-----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, Hs2qeFVVky7Zn5cetleTnrp/HIbfHo27BspFkJzotHrJCPAn4y4pZGcqqVdlJMoC Qw7wekoa4zHNqzUiGAGnhA== 0000950116-97-002372.txt : 19971230 0000950116-97-002372.hdr.sgml : 19971230 ACCESSION NUMBER: 0000950116-97-002372 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOLMES PROTECTION GROUP INC CENTRAL INDEX KEY: 0000926764 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 061070719 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-24510 FILM NUMBER: 97745757 BUSINESS ADDRESS: STREET 1: 440 9TH AVE CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2127600630 MAIL ADDRESS: STREET 1: 440 9TH AVENUE CITY: NEW YORK STATE: NY ZIP: 10001 10-Q/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 Commission file number 0-24510 ------- HOLMES PROTECTION GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 06-1070719 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 440 Ninth Avenue, New York, New York 10001-1695 (Address of principal executive offices) (Zip Code) (212) 760-0630 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of Common Stock, par value $.01 per share, outstanding as of November 10, 1997: 6,310,034. Certain statements in this Quarterly Report on Form 10-Q/A constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; cancellation rates of subscribers; competitive factors in the industry, including additional competition from existing competitors or future entrants to the industry; social and economic conditions; local, state and federal regulations; changes in business strategy or development plans; the Company's indebtedness; availability, terms and deployment of capital; availability of qualified personnel; and other factors detailed in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996. 2 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES FORM 10-Q/A FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 INDEX
PART I FINANCIAL INFORMATION PAGE NO. - ---------------------------- -------- Item 1. FINANCIAL STATEMENTS Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 1997 and 1996................................................................ 4 Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996....................... 5 Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 1997 and 1996...................................................................... 6 Notes to Financial Statements.................................................................... 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................10 PART II OTHER INFORMATION - ------------------------- Item 6. EXHIBITS.........................................................................................14 Signatures.......................................................................................15
3 Part 1 -- Financial Information Item 1 -- Financial Statements HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (000's omitted, except earnings per share data) (Unaudited)
Three Months Ended Nine Months Ended ---------------------------- --------------------------- September 30, September 30, September 30, September 30, 1997 1996 1997 1996 -------- -------- -------- -------- (Restated) (Restated) REVENUES: Monitoring and service $ 9,853 $ 8,745 $ 28,863 $ 26,757 Installation 6,731 3,191 15,162 7,845 Franchise royalties, product sales and other 1,842 1,223 4,684 3,212 -------- -------- -------- -------- Total revenues 18,426 13,159 48,709 37,814 -------- -------- -------- -------- COST OF SALES (exclusive of depreciation and amortization shown below): Monitoring and service 5,654 4,394 15,415 13,263 Installation 4,123 1,767 9,200 3,884 Franchise royalties, product sales and other 1,481 1,079 3,820 2,902 -------- -------- -------- -------- Total cost of sales 11,258 7,240 28,435 20,049 -------- -------- -------- -------- Selling, general and administrative 6,260 4,030 17,289 10,874 Depreciation and amortization 2,893 2,638 8,356 8,070 Non-recurring charge -- -- 1,500 -- -------- -------- -------- -------- 20,411 13,908 55,580 38,993 Loss from operations (1,985) (749) (6,871) (1,179) Other income 160 136 218 147 Interest expense, net (500) (144) (1,060) (462) Loss before income taxes (2,325) (757) (7,713) (1,494) Benefit for income taxes (697) (118) (2,314) (222) Net Loss $ (1,628) $ (639) $ (5,399) $ (1,272) ======== ======== ======== ======== Loss per common share $ (0.26) $ (0.13) $ (0.90) $ (0.28) -------- -------- -------- -------- Weighted Average Shares Outstanding 6,244 4,801 6,009 4,596 ======== ======== ======== ========
(See accompanying notes.) 4 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (000's omitted)
September 30, December 31, 1997 1996 --------- --------- (Unaudited) (Restated) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents 87 $ 990 Accounts receivable, less allowance for doubtful accounts of $1,111 in 1997 and $973 in 1996 $ 11,579 5,333 Inventories 4,857 2,795 Prepaid expenses and other 4,364 2,448 --------- --------- Total current assets 20,887 11,566 --------- --------- FIXED ASSETS, net 49,602 47,198 SUBSCRIBER CONTRACTS, at cost, less accumulated amortization of $27,491 in 1997 and $25,137 in 1996 27,732 19,650 TRADENAMES, less accumulated amortization of $2,173 in 1997 and $2,045 in 1996 3,936 4,063 OTHER ASSETS 8,769 7,917 --------- --------- $ 110,926 $ 90,394 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt $ 24,227 $ 364 Accounts payable and accrued expenses 9,584 7,290 Deferred revenue 4,588 3,969 Customer deposits 2,456 2,813 --------- --------- Total current liabilities 40,855 14,436 --------- --------- LONG-TERM LIABILITIES: Long-term debt 1,205 4,370 Other long-term liabilities 2,750 2,503 Deferred income taxes 7,919 10,457 --------- --------- Total long-term liabilities 11,874 17,330 --------- --------- SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000 authorized; none outstanding -- -- Common stock, $0.01 par value; 12,000 authorized shares; 6,317 issued in 1997 and 5,835 issued in 1996 63 58 Additional paid-in capital 138,214 133,251 Accumulated deficit (79,995) (74,596) --------- --------- 58,282 58,713 Less- Treasury stock - 7 shares in 1997 and 1996 at cost (85) (85) --------- --------- Total shareholders' equity 58,197 58,628 --------- --------- $ 110,926 $ 90,394 ========= =========
(See accompanying notes.) 5 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000's omitted) (Unaudited)
Nine Months Ended September 30, September 30, 1997 1996 -------- -------- (Restated) CASH FLOW FROM OPERATING ACTIVITIES: Net Income (Loss) $ (5,399) $ (1,272) Adjustments to reconcile net income (loss) to cash provided by operating activities - Depreciation and amortization 8,356 8,070 Provision for doubtful accounts 115 (109) Non-recurring charge 1,500 -- Deferred income taxes (2,538) (372) Changes in operating assets and liabilities - Increase in accounts receivable (5,721) (195) Increase in inventories (1,825) (231) Increase in prepaid expenses and other current assets (1,944) (148) Increase (decrease) in accounts payable and accrued expenses 1,160 (2,833) (Decrease) increase in customer deposits (357) 672 Increase in deferred revenue 281 (174) Decrease in pension and other liabilities (265) (947) -------- -------- Net cash (used in) provided by operating activities (6,637) 2,461 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (7,629) (6,755) Acquisition of businesses, net of cash acquired (6,874) -- Purchase of short-term investments -- -- Maturities of short-term investments -- 2,043 Other 62 -- -------- -------- Net cash used by investing activities (14,441) (4,712) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt obligations 19,500 8,496 Proceeds from sale of common stock -- 12,252 Proceeds from exercised stock options 1,386 -- Payment on secured note and other long-term debt -- (6,188) Payment on other long-term debt (711) (323) Payment on short-term borrowings -- (943) -------- -------- Net cash provided by financing activities 20,175 13,294 -------- -------- Net (decrease) increase in cash and cash equivalents (903) 11,043 CASH AND CASH EQUIVALENTS, beginning of period 990 435 -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 87 $ 11,478 ======== ======== CASH PAYMENTS FOR: Interest $ 749 $ 503 Income taxes $ 351 $ 117 NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of notes payable in connection with acquired businesses $ 1,147 $ -- Issuance of common stock in connection with acquired businesses $ 3,582 $ --
(See accompanying notes.) 6 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES Notes to Interim Financial Statements Note 1 Restatement Effective January 1, 1995, the Company changed its method of accounting for installation revenue with respect to the recording of non-refundable payments received form customers upon the completion of the installation of Company-owned systems. Previous to this change, the Company deferred the difference between these payments and the estimated selling costs and amortized such difference over the initial term of the non-cancelable customer monitoring and service contract (generally five years) (the "Deferral Method"). Following discussions with the staff of the Division of Corporation Finance of the Securities and Exchange Commission, in connection with a Registration Statement filed by the Company, the Company has determined to restate its consolidated financial statements for the interim periods of 1997 and the years ended December 31, 1996 and 1995 using the Deferral Method. Accordingly, the accompanying consolidated financial statements have been restated from those originally reported to reflect such determination. This Deferral Method of recording revenue had no impact on the Company's liquidity or cash flows. The following table provides selected summarized financial information illustrating the effect of the restatement on the Company's consolidated financial statements for the three months and nine months ended September 30, 1997 and September 30, 1996:
Three Months Ended September 30, 1997 September 30, 1996 ----------------------------- --------------------------- As Originally As Originally Reported As Restated Reported As Restated ------------------------------------------------------------------------------------------------------ Revenue $18,584 $18,426 $13,037 $13,159 Loss before income taxes (2,167) (2,325) (879) (757) Net Loss (1,517) (1,628) (712) (639) Loss per common share (0.24) (0.26) (0.15) (0.13) ------------------------------------------------------------------------------------------------------ Nine Months Ended September 30, 1997 September 30, 1996 ----------------------------- ---------------------------- As Originally As Originally Reported As Restated Reported As Restated ------------------------------------------------------------------------------------------------------- Revenue $48,899 $48,709 $37,520 $37,814 Loss before income taxes (7,523) (7,713) (1,788) (1,494) Net Loss (5,266) (5,399) (1,448) (1,272) Loss per common share (0.88) (0.90) (0.32) (0.28) -------------------------------------------------------------------------------------------------------
7 Note 2 Financial Statements The restated consolidated statements of operations and statements of cash flows for the three month and nine-month periods ended September 30, 1997 and 1996 and the restated balance sheet as of September 30, 1997 have been prepared by Holmes Protection Group, Inc. ("Holmes" or "the Company") without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated results should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A, filed with the Securities and Exchange Commission. Results of operations for the three-month and nine-month periods ended September 30, 1997 are not necessarily indicative of the operating results expected for the full year. Interim statements are prepared on a basis consistent with year-end statements. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments necessary for a fair presentation of the results of the operations of the Company. All such adjustments are of a normal recurring nature, except for the $1,500,000 pretax charge relating to the outsourcing agreement termination (See Note 3). Note 3 Outsourcing Agreement Termination On March 12, 1997, the Company announced that it had reached an agreement in principle (the "Agreement") with PremiTech to terminate its outsourcing agreement effective April 1, 1997. Changes in the Company's growth strategy and the sale by PremiTech of its alarm monitoring business in late 1995 led both parties to re-evaluate the outsourcing agreement. On April 1, 1997, pursuant to the Agreement, the Company paid $650,000 in cash and executed a noninterest bearing promissory note ("Note") in the amount of $1,000,000 payable to EDS in twenty quarterly installments of $50,000, beginning January 1, 1998. The Note is secured by an irrevocable letter of credit for $1,000,000. In addition, the Company agreed to lease certain computer equipment for a three year term with an option to purchase the equipment at the end of the lease for the fair market value. The Company has recorded a pretax charge of $1,500,000 in connection with the Agreement. Note 4 Acquisitions In the nine months ended September 30, 1997, the Company acquired alarm companies for an aggregate purchase price of $6,874,000. In addition, the Company acquired three alarm companies in exchange for 249,943 shares of the Company's Common Stock. These acquisitions were accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated based on their estimated values and the results of operations of the acquired entities have been included in the accompanying consolidated statements of operations from the respective dates of the acquisition. The allocation of estimated values is subject to final adjustments of purchase price. The results of operations for these acquisitions were not significant to the consolidated financial statements of the Company and therefore no pro forma financial data has been included. 8 Note 5 Recently Issued Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. This statement establishes standards for computing and presenting earnings per share (EPS), replacing the presentation of currently required primary EPS with a presentation of Basic EPS. For entities with complex capital structures, the statement requires the dual presentation of both Basic EPS and Diluted EPS on the face of the statement of operations. Under this new standard, Basic EPS is computed based on weighted average shares outstanding and excludes any potential dilution; Diluted EPS reflects potential dilution from the exercise or conversion of securities into common stock or from other contracts to issue common stock and is similar to the currently required fully diluted EPS. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and earlier application is not permitted. When adopted, the Company will be required to restate its EPS data for all prior periods presented. The Company does not expect the impact of the adoption of this statement to be material to previously reported EPS amounts. Note 6 Credit Facility At September 30, 1997, the Company had $1.0 million of borrowing capacity remaining under its bank credit agreement and was not in compliance with certain of the financial covenants contained in the credit agreement. The banks waived such non compliance for periods prior to or ending on such date. Management has determined that the Company was not in compliance as of October 31, 1997, with certain of the financial covenants contained in the credit agreement referred to above and does not expect it will be in compliance with the covenants for November and December 1997. Accordingly, the Company has obtained waivers from its banks waving such non compliance through and including December 31, 1997. As a result of the Company's non compliance with its credit agreement, the Company has classified the indebtedness under its bank credit agreement ($23,000,000) from long-term debt to current debt. However, the banks have not accelerated, or taken any action to change the payment status of such debt. Note 7 Subsequent Events Pursuant to agreements under which the Company acquired certain security services businesses, the sellers of the businesses may elect, on or after January 1 , 1998, to surrender to the Company for cancellation the shares of common stock of the Company that were issued to them in connection with such acquisitions if the Company has not effected the registration of such shares under the Securities Act of 1933 prior to such date, and the Company would be required to pay such sellers the purchase price in cash. The Company may be unable to effect such registration by such date. In such event, the Company would seek to obtain extensions of such date from the sellers. If such extensions were not provided and all of the sellers exercised such elections, the total maximum amount of cash that would be payable to the sellers by the Company would be approximately $4,000,000. The Company is engaged in discussions for a guarantee or other arrangement that would provide funding for such obligations if they become due but does not have commitments for any such arrangement. The Company is a defendant in certain litigation seeking damages for property loss of approximately $2,000,000 to $3,000,000 (in addition, plaintiff would be entitled to 9% interest from 1991 on any amount recovered) as to which the Company has been informed that there remains only about $200,000 to $300,000 of coverage under its primary insurance layer. In addition, a question has arisen as to whether, if damages awarded exceed the $1,000,000 primary layer, the carrier for the next layer of coverage (for $5,000,000) will respond to the alleged damages being sought in this litigation. The Company does not believe that a coverage question exists as to the carrier providing the third layer of coverage (an additional $5,000,000). 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Restatement - ----------- Effective January 1, 1995, the Company changed its method of accounting for installation revenue with respect to the recording of non-refundable payments received from customers upon the completion of the installation of Company owned systems. Previous to this change, the Company deferred the difference between these payments and the estimated selling costs and amortized such difference over the initial term of the non-cancelable customer monitoring and service contract (generally five years) (the "Deferral Method"). Following discussions with the staff of the Division of Corporation of Finance of the Securities and Exchange Commission, in connection with a Registration Statement filed by the Company, the Company has determined to restate its consolidated financial statements for the interim periods of 1997 and the years ended December 31, 1996 and 1995 using the Deferral Method. Accordingly, the accompanying consolidated financial statements have been restated from those originally reported to reflect such determination. This Deferral Method of recording revenue had no impact on the Company's liquidity or cash flows. Three Months Ended September 30, 1997 Compared with Three Months Ended - ---------------------------------------------------------------------- September 30, 1996 - ------------------ Revenues increased $5.2 million (40.0%) to $18.4 million in the third quarter of 1997 from $13.2 million in the third quarter of 1996. This increase was primarily attributable to an increase in installation revenue of $3.5 million (110.9%) from $3.2 million in the third quarter of 1996 to $6.7 million in the third quarter of 1997 resulting from increased sales due to the Company's expansion of its branch and National Account operations. In addition, monitoring and service revenue increased $1.1 million (12.7%) from $8.8 million in the third quarter of 1996 to $9.9 million in the third quarter of 1997. Increased revenues from the Company's One Service business also contributed to the increase. Cost of sales increased $4.0 million (55.5%) to $11.3 million in the third quarter of 1997 from $7.2 million for the comparable period of 1996, due primarily to increased installation costs resulting from the growth in related revenue and increased monitoring expenses resulting from recent acquisitions of central stations, which have not yet been consolidated. Selling, general and administrative expenses increased $2.2 million (55.3%) to $6.3 million from $4.0 million for the same period of 1996. This increase is primarily related to costs associated with increased sales, marketing and administrative support as the Company continues to implement its nation-wide growth strategy. The Company aggressively pursued this strategy during the fourth quarter of 1996 and the first three quarters of 1997, expanding into many new geographic locations, including: Boston, MA, Chicago, IL, Cincinnati, OH, Dallas, TX, Erie, PA, Harrisburg, PA, Louisville, KY, Miami, FL, Nashville, TN, Orangeburg, SC, San Francisco, CA, Scranton, PA, and Tampa, FL. In addition, sales, marketing and administrative support was added in 1997 to establish and expand the Company's National Accounts operation. Depreciation and amortization expense increased to $2.9 million in the third quarter of 1997 from $2.6 million for the comparable period of 1996. Interest expense increased $0.4 million (247.2%) to $0.5 million in the third quarter of 1997 from $0.1 million in the third quarter of 1996 principally as a result of increased borrowings during 1997. Loss before income taxes was $2.3 million for the third quarter of 1997 compared to a loss of $0.8 million for the third quarter of 1996, primarily as a result of the selling ,marketing and general and administrative costs relating to the Company's expansion into new geographical markets which was partially offset by margins on increased revenues. 10 Nine Months Ended September 30, 1997 Compared with Nine Months Ended - -------------------------------------------------------------------- September 30, 1996 - ------------------ Revenues increased $10.9 million (28.8%) in the nine months ended September 30, 1997 to $48.7 million from $37.8 million in the nine months ended September 30, 1996. This increase was primarily attributable to an increase in installation revenue of $7.3 million (93.3%) resulting from increased sales due to the Company's expansion of its branch operations and National Accounts operation. An increase in monitoring and service revenue of $2.1 million (7.9%) and increased revenues from the One Service business also contributed to the increased revenues. The Company's annual recurring revenue base increased from $35.0 million at December 31, 1996 to $38.3 million at September 30, 1997, resulting from recurring revenues acquired during 1997. The recurring revenue base at September 30, 1996 was $34.3 million. The Company's backlog of orders increased to $10.8 million at September 30, 1997 versus $5.6 million at September 30, 1996. The backlog of orders was $6.0 million at December 31, 1996. Cost of sales increased 41.8% from $20.0 million in the nine months ended September 30, 1996 to $28.4 million in the nine months ended September 30, 1997. This increase was primarily the result of increased installation costs resulting from the growth in related revenue. Selling, general and administrative expenses were $17.3 million for the nine months ended September 30, 1997 compared to $10.9 million for the same period of 1996. This increase is primarily related to costs associated with increased sales, marketing and administrative support as the Company continued the implementation of its nation-wide growth strategy. The Company aggressively pursued this strategy during the fourth quarter of 1996 and the first three quarters of 1997, expanding into many new geographic locations, including: Boston, MA, Chicago, IL, Cincinnati, OH, Dallas, TX, Erie, PA, Harrisburg, PA, Louisville, KY, Miami, FL, Nashville, TN, Orangeburg, SC, San Francisco, CA, Scranton, PA, and Tampa, FL. In addition, sales, marketing and administrative support was added in 1997 to establish and expand the Company's National Accounts operation. Depreciation and amortization expense was $8.4 million in the nine months ended September 30, 1997 compared to $8.1 million in the nine months ended September 30, 1996. Additionally, in the first quarter of 1997, the Company incurred a non-recurring charge of $1.5 million related to the termination of its outsourcing agreement with PremiTech (See Note 3). Interest expense increased $0.6 million (129.4%) to $1.1 million in the nine months ended September 30, 1997 from $0.5 million in the comparable period of 1996 principally as a result of increased borrowing during 1997. Loss before income taxes reflected a loss of $7.7 million for the nine months ended September 30, 1997 compared to a loss of $1.5 million for the nine months ended September 30, 1996, primarily as a result of the selling ,marketing and general and administrative costs relating to the Company's expansion into new geographical markets partially offset by margins on increased revenues. Liquidity and Capital Resources Nine months Ended September 30, 1997 Cash and cash equivalents decreased by $0.9 million from $1.0 million to $0.1 million during the nine months ended September 30, 1997. Net cash provided by financing activities was $20.2 million, offset by cash utilized by operating activities of $6.7 million and net cash utilized by investing activities of $14.4 million. Net cash utilized by operating activities of $6.7 million principally consisted of cash provided by sales of electronic security services, adjusted for non-cash charges for depreciation and amortization, an increase in accounts receivable ($5.7 million) resulting from increased revenues, an increase in accounts payable and accrued expenses ($1.4 million), an increase in prepaid expenses and other current assets ($1.9 million), and an increase in inventory ($1.8 million). Net cash used in investing activities consisted primarily of acquisition costs and the additions to Company-owned equipment on subscribers' premises and other fixed assets. Net cash provided by financing activities of $20.2 million during this period consisted of bank borrowings of $19.5 million, and proceeds from the exercise of stock options of $1.4 million, offset by repayments of other long term debt obligations of $0.7 million. 11 Future Commitments and Cash Requirements Liquid assets available to the Company as of September 30, 1997 included cash and cash equivalents of $0.1 million. On August 30, 1996, the Company entered into a credit agreement (the "Credit Agreement"), amended and restated as of December 31, 1996 and subsequently amended as of January 1, 1997, with Merita Bank Ltd. and Bank of Boston Connecticut (together, the "Banks") pursuant to which the Banks have agreed, subject to the terms and conditions set forth therein, to provide a two-year $25 million revolving credit facility to the Company, the borrowings pursuant to which would automatically convert into a five-year term loan on September 30, 1998. The Company's ability to obtain future borrowings under this credit facility is contingent upon its compliance with various financial covenants, tests and ratios, including those relating to (i) ratios of total debt to EBITDA, (ii) ratios of total debt to recurring monthly revenue, (iii) minimum debt service coverage, (iv) minimum net worth, (v) maximum capital expenditures and (vi) maximum subscriber attrition rate (as defined in the Credit Agreement). On September 30, 1997, the outstanding balance under the Credit Agreement was $24.0 million, including an outstanding irrevocable letter of credit of $1.0 million (See Note 3). These borrowings were used to finance the Company's acquisition of alarm companies and to meet working capital requirements. On April 4, 1995, the Company entered into a ten-year, $51 million Outsourcing Agreement with PremiTech Corporation ("Premitech"), a subsidiary of Electronic Data Systems Corporation ("EDS"), which provided for PremiTech to assist in the consolidation of the Company's central monitoring facilities, to manage the Company's technological infrastructure and to perform certain of the Company's administrative functions. On March 12, 1997, the Company reached an agreement in principle (the "Agreement") with Premitech to terminate its Outsourcing Agreement effective April 1, 1997. As a result, on April 1 1997, the Company paid $650,000 in cash and executed a noninterest bearing promissory note ("Note") in the amount of $1,000,000 payable to EDS in twenty quarterly installments of $50,000, beginning January 1, 1998. The Note is secured by an irrevocable letter of credit for $1,000,000. In addition, the Company agreed to lease certain computer equipment for a three year term with an option to purchase the equipment at the end of the lease for the fair market value. The information in the following paragraphs is set forth as of the date of filing of this Form 10-Q/A: At September 30, 1997 the Company had $1.0 million of borrowing capacity remaining under its bank credit agreement and was not in compliance with certain of the financial covenants contained in the credit agreement. The banks waived such non compliance for periods prior to or ending on such date. Management has determined that the Company was not in compliance as of October 31, 1997, with certain of the financial covenants contained in the credit agreement referred to above and does not expect it will be in compliance with the covenants for November and December 1997. Accordingly, the Company has obtained waivers from its banks waving such non compliance through and including December 31, 1997. As a result of the Company's non compliance with its credit agreement, the Company has classified the indebtedness under its bank credit agreement ($23,000,000) from long-term debt to current debt. However, the banks have not accelerated, or taken any action to change the payment status of such debt. The Company does not presently have any remaining loan availability under the above credit agreement, and the Company is continuing its discussions with the banks with regard to additional financing required to meet its short-term operating and working capital needs. However, the Company does not presently have any commitment from the banks for any such waiver or for additional financing. The Company is also in discussions with its banks to amend the credit agreement covenants. The Company continues to experience significant working capital constraints resulting in part from its rapid sales growth and capital required to expand its operations in new geographic markets. The Company is continuing its exploration of strategic alternatives, including a possible sale of the business, as referred to above. If the Company is unable to achieve a sales or other strategic transaction in the near term, the Company will continue to experience significant working capital constraints, and the Company can provide no assurance that it will be able to obtain the additional financing necessary to provide for its short-term operating and working capital needs. The Company's independent public accountants, Arthur Andersen LLP, have informed the Company that, if the Company is unable to obtain additional financing and amend its present credit agreement, its report on the financial statements for the year ending December 31, 1997, may be modified because of substantial doubt about the Company's ability to continue as a going concern. 12 Pursuant to agreements under which the Company acquired certain security services businesses, the sellers of the businesses may elect, on or after January 1, 1998 to surrender to the Company for cancellation the shares of common stock of the Company that were issued to them in connection with such acquisitions if the Company has not effected the registration of such shares under the Securities Act of 1933 prior to such date, and the Company would be required to pay such sellers the purchase price in cash. The Company may be unable to effect such registration by such date. In such event, the Company would seek to obtain extensions of such date from the sellers. If such extensions were not provided and all of the sellers exercised such elections, the total maximum amount of cash that would be payable to the sellers by the Company would be approximately $4,000,000. The Company is engaged in discussions for a guarantee or other arrangement that would provide funding for such obligations if they become due but does not have commitments for any such arrangement. The Company is a defendant in certain litigation seeking damages for property loss of approximately $2,000,000 to $3,000,000 (in addition, plaintiff would be entitled to 9% interest from 1991 on any amount recovered) as to which the Company has been informed that there remains only about $200,000 to $300,000 of coverage under its primary insurance layer. In addition, a question has arisen as to whether, if damages awarded exceed the $1,000,000 primary layer, the carrier for the next layer of coverage (for $5,000,000) will respond to the alleged damages being sought in this litigation. The Company does not believe that a coverage question exists as to the carrier providing the third layer of coverage (an additional $5,000,000). 13 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit-27 Financial Data Schedule Worksheet (For SEC Use Only). (b) No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended September 30, 1997. 14 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOLMES PROTECTION GROUP, INC. ----------------------------- (Registrant) December 29, 1997 /s/ George V. Flagg George V. Flagg President and Chief Executive Officer Date: December 29, 1997 /s/ Lawrence R. Irving Lawrence R. Irving Vice President - Finance 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 SEP-30-1997 87 0 12,690 1,111 4,857 20,887 130,131 80,529 110,926 40,855 25,432 0 0 63 58,134 110,926 13,316 48,709 10,569 28,435 25,645 1,111 (1,060) (7,713) (2,314) (5,399) 0 0 0 (5,399) (0.90) (0.90)
-----END PRIVACY-ENHANCED MESSAGE-----