-----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, Sv3WJqj+Q/MlZTTnuSMebplg4ZbLulvObrjgrpXCGGmoJt1RlyjrCf/qd/9SphmB wGGctp9axKo6vsWuXagASg== 0000950148-97-001354.txt : 19970515 0000950148-97-001354.hdr.sgml : 19970515 ACCESSION NUMBER: 0000950148-97-001354 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTION ONE INC CENTRAL INDEX KEY: 0000916230 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 931063818 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24780 FILM NUMBER: 97603300 BUSINESS ADDRESS: STREET 1: 6011 BRISTOL PARKWAY CITY: CULVER CITY STATE: CA ZIP: 90230 BUSINESS PHONE: 3103386930 MAIL ADDRESS: STREET 1: 3900 SW MURRAY BLVD CITY: BEAVERTON STATE: OR ZIP: 97005 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTION ONE ALARM MONITORING INC CENTRAL INDEX KEY: 0000916310 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 931064579 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12181 FILM NUMBER: 97603301 BUSINESS ADDRESS: STREET 1: 6011 BRISTOL PARKWAY CITY: CULVER CITY STATE: CA ZIP: 90230 BUSINESS PHONE: 3103386930 MAIL ADDRESS: STREET 1: 3900 SW MURRAY BLVD CITY: BEAVERTON STATE: OR ZIP: 97005 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________
0-24780 33-73002-01 (Commission File Number) (Commission File Number) PROTECTION ONE, INC. PROTECTION ONE ALARM MONITORING, INC. (EXACT NAME OF REGISTRANT (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) AS SPECIFIED IN ITS CHARTER) DELAWARE DELAWARE (State or Other Jurisdiction (State or Other Jurisdiction of Incorporation or Organization) of Incorporation or Organization) 93-1063818 93-1065479 (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 Offices, (Address of Principal Executive Offices, Including Zip Code) Including Zip Code) (310) 342-6300 (310) 342-6300 (Registrant's Telephone Number, (Registrant's Telephone Number, Including Area Code) Including Area Code)
Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that such registrants were required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of May 8, 1997, Protection One, Inc. had outstanding 13,745,002 shares of Common Stock, par value $0.01 per share. As of such date, Protection One Alarm Monitoring, Inc. had outstanding 110 shares of Common Stock, par value $0.10 per share, all of which shares were owned by Protection One, Inc.. Protection One Alarm Monitoring, Inc. meets the conditions set forth in General Instructions H(1)(a) and (b) for Form 10-Q and is therefore filing this form with the reduced disclosure format set forth therein. 2 PART I ITEM 1. FINANCIAL STATEMENTS PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
SEPTEMBER 30, MARCH 31, 1996 1997 -------------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ............................. $ 1,782 $ 0 Restricted cash ....................................... 3,680 5,016 Receivables, net ...................................... 12,743 14,909 Inventories ........................................... 1,920 1,910 Prepaid expenses ...................................... 1,221 1,774 Deferred tax asset .................................... 7,561 9,197 --------- --------- Total current assets ............................. 28,907 32,806 Property and equipment, net ................................. 9,952 11,948 Subscriber accounts and intangibles, net .................... 257,354 299,193 Assets held for sale ........................................ 775 -- Deposits .................................................... 648 449 --------- --------- $ 297,636 $ 344,396 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ...................................... $ 2,278 $ 2,190 Accrued salaries, wages and benefits .................. 1,495 1,385 Other accruals ........................................ 1,048 597 Purchase holdbacks .................................... 9,942 13,176 Acquisition transition costs .......................... 4,326 6,865 Other current liabilities ............................. 1,623 1,330 Deferred revenue ...................................... 13,827 16,042 --------- --------- Total current liabilities ........................ 34,539 41,585 Long-term debt, net of current portion ...................... 225,650 264,340 Deferred tax liability ...................................... 7,561 8,393 Other liabilities ........................................... 1,059 649 --------- --------- Total liabilities ................................ 268,809 314,967 --------- --------- Commitments and contingencies (Note 8) Stockholders' equity: Common Stock, $.01 par value, 40,000,000 shares authorized, 12,914,783 and 13,728,663 shares issued and outstanding, at September 30, 1996 and March 31, 1997, respectively ... 129 137 Additional paid-in capital .................................. 79,767 89,182 Accumulated deficit ......................................... (51,069) (59,890) --------- --------- Total stockholders' equity ....................... 28,827 29,429 --------- --------- $ 297,636 $ 344,396 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 2 3 PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
SIX MONTHS ENDED MARCH 31, -------------------------- 1996 1997 -------- -------- (UNAUDITED) Revenues: Monitoring and related services .............. $ 30,966 $ 45,367 Other ........................................ 2,212 1,708 -------- -------- Total revenues .......................... 33,178 47,075 Cost of revenues: Monitoring and related services .............. 8,853 12,575 Other ........................................ 1,374 1,146 -------- -------- Total cost of revenues .................. 10,227 13,721 -------- -------- Gross profit ............................ 22,951 33,354 Selling, general and administrative expenses ....... 6,914 9,535 Acquisition and transition expenses ................ 1,927 2,632 Amortization of intangibles and depreciation expense 10,841 17,565 -------- -------- Operating income ........................ 3,269 3,622 Other expenses: Interest expense, net ........................ 1,856 4,054 Amortization of OID and debt issuance costs .. 8,633 10,009 Loss on sales of assets ...................... 19 -- Loss on assets held for sale ................. -- 166 -------- -------- Loss before income taxes ................ (7,239) (10,607) Income tax benefit ................................. -- (1,786) -------- -------- Net loss ..................................... (7,239) (8,821) Preferred stock dividends .......................... 248 -- -------- -------- Loss attributable to common stock ............ $ (7,487) $ (8,821) ======== ======== Net loss per common share .................... $ (0.75) $ (0.65)
The accompanying notes are an integral part of the consolidated financial statements. 3 4 PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1996 1997 -------- -------- (UNAUDITED) Revenues: Monitoring and related services .............. $ 16,431 $ 23,451 Other ........................................ 1,235 963 -------- -------- Total revenues .......................... 17,666 24,414 Cost of revenues: Monitoring and related services .............. 4,677 6,504 Other ........................................ 709 523 -------- -------- Total cost of revenues .................. 5,386 7,027 -------- -------- Gross profit ............................ 12,280 17,387 Selling, general and administrative expenses ....... 3,601 5,036 Acquisition and transition expenses ................ 1,172 1,378 Amortization of intangibles and depreciation expense 5,681 9,247 -------- -------- Operating income ........................ 1,826 1,726 Other expenses: Interest expense, net ........................ 921 2,167 Amortization of OID and debt issuance costs .. 4,386 5,090 Loss on sales of assets ...................... 19 -- Loss on assets held for sale ................. -- 43 -------- -------- Loss before income taxes ................ (3,500) (5,574) Income tax expense ................................. -- 71 -------- -------- Net loss ..................................... (3,500) (5,645) Preferred stock dividends .......................... 79 -- -------- -------- Loss attributable to common stock ............ $ (3,579) $ (5,645) ======== ======== Net loss per common share .................... $ (0.33) $ (0.41)
The accompanying notes are an integral part of the consolidated financial statements. 4 5 PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED MARCH 31, -------------------------- 1996 1997 --------- ---------- (UNAUDITED) Cash flow from operating activities: Net loss .......................................................... $ (7,239) $ (8,821) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation .................................................. 780 1,282 Amortization of intangibles .................................. 10,061 16,282 Amortization of OID and debt issuance costs ................... 8,633 10,009 Deferred tax benefit .......................................... -- (2,327) Provision for doubtful accounts ............................... 1,039 1,792 Changes in assets and liabilities, net of effects of acquisitions: Receivables ................................................... (3,005) (3,566) Inventories ................................................... 271 49 Prepaid expenses and deposits ................................. (438) (298) Accounts payable .............................................. 416 (88) Accrued liabilities ........................................... (355) (838) Deferred revenue .............................................. 352 722 -------- -------- Net cash provided by operating activities ................ 10,515 14,198 -------- -------- Cash flows from investing activities: Cash restricted for acquisitions .............................. 0 (1,336) Purchases of property and equipment ........................... (2,387) (3,260) Sales of assets previously held for sale ...................... -- 187 Acquisitions, net of cash received ............................ (38,776) (37,893) Payments on purchase holdbacks ................................ (50) (331) Deferred acquisition payments ................................. (1,295) (977) Acquisition transition costs .................................. (1,525) (1,136) -------- -------- Net cash used in investing activities ............... (44,033) (44,746) -------- -------- Cash flows from financing activities: Payments on long-term debt .................................... (23,828) (7,500) Proceeds from long-term debt .................................. 38,077 37,002 Debt and equity issuance costs ................................ (634) (753) Issuance of preferred and common stock and warrants ........... 23,648 17 Cash dividends paid ........................................... (168) -- -------- -------- Net cash provided by financing activities ................ 37,095 28,766 -------- -------- Net decrease in cash and cash equivalents ................ 3,577 (1,782) Cash and cash equivalents: Beginning of period ........................................... 1,256 1,782 -------- -------- End of period ................................................. $ 4,833 $ 0 ======== ======== Interest paid during the period ................................... $ 1,500 $ 4,087 ======== ======== Taxes paid during current year (see Note 6) ....................... $ -- $ 627 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 5 6 PROTECTION ONE, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Dollar amounts in thousands) 1. BASIS OF CONSOLIDATION AND INTERIM FINANCIAL INFORMATION: The accompanying unaudited consolidated financial statements include the accounts of Protection One, Inc. ("POI") and its wholly owned subsidiary Protection One Alarm Monitoring, Inc. ("Monitoring" and together with POI, the "Company"). Monitoring's former wholly owned subsidiary, Security Holdings, Inc. was merged into Monitoring on March 31, 1997. The assets, results of operations and stockholder's equity of Monitoring comprise substantially all the assets, results of operations and stockholders' equity of the Company on a consolidated basis. POI's principal assets and sole operations are in and through its investment in Monitoring. All significant intercompany balances and transactions have been eliminated in consolidation. Separate financial statements for Monitoring have not been provided because the Company does not believe such separate financial statements are material to investors. Summarized consolidated financial information of Monitoring is included in Note 9. The Company's unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q which mandate adherence to Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended September 30, 1996 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 31, 1996. In the opinion of management of the Company, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results of operations for the three and six month periods ended March 31, 1997 are not necessarily indicative of the results to be expected for the full year. Certain items in the September 30, 1996 financial statements have been reclassified to conform to the March 31, 1997 presentation. Recent Accounting Pronouncement: In February 1997, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 - "Earnings per Share", which is required to be adopted in 1997. The unaudited pro forma "basic" and "diluted" earnings per share under the new standard do not differ from the earnings per share calculated under the existing standard. 2. RECEIVABLES: Receivables, which consist primarily of trade accounts receivable of $22,552 at March 31, 1997 and $18,284 at September 30, 1996 have been reduced by allowances for doubtful accounts of $7,643 and $5,541, respectively. Included in receivables and deferred revenue at March 31, 1997 and September 30, 1996 are invoices billed in advance of the periods in which services are provided totaling $8,364 and $7,309, respectively. The provisions for doubtful accounts for the six months ended March 31, 1997 and 1996 were $1.8 million and $1.0 million, respectively. 3. SUBSCRIBER ACCOUNTS AND INTANGIBLES: Subscriber accounts and intangibles (at cost) consist of the following:
September 30, March 31, 1996 1997 --------- --------- Acquired subscriber accounts $ 298,767 $ 355,397 Debt issuance costs ......... 11,847 12,607 Goodwill and other .......... 2,497 4,049 --------- --------- 313,111 372,053 Less accumulated amortization (55,757) (72,860) --------- --------- $ 257,354 $ 299,193 ========= =========
6 7 PROTECTION ONE, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONT.) (Dollar amounts in thousands) 3. SUBSCRIBER ACCOUNTS AND INTANGIBLES (CONT.): Reconciliation of acquired subscriber accounts:
Six Months Year Ended Ended September 30, March 31, 1996 1997 ------------- --------- Balance, beginning of period ..... $ 184,463 $ 298,767 Acquisition of subscriber accounts 119,629 59,021 Charges against purchase holdbacks (5,325) (2,391) --------- --------- Balance, end of period ........... $ 298,767 $ 355,397 ========= =========
In conjunction with certain purchases of subscriber accounts, the Company withholds a portion of the purchase price as a reserve to offset qualifying attrition of the acquired subscriber accounts for a specified period as provided for in the purchase agreements, and as a reserve for purchase price settlements of assets acquired and liabilities assumed. Reconciliation of purchase holdbacks:
Six Months Year Ended Ended September 30, March 31, 1996 1997 ------------- ---------- Balance, beginning of period ...... $ 4,949 $ 9,942 Purchase holdback additions ....... 13,850 5,956 Charges against subscriber accounts (5,325) (2,391) Cash paid to sellers .............. (3,532) (331) -------- -------- Balance, end of period ............ $ 9,942 $ 13,176 ======== ========
4. LOSS PER COMMON SHARE: The computation of fully diluted net loss per share for each of the periods presented was antidilutive; as such, no presentation of fully diluted earnings per share has been included in the consolidated statements of operations. The weighted average shares outstanding used in the computation of the net loss attributable to common shares are as follows:
Six Months Ended Three Months Ended March 31, March 31, -------------------------- ---------------------------- 1996 1997 1996 1997 --------- ---------- ---------- ---------- Common Stock 9,959,926 13,576,579 10,828,400 13,707,012
5. DIVIDEND RESTRICTIONS: The Company's Amended and Restated Credit Agreement (the "Credit Agreement") governing its revolving credit facility (the "Revolving Credit Facility") and the Indenture governing Monitoring's 13 5/8% Senior Subordinated Discount Notes due 2005 (the "Discount Notes") place certain restrictions on POI's and Monitoring's ability to make dividend payments, distributions and other asset transfers in respect of such company's capital stock. At March 31, 1997, under provisions of the Credit Agreement (the most restrictive agreement), no amounts were available for such dividend payments, distributions or other transfers by POI or Monitoring. 7 8 PROTECTION ONE, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONT.) (Dollar amounts in thousands) 6. INCOME TAXES: For the six months ended March 31, 1997, the Company experienced a net increase in its net deferred tax asset valuation allowance of $3.3 million. At March 31, 1997, the Company had $28.1 million in Federal net operating loss ("NOL") carryforwards for regular tax purposes and $29.3 million for alternative minimum tax ("AMT NOL") purposes, which expire in the years 2006-2010. These carryforwards are available, subject to certain restrictions, to reduce taxable income, alternative minimum taxable income and income taxes payable in future years. As a result of the issuance of warrants in conjunction with the Company's refinancing plan, as well as various prior issuances of preferred and common stock and stock warrants, there are annual limitations on the amount of regular tax NOL and AMT NOL carryforwards, that can be used to reduce taxable income, alternative minimum taxable income and income tax payable. Future substantial changes in the Company's ownership could create additional limitations. The Company has utilized $4.0 million in net operating loss carryforwards for the six months ended March 31, 1997 which results in the effective tax rate being lower than the expected statutory rate. The tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities are presented below:
September 30, March 31, 1996 1997 -------- -------- Deferred tax assets: Allowances for doubtful accounts .................. $ 2,214 $ 2,966 Acquisition transition costs and purchase holdbacks 5,701 7,778 Performance warrants .............................. 1,662 1,685 Net operating loss carryforwards .................. 12,814 10,279 OID amortization .................................. 8,634 11,858 Other ............................................. 139 61 Less valuation allowance .......................... (1,907) (5,199) -------- -------- Total deferred tax assets .................... 29,257 29,428 Deferred tax liabilities: Differences in depreciation, amortization and acquisition basis ............................. (29,257) (28,624) -------- -------- Net deferred tax asset ....................... $ -- $ 804 ======== ========
The valuation allowances at September 30, 1996 and March 31, 1997 reflect current estimates of limitations on utilization of NOL carryforwards for Federal and state income tax purposes. The balance sheet presentation of the net deferred tax asset is as follows:
September 30, March 31, 1996 1997 ------------- --------- Current deferred tax asset $7,561 $9,197 Non-current deferred tax liability 7,561 8,393 ------ ------ $ -- $ 804 ====== ======
In October, 1996, the Company acquired all of the outstanding shares of Security Holdings, Inc. For financial reporting purposes, the assets acquired and the liabilities assumed were valued at fair market value as of the date of purchase. For income tax reporting purposes, the acquisition was treated as a non-taxable stock purchase with acquired assets and liabilities retaining their historical tax basis. The deferred tax liability resulting from the acquisition basis difference exceeded the Company's existing net deferred tax asset (before reduction for valuation allowance) at the date of acquisition. Consequently, the existing deferred tax asset valuation allowance as of the acquisition date was eliminated. This resulted in a reduction to the goodwill and deferred tax liability account balances that were recognized as a result of 8 9 PROTECTION ONE, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONT.) (Dollar amounts in thousands) 6. INCOME TAXES (CONT.): the acquisition. For the six months ended March 31, 1997, the Company generated (subsequent to the acquisition) additional deferred tax assets which exceeded the Company's net deferred tax liability. To the extent these additional deferred tax assets offset the net deferred tax liability that was required to be recognized on the acquisition, a deferred income tax benefit was recognized on the Company's income statement. Due to uncertainties regarding the future utilization of a portion of the deferred tax asset, a valuation allowance was recorded. 7. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisitions:
Six months ended March 31, -------------------------- 1996 1997 -------- -------- Subscriber accounts acquired .............. $ 51,925 $ 56,708 Goodwill .................................. -- 1,523 Inventories ............................... 78 39 Accounts receivable, net .................. 56 282 Property and equipment .................... 22 18 Other assets acquired ..................... 235 137 -------- -------- Total assets acquired ................ 52,316 58,707 -------- -------- Cash paid to seller ....................... 38,382 37,471 Stock issued to seller .................... -- 9,406 Acquisition expenses ...................... 391 572 Purchase holdbacks ........................ 7,207 3,235 Acquisition transition reserves ........... 2,303 3,675 Deferred revenue acquired ................. 2,074 1,492 Other liabilities assumed ................. 1,959 2,856 -------- -------- Purchase price and assumed liabilities $ 52,316 $ 58,707 ======== ========
Cash paid to sellers, payments for acquisition expenses and payments on liabilities assumed in conjunction with acquisitions are included in cash used in investing activities in the period paid. Deferred revenue, which represents advance billings to subscribers, is recognized as revenue in the period in which the related service is provided. Such amounts are considered a non-cash component of operations and are reflected as a reduction in cash provided by operating activities. The following reflects (decreases) in assets and decreases (increases) in liabilities and capital stock resulting from non-cash investing and financing activities which occurred in the six months ended March 31, 1996:
Additional Series H Purchase Common Paid-In Preferred Intangibles Holdbacks Stock Capital Stock ----------- --------- -------- ----------- ---------- Charge off of purchase holdbacks... $(1,436) $ 1,436 -- -- -- Conversion of Series H Preferred... -- -- $ (7) $(6,120) $ 6,127 Reclassification of stock offering costs .................. (507) -- -- 507 -- ------- ------- ------- ------- ------- $(1,943) $ 1,436 $ (7) $(5,613) $ 6,127 ======= ======= ======= ======= =======
9 10 PROTECTION ONE, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONT.) (Dollar amounts in thousands) 7. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES(CONT.) The following reflects increases (decreases) in assets and increases in liabilities and capital stock resulting from non-cash investing and financing activities which occurred in six months ended March 31, 1997:
Additional Other Assets Held Purchase Common Paid-In Receivables For Sale Intangibles Holdbacks Stock Capital ----------- ------------ ----------- --------- -------- ----------- Chargeoff of purchase holdbacks ............. $(2,391) $ 2,391 Common shares issued for acquisitions ....... 9,406 $ (8) $(9,398) Sale of guard and patrol operations ......... $ 588 $ (588) ------- ------ ------- ------- ------- ------- $ 588 $ (588) $ 7,015 $ 2,391 $ (8) $(9,398) ======= ====== ======= ======= ======= =======
8. COMMITMENTS AND CONTINGENCIES: The Company is a party to claims and matters of litigation incidental to the normal course of business. The ultimate outcome of these matters cannot presently be determined; however, in the opinion of management of the Company, the resolution of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. 9. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION: POI has fully and unconditionally guaranteed the Discount Notes and the $103.5 million principal amount of 6 3/4% Convertible Senior Subordinated Notes due 2003 (the "Convertible Notes") on a joint and several basis. The assets, results of operations and stockholder's equity of Monitoring comprise substantially all of the assets, results of operations and stockholders' equity of the Company on a consolidated basis. POI's principal assets and sole operations are in and through its investment in Monitoring. Monitoring's former wholly owned subsidiary, Security Holdings, Inc., was merged into Monitoring on March 31, 1997. All significant intercompany balances and transactions have been eliminated in consolidation. Separate audited financial statements for Monitoring have not been provided because the Company does not believe such separate financial statements and separate summarized financial information are material to investors. Summarized consolidated financial information of Monitoring is presented below:
September 30, March 31, 1996 1997 ------------- ---------- (unaudited) (unaudited) Summarized Balance Sheet Assets Current assets .................................. $ 28,907 $ 32,806 Subscriber accounts and intangibles, net ..... $257,354 $299,193 Other non-current assets ..................... $ 11,375 $ 12,397 Liabilities and Stockholders' Equity Deferred revenue ............................. $ 13,827 $ 16,042 Other current liabilities .................... $ 20,712 $ 25,543 Long-term debt, net of current portion ....... $225,650 $264,340 Other long-term liabilities .................. $ 8,620 $ 9,042 Stockholders' equity ......................... $ 28,827 $ 29,429
Three Months Three Months Six Months Six Months Ended Ended Ended Ended March 3, 1996 March 31, 1997 March 31, 1996 March 31, 1997 ------------- -------------- -------------- -------------- Summarized Statements of Operations Revenue .................................... $ 17,666 $ 24,414 $ 33,178 $ 47,075 Gross Profit ......................... $ 12,280 $ 17,387 $ 22,951 $ 33,354 Net loss ............................. $ (3,500) $ (5,645) $ (7,239) $ (8,821)
10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters discussed in this section are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified as such because the context of the statement includes words such as the Company or its management "believes," "expects," "anticipates" or other words of similar import. Similarly, statements herein that describe the Company's objectives, plans or goals are forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Information with respect to these risks and uncertainties is included on pages 5-11 of POI's prospectus dated January 2, 1997, and under the caption "Risk Factors" in Item 5(d) on the Current Report on Form 8-K filed by Protection One, Inc. and Protection One Alarm Monitoring, Inc. dated September 20, 1996, which information is incorporated herein by reference. POI's sole asset is, and all of POI's operations are conducted through, POI's investment in Monitoring; in addition, all of Monitoring's long-term debt has been guaranteed on a full and unconditional basis by POI. Accordingly, no separate analysis of results of operations of Monitoring has been included herein. OVERVIEW For an overview of the Company's accounting policies and specific discussions of, among other things, a change in the method of accounting for certain acquisition and transition expenses and the impact of SFAS 121 on the Company's financial statements, see the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. Acquisition and Dealer Program Activity. A significant portion of the Company's growth has been generated by the purchase of subscriber accounts through the Company's Dealer Program and through the acquisition of portfolios of subscriber accounts from other alarm companies. The Company's Dealer Program consists of exclusive purchase agreements with independent alarm companies specializing in the sale and installation of new alarm systems. Dealer Program participants install alarm systems (which have a Protection One logo on the keypad), arrange for subscribers to enter into Protection One alarm monitoring agreements, and install Protection One yard signs and window decals. All of these subscribers are contacted individually by Company personnel, at the time of purchase of the accounts from the dealer, to facilitate customer satisfaction and quality control. In addition, the Company requires dealers to evaluate the credit history of prospective new subscribers. The Company also purchases portfolios of subscriber accounts. Because the Company typically acquires only the subscriber accounts (and not the accounts receivable or similar assets) of the sellers, the Company focuses its pre-acquisition review and analysis on the quality and stability of the subscriber accounts to verify the monthly recurring revenue ("MRR") represented by such accounts. If the subscriber accounts to be purchased pass such due diligence scrutiny, the Company then applies its monitoring and other servicing costs to such MRR as a basis for determining the purchase price to be paid by the Company. To protect the Company against the loss of acquired accounts, the Company typically seeks to obtain from the seller a guarantee against the subscriber account cancellation for a period following the acquisition and the right to retain a portion of the acquisition price (a "purchase price holdback") against the MRR lost due to subscriber account cancellations during the specified period. The Company obtains a similar purchase price holdback in its purchases through the Dealer Program. During the six months ended March 31, 1997 (the "first half of fiscal 1997"), the Company added (through its Dealer Program and acquisitions of nine portfolios of subscriber accounts) an aggregate of approximately 48,400 subscriber accounts for a total purchase price of approximately $59.0 million. The MRR of the acquired accounts ranged from approximately $15.00 to $60.00, with an average MRR of $28.27. Of the nine acquisitions completed during the first half of fiscal 1997 by the Company, purchase price holdbacks in amounts that ranged from 0% to 20% of the initial purchase price (and averaged 12% of the initial purchase price) and attrition guarantee periods ranged from 0 months to 12 months (and averaged 11.9 months). 11 12 Subscriber Attrition. Subscriber attrition has a direct impact on the Company's results of operations, since it affects both the Company's revenues and its amortization expense. Attrition can be measured in terms of canceled subscriber accounts and in terms of decreased MRR resulting from canceled subscriber accounts. Gross subscriber attrition is defined by the Company for a particular period as a quotient, the numerator of which is equal to the number of subscribers who disconnect service during such period and the denominator of which is the average of the number of subscribers at each month end during such period. Net MRR attrition is defined by the Company for a particular period as a quotient, the numerator of which is an amount equal to gross MRR lost as the result of canceled subscriber accounts or services during such period, net of (i) MRR generated during such period by the sale of additional services and increases in rates to existing subscribers, (ii) MRR generated during such period from the connection of subscribers who move into premises previously occupied by subscribers and in which existing systems are installed and from conversion of accounts that were previously monitored by other companies to the Company's monitoring service (i.e., "reconnects" and "conversions"); and (iii) MRR attributable to canceled accounts that, by virtue of a purchase holdback are "put" back to the seller of such accounts during such period (i.e., "guaranteed accounts"); and the denominator of which is the average month-end MRR in effect during such period. While the Company reduces the gross MRR lost during a period by the amount of guaranteed accounts provided for in purchase agreements with sellers, in some cases the Company may not collect all or any of the reimbursement due it from the sellers. The following table sets forth the Company's gross subscriber attrition and net MRR attrition for the periods indicated:
TWELVE MONTHS ENDED --------------------------------------------------- 3/31/96 6/30/96 9/30/96 12/31/96 3/31/97 ------- ------- ------- -------- ------- Gross subscriber attrition 20.5% 19.9% 18.3% 16.6% 17.6% Net MRR attrition 7.9 7.1 7.0 6.5 6.9
MRR represents the monthly recurring revenue the Company is entitled to receive under subscriber contracts in effect at the end of the period. Included in MRR and the number of subscribers are amounts associated with past due balances. It is the policy and practice of the Company that every effort be made to preserve the revenue stream associated with these contractual obligations. To this end, the Company actively works to both collect amounts owed and to retain the customer. In certain instances, the collection and evaluation period may exceed six months in length. When, in the judgment of the Company's collection personnel, all reasonable efforts have been made to collect balances due, subscribers are disconnected from the Company's monitoring center and are included in the calculation of gross subscriber and net MRR attrition. Because the Company determines payments to sellers under purchase price holdbacks subsequent to the periods to which such holdbacks apply, and because holdbacks are not allocated to specific guaranteed accounts or specific fiscal periods, the Company reduces gross MRR lost during a period by the amount of guaranteed accounts provided for in purchase agreements with sellers. However, in some cases, the Company has not retained the full amount of such holdback to which the Company is contractually entitled. If guaranteed accounts for which the Company was not compensated by the seller were taken into account in calculating net MRR attrition, net MRR attrition would have been higher in each period presented in the table above. Generally, net MRR attrition is less than actual "net account attrition," which the Company defines as canceled subscriber accounts net of reconnects, conversions and guaranteed accounts. Estimated net account attrition is the basis upon which the Company determines the period over which it amortizes its investment in subscriber accounts. The Company amortizes such investment over 10 years based on current estimates. If actual subscriber account attrition were to exceed such estimated attrition, the Company could be required to amortize its investment in subscriber accounts over a shorter period, thus increasing amortization expense in the period in which such adjustment is made and in future periods. There can be no assurance that the actual attrition rates for such accounts will not be greater than the rate assumed by the Company. 12 13 The table below sets forth the change in the Company's subscriber base over the periods indicated below:
TWELVE MONTHS ENDED MARCH 31, ----------------------- 1996 1997 -------- -------- Number of subscribers: Beginning of period ............................... 107,401 165,242 Additions through portfolio acquisitions and Dealer Program, net of sales of subscriber accounts .... 80,449 93,283 Installations by Company personnel ................ 1,179 504 Reconnects and conversions ........................ 4,023 4,818 Gross subscriber attrition ........................ (27,810) (35,022) -------- -------- End of period .................................. 165,242 228,825 ======== ========
Change in Presentation Format. Beginning with its Quarterly Report on Form 10-Q for the first quarter of fiscal 1997, the Company made changes to its presentation of income statement information. First, the Company has reclassified revenues and cost of revenues associated with its alarm response and patrol operations from the "other" category to "monitoring and related services." The "other" category now reflects solely results from the Company's installation, lock and other operations. The Company made this change to better reflect its efforts to sell a bundle of monitoring, field service and alarm response services to both existing and new subscribers. Second, the Company has reclassified depreciation expense from monitoring and service cost of revenues, other cost of revenues and the selling, general and administrative expenses category, and included depreciation expense in a line item entitled "amortization of intangibles and depreciation expense." The Company made this change to allow readers to more easily calculate the aggregate amount of non-cash charges in the income statement. Finally, the Company has reclassified customer service expense from monitoring and service cost of revenues to selling, general and administrative expenses. This change reflects the Company's move to centralize all customer service functions into a single facility in Chatsworth, California. Customer service personnel formerly dedicated to the support of monitoring and related services are responsible for the Company's entire customer service efforts. Results reported in this Quarterly Report for the three and six months ended March 31, 1996 have been modified to reflect these changes and make the information for such periods comparable to information for the three and six months ended March 31, 1997. The table below displays selected income statement data for fiscal years 1994-1996 after giving effect to the changes described above:
Year Ended September 30, ------------------------------------- 1994 1995 1996 -------- -------- -------- Revenues: Monitoring and related services ................. $ 29,297 $ 48,909 $ 68,778 Other ........................................... 5,183 6,973 4,679 -------- -------- -------- Total revenues ............................... 34,480 55,882 73,457 Cost of revenues: Monitoring and related services ................. 8,355 13,627 19,065 Other ........................................... 3,224 3,887 2,513 -------- -------- -------- Total cost of revenues ....................... 11,579 17,514 21,578 -------- -------- -------- Gross profit ....................................... 22,901 38,368 51,879 Selling, general and administrative expense ........ 10,607 13,031 15,478 Loss on acquisition terminations ................... 26 208 -- Performance warrants compensation expense .......... 4,504 -- -- Acquisition and transition expenses ................ -- 3,090 4,219 Amortization of intangibles and depreciation expense 9,290 16,543 25,121 -------- -------- -------- Operating income (loss) ....................... $ (1,526) $ 5,496 $ 7,061 ======== ======== ========
13 14 RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of total revenues for the periods indicated.
Six Months Ended Three Months Ended March 31, March 31, ------------------ ------------------- 1996 1997 1996 1997 ----- ----- ----- ----- Revenues: Monitoring and related services .................. 93.3% 96.4% 93.0% 96.1% Other ............................................ 6.7 3.6 7.0 3.9 ----- ----- ----- ----- Total revenues ........................... 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== Cost of revenues: Monitoring and related services ............ 26.7% 26.7% 26.5% 26.6% Other ........................................... 4.1 2.4 4.0 2.2 ----- ----- ----- ----- Total cost of revenues ................... 30.8 29.1 30.5 28.8 ----- ----- ----- ----- Gross profit ............................. 69.2 70.9 69.5 71.2 Selling, general and administrative expense ........ 20.8 20.3 20.4 20.6 Acquisition and transition expenses ................ 5.8 5.6 6.6 5.6 Amortization of intangibles and depreciation expense 32.7 37.3 32.2 37.9 ----- ----- ----- ----- Operating income (loss) .................. 9.9% 7.7% 10.3% 7.1% ===== ===== ===== =====
SIX MONTHS ENDED MARCH 31, 1997 COMPARED TO SIX MONTHS ENDED MARCH 31, 1996 Revenues for the six months ended March 31, 1997 increased by approximately $13.9 million, or 41.9%, to $47.1 million from $33.2 million for the comparable period in 1996. Monitoring and related services revenues increased by approximately $14.4 million, or 46.5%, a substantial majority of this increase resulted from the addition of subscribers through the Dealer Program and the acquisition of portfolios of subscriber accounts. The Company's subscriber base increased by 38.5% to approximately 228,825 subscribers at March 31, 1997 as compared to 165,242 subscribers at March 31, 1996. The sale of enhanced services and new subscribers generated by Company personnel comprised the remainder of revenue growth. Other revenues, consisting primarily of revenues generated by the Company's installation and lock businesses, decreased by $0.5 million, or 22.8%, to $1.7 million. Such decrease was caused primarily by a decline in installation revenues of 28.2%, or approximately $0.4 million. The decline in installation revenues resulted from the Company's continued emphasis on growth through the Dealer Program and acquisitions, rather than through the sale of new alarm systems by Company personnel. Cost of revenues for the six months ended March 31, 1997 increased by approximately $3.5 million, or 34.2%, to $13.7 million. Cost of revenues as a percentage of total revenues declined to 29.1% for the six months ended March 31, 1997 from 30.8% for the comparable period in fiscal 1996. Monitoring and related services expenses increased by approximately $3.7 million, or 42.0%, reflecting increased activity at the Company's central monitoring station and field service branches due to a substantially larger subscriber base. Monitoring and related services expenses as a percentage of monitoring and related services revenues decreased to 27.7% for the six months ended March 31, 1997 from 28.6% during the comparable period in fiscal 1996. Such decrease was generated by efficiencies realized in the monitoring center and by greater service technician productivity. Other expenses decreased by approximately $0.2 million, or 16.6%, to approximately $1.1 million for the six months ended March 31, 1997 from $1.3 million for the six months ended March 31, 1996. The decrease primarily was caused by a 16.1% decrease ($0.1 million) in installation expense. Gross profit for the six months ended March 31, 1997 was approximately $33.4 million, representing an increase of approximately $10.4 million, or 45.3%, over the $23.0 million of gross profit recognized in the comparable period in fiscal 1996. Such increase was caused primarily by an increase in monitoring and related services activities, which paralleled the increase in the Company's subscriber base noted above. Gross profit as a percentage of total revenues was 70.9% for the six months ended March 31, 1997 compared to 69.2% for the comparable period in fiscal 1996. This increase was caused by both an improvement in the gross profit margin for monitoring and related services and an increase in monitoring and related services revenues as a percentage of total revenues (96.4% for the six months ended March 31, 1997 compared to 93.3% for the six months ended March 31, 1996). Gross profit from other revenues declined to approximately $0.6 million for the six months ended March 31, 1997 from $0.8 million for the comparable period in fiscal 1996. Such decline was caused primarily by a decrease in the gross profit from reduced installation activities. 14 15 Selling, general and administrative expenses rose to approximately $9.5 million in the six months ended March 31, 1997, which represents an increase of approximately $2.6 million, or 37.9%, over selling, general and administrative expenses in the comparable period in fiscal 1996. The majority of the increase reflects higher general and administrative expenses arising from the Company's growth, including the addition of two branch offices and the implementation of a 24 hour, 7 day a week customer service call center. Such figure as a percentage of total revenues decreased from 20.8% in the six months ended March 31, 1996 to 20.3% in the six months ended March 31, 1997. Advertising and marketing expenses are expensed as incurred and comprised less than 1% of revenues in each of the six month periods ended March 31, 1996 and 1997. The provision for doubtful accounts increased to approximately $1.8 million for the six months ended March 31, 1997 from $1.0 million for the comparable period in fiscal 1996. Acquisition and transition expenses for the six months ended March 31, 1997 totaled $2.6 million compared to $1.9 million for the comparable period in fiscal 1996. Such expenses will fluctuate from quarter to quarter based primarily on the amount of the Company's acquisition and Dealer Program activity and its ability to require sellers to bear certain of such acquisition-related expenses. Amortization of intangibles and depreciation expense for the six months ended March 31, 1997 increased by approximately $6.7 million, or 62.0%, to $17.6 million. This increase is primarily the result of the addition of subscriber accounts through the acquisition of portfolios of subscriber accounts and through the Dealer Program. Operating income for the six months ended March 31, 1997 was $3.6 million, compared to $3.3 million in the comparable period in fiscal 1996. Operating income as a percentage of total revenues was 7.7% in the six months ended March 31, 1997, compared to 9.9% in the comparable period in fiscal 1996. The decrease in such figure over the comparable period in fiscal 1996 reflects substantial increases in operating expenses and amortization expense, offset by improvement in the Company's gross profit and higher revenues. Interest expense, net and amortization of debt issuance costs and OID. These amounts increased by $3.6 million, or 34.1%, to $14.1 million in the six months ended March 31, 1997, reflecting the Company's use of debt to finance a substantial portion of its subscriber account growth. Balance sheet data. At March 31, 1997, the Company's working capital deficit was $8.8 million, as compared to a working capital deficit of $5.6 million at September 30, 1996. This decrease of $4.4 million in the working capital deficit was caused primarily by an increase of $2.2 million in accounts receivable and a $1.6 million increase in deferred tax assets offset by increases in purchase holdbacks of $3.2 million, acquisition transition costs of $2.5 million, deferred revenues of $2.2 million and a decrease in cash of $0.4 million. Subscriber accounts and intangibles, net, increased to $299.2 million at March 31, 1997 from $257.4 million at September 30, 1996. This increase of $41.8 million, or 16.2%, was caused by the addition of new subscribers, net of amortization expense. Total stockholders' equity increased to approximately $29.4 million at March 31, 1997 from $28.8 million at September 30, 1996. The increase in such figure reflects the issuance of shares of the Company's Common Stock as a portion of the purchase price of Security Holdings, Inc. (approximately $7.3 million) and Phillips Electronics, Inc. (approximately $2.0 million), offset by the Company's $8.8 million loss for the six months ended March 31, 1997. THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 Revenues for the three months ended March 31, 1997 (the "second quarter of fiscal 1997") increased by approximately $6.7 million, or 38.2%, to $24.4 million from $17.7 million for the comparable period in 1996 (the "second quarter of fiscal 1996"). Monitoring and related services revenues increased by approximately $7.0 million, or 42.7%, a substantial majority of this increase resulted from the addition of subscribers through the Dealer Program and the acquisition of portfolios of subscriber accounts. The sale of enhanced services and new subscribers generated by Company personnel comprised the remainder of revenue growth. Other revenues, consisting primarily of revenues generated by the Company's installation and lock businesses, decreased by $0.3 million, or 22.0%, to $1.0 million. Such decrease was caused by a decline in installation revenues of 17.9%, or approximately $0.1 million. Cost of revenues for the second quarter of fiscal 1997 increased by approximately $1.6 million, or 30.5%, to $7.0 million. Cost of revenues as a percentage of total revenues declined to 28.8% for the second quarter of fiscal 1997 from 30.5% for the comparable period in fiscal 1996. Monitoring and related services expenses increased by approximately 15 16 $1.8 million, or 39.1%, primarily due to increased activity at the Company's central monitoring station and field service branches due to a substantially larger subscriber base. Monitoring and related services expenses as a percentage of monitoring and related services revenues decreased to 27.7% for the second quarter of fiscal 1997 from 28.5% during the comparable period in fiscal 1996. Such decrease was generated by efficiencies realized in the monitoring center and by greater service technician productivity. Other expenses decreased by approximately $0.2 million, or 26.2%, to approximately $0.5 million for the second quarter in fiscal 1997 from $0.7 million for the second quarter of fiscal 1996. The decrease primarily was caused by a 24.8% decrease ($0.1 million) in installation expense. Gross profit for the second quarter of fiscal 1997 was approximately $17.4 million, representing an increase of approximately $5.1 million, or 41.6%, over the $12.3 million of gross profit recognized in the comparable period in fiscal 1996. Such increase was caused primarily by an increase in monitoring and related services activities, which paralleled the increase in the Company's subscriber base noted above. Gross profit as a percentage of total revenues was 71.2% for the second quarter of fiscal 1997 compared to 69.5% for the comparable period in fiscal 1996. This increase was caused primarily by an improved gross profit margin for monitoring and related services and an increase in monitoring and related services revenues as a percentage of total revenues (96.1% for the second quarter of fiscal 1997 compared to 93.0% for the second quarter of fiscal 1996). Gross profit from other revenues declined to approximately $0.4 million for the second quarter of fiscal 1997 from $0.5 million for the comparable period in fiscal 1996. Such decline was caused primarily by a decrease in the gross profit from reduced installation activities. Selling, general and administrative expenses rose to $5.0 million in the second quarter of fiscal 1997, which represents an increase of approximately $1.4 million, or 39.9%, over selling, general and administrative expenses in the comparable period in fiscal 1996. The majority of the increase reflects higher general and administrative expenses arising from the Company's growth, including the addition of two branch offices. Such figure as a percentage of total revenues increased from 20.4% in the second quarter of fiscal 1996 to 20.6% in the second quarter of fiscal 1997. Advertising and marketing expenses are expensed as incurred and comprised less than 1% of revenues in each of the quarters ending March 31, 1996 and 1997. The provision for doubtful accounts increased to approximately $1.0 million for the second quarter of fiscal 1997 from $0.6 million for the comparable period in fiscal 1996. Acquisition and transition expenses for the second quarter of fiscal 1997 totaled $1.4 million compared to $1.2 million for the comparable period in fiscal 1996. As described above, such expenses will fluctuate from quarter to quarter based primarily on the amount of the Company's acquisition and Dealer Program activity and its ability to require sellers to bear certain of such acquisition-related expenses. Amortization of intangibles and depreciation expense for the second quarter of fiscal 1997 increased by approximately $3.6 million, or 62.8%, to $9.2 million. This increase is primarily the result of the addition of subscriber accounts through the acquisition of portfolios of subscriber accounts and through the Dealer Program. Operating income for the second quarter of fiscal 1997 was $1.7 million, compared to $1.8 million in the comparable period in fiscal 1996. Operating income as a percentage of total revenues was 7.1% in the second quarter of fiscal 1997, compared to 10.3% in the comparable period in fiscal 1996. The decrease in such figure over the comparable period in fiscal 1996 reflects substantial increases in operating expenses and amortization expense, offset by improvement in the Company's gross profit and higher revenues. Interest expense, net and amortization of debt issuance costs and OID. These amounts increased by $2.0 million, or 36.8%, to $7.3 million in the second quarter of fiscal 1997, reflecting the Company's use of debt to finance a substantial portion of its subscriber account growth. LIQUIDITY AND CAPITAL RESOURCES General. Since its formation in September 1991, the Company has financed its operations and growth from a combination of capital raised through debt and equity offerings and to a lesser extent, cash flow from operations. During the fiscal 1994-1996 period, the Company completed three long-term debt offerings, including the proceeds of the $50.0 million principal amount of senior subordinated notes issued in November 1993 (which notes were retired in fiscal 1995), $166.0 million principal amount ($105.2 million net proceeds) of senior subordinated discount notes issued in May 1995 16 17 (the "Discount Notes") and $103.5 million principal amount of senior subordinated convertible notes issued in September and October of 1996 (the "Convertible Notes"); the Company also has utilized borrowings under its Revolving Credit Facility to fund acquisitions and the Dealer Program. In September 1994, the Company raised $18.3 million in net proceeds from its initial public offering of Common Stock and in February 1996, the Company raised $23.1 million in net proceeds from another public offering of the Common Stock. The Company intends to continue to use cash flows from operations, together with borrowings under the Revolving Credit Facility, to finance the addition of subscriber accounts and capital expenditures. Although the Company anticipates that it will continue to acquire portfolios of subscriber accounts, the Company cannot estimate the number, the size, or timing of such acquisitions. Depending on such factors, additional funds beyond those currently available to the Company may be required to continue the acquisition program and to finance the Dealer Program, and there can be no assurance that the Company will be able to obtain such financing on acceptable terms or at all. On a long-term basis, the Company has several material commitments. Borrowings under the Revolving Credit Facility were approximately $21.3 million at March 31, 1997 and could be as high as $100.0 million through the period ended January 3, 2000, the current maturity date of the Revolving Credit Facility. While the Company believes it will be able to obtain further extensions of the maturity date of the Revolving Credit Facility from time to time, or will be able to refinance the Revolving Credit Facility prior to its maturity date, there can be no assurance that the Company will be able to do so. The Convertible Notes require the Company to make semi-annual cash interest payments of $3.5 million, the first of which was made on March 15, 1997. The Discount Notes require the Company to begin to make interest payments on such obligations on December 31, 1998. Based on an interest rate of 13 5/8%, such payment will be approximately $11.3 million semiannually, or approximately $22.6 million on an annual basis. As a result, a substantial portion of the Company's cash flows from operations will be required to make interest payments on the Convertible Notes and the Discount Notes, and there can be no assurance that the Company's cash flow from operations will be sufficient to meet such obligation, or that there will be sufficient funds available to the Company after such interest payments to meet other debt, capital expenditure and operational obligations. The $103.5 million principal amount of the Convertible Notes matures on September 15, 2003, although the Notes may be converted into Common Stock at any time prior to such date. The $166.0 million principal amount of Discount Notes matures on June 30, 2005. There can be no assurance that the Company will have the cash necessary to repay either the Convertible Notes or the Discount Notes at maturity or will be able to refinance such obligations. The Company maintains a $2.0 million letter of credit sub-facility under its Revolving Credit Facility, and has extended an approximately $0.8 million letter of credit to a seller, scheduled payments under which are approximately $0.4 million during each of fiscal 1998 and 1999. The Company has had, and expects to continue to have, a working capital deficit. At March 31, 1997, the Company had a working capital deficit of $8.8 million. There are two principal categories of current liabilities that cause the Company to have a working capital deficit: (i) "purchase holdbacks," which represent the portion of the aggregate acquisition cost of subscriber accounts retained by the Company to offset lost MRR arising from the cancellation of acquired accounts; and (ii) "deferred revenue," which represents billings and cash collections received by the Company from its subscriber base in advance of performance of services. Both purchase holdbacks and deferred revenues are recorded as a current liability on the Company's balance sheet. The Company generated $14.2 million of net cash provided by operating activities in the six months ended March 31, 1997, compared to $10.5 million net cash provided by operating activities for the comparable period in fiscal 1996. The increase in net cash provided by operating activities reflects the Company's substantial growth. In the six months ended March 31, 1997, the Company's net cash used in investing activities was $44.7 million, compared to $44.0 million during the six months ended March 31, 1996. Investing activities during the six months ended March 31, 1997 included purchases through the Dealer Program, as well as the acquisition of portfolios of subscriber accounts, including the purchase of Security Holdings, Inc. and Phillips Electronics, Inc. During the six months ended March 31, 1997, the Company's net cash provided by financing activities was $28.8 million, compared to $37.1 million for the six months ended March 31, 1996. The Company's primary financing activities during the six months ended March 31, 1997 were the issuance of $13.5 million of Convertible Notes pursuant to the underwriters' exercise of an over-allotment option and $9.3 million of Common Stock in connection with the acquisitions of Security Holdings, Inc. ($7.3 million) and Phillips Electronics, Inc. ($2.0 million). 17 18 The Discount Notes Indenture, the Convertible Notes Indenture and the Credit Agreements contain certain restrictions on transfers of funds, such as dividends, loans and advances, by the Company. The Company believes that such restrictions have not had and will not have a significant impact on the Company's ability to meet its cash obligations. The Company does not anticipate payment of dividends on Common Stock, and such dividends are currently prohibited by the Credit Agreement and the Discount Notes Indenture. Capital Expenditures. The Company anticipates making capital expenditures in the remainder of fiscal 1997 of approximately $2.0 million for routine replacement and upgrading of vehicles, computers and other capital items. In addition, the Company anticipates making capital expenditures of approximately $0.7 million to complete a project to upgrade its monitoring and administrative hardware and software. The Company believes the installation of the new computer software will create efficiencies Company-wide, and particularly in the customer service, data entry and field maintenance and repair functions. The Company believes the complete implementation of the new software will not occur until the end of fiscal 1997. The Company believes cash flows from operations, together with borrowing under the Revolving Credit Facility, will be sufficient to fund the Company's capital expenditures in fiscal 1997. 18 19 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES Amendment of Certificate of Incorporation. As previously reported, the Fifth Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), of Protection One, Inc. ("POI") was further amended effective upon the filing of a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of Delaware on February 6, 1997, to increase the number of authorized shares of Common Stock from 24,000,000 shares to 40,000,000 shares. For additional information with respect to this amendment, see Item 2 of POI's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996. Issuances of Securities. Pursuant to an Agreement for Purchase and Sale of Assets dated as of March 19, 1997 (the "Purchase Agreement"), Protection One Alarm Monitoring, Inc. ("Monitoring") purchased the security alarm accounts, equipment, telephone line and certain other assets of Peterson Alarm Service of Riverside, California ("Peterson Alarm"). In consideration of the acquisition, Monitoring (i) assumed certain operating obligations of Peterson Alarm, (ii) paid to Mr. Homer Peterson, the owner of Peterson Alarm, approximately $922,000 in cash, and (iii) delivered to Mr. Peterson 11,904 shares of Common Stock (the "Shares") newly issued by POI, which number was valued for purposes of the acquisition at the average of the closing price of the Common Stock on the NASDAQ National Market during the period of the 10 most recent trading days ending on the second trading day prior to the acquisition. The offer and sale of the Shares was not registered under the Securities Act in reliance on Section 4(2) thereof. Mr. Peterson certified to POI that Mr. Peterson was an "accredited investor" as such term is defined in Rule 501 under the Securities Act, and was provided by POI with registration statements and reports of, and access to other information concerning POI and its subsidiaries. Mr. Peterson represented to POI that he was acquiring the Shares for investment and not with a view to distribution thereof. No underwriter participated in the offer or sale of any of these securities and no underwriter's fees or commissions were paid. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. 19 20 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 1997 annual meeting of POI's stockholders (the "Annual Meeting") was held on January 29, 1997. All directors nominated were elected at the Annual Meeting. For the election of directors, the results were as follows: James M. Mackenzie, Jr ................... For: 10,479,922 Withheld: 15,400 Robert Chefitz ........................... For: 10,479,922 Withheld: 15,400 Ben Enis ................................. For: 10,478,987 Withheld: 16,335 James Q. Wilson .......................... For: 10,479,122 Withheld: 16,200
On the ratification of the appointment of Coopers & Lybrand LLP as auditors for fiscal 1997, the results were as follows: For: 10,479,457 Against: 15,165 Abstained: 700
On the proposal to amend the Certificate of Incorporation to increase the authorized number of shares of Common Stock to 40,000,000, the results were as follows: For: 9,738,334 Against: 574,088 Abstained: 2,900 Broker Non-Votes: 270,354
On the proposal to amend the 1994 Stock Option Plan as amended, to increase the number of shares of Common Stock for which options might be issued, the results were as follows: For: 8,879,934 Against: 1,440,688 Abstained: 700 Broker Non-Votes: 270,354
ITEM 5. OTHER INFORMATION None. 20 21 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits. The following exhibits are filed with this Quarterly Report on Form 10-Q:
Exhibit Number Exhibit - ------ ------- 3.1 Fifth Restated Certificate of Incorporation of Protection One, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed by Protection One, Inc. ("POI") and Protection One Alarm Monitoring, Inc. ("Monitoring") for the quarter ended December 31, 1996). 3.2 Certificate of Incorporation of Monitoring (incorporated by reference to the Registration Statement on Form S-3 (Registration No. 333-09401) filed by POI and Monitoring on August 1, 1996). 3.3 By-laws of POI, as amended (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed by POI and Monitoring for the quarter ended March 31, 1996). 3.4 By-laws of Monitoring (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed by POI and Monitoring for the fiscal year ended September 30, 1994). 10.1 Second Amendment to Amended and Restated Credit Agreement dated as of March 31, 1997, among Monitoring, Heller Financial Inc. and the other financial institutions signatory thereto as Lenders. 10.2 Amendment No. 1 to Amended and Restated Employment Agreement dated as of February 28, 1997, between POI and John W. Hesse. 27.1 Financial Data Schedule. 99.1 Information included under the caption "Risk Factors" on pages 5-11 of POI's Prospectus dated January 2, 1997, as filed pursuant to Rule 424(b) (incorporated by reference to said Prospectus, which is a part of POI's Registration Statement on Form S-3 (Registration No. 333-18159)).
Reports on Form 8-K. No report on Form 8-K was filed during the quarter for which this Quarterly Report on Form 10-Q is filed. 21 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. May 12, 1997 PROTECTION ONE, INC. PROTECTION ONE ALARM MONITORING, INC. By: /s/ John W. Hesse ------------------------------- John W. Hesse Executive Vice President and Chief Financial Officer 22 23
Exhibit Sequential Number Exhibit Page # - ------- ------- ----------- 3.1 Fifth Restated Certificate of Incorporation of Protection One, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed by Protection One, Inc. ("POI") and Protection One Alarm Monitoring, Inc. ("Monitoring") for the quarter ended December 31, 1996). .............................................. 3.2 Certificate of Incorporation of Monitoring (incorporated by reference to the Registration Statement on Form S-3 (Registration No. 333-09401) filed by POI and Monitoring on August 1, 1996). ........................................................................ 3.3 By-laws of POI, as amended (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed by POI and Monitoring for the quarter ended March 31, 1996)....................................... 3.4 By-laws of Monitoring (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed by POI and Monitoring for the fiscal year ended September 30, 1994).......................................... 10.1 Second Amendment to Amended and Restated Credit Agreement dated as of March 31, 1997, among Monitoring, Heller Financial Inc. and the other financial institutions signatory thereto as Lenders..................... 24-28 10.2 Amendment No. 1 to Amended and Restated Employment Agreement dated as of February 28, 1997, between POI and John W. Hesse..................... 29 27.1 Financial Data Schedule................................................. 30 99.1 Information included under the caption "Risk Factors" on pages 5-11 of POI's Prospectus dated January 2, 1997, as filed pursuant to Rule 424(b) (incorporated by reference to said Prospectus, which is a part of POI's Registration Statement on Form S-3 (Registration No. 333-18159))...........................................
EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT This Second Amendment to Amended and Restated Credit Agreement, dated as of March __, 1997 (this "Agreement"), is between PROTECTION ONE ALARM MONITORING, INC., a Delaware corporation ("Borrower"), the Lenders identified on the signature pages hereto and HELLER FINANCIAL, INC., a Delaware corporation, in its individual capacity as a Lender and in its capacity as agent for the Lenders, "Agent". WITNESSETH: WHEREAS, Agent, Borrower and Lenders are parties to that certain Amended and Restated Credit Agreement dated as of June 7, 1996 (as heretofore amended, the "Credit Agreement"; capitalized terms not otherwise defined herein shall have the definitions provided therefor in the Credit Agreement) and to certain other documents executed in connection with the Credit Agreement; and WHEREAS, the parties wish to further amend the Credit Agreement as provided herein; NOW, THEREFORE, the parties agree as follows: 1. Amendments to the Credit Agreement. (a) The definition of "Indebtedness Ratio Test" set forth in subsection 1.1 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "Indebtedness Ratio Test" means, as of any date of determination, that (i) the Senior Indebtedness to Annualized EBIDAT Ratio as of such date does not exceed: 2.75 as of any date of determination on or prior to December 31, 1997; 3.00 as of any date of determination during the period from January 1, 1998 to September 30, 1998; 2.75 as of any date of determination during the period from September 30, 1998 to June 30, 1999; and 2.50 as of any date of determination on or after June 30, 1999; (ii) the Total Indebtedness to Annualized EBIDAT Ratio as of such date does not exceed (A) for any date of determination on or prior to December 31, 1997, the lesser of (I) 6.25 or (II) the Debt to EBIDAT Ratio then in effect under subsection 4.03(a) of the Subordinated Discount Note Indenture (after giving effect to clauses (i) through (vi) thereof), and (B) for any date of determination after December 31, 1997, 6.0; and (iii) the Senior Indebtedness to MRR Ratio as of such date does not exceed: 21 as of any date of determination prior to September 30, 1998; and 19 as of any date of determination on or after September 30, 1998. All calculations shall be based upon the EBIDAT and MRR for the most recent month for which financial statements are required to be delivered pursuant to subsection 5.1(A), adjusted to include (a) pro forma EBIDAT and MRR for any prior acquisitions made during the course of the month covered by such financial statements and (b) pro forma EBIDAT and MRR for any prior acquisitions made subsequent to the date of such financial statements. (b) Subsection 2.2(A) of the Credit Agreement is hereby amended by inserting the following new paragraph immediately preceding the last paragraph of said subsection: "If at any time through and including December 31, 1997 the Total Indebtedness to Annualized EBIDAT Ratio exceeds 6.0, an amount of the Loans equal to the Excess Indebtedness shall bear interest as follows: (X) if a Base Rate Loan, then at the sum of the Base Rate plus two percent (2%) per annum; and (Y) if a LIBOR Rate Loan, then at the sum of the LIBOR Rate plus three and one-half percent (3.50%) per annum. 23 2 For purposes of this subsection 2.2(A), (i) "Excess Indebtedness" means, for any monthly period, (I) Total Indebtedness minus (II) (A) six multiplied by (B) EBIDAT for such one month period multiplied by twelve (12); provided that Excess Indebtedness shall never be less than zero; and (ii) "Total Indebtedness" means, at any date of determination, the aggregate principal amount of all Indebtedness of Holdings, Borrower and Borrower's Subsidiaries as of such date on a consolidated basis plus the aggregate liquidation preference or redemption amount of all Disqualified Stock as of such date. Further, for purposes of this paragraph only, Total Indebtedness shall be calculated based on: (x) the average daily balance of all Indebtedness (excluding Subordinated Indebtedness) during such one month Interest Period, and (y) the Subordinated Indebtedness outstanding as of the last day of such month. Excess Indebtedness for any month, and the corresponding additional interest charge, shall be calculated by Agent as soon as reasonably practicable after receipt by Agent of financial information for the month in question from Borrower sufficient to allow Agent to make the necessary calculations. Any such calculation of the additional interest charge by Agent shall, absent manifest error, be deemed to be conclusive and binding on Borrower. Borrower hereby covenants and agrees to provide Agent with the necessary financial information on or before the thirtieth day of each month through January 1998." (c) Subsection 6.1 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: 6.1 Capital Expenditure Limits. The aggregate amount of all Capital Expenditures of Borrower and its Subsidiaries will not exceed $6,000,000 during any Fiscal Year. 2. No Waiver of Past Defaults. Nothing contained herein shall be deemed to constitute a waiver of any Event of Default that may heretofore or hereafter occur or have occurred and be continuing or to modify any provision of the Credit Agreement except as expressly provided herein. 3. Representations and Warranties. To induce Agent and Lenders to enter into this Agreement, Borrower represents and warrants to Agent on behalf of the Lenders that the execution, delivery and performance by Borrower of this Agreement are within its corporate powers, have been duly authorized by all necessary corporate action and do not and will not contravene or conflict with any provision of law applicable to Borrower, the Certificate of Incorporation or Bylaws of Borrower, or any order, judgment or decree of any court or other agency of government or any contractual obligation binding upon Borrower; and the Credit Agreement as amended as of the date hereof is the legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms. 4. Conditions. The effectiveness of the amendments stated in this Agreement is subject to each of the following conditions precedent or concurrent: (a) No Default. No Default or Event of Default under the Credit Agreement, as amended hereby, shall have occurred and be continuing; (b) Warranties and Representations. The warranties and representations of Borrower contained in this Agreement shall be true and correct as of the effective date hereof, with the same effect as though made on such date; and (c) Amendment Fee. Borrower shall have paid to Agent, for the pro rata benefit of Lenders, an amendment fee of $100,000. (d) Subordinated Indebtedness. No default under the Subordinated Indebtedness shall have occurred and be continuing or be caused by the effectiveness of this Agreement. 5. Miscellaneous. (a) Captions. Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement. 24 3 (b) Governing Law. This Agreement shall be a contract made under and governed by the laws of the State of Illinois, without regard to conflict of laws principles. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. (c) Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. (d) Successors and Assigns. This Agreement shall be binding upon Agent, Borrower, and Lenders and their respective successors and assigns, and shall inure to the sole benefit of Agent, Borrower and Lenders and the successors and assigns of Agent, Borrower and Lenders. (e) References. Any reference to the Credit Agreement contained in any notice, request, certificate, or other document executed concurrently with or after the execution and delivery of this Agreement shall be deemed to include this Agreement unless the context shall otherwise require. (f) Continued Effectiveness. Notwithstanding anything contained herein, the terms of this Agreement are not intended to and do not serve to effect a novation as to the Credit Agreement. The parties hereto expressly do not intend to extinguish the Credit Agreement. Instead, it is the express intention of the parties hereto to reaffirm the indebtedness created under the Credit Agreement which is evidenced by the Revolving Note and secured by the Collateral. The Credit Agreement as amended hereby and each of the other Loan Documents remains in full force and effect. (g) Costs, Expenses and Taxes. Borrower affirms and acknowledges that subsection 10.1 of the Credit Agreement applies to this Agreement and the transactions and Agreements and documents contemplated hereunder. Delivered at Chicago, Illinois, as of the day and year first above written. PROTECTION ONE ALARM MONITORING, INC. By:_______________________________ Name Printed:_____________________ Title:____________________________ HELLER FINANCIAL, INC., as Lender and as Agent By:______________________________ Name Printed:____________________ Title:___________________________ BANQUE NATIONALE DE PARIS, NEW YORK BRANCH, as a Lender By:______________________________ Name Printed:____________________ Title:___________________________ 25 4 MERITA BANK, LTD., as a Lender By:______________________________ Name Printed:____________________ Title:___________________________ TORONTO DOMINION (TEXAS), INC., as Lender By:______________________________ Name Printed:____________________ Title:___________________________ IBJ SCHRODER BANK & TRUST, as Lender By:______________________________ Name Printed:____________________ Title:___________________________ FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Lender By:______________________________ Name Printed:____________________ Title:___________________________ 26 5 Acknowledgment PROTECTION ONE, INC. hereby acknowledges and consents to the terms of this Agreement and hereby affirms, ratifies and confirms all of the terms and provisions of the Amended and Restated Guaranty dated June 7, 1996. PROTECTION ONE, INC. By:_____________________________________ Name Printed:___________________________ Title:__________________________________ 27 EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 AMENDMENT NO. 1 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of February 28, 1997, is entered into between John W. Hesse (the "Employee") and Protection One, Inc. (previously known as P1 Acquisition Corporation), a Delaware corporation (the "Company"), with reference to the following facts and objectives: A. The Employee and the Company are parties to an Amended and Restated Employment Agreement dated as of May 24, 1996 (as so amended, the "Employment Agreement"). B. The Employee and the Company desire to further amend the Employment Agreement as provided herein. NOW, THEREFORE, the Company and the Employee hereby agree as follows: Section 2 of the Employment Agreement is amended to read in full as follows: 2. The term of this Agreement commenced on September 16, 1991 and shall be continually extended such that at all times the remaining term hereof is three years; provided, however, that this Agreement shall be subject to termination as provided in Section 13 hereof." In the second paragraph of Section 17, the date "September 30, 1998" is replaced with the date "May 24, 1999." In the third paragraph of Section 17, the date "September 30, 1998" is replaced with the date "May 24, 2000." Subject to the foregoing amendments, the Employment Agreement remains in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first written above. PROTECTION ONE, INC. By: /s/ James M. Mackenzie, Jr. /s/ John W. Hesse -------------------------------------- -------------------------- James M. Mackenzie, Jr. JOHN W. HESSE President 28 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 0000916230 PROTECTION ONE INC. 1,000 6-MOS SEP-30-1997 MAR-31-1997 5,016 0 22,552 7,643 1,910 32,806 17,046 5,098 344,396 41,585 243,060 0 0 137 29,292 344,396 47,075 47,075 13,721 13,721 166 1,792 4,054 (10,607) (1,786) (8,821) 0 0 0 (8,821) (0.65) (0.65)
EX-27.2 5 FINANCIAL DATA SCHEDULE
5 0000916310 PROTECTION ONE ALARM MONITORING INC. 1,000 6-MOS SEP-30-1997 MAR-31-1997 5,016 0 22,562 7,643 1,910 32,806 17,046 5,098 344,396 41,585 243,060 0 0 137 29,292 344,696 47,075 47,075 13,721 13,721 166 1,792 4,054 (10,607) (1,786) (8,821) 0 0 0 (8,821) (0.65) (0.65)
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