years, of the cost of allocated purchase price cost of acquired subscriber accounts, including adjustment for deferred income taxes. (e) To reflect an increase in interest expense, at the rate of 8.6%, on borrowings used to complete the Acquisition. (f) To recognize income tax benefit based upon the Pro Forma Combined tax rate. (g) To include proceeds received in key man life insurance settlement in other income. (h) Loss per common share before extraordinary item and cumulative effect of change in accounting method include the effects of preferred stock dividends and accretion of redeemable preferred stock as noted below.
Metrol Security Protection Services, Pro Forma Pro Forma One, Inc. Inc. Adjustments Combined ---------- -------- ----------- --------- Loss from continuing operations $(11,099) $(2,237) $712 $(12,624) Preferred stock dividends (248) (248) -------- ------- ---- -------- Loss attributable to common stock $(11,347) $(2,237) $712 $(12,872) ======== ======= ==== ========
F-41 45 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each of the Registrants has duly caused the Report to be signed on its behalf by the undersigned thereunto duly authorized. PROTECTION ONE, INC. PROTECTION ONE ALARM MONITORING, INC. Date: August 27, 1996 By: /s/ JOHN W. HESSE -------------------------------- John W. Hesse Executive Vice President and Chief Financial Officer 3 EX-5.1 2 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 5.1 [KPMG Peat Marwick LLP letterhead] INDEPENDENT ACCOUNTANTS' CONSENT We consent to incorporation by reference in the registration statement filed on Form S-3 of Protection One, Inc. of our reports dated March 29, 1996 and February 10, 1995, except as to note 12 which is as of April 4, 1995, relating to the consolidated balance sheets of Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years ended December 31, 1995, 1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated June 28, 1996. KPMG Peat Marwick LLP Phoenix, Arizona August 1, 1996 EX-5.2 3 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 5.2 [KPMG PEAT MARWICK LLP LETTERHEAD] INDEPENDENT ACCOUNTANTS' CONSENT We consent to incorporation by reference in the registration statement filed on the Amendment No. 1 to Form S-3 (File No. 333-5849) of Protection One, Inc. of our reports dated March 29, 1996 and February 10, 1995, except as to note 12 which is as of April 4, 1995, relating to the consolidated balance sheets of Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years ended December 31, 1995, 1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated June 28, 1996. KPMG Peat Marwick LLP Phoenix, Arizona August 1, 1996 EX-5.3 4 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 5.3 [KPMG PEAT MARWICK LLP LETTERHEAD] INDEPENDENT ACCOUNTANTS' CONSENT We consent to incorporation by reference in the registration statement filed on Form S-8 (File No. 333-2828) of Protection One, Inc.'s Protection One Employees Savings Plan of our reports dated March 29, 1996 and February 10, 1995, except as to note 12 which is as of April 4, 1995, relating to the consolidated balance sheets of Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years ended December 31, 1995, 1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated June 28, 1996. KPMG Peat Marwick LLP Phoenix, Arizona August 1, 1996 EX-5.4 5 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 5.4 [KPMG PEAT MARWICK LLP LETTERHEAD] INDEPENDENT ACCOUNTANTS' CONSENT We consent to incorporation by reference in the registration statement filed on Form S-8 (File No. 333-2892) of Protection One, Inc.'s 1994 Stock Option Plan of our reports dated March 29, 1996 and February 10, 1995, except as to note 12 which is as of April 4, 1995, relating to the consolidated balance sheets of Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years ended December 31, 1995, 1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated June 28, 1996. KPMG Peat Marwick LLP Phoenix, Arizona August 1, 1996 EX-5.5 6 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 5.5 [KPMG PEAT MARWICK LLP LETTERHEAD] INDEPENDENT ACCOUNTANTS' CONSENT We consent to incorporation by reference in the registration statement filed on the Amendment No. 1 to Form S-3 (File No. 33-99220) of Protection One, Inc. of our reports dated March 29, 1996 and February 10, 1995, except as to note 12 which is as of April 4, 1995, relating to the consolidated balance sheets of Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years ended December 31, 1995, 1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated June 28, 1996. KPMG Peat Marwick LLP Phoenix, Arizona August 1, 1996 EX-5.6 7 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 5.6 [KPMG PEAT MARWICK LLP LETTERHEAD] INDEPENDENT ACCOUNTANTS' CONSENT We consent to incorporation by reference in the registration statement filed on Form S-8 (File No. 33-97542) of Protection One, Inc.'s Employee Stock Purchase Plan of our reports dated March 29, 1996 and February 10, 1995, except as to note 12 which is as of April 4, 1995, relating to the consolidated balance sheets of Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years ended December 31, 1995, 1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated June 28, 1996. KPMG Peat Marwick LLP Phoenix, Arizona August 1, 1996 EX-5.7 8 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 5.7 [KPMG PEAT MARWICK LLP LETTERHEAD] INDEPENDENT ACCOUNTANTS' CONSENT We consent to incorporation by reference in the registration statement filed on Form S-8 (File No. 33-95702) of Protection One, Inc.'s 1994 Stock Option Plan of our reports dated March 29, 1996 and February 10, 1995, except as to note 12 which is as of April 4, 1995, relating to the consolidated balance sheets of Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years ended December 31, 1995, 1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated June 28, 1996. KPMG Peat Marwick LLP Phoenix, Arizona August 1, 1996 EX-5.8 9 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 5.8 [KPMG PEAT MARWICK LLP LETTERHEAD] INDEPENDENT ACCOUNTANTS' CONSENT We consent to incorporation by reference in the registration statement filed on the Post-Effective Amendment No. 1 to Form S-3 (File No. 33-83494) of Protection One, Inc. of our reports dated March 29, 1996 and February 10, 1995, except as to note 12 which is as of April 4, 1995, relating to the consolidated balance sheets of Metrol Security Services, Inc. as of December 31, 1995 and 1994 and December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years ended December 31, 1995, 1994 and 1993, which reports appear in Protection One, Inc.'s Form 8-K/A dated June 28, 1996. KPMG Peat Marwick LLP Phoenix, Arizona August 1, 1996 -----END PRIVACY-ENHANCED MESSAGE-----