-----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, HroCAuwr5b1zR6WhPzzkBdGVxHtwqexLLn2qL2BW7kafwFGqLDngjtk4cTkgXeA1 bS6d98Qzbu/NdlXrKEkwBQ== 0000950116-97-002373.txt : 19971230 0000950116-97-002373.hdr.sgml : 19971230 ACCESSION NUMBER: 0000950116-97-002373 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 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-K/A SEC ACT: SEC FILE NUMBER: 000-24510 FILM NUMBER: 97745771 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-K/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Fiscal Year ended December 31, 1996 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 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) Registrant's telephone number including area code: (212) 760-0630 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based on the closing sale price per share of the registrant's Common Stock of $14.25 on March 27, 1997, as quoted on the NASDAQ National Market, the aggregate market value of the voting shares held by non-affiliates of the registrant (including 1,106,819 shares held by the "Institutions" (as defined herein)) was $60.9 million. At March 27, 1997, the number of shares outstanding of the registrant's Common Stock, par value $.01 per share, was 5,828,062 shares. Certain statements in this Annual Report on Form 10-K/A constitute "forward-looking statements" within he 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 form 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 referenced in this Annual Report on Form 10-K/A. The undersigned Registrant is filing this amended Annual Report on Form 10-K/A to restate its consolidated financial statements for the years ended December 31, 1996 and 1995 resulting from a change in its method of accounting for installation revenue, and to make certain corresponding and other changes. PART II Item 6. Selected Financial Data. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART III Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Financial Statements Consolidated Balance Sheets at December 31, 1996 and 1995 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements (b) Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts (c) Exhibits Exhibit No. Description ----------- ----------- 23 ................... Consent of Independent Public Accountants 27 ................... Restated Financial Data Schedule for the year ended December 31, 1996 Except for the foregoing exhibit, no exhibits are being filed with this Form 10-K/A. An index to exhibits is set forth in Item 14 of the Form 10-K as originally filed. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (1) The selected consolidated financial data set forth below as of December 31, 1996 and 1995 are derived from the Company's financial statements included elsewhere in this Form 10-K/A, which have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial data set forth below as of December 31, 1994, 1993 and 1992 are derived from financial statements not included in this Form 10-K/A. This data should be read in conjunction with the Company's consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere herein.
For the Year Ended December 31 -------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (000's omitted, except per share amounts) (Restated) Statement of Operations Data (2): Revenues $ 51,424 $ 50,821 $ 51,402 $ 53,500 $ 56,173 Cost of sales (exclusive of depreciation expense) (28,124) (26,262) (24,885) (29,916) (29,560) -------- -------- -------- -------- -------- Gross profit 23,300 24,559 26,517 26,584 26,613 Selling, general and administrative expenses (14,989) (16,668) (15,051) (17,837) (17,287) Depreciation and amortization (10,574) (10,390) (9,736) (8,919) (8,139) -------- -------- -------- -------- -------- Income (loss) before income taxes (3,218) (5,047) 982 145 3,803 -------- -------- -------- -------- -------- Income (loss) before extraordinary item (2,185) (3,231) 404 (55) (3,795) Extraordinary item -- -- -- -- 23,187 -------- -------- -------- -------- -------- Net income (loss) (2,185) (3,231) 404 (55) 19,392 Earnings (loss) per common share before extraordinary item (0.45) (0.72) 0.11 (0.02) (3.04) Earnings (loss) per common share (3) (0.45) (0.72) 0.11 (0.02) 15.54 Weighted average shares outstanding 4,827 4,459 3,580 2,944 1,250 For the Year Ended December 31 -------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (000's omitted) (Restated) Other Data: EBITDA (4) $ 8,593 $ 8,138 $ 11,659 $ 9,649 $ 12,312 Interest expense 537 721 941 585 370 Capital expenditures 9,428 7,494 7,361 7,883 7,074 Net cash provided by operating activities 3,337 6,144 6,164 2,335 1,797
3
December 31 ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (000's omitted) (Restated) Balance Sheet Data: Working Capital $ (2,870) $ (6,054) $ (1,818) $ (9,107) $ (8,307) Total Assets 90,394 80,859 87,148 84,078 83,450 Long-term debt, net of current maturities 4,370 4,862 6,709 5,995 435 Shareholders' equity 58,628 45,638 48,420 39,319 38,006
(1) See Note 1 to Consolidated Financial Statements for information concerning the Company's restatement of its financial statements for the years ended December 31, 1996 and 1995. All financial data in this table above as of and for the years ended December 31, 1996 and 1995 reflect such restatement. (2) Results of operations vary significantly among the years due to reorganization and a recapitalization of the Company. Net loss for 1996 reflects the effect of a non-recurring charge of $700,000. Net loss for 1995 reflects the effect of a non-recurring charge of $2,074,000. See Note 4 to Consolidated Financial Statements for further explanation. Net income for 1992 reflects the effect of an extraordinary gain, net of tax of $23,187,000, resulting from the restructuring of debt that occurred in August 1992. (3) The net income (loss) per common share data has been adjusted to give effect to the Reclassification on March 27, 1995. (4) EBITDA means earnings before interest, taxes, depreciation and amortization and is presented because it is an accepted and useful financial indicator of a Company's ability to service and incur debt. EBITDA should not be considered (i) as an alternative to net income or any other GAAP measure of performance (ii) as an indicator of operating performance or cash flows generated by operating, investing or financing activities or (iii) as a measure of liquidity. EBITDA for 1996 does not reflect a non-recurring charge of $700,000. EBITDA for 1995 does not reflect a non-recurring charge of $2,074,000. EBITDA for 1992 does not reflect an extraordinary gain of $23,187,000. 4 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS Results of Operations - ---------------------
Year Ended December 31 ---------------------------------------------------- 1996 1995 1994 1993 ---- ---- ---- ---- (000's omitted) Monitoring and service $ 35,656 $ 37,912 $ 39,747 $ 41,004 Installation 10,986 8,901 8,425 9,141 Franchise royalties, product sales and other 4,782 4,008 3,230 3,355 ---------- ---------- ---------- ---------- Total revenues 51,424 50,821 51,402 53,500 Cost of sales (exclusive of depreciation expense shown below) (28,124) (26,262) (24,885) (26,916) ---------- ---------- ---------- ---------- Gross profit 23,300 24,559 26,517 26,584 Selling, general and administrative expenses (14,989) (16,668) (15,051) (17,837) Depreciation and amortization (10,574) (10,390) (9,736) (8,919) Nonrecurring charge (700) (2,074) - - Other income 282 247 193 902 Interest expense, net (537) (721) (941) (585) ---------- ---------- ---------- ---------- Income (loss) before income taxes (3,218) (5,047) 982 145 Provision (benefit) for income taxes (1,033) (1,816) 578 200 ---------- ---------- ---------- ---------- Net income (loss) $ (2,185) $ (3,231) $ 404 $ (55) ========== ========== ========== ==========
Overview - -------- The majority of the Company's revenues is derived from a combination of (i) recurring payments received from subscribers for providing monitoring, service and equipment relating to electronic security systems, primarily under renewable contracts which generally have an initial five-year term, (ii) non-refundable charges received in connection with the installation of Company-owned systems in subscribers' premises, (iii) direct sales of electronic security systems and (iv) billable service charges, primarily from subscribers who own their systems outright. The remainder of the Company's revenues is derived from its insured parcel delivery service for the jewelry trade, jewelry vault rentals and royalties and product sales relating to its franchise and dealer operations. Recurring revenues are payable monthly, quarterly or annually in advance, and are recognized as the service is provided. Installation revenue is recognized on completion for systems sold outright to the subscriber. For those systems to which the Company retains ownership, revenue is recognized to the extent of the selling expense on completion of the installation, and the remaining revenue is recognized over the initial term of the contract. Direct installation costs, which include materials, labor and installation overhead are capitalized in the case of Company owned systems and are depreciated over the average useful life of the contract (including renewals), estimated by the Company to be twelve years. Other than as described above, all costs (including installation costs relating to outright sales) are recognized in the period in which they are incurred. 5 Restatement - ----------- Effective January 1, 1995, the Company changed its method of accounting for installation revenue to record 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 Corporate 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 years ended December 31, 1996 and 1995 using the Deferral Method. Accordingly, the consolidated financial statements for such years included in Item 8 have been restated from those originally reported. This Deferral Method of recording revenue had no impact on the Company's liquidity or cash flows. Fiscal Year Ended 1996 Compared With Fiscal Year Ended 1995 - ------------------------------- Revenues increased $0.6 million (1.2%) to $51.4 million in 1996 from $50.8 million in 1995. The increase was attributable to an increase in installation revenues of $2.1 million (23.4%) primarily from new installations of customer-owned systems and an increase of approximately $0.8 million in other revenues which represents an increase in revenues associated with the One Service business acquired in March, 1995 offset by a decline in revenues from the Company's Dictograph operations. The increase in installation and other revenues was partially offset by a decrease in monitoring and service revenue of $2.2 million (6.0%) relating to the cancellation of annual recurring revenues in excess of new sales. The annualized cancellation rate was 10.8% in 1996 compared to 10.9% in 1995. The annual recurring revenue base declined from $35.5 million at December 31, 1995 to $35.0 million at December 31, 1996. In 1996, the Company acquired approximately $1.9 million of annual recurring revenue most of which was acquired in December. Cost of sales increased $1.8 (7.1%) to $28.1 million in 1996 from $26.3 million in 1995. This increase was a result of the costs associated with the increase of new installations of customer-owned systems and the costs associated with the increased One Service business. New installation margins on customer-owned systems remained constant for 1996 as compared to 1995. Selling, general and administration expenses decreased $1.7 million (10.1%) to $15.0 million in 1996 from $16.7 in 1995. The decrease reflects reduced costs associated with staff reductions completed in the fourth quarter of 1995 and additional reductions completed in 1996 offset slightly by increased selling expenses associated with increased sales in 1996. Depreciation and amortization expense increased $0.2 million (1.8%) to $10.6 million in 1996 from $10.4 million in 1995. The increase relates to additional depreciation of installation costs relating to new and upgraded company-owned systems partially offset by a reduction in depreciation on other assets as a result of the writedown of leasehold improvements and other fixed assets in the fourth quarter of 1995. Interest expense, net of interest income, declined by $0.2 million (25.5%) from $0.7 million in 1995 to $0.5 million in 1996 primarily due to a declining debt balance. 6 Nonrecurring charges of $0.7 million in 1996 included $0.5 million relating to severance pay and related benefits in connection with additional reserves required for the staff reductions announced in the fourth quarter of 1995 and further reductions in 1996 as well as a settlement of an outstanding legal matter. In 1995, nonrecurring charges of $2.1 million included $1.1 million relating to severance pay and related benefits for staff reductions and approximately $1.0 million relating to the write-off of unamortized leasehold improvements and other assets in connection with the Company's central station consolidation and the relocation of the Company's corporate headquarters. The Company recorded a net loss in 1996 of $2.2 million compared to a net loss of $3.2 million in 1995. The net increase income of $1.0 million in 1996 is due to all the various changes described above. Fiscal Year Ended 1995 Compared With Fiscal Year Ended 1994 - ------------------------------- Revenues declined $0.6 million (1.1%) to $50.8 million in 1995 from $51.4 million in 1994. A portion of the decline was attributable to a reduction in revenues of $1.8 million from the Company's monitoring and service operations relating to the cancellation of annual recurring revenues in excess of new sales. Such annual recurring revenue base declined from $37.4 million at December 31, 1994 to $35.5 million at December 31, 1995. In addition, reduced revenues resulted from a decline in revenues of $0.7 million from franchise and dealer operations. The decline in revenues was partially offset by revenues from the insured parcel delivery service of $1.4 million, which business was acquired in March 1995. In 1995, the franchise and dealer operations experienced the loss of several franchises and a reduction in related royalties and product sales. The Company's cancellation rate continued to improve from a high in 1991 of 15.2% to 10.9% in 1995, which was slightly better than the 11.1% cancellation rate in 1994. This improvement reflects continued efforts to upgrade older accounts with new systems and to provide high quality service to subscribers. Cost of sales increased by $1.4 million (5.5%) to $26.3 million in 1995 from $24.9 million in 1994 primarily due to costs incurred in the operation of the insured parcel delivery business. Selling, general and administrative expenses increased by $1.6 million (10.7%) to $16.7 million in 1995 from $15.1 million in 1994. The increase relates in part to legal and professional fees incurred in connection with the Outsourcing Agreement and a significant prospective acquisition which did not materialize. Increased selling expenses were incurred in connection with new marketing efforts relating to the ProWatch and LifeNet systems. Depreciation and amortization expense increased $0.7 million (6.7%) to $10.4 million in 1995 from $9.7 million in 1994. The increase relates to additional depreciation of installation costs relating to new Company-owned systems as well as those systems which have been upgraded. Interest expense, net of interest income, declined by $0.2 million (23.4%) from $0.9 million in 1994 to $0.7 million in 1995 primarily due to an increase in interest income on investments and a declining debt balance under the Loan Agreement. Nonrecurring charges of $2.1 million in 1995 included $1.1 million relating to (i) severance pay and related benefits costs in connection with the selective reduction of approximately 70 employees in the Company's work force, all of whom were terminated, notified or identified at 7 December 31, 1995 and (ii) approximately $1.0 million relating to the write-off of unamortized leasehold improvements and other assets in connection with the Company's central station consolidation and the relocation of the Company's corporate headquarters which took place in late 1996. See Note 4 to Notes to Consolidated Financial Statements. The Company recorded a net loss in 1995 of $3.2 million compared to net income of $0.4 million in 1994. The net reduction in income of $3.6 million in 1995 is due to all the various changes described above. Liquidity and Capital Resources - ------------------------------- Fiscal Year Ended 1996 - ---------------------- Cash and cash equivalents increased by $0.6 million from $0.4 million in 1995 to $1.0 million in 1996. In 1996, net cash provided by operating activities of $3.3 million and net cash provided by financing activities of $7.8 million was offset by $10.5 million of cash used by investing activities. Net cash provided by operating activities of $3.3 million in this period principally consisted of cash provided by sales of electronic security services, adjusted for non-cash charges for depreciation and amortization, an increase in inventory of $0.8 million, a decrease in accounts payable and accrued expenses of $1.8 million and an increase in customer deposits of $1.0 million. The excess of current liabilities over current assets decreased from $6.1 million in 1995 to $2.9 million in 1996 primarily as a result of a reduction in long-term debt, accounts payable and accrued expenses. Net cash of $10.5 million used by investing activities in 1996 consisted of $9.4 million of capital expenditures (primarily for installation of alarm equipment on subscribers' premises), and investments in acquired companies of $3.2 million offset by a net reduction of $2.0 million from net maturities of short-term investments. Net cash of $7.8 million provided by financing activities during this period consisted principally of net proceeds from the issuance of Common Stock of $12.1 million and proceeds from the Credit Facility of $12.0 million, offset by repayments of amounts due under the Loan Agreement of $6.2 million, the Credit Facility of $8.5 million, and short-term borrowings of $1.0 million. In addition, $0.6 million was used for issuance costs associated with the Credit Facility. See Notes 6 and 7 to Notes to Consolidated Financial Statements. Fiscal Year Ended 1995 - ---------------------- Cash and cash equivalents declined by $1.0 million from $1.4 million in 1994 to $0.4 million in 1995. In 1995, net cash provided by operating activities of $6.1 million was offset by $1.5 million of cash used by financing activities and $5.6 million of cash used by investing activities. Net cash provided by operating activities of $6.1 million in this period 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 of $1.6 million, an increase in accounts payable and accrued expenses of $1.8 million and a decrease in customer deposits and other liabilities of $1.6 million. The excess of current liabilities over current assets increased from $1.8 million in 1994 to $6.1 million in 1995 primarily as a result of a reduction in long-term debt, 8 additions to property, plant and equipment and establishment of the reserve for severance and related benefit costs. Net cash of $5.6 million used by investing activities in 1995 consisted of $7.5 million of capital expenditures (primarily for installation of alarm equipment on subscribers' premises), offset by a net reduction of $1.9 million from net maturities of short-term investments. Net cash of $1.5 million used by financing activities during this period consisted principally of repayments of amounts due under the Loan Agreement and short-term borrowings under a Company margin account. See Note 6 to Notes to Consolidated Financial Statements. Future Commitments and Cash Equivalents - --------------------------------------- Liquid assets available to the Company as of December 31, 1996 included cash and cash equivalents of $1.0 million. At December 31, 1996 the Company had undrawn funds of $21.5 million under its new revolving credit facility. In August 1996, the Company entered into the Credit Facility with Merita Bank Ltd. and Bank of Boston Connecticut (see "Business-Other Developments 1996 Credit Facility") to provide a two-year, $25 million revolving credit facility to the Company which converts into a five-year term loan on September 30, 1998. At December 31, 1996 the outstanding balance under the Credit Facility was $3.5 million. At such date outstanding balances under the Company's previous loan agreement, aggregating $6.2 million, were paid in full and such agreement was subsequently canceled. The Credit Facility matures on September 30, 2003, with principal payments payable in increasing quarterly installments commencing December 31, 1998. Borrowings under the Credit Facility bear interest, at the Company's option, at an annual rate equal to either a base rate, defined as the higher of the prime rate or a specified federal funds rate, or a specified Eurodollar rate plus, in each case, an applicable margin which varies with the Company's leverage (the ratio of total debt to EBITDA less capital expenditures). The Company is obligated to pay a commitment fee of 1/2% per annum of any undrawn amounts. The New Banks also received warrants to purchase an aggregate of 166,666 shares of Common Stock at an initial exercise price of $9.75 per share and were granted certain registration rights in connection therewith. Mandatory prepayment of the Credit Facility will be required under certain circumstances. Additionally, the Credit Facility contains a number of negative covenants customary in credit agreements for this type of loan, including, without limitation, restrictions on additional indebtedness, certain acquisitions, dividends, investments, mergers and sales of assets, creation of liens, guarantees, issuance of capital stock by the Company's subsidiaries and transactions with affiliates. The Company is also required to comply with various financial covenants, tests and ratios, including those relating to (i) ratios of total debt to recurring monthly revenue, (ii) minimum debt service coverage, (iii) minimum net worth, (iv) maximum capital expenditures and (v) maximum subscriber attrition rate (as defined in the Credit Facility). The Credit Facility is secured by all current and future assets and the pledge of the capital stock of the Company's subsidiaries. In 1995, the Company entered into the Outsourcing Agreement with PremiTech which provides for PremiTech to manage the Company's technological infrastructure, perform certain of the 9 Company's administrative functions, and assist in the consolidation of the Company's central monitoring facilities. For on-going services during the ten-year term of the agreement, the Company was obligated to pay PremiTech a total of $47.7 million in equal monthly installments aggregating $4.8 million per year, subject to certain adjustments. In addition, the Company agreed to pay PremiTech a total of $3.3 million for its consolidation activities. In March 1997, the Company and PremiTech reached an agreement in principle to terminate the Outsourcing Agreement, under which the Company will record a one-time, nonrecurring charge of approximately $1.5 million in the first quarter of 1997. See Notes 4 and 14 to Notes to Consolidated Financial Statements. The Company has in the past experienced cash flow shortages. The Company believes that net cash provided by operations, together with funds available under the Credit Facility, will enable it to meet its future cash operating needs. In the course of its business, the Company plans on-going annual capital expenditures for Company-owned alarm equipment installed at subscriber premises. Additionally, the Company continues to invest in the replacement and modernization of the equipment utilized in its central monitoring activities and associated security services. All such capital expenditures will require substantial financial resources which are expected to be provided by internally generated funds and, as necessary, supplemental funding from other sources, including its Credit Facility. The foregoing information under the caption "Future Commitments and Cash Equivalents" is set forth as of April 7, 1997, the date of filing the Form 10-K being amended by the Form 10-K/A. For current information relating to the Company's liquidity and other matters set forth under such caption, see the Company's Form 10-Q/A for the quarterly period ended September 30, 1997. 10 INDEX TO FINANCIAL STATEMENTS
Page ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-22 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS S-1
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Holmes Protection Group, Inc.: We have audited the accompanying consolidated balance sheets of Holmes Protection Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, as restated (see Note 1) and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years ended December 31, 1996 and 1995, as restated, and for the year ended December 31, 1994. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Holmes Protection Group, Inc. and subsidiaries as of December 31, 1996 and 1995, as restated, and the results of their operations and their cash flows for each of the two years ended December 31, 1996 and 1995, as restated, and for the year ended December 31, 1994 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed on the Index to Financial Statements is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen ------------------- ARTHUR ANDERSEN LLP New York, New York February 28, 1997 (except with respect to the matters discussed in Notes 14 and 15, as to which the dates are March 12, 1997, and December 18, 1997, respectively, and with respect to the restatement information in Notes 1b, 1c, 8, 9 and 11, as to which the date is December 18, 1997) F-2 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (000's omitted)
ASSETS 1996 1995 ------ ---- ---- CURRENT ASSETS: (Restated) Cash and cash equivalents $ 990 $ 435 Short-term investments -- 2,043 Accounts receivable, less allowance for doubtful accounts of $973 in 1996 and $1,340 in 1995 5,333 4,997 Inventories 2,795 1,923 Prepaid expenses and other 2,448 2,550 --------- --------- Total current assets 11,566 11,948 --------- --------- FIXED ASSETS, net 47,198 45,231 SUBSCRIBER CONTRACTS, at cost, less accumulated amortization of $25,137 in 1996 and $22,522 in 1995 19,650 18,894 TRADENAMES, less accumulated amortization of $2,045 in 1996 and $1,875 in 1995 4,063 4,234 OTHER ASSETS 7,917 552 --------- --------- $ 90,394 $ 80,859 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Short-term borrowings $ -- $ 943 Current maturities of long-term debt 364 2,497 Accounts payable and accrued expenses 7,290 8,689 Deferred revenue 3,969 4,123 Customer deposits 2,813 1,750 --------- --------- Total current liabilities 14,436 18,002 --------- --------- LONG-TERM LIABILITIES: Long-term debt 4,370 4,862 Other long-term liabilities 2,503 3,048 Deferred income taxes 10,457 9,309 --------- --------- Total long-term liabilities 17,330 17,219 --------- --------- COMMITMENTS AND CONTINGENCIES (Note 12) SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000 authorized shares; none outstanding -- -- Common stock, $0.01 par value; 12,000 authorized shares; 5,835 issued in 1996 and 4,466 issued in 1995 58 45 Additional paid-in capital 133,251 120,763 Accumulated deficit (74,596) (72,222) Minimum pension liability adjustment -- (2,863) --------- --------- 58,713 45,723 Less- Treasury stock - 7 shares in 1996 and 1995 at cost (85) (85) --------- --------- Total shareholders' equity 58,628 45,638 --------- --------- $ 90,394 $ 80,859 ========= =========
The accompanying notes to financial statements are an integral part of these balance sheets. F-3 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (000's omitted, except earnings per share data)
1996 1995 1994 ---------- ---------- ---------- (Restated) REVENUES: Monitoring and service $ 35,656 $ 37,912 $ 39,747 Installation 10,986 8,901 8,425 Franchise royalties, product sales and other 4,782 4,008 3,230 ---------- ---------- ---------- Total revenues 51,424 50,821 51,402 ---------- ---------- ---------- COST OF SALES (exclusive of depreciation expense shown below): Monitoring and service 18,054 18,554 18,632 Installation 5,831 3,971 3,595 Franchise royalties, product sales and other 4,239 3,737 2,658 ---------- ---------- ---------- Total cost of sales 28,124 26,262 24,885 SELLING, GENERAL AND ADMINISTRATIVE 14,989 16,668 15,051 DEPRECIATION AND AMORTIZATION 10,574 10,390 9,736 NON-RECURRING CHARGE 700 2,074 - ---------- ---------- ---------- 54,387 55,394 49,672 ---------- ---------- ---------- Income (Loss) from operations (2,963) (4,573) 1,730 OTHER INCOME 282 247 193 INTEREST EXPENSE (net of interest income of $62 in 1996, $276 in 1995 and $70 in 1994) (537) (721) (941) ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES (3,218) (5,047) 982 PROVISION (BENEFIT) FOR INCOME TAXES (1,033) (1,816) 578 ---------- ---------- ---------- Net Income (Loss) $ (2,185) $ (3,231) $ 404 ========== ========== ========== EARNINGS (LOSS) PER COMMON SHARE: Net Earnings (Loss) per common share $ (0.45) $ (0.72) $ 0.11 ---------- ---------- ---------- WEIGHTED AVERAGE SHARES OUTSTANDING 4,827 4,459 3,580 ========== ========== ==========
The accompanying notes to financial statements are an integral part of these statements. F-4 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (000's omitted)
Minimum Additional Pension Common Treasury Paid- In Liability Accumulated Stock Stock Capital Adjustment Deficit Total --------- --------- --------- --------- --------- --------- BALANCE, January 1, 1994 $ 10,330 $ (85) $ 101,978 $ (3,509) $ (69,395) $ 39,319 Net income for year -- -- -- -- 404 404 Proceeds from issuance of shares of common stock 5,305 -- 4,695 -- -- 10,000 Common stock issuance and other related costs -- -- (1,500) -- -- (1,500) Change in minimum pension obligation (net of taxes of $155) -- -- -- 197 -- 197 Effect of reverse stock split (14,518) -- 14,518 -- -- -- Effect of change in par value (1,072) -- 1,072 -- -- -- --------- --------- --------- --------- --------- --------- BALANCE, December 31, 1994 45 (85) 120,763 (3,312) (68,991) 48,420 Net loss for year (Restated) -- -- -- -- (3,231) (3,231) Change in minimum pension obligation (net of taxes of $307) -- -- -- 449 -- 449 --------- --------- --------- --------- --------- --------- BALANCE, December 31, 1995 (Restated) 45 (85) 120,763 (2,863) (72,222) 45,638 Net loss for year (Restated) -- -- -- -- (2,185) (2,185) Change in minimum pension obligation (net of taxes of $2,295) -- -- -- 2,863 -- 2,863 Proceeds from issuance of shares of common stock, net of expenses of $1,815 12 -- 12,089 -- -- 12,101 Issuance of shares to former stockholders of acquired company 1 -- (1) -- (189) (189) Fair value of warrants issued in connection with new Credit Facility -- -- 400 -- -- 400 --------- --------- --------- --------- --------- --------- BALANCE, December 31, 1996 (Restated) $ 58 $ (85) $ 133,251 $ -- $ (74,596) $ 58,628 ========= ========= ========= ========= ========= =========
The accompanying notes to financial statements are an integral part of these statements. F-5 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (000's omitted)
1996 1995 1994 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: (Restated) Net Income (Loss) $ (2,185) $ (3,231) $ 404 Adjustments to reconcile net income (loss) to net cash provided by operating activities- Depreciation and amortization 10,574 10,390 9,736 Provision for doubtful accounts (146) 486 506 Non-recurring charge 700 2,074 - Deferred income taxes (1,283) (2,016) 484 Changes in operating assets and liabilities- Increase in accounts receivable (30) (1,628) (423) (Increase) decrease in inventories (837) 57 337 Decrease in prepaid expenses and other current assets 97 559 957 (Increase) decrease in other assets (1,165) - 58 (Decrease) increase in accounts payable and accrued expenses (1,844) 1,840 (2,812) Increase (decrease) in customer deposits 1,063 (696) 376 Decrease in deferred revenue (588) (869) (801) Decrease in pension and other liabilities (1,019) (822) (2,658) ---------- ---------- ---------- Net cash provided by operating activities 3,337 6,144 6,164 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (9,428) (7,494) (7,361) Purchase of subscriber contracts - - (1,840) Acquisition of businesses, net of cash acquired (3,185) - - Purchase of short-term investments - (6,601) (5,486) Maturities of short-term investments 2,043 8,544 1,500 Other - (50) - ---------- ---------- ---------- Net cash used by investing activities (10,570) (5,601) (13,187) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Credit Facility 11,996 - - Payments on Credit Facility (8,496) - - Payments for issuance costs related to debt obligation (568) - - Proceeds from secured note - - 3,405 Payments on secured note (6,188) (2,250) (3,681) Payments on other long-term debt (114) (210) (449) Proceeds from issuance of common stock 13,916 - 10,000 Transaction and other related costs (1,815) - (1,500) (Repayments) proceeds from short-term borrowings (943) 943 - ---------- ---------- ---------- Net cash provided (used) by financing activities 7,788 (1,517) 7,775 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 555 (974) 752 CASH AND CASH EQUIVALENTS, beginning of year 435 1,409 657 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, end of year $ 990 $ 435 1,409 ========== ========== ========== CASH PAYMENTS FOR: Interest $ 636 $ 1,016 $ 992 Income taxes $ 301 $ 167 $ 155 NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations $ - $ 234 $ 302 Issuance of warrants in connection with new Credit Facility $ 400 $ - $ - Issuance of notes payable in connection with acquired businesses $ 179 $ - $ -
The accompanying notes to financial statements are an integral part of these statements. F-6 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ (a) Principles of Consolidation --------------------------- Holmes Protection Group, Inc. (the "Company"), a Delaware corporation, is the holding company for its subsidiaries which operate in the security alarm business primarily in the Northeastern United States. The consolidated financial statements incorporate all the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated. Certain amounts for prior periods have been reclassified to conform to the 1996 presentation. (b) Restatement ----------- Effective January 1, 1995, the Company changed its method of accounting for installation revenue to record 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 Corporate 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 years ended December 31, 1996 and 1995 using the Deferral Method. Accordingly, the accompanying consolidated financial statements for the years ended December 31, 1996 and 1995 have been restated from those originally reported to reflect such determination. The 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 years ended December 31, 1996 and 1995.
December 31, 1996 December 31, 1995 ----------------------------- ----------------------------- As As Originally As Originally As Reported Restated Reported Restated -------------- ------------ -------------- ----------- Income Statement (000's omitted) ---------------- Revenue $ 50,975 $ 51,424 $ 50,075 $ 50,821 Income (loss) before income taxes (3,667) (3,218) (5,793) (5,047) Income (loss) before cumulative effect of change in accounting principle (2,452) (2,185) (3,674) (3,231) Cumulative effect of change in accounting - - 2,477 - principle Net income (loss) (2,452) (2,185) (1,197) (3,231)
F-7
December 31, 1996 December 31, 1995 ----------------------------- ----------------------------- As As Originally As Originally As Reported Restated Reported Restated -------------- ------------ -------------- ----------- (000's omitted) Earnings (loss) per common share: Before cumulative effect of change in accounting principle $ (.51) $ (.45) $ (.82) $ (.72) Cumulative effect of change in accounting principle - - .55 - Net loss (.51) (.45) (.27) (.72) Balance Sheet ------------- Current assets 10,989 11,566 11,297 11,948 Current liabilities 13,160 14,436 16,543 18,002 Long-term liabilities 16,262 17,330 15,993 17,219 Shareholders' equity 60,395 58,628 47,672 45,638
(c) Revenue Recognition ------------------- The Company's subsidiaries design, install, service and monitor security alarm systems, which are either sold outright ("customer owned") or the Company retains title to the equipment ("Company owned"). Installation revenue, and related cost under customer owned contracts, is recognized upon completion of installation. In contracts relating to Company-owned equipment, an amount equal to the estimated selling cost is recognized upon completion of the installation, and the remaining revenue is deferred and recognized over the term of the initial contract (generally 5 years). In both cases, revenue from monitoring and servicing activities is recognized on a straight-line basis over the life of the contract. (d) Allowance for Doubtful Accounts ------------------------------- Management reviews the collectibility of accounts receivables on a regular basis. Amounts, if any, which are determined to be uncollectible are provided for in the financial statements in the period such determination is made. (e) Fixed Assets ------------ Fixed assets are recorded at cost. The Company's equipment installed on the subscribers' premises for Company owned systems is capitalized on the basis of the cost of materials, labor and overhead relating to the specific installation. The Company provides for depreciation of equipment on subscribers' premises, central stations and vaults using the straight-line method over an average life of 12 years. Periodically, management will review these lives to assess their adequacy given changes in its business. If circumstances warrant a significant change in lives, management will adjust such lives to those which are more representative of its business environment. The Company depreciates other equipment, including computers, utilizing the straight-line method over a period ranging between 5 to 12 years, and automotive equipment over the equipment's useful lives ranging from 3 to 5 years. Leasehold improvements are depreciated utilizing the straight-line method over the asset's useful life or the remaining lease term, whichever is shorter. Assets held under capital lease obligations are depreciated utilizing the straight line method over the life of the lease or asset, whichever is applicable. F-8 Repair and maintenance costs are expensed as incurred. (f) Subscriber Contracts -------------------- The cost of acquired subscriber contracts is amortized, based upon average experience, on a straight-line basis over their estimated useful lives which has been determined to be 12 years. Such life is periodically reviewed by management in order to assess its reasonableness. When, in the opinion of the Company's management, a permanent diminution in the value of subscriber contracts has occurred, the amount of the diminution would be included in the consolidated statements of operations. In order to determine whether a permanent diminution in value has occurred, management monitors the Company's cancellation rates. If an increasing trend in cancellation rates exists and is recurring, and such cancellation rates indicate nonrecoverability of the assets, a write down of assets is reflected in the consolidated statement of operations based upon the discounted future net cash flows of the remaining subscriber contracts or other method to determine fair market value of such assets. Amortization expense was $2,615,000, $2,580,000 and $2,483,000 in 1996, 1995 and 1994, respectively. (g) Tradenames ---------- Tradenames are amortized on a straight-line basis over a period of forty years. Such life is periodically reviewed by management in order to assess its adequacy. When, in the opinion of the Company's management, a permanent diminution in the value of tradenames has occurred, the amount of the diminution would be included in the consolidated statements of operations. Amortization expense was $170,000 for each year presented. (h) Inventories ----------- Inventories consist primarily of parts used in the installation and repair of equipment on subscribers' premises and equipment sold to franchise dealers. Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Inventories as of December 31, 1996 and 1995 consist of the following (000's omitted): 1996 1995 ---- ---- Materials $ 1,749 $ 1,390 Work-in-process 1,046 533 --------- ------- $ 2,795 $ 1,923 ========= ======= (i) Cash and Cash Equivalents ------------------------- Cash equivalents consist principally of short-term investments having original maturities of 90 days or less, and are carried at cost, which approximates market. F-9 (j) Short-Term Investments ---------------------- Short-term investments consisted primarily of short-term U.S. Government obligations ($1,853,000 at December 31, 1995), which had an original maturity of greater than 90 days, as well as certificates of deposit ($190,000 at December 31, 1995). All such investments matured during 1996. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". This Statement requires the classification of debt and equity securities based on whether the securities will be held to maturity, are considered trading securities or are available for sale. Classification within these categories may require the securities to be reported at their fair market value with unrealized gains and losses included either in current earnings or reported as a separate component of shareholders' equity, depending on the ultimate classification. The Company adopted the provisions of this statement effective January 1, 1994, the adoption of which had no impact on the Company's consolidated financial statements. As of December 31, 1995, all short-term investments used as part of the Company's investment management have been classified as held to maturity. These investments are stated at cost which approximates market. Interest is accrued as earned. (k) Stock-Based Compensation ------------------------ The Company accounts for employee stock options in accordance with Accounting Principles Board No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees." Under APB No. 25, the Company applies the intrinsic value method of accounting and therefore does not recognize compensation expense for options granted, because options are only granted at a price equal to market value on the day of grant. During 1996, Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock Based Compensation," became effective for the Company. SFAS No. 123 prescribes the recognition of compensation expense based on the fair value of options determined on the grant date. However, SFAS No. 123 allows companies currently applying APB No. 25 to continue using that method. The Company has therefore elected to continue applying the intrinsic value method under APB No. 25. For companies that choose to continue applying the intrinsic value method, SFAS No. 123 mandates certain pro forma disclosures as if the fair value method had been utilized. See Note 8 for additional discussion. (l) Income Taxes ------------ Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on the enacted tax law rates. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. (m) Long-Lived Assets ----------------- Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable. The new standard, which was adopted in 1996, did not have a material effect on the Company's results of operations, cash flows or financial position. F-10 (n) Earnings Per Share ------------------ Earnings per common share calculations are based on the weighted average number of shares of common stock outstanding and dilutive common stock equivalents outstanding. All earnings per share amounts have been adjusted to give effect of the reverse stock split (Note 7). (o) Use of Estimates ---------------- The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. 2. ACQUISITIONS ------------ In September 1996, the Company acquired an alarm monitoring company using the pooling of interest method. In connection with this acquisition 103,805 shares were exchanged for all the outstanding stock of the acquired company. The consolidated financial statements of the Company have not been restated to reflect the impact of the pooling of interests as such amounts are immaterial. In addition, during the forth quarter of 1996, the Company acquired five alarm companies for an aggregate purchase price of $3,364,000. These acquisitions are accounted for using the purchase method. 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 results of operations for these acquisitions were not significant to the consolidated financial statements of the Company. 3. INFORMATION TECHNOLOGY SERVICES AGREEMENT ----------------------------------------- On April 4, 1995, the Company entered into an information technology services agreement with PremiTech Corporation ("PremiTech"), a subsidiary of Electronic Data Systems Corporation. The ten year $51 million outsourcing agreement provided for PremiTech to consolidate and manage the Company's data processing, communications and certain administrative functions. In connection with the consolidation of its operations, the Company paid PremiTech $3.3 million. This amount was to compensate PremiTech for the cost of constructing the new central station facility and certain leasehold improvements. PremiTech is a limited partner of the Investor (see Note 7), holding a partnership interest equivalent to approximately 5% of the Company's common stock. Payments made to PremiTech for managing the Company's data processing, communications and certain administrative functions amounted to $4,772,000 during 1996 and $3,073,000 during 1995. (See "Subsequent Event" Note 14). 4. NON-RECURRING CHARGE -------------------- In connection with the Company entering into the information technology services agreement (see Note 3), the Company determined that certain existing asset and resource requirements were to be redeployed or no longer required. After analyzing numerous alternatives regarding its consolidation, management determined that certain existing assets and personnel resources would no longer be necessary. Accordingly, the Company recorded a non-recurring charge of $2,074,000 in 1995 which F-11 consisted of severance and related benefit costs of $1,133,000 covering selected reductions in work force throughout the Company of approximately 70 employees, all of whom were terminated, notified or identified at December 31, 1995 and writedowns of leasehold improvements and other fixed assets amounting to $941,000 which will no longer be utilized. In 1996, the Company recorded a non-recurring charge of $700,000. This charge consists of (i ) $387,000 for additional severance and related benefits resulting from delays in the Company's consolidation, (ii) $163,000 for severance and related benefit costs associated with additional staff reductions in connection with the restructuring of the operations and (iii) $150,000 for the settlement of an outstanding legal matter. These employees have been terminated or notified at December 31, 1996. At December 31, 1996, the reserve for severance and related benefit costs was $863,000. The Company anticipates completing its consolidation in February 1997. 5. FIXED ASSETS ------------ Fixed assets as of December 31, 1996 and 1995 consist of the following (000's omitted): 1996 1995 ------------ ------------ Subscriber installation costs $ 103,903 $ 97,558 Central station and other equipment 10,051 9,588 Leasehold improvements 5,955 4,087 Furniture and fixtures 1,038 917 Construction in progress 1,009 615 ------------ ------------ 121,956 112,765 Less- Accumulated depreciation (74,758) (67,534) ------------ ------------ $ 47,198 $ 45,231 ============ ============ Depreciation expense relating to cost of sales is $6,428,000, $6,378,000 and $6,507,000 for 1996, 1995 and 1994, respectively. 6. DEBT ---- Short-Term Borrowings - --------------------- Short-term borrowings of $943,000 at December 31, 1995 consisted of borrowings from a margin account, which were secured against the value of the securities in the Company's short term investment account. The weighted average interest rate on the outstanding balances during 1995 was 8%. F-12 Long-Term Debt - -------------- At December 31, 1996 and 1995, the Company had the following long-term indebtedness outstanding (000's omitted): 1996 1995 --------- --------- Credit Facility $ 3,500 $ - Term Note - 6,188 Capital lease obligations, interest rates ranging from 9.0% to 12.6%, maturing through August 2000 896 981 Other 338 190 --------- --------- 4,734 7,359 Less- Current portion 364 2,497 --------- --------- $ 4,370 $ 4,862 ========= ========= The maturities of long-term debt due within the next five years are as follows (000's omitted): 1996 --------- 1997 $ 364 1998 460 1999 922 2000 888 2001 700 Thereafter 1,400 --------- $ 4,734 ========= In 1993 the Company negotiated a credit facility of $12 million (the "loan agreement") with its bank. The loan agreement provided for a $9 million five-year term note ("Term Note") and a $3 million revolving loan facility ("Credit Note"). These amounts were used in 1993 and 1994 to replace the Company's existing short-term borrowings, to finance acquisitions and to provide for working capital. The Term Note bore interest on the outstanding balance at the bank's prime rate (8.5 percent at December 31, 1995) plus 2 percent. However, the Company had a separate agreement with a bank which provided for a minimum and a maximum interest rate on its term note of 8% and 10.25%, respectively. The Credit Note bore interest on outstanding balances at the bank's prime rate (8.5 percent at December 31, 1995) plus 1 percent and was subject to renewal at the option of the bank on May 31, 1996. The outstanding balance on the Term Note was $6,188,000 on December 31, 1995. On August 30, 1996, the Company entered into a new credit agreement (the "Credit Agreement") and further amended and restated this agreement on December 31, 1996 with Merita Bank Ltd. and Bank of Boston Connecticut (together, the "New Banks") pursuant to which the New 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 of which automatically converts into a five-year term loan on September 30, 1998 (the "Credit Facility"). The Credit Facility matures on September 30, 2003 with principal payments payable in increasing quarterly installments commencing December 31, 1998. Borrowings under the Credit Facility bear interest, at the Company's option, at an annual rate equal to either a base rate, defined as the higher of the prime rate or a specified federal funds rate, or a specified Eurodollar rate plus, in each case, an F-13 applicable margin which varies with the Company's leverage (as defined in the Credit Agreement). The Company is obligated to pay a commitment fee of 1/2% per annum of any undrawn amounts. The New Banks also received warrants to purchase an aggregate of 166,666 shares of Common Stock at an initial exercise price of $9.75 per share (the "New Bank Warrants") and were granted certain registration rights in connection therewith. Such warrants were valued at approximately $400,000 and are being amortized over the life of the Credit Facility. At December 31, 1996, the outstanding balance under the Credit Facility was $3.5 million at an interest rate of 9.75%. The Company is subject to certain covenants under the Credit Facility which include, but are not limited to, ratios of total debt to recurring monthly revenue, minimum debt service coverage, minimum net worth, maximum capital expenditures, maximum subscriber attrition rate (as defined in the Credit Agreement), restrictions on additional indebtedness, certain acquisitions, dividends, investments, mergers and sales of assets, creation of liens, guarantees and issuance of capital stock by the Company's subsidiaries. The Credit Facility is secured by all current and future assets, and the pledge of the Company's common stock of the Company's subsidiaries. The carrying amounts of the Company's short-term borrowings and long-term debt approximate their fair value. The fair value of the Company's long-term debt is estimated based on current rates offered to the Company for debt with similar remaining maturities. 7. COMMON STOCK ------------ On August 13, 1992, the Company issued warrants to purchase 193,150 shares of common stock, subject to adjustment upon certain dilutive events, in connection with a restructuring of debt. These warrants expire on August 13, 2002 and are exercisable at any time prior to expiration at an exercise price of $10.68, subject to adjustment upon certain dilutive events. On August 1, 1994, the Company sold to HP Partners L.P. (the "Investor") for $10,000,000 (i) 1,515,886 shares of common stock and (ii) warrants to purchase 685,714 shares of common stock at an exercise price of $4.58 per share. The warrants are exercisable at any time prior to their expiration date on August 1, 2004 and are subject to adjustment upon certain dilutive events. On March 27, 1995, the Company effected a reverse stock split pursuant to which one share of common stock, $.01 par value, was exchanged for every 14 shares of common stock, $.25 par value, then issued or outstanding. In addition, the Company reduced its authorized shares of preferred and common stock from 10,000,000 and 100,000,000 shares to 1,000,000 and 12,000,000 shares, respectively. The share information included in the accompanying financial statements reflect the effect of the reverse stock split effected March 27, 1995. On September 25, 1996, the Company issued 1,265,000 shares of Common Stock at $11.00 per share, par value $0.01 per share, in a public offering for net proceeds of approximately $12.1 million. At December 31, 1996, the Company has 2,196,861 shares of common stock reserved for share option plans and 1,045,530 for warrants. F-14 Changes in common stock outstanding are as follows (000's omitted): Common Stock Treasury Stock January 1, 1994 2,951 7 Additions - Sales of common stock 1,515 - -------- -------- December 31, 1994 4,466 7 Additions - - -------- -------- December 31, 1995 4,466 7 Additions - Sales of common stock 1,265 - Additions - Common stock issued for an acquisition 104 - -------- -------- December 31,1996 5,835 7 ======== ======== 8. STOCK OPTIONS ------------- The Company, with the approval of its stockholders, adopted the 1992 Senior Executives' Option Plan (the "Executives Plan") and the 1992 Directors' Option Plan (the "Directors Plan"). The Executives Plan and the Directors Plan (collectively, the "Option Plans") took effect on August 13, 1992. On such date, one-time grants of options were made to certain current and former directors under the Directors Plan. At December 31, 1996, options to purchase 165,429 shares of common stock were outstanding under the Directors Plan, of which no options were exercisable. Under the Directors Plan, all options vested on January 1, 1993. On July 29, 1994 (the "Effective Date"), the Company's stockholders approved the amendment and restatement of the Executives Plan, which amendment and restatement (i) replaced all options outstanding under the Plan with a like number of options at a reduced exercise price of $7.28 per share, (ii) commenced a new vesting period for such options, (iii) reduced the "hurdle rate" relating to the price at which the shares must trade prior to becoming exercisable and (iv) modified the provisions of the Plan to satisfy the requirements of Rule 16b-3 of the Securities Exchange Act of 1934. Under the Executives Plan, initial option grants to certain designated senior executives made on the Effective Date will become exercisable as to thirty percent (30%) of the option shares on the first anniversary of the Effective Date; twenty percent (20%) of the option shares on the second and third anniversaries of the Effective Date, and fifteen percent (15%) of the option shares on each of the fourth and fifth anniversaries of the Effective Date. At December 31, 1996, options to purchase 31,432 shares of common stock were outstanding under the Executives Plan, of which no options were exercisable. No options granted under the Executives Plan or the Directors Plan will become exercisable until the price of the shares subject thereto reaches or has reached a trading price of $13.30 and $24.45, respectively, and remains at or above such price for 30 consecutive trading days. The options will expire ten years after the date of grant. No further stock options or other awards shall be granted under the Executives Plan and the Directors Plan. All stock options outstanding under the Executives Plan and the Directors Plan shall continue to be governed by the terms of the respective plans, and the relevant stock option agreement pertaining to each such stock option. During 1995, the Company adopted the 1996 Stock Incentive Plan (the "Plan"), which permits the issuance of incentive stock options, no qualified stock options and restricted stock. The Plan provides for the granting of up to 2,000,000 shares of the Company's common stock. Pursuant to the terms and conditions of the Plan, 300,000 and 702,500 options to purchase common stock were granted during 1995 and 1996, respectively, at exercise prices ranging from $5.50 to $12.00 per share. At December 31, 1996, options to purchase 465,500 shares of common stock were exercisable. Each option issued under F-15 the Plan vests at a rate and expires on a date designated by the Compensation Committee of the Board of Directors. The Company accounts for awards granted to employees and directors under APB No. 25, under which no compensation cost has been recognized for stock options granted. Had compensation cost for these stock options been determined consistent with SFAS No. 123, the Company's net loss and loss per share would have been reduced to the following pro forma amounts: 1996 1995 ------------ ------------ (Restated) Net loss: As reported $(2,185,000) $(3,231,000) Pro forma (2,444,000) (3,630,000) Loss per share: As reported $ (0.45) $ (0.72) Pro forma (0.51) (0.81) The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts as additional awards in future years are anticipated. Option activity for the three years ended December 31, 1996 is as follows: Weighted Average Number Exercise of Shares Price ---------- -------- Options outstanding, January 1, 1994 247,928 $12.54 Granted 73,930 $ 7.28 Canceled (29,515) $13.97 Exercised - - --------- ------ Options outstanding, December 31, 1994 292,343 $11.07 Granted 308,854 $ 5.57 Canceled (56,672) $ 7.28 Exercised - - --------- ------ Options outstanding, December 31, 1995 544,525 $ 8.34 Granted 702,500 $ 9.00 Canceled (47,664) $ 7.28 Exercised - - --------- ------ Options outstanding, December 31, 1996 1,199,360 $ 8.77 ========= ====== There were 977,500 options available for future grant at December 31, 1996. The weighted average fair value of options granted is $3.58 and $2.18 for the years ended December 31, 1996 and 1995, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: risk-free interest rate of 5.72%; expected life of 4 years; expected volatility of 50% and expected dividend yield of 0%. F-16 The following table summarized information with respect to stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ----------------------------------------------- ----------------------------- Number of Weighted Number of Options Average Options Weighted Outstanding at Remaining Weighted Exercisable at Average Range of December 31, Contractual Average December 31, Exercise Exercise Prices 1996 Life Exercise Price 1996 Price --------------------- -------------- ----------- -------------- -------------- --------- $ 5.50 - $ 8.25 629,431 6.0 $ 6.33 401,000 $ 5.76 $ 8.26 - $12.39 404,500 9.0 $10.44 64,500 10.40 $ 12.40 - $13.97 165,429 5.0 $13.97 - - $ 5.50 - $13.97 1,199,360 6.9 $ 8.77 465,500 6.40
9. INCOME TAXES Income tax provision (benefit) include current and deferred taxes as follows (000's omitted): For the Years Ended December 31 -------------------------------------- 1996 1995 1994 -------- --------- --------- (Restated) Current: Federal $ - $ - $ - State 250 200 94 -------- --------- --------- 250 200 94 -------- --------- --------- Deferred: Federal (943) (1,461) 301 State (340) (555) 183 -------- ---------- --------- (1,283) (2,016) 484 -------- ---------- --------- $ (1,033) $ (1,816) $ 578 ======== ========= ========= The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to a significant portion of the deferred tax liability and deferred tax asset and their approximate tax effects are as follows at December 31 (000's omitted): 1996 1995 -------- -------- (Restated) Current deferred tax asset: Accrued expenses $ 119 $ 414 Deferred revenue 577 651 Allowance for doubtful accounts 395 589 Other (48) 145 -------- -------- Net current deferred tax asset 1,043 1,799 -------- -------- Noncurrent deferred tax liability: Fixed assets (12,017) (11,867) Subscriber contracts (5,645) (4,990) Net operating loss carryforward 9,569 7,418 Deferred revenue 880 988 Prepaid pension (2,176) - Accrued expenses and other (1,068) (858) -------- -------- Net noncurrent deferred tax liability (10,457) (9,309) -------- -------- Net deferred tax liability $ (9,414) $ (7,510) ======== ======== F-17 The tax expense allocated to shareholders' equity related to the change in the minimum pension obligation was $2,295,000, $307,000 and $155,000 in 1996, 1995 and 1994, respectively. Reconciliation of tax at the U.S. statutory income tax rate of 34% to the provision (benefit) for income taxes was as follows (000's omitted): 1996 1995 1994 ---- ---- ---- (Restated) U.S. statutory rate $(1,094) $ (1,716) $ 334 Nondeductible amortization 58 58 58 State income taxes (30) (185) 163 Other 33 27 23 ------- --------- --------- Tax provision (benefit) $(1,033) $ (1,816) $ 578 ======= ========= ========= The Company has net operating loss carryforwards for tax purposes at December 31, 1996 of approximately $22,000,000 which expire through 2011, and is limited as to its utilization in any one year due to a previous change in ownership of the Company. Future changes in ownership, as defined by Section 382 of the Internal Revenue Code, could limit the amount of net operating loss carryforwards in any one year. 10. PENSION PLANS ------------- The Company covers approximately 15 percent of its employees under two defined benefit pension plans which were frozen at June 30, 1987. The benefits under these plans are based upon compensation levels and length of service. The pension plans are being funded in accordance with the Employee Retirement Income Security Act of 1974. The components of net periodic pension cost were as follows: 1996 1995 Components: Service cost - benefits earned during period $ 150 $ 150 Interest cost on projected benefit obligation 1,552 1,623 Actual return on assets (2,551) (3,174) Net amortization and deferral 973 1,795 ---------- ---------- Net periodic pension cost $ 124 $ 394 ========== ========== Assumptions: Discount rate for benefit obligations 7.5% 7.5% Expected long-term rate of return on assets 8.5% 8.5% F-18 The following table sets forth the funded status of the plans at September 30, 1996 and 1995 and amounts recognized in the Company's consolidated balance sheets at December 31, 1996 and 1995, respectively (000's omitted):
1996 1995 ----------- --------------------------- Over Over Under Funded Funded Funded Plans Plan Plan ----------- ----------- ----------- Vested benefits $ (20,917) $ (1,601) $ (19,838) =========== =========== =========== Accumulated benefit obligation $ (20,970) $ (1,603) $ (19,892) ----------- ----------- ----------- Project benefit obligation (20,970) (1,603) (19,892) Plan assets at fair value 21,964 1,645 18,871 ----------- ----------- ----------- Plan assets in excess of (less than) projected benefit obligation 994 42 (1,021) ----------- ----------- ----------- Unrecognized net (gain) loss 4,472 602 5,164 Unrecognized prior service cost - - - Unrecognized net transition obligation (asset) (2) (10) (5) Fourth quarter contribution 146 18 203 Adjustment required to recognize minimum liability - - (5,159) ----------- ----------- ----------- Prepaid (accrued) pension cost recognized in the balance sheet $ 5,610 $ 652 $ (818) =========== =========== ===========
Pension plan assets are primarily invested in corporate common stocks and bonds and U.S. government securities. 11. SUPPLEMENTARY FINANCIAL STATEMENT DATA --------------------------------------- 1996 1995 --------- --------- (Restated) (000's omitted) Prepaid expenses and other: Deferred tax assets $ 1,043 $ 1,799 Prepaid pension cost 250 652 Other 1,155 99 --------- --------- $ 2,448 $ 2,550 ========= ========= Other Assets: Prepaid pension cost $ 5,360 $ - Other 2,557 552 --------- --------- $ 7,917 $ 552 ========= ========= Accounts payable and accrued expenses: Accounts payable $ 4,090 $ 3,975 Accrued pension 162 740 Accrued severance 792 1,020 Accrued expenses 2,246 2,954 --------- --------- $ 7,290 $ 8,689 ========= ========= F-19 1996 1995 --------- --------- (000's omitted) Other: Deferred installation revenue $ 1,948 $ 2,214 Other long-term liabilities 555 834 --------- --------- $ 2,503 $ 3,048 ========= ========= 12. COMMITMENTS AND CONTINGENCIES The Company conducts its operations principally from leased facilities and has entered into capital lease arrangements for certain fixed assets. Future minimum lease payments with respect to leases in effect at December 31, 1996 are as follows (000's omitted): Capital Operating 1997 $ 308 $ 1,497 1998 296 1,380 1999 294 1,147 2000 146 767 2001 - 644 Thereafter - 1,016 --------- -------- 1,044 $ 6,451 ======== Less-Amount representing interest 148 --------- $ 896 ========= Rental expense for the years ended December 31, 1996, 1995 and 1994 was approximately $1,467,000, $1,084,000 and $1,166,000 respectively. Certain subsidiaries of the Company are defendants or co-defendants in various lawsuits, some of which claim damages in substantial amounts. Management of the Company is of the opinion that the ultimate resolution of all these claims is not likely to have a material adverse effect on the consolidated financial condition of the Company, future results of operations or liquidity. The Company has entered into employment agreements with certain of its employees. Termination of employment for reasons other than (i) "Cause" (ii) such employee's "Disability" (each defined in the employment agreements), (iii) the employee's death, incompetence or bankruptcy or (iv) the expiration of the term of the employment agreement will obligate the Company to pay the employee's salary for a period of twelve months and maintain certain benefits. The amount of this obligation would be approximately $595,000. In addition, the employment agreements grant these employees the right to receive their respective salaries and certain other benefits for a period of twelve months if the Company terminates any of such employees within twelve months of a change in control of the Company (as defined). Upon a change in control, the salary obligation would result in an aggregate payment of approximately $595,000 based upon such employees 1996 salary. F-20 13. QUARTERLY FINANCIAL DATA (UNAUDITED) ----------------------------------- The following is a summary of the quarterly results of operations for the years ended December 31, 1996 and 1995:
Three Months Ended (Restated) ---------------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- -------- -------- -------- (000's omitted, except per share data) 1996: Revenue $ 12,305 $ 12,350 $ 13,159 $ 13,610 Gross profit 5,876 5,970 5,919 5,535 Net income (loss) (245) (388) (639) (913) -------- -------- -------- -------- Earnings (loss) per share $ (0.05) $ (0.09) $ (0.13) $ (0.15) ======== ======== ======== ======== Three Months Ended (Restated) ---------------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- -------- -------- -------- (000's omitted, except per share data) 1995: Revenue $ 12,704 $ 12,749 $ 12,785 $ 12,583 Gross profit 6,525 6,365 6,003 5,666 Net income (loss) 76 (520) (912) (1,875) -------- -------- -------- -------- Earnings (loss) per share $ .02 $ (0.12) $ (0.20) $ (0.42) ======== ======== ======== ========
14. SUBSEQUENT EVENT ---------------- 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. The recent 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. Pursuant to the Agreement, the Company will be obligated to pay $650,000 in cash and execute 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 will be secured by an irrevocable letter of credit for $1,000,000. In addition, the Company has 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 expects to record a pretax charge of approximately $1,500,000. 15. OTHER EVENTS ------------ As set forth in the Company's third-quarter report on Form 10-Q, as of September 30, 1997, the Company has $1 million of borrowing capacity remaining under its bank credit agreement and was not in compliance with certain of the financial covenants contained therein. The banks have waived such noncompliance for periods prior to or ending on that date. Subsequently, management 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 that it will be in compliance with those covenants for November and December 1997. Accordingly, the Company has obtained waivers from its banks waiving such noncompliance through and including December 31, 1997. F-21 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. The Company is also in discussions with its banks to amend the credit agreement covenants. 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. F-22 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENT SCHEDULE SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (000's omitted)
Charged Balance at to Costs Charged Balance at Beginning and to Other (A) End of Description of Period Expenses Accounts Deductions Period ----------- --------- -------- -------- ---------- ------ Allowance for doubtful accounts: December 31- 1996 $ 1,340 $ (146) $ - $ (221) $ 973 1995 1,315 486 - (461) 1,340 1994 1,240 506 - (431) 1,315
(A) Deductions represent the net effect of write-offs and recoveries. S-1 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized. HOLMES PROTECTION GROUP, INC. By: /s/ George V. Flagg ------------------------------------- George V. Flagg President and Chief Executive Officer Date: December 29 , 1997 EX-23 2 CONSENT OF PUBLIC INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF PUBLIC INDEPENDENT ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K/A into the Company's previously filed Form S-8 Registration Statement (No. 333-25467). ARTHUR ANDERSEN LLP New York, New York December 29, 1997 EX-27 3 FINANCIAL DATA SCHEDULE
5 Holmes Protection Group, Inc. For the Year Ended December 31, 1996 Financial Data Schedule Worksheet Commercial and Industrial Companies - Article 5 of Regulation S-X 1,000 12-MOS DEC-31-1996 DEC-31-1996 990 0 5,333 973 2,795 11,566 121,956 74,758 90,394 14,436 4,734 0 0 58 58,570 90,394 8,879 51,424 7,438 28,124 25,563 (146) (537) (3,218) (1,033) (2,185) 0 0 0 (2,185) (0.45) (0.45)
-----END PRIVACY-ENHANCED MESSAGE-----