UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2004
or

 

 

For the transition period from       to      

 

 

Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that such registrants were required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark whether each of the registrants is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý

 

As of November 10, 2004, Protection One, Inc. had outstanding 98,282,679 shares of Common Stock, par value $0.01 per share. As of such date, Protection One Alarm Monitoring, Inc. had outstanding 110 shares of Common Stock, par value $0.10 per share, all of which shares were owned by Protection One, Inc.

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q and the materials incorporated by reference herein include “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.  These forward-looking statements generally can be identified as such because the context of the statement includes words such as we “believe,” “expect,” “anticipate,” “will,” “should” or other words of similar import.  Similarly, statements herein that describe our objectives, plans or goals also are forward-looking statements.  Such statements include those made on matters such as our earnings and financial condition, litigation, accounting matters, our business, our efforts to consolidate and reduce costs, our customer account acquisition strategy and attrition, our efforts to implement new financial software, our liquidity and sources of funding and our capital expenditures.  All forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.  We continue to face liquidity problems caused by our significant debt burdens and continuing net losses.  The consummation of the sale of its ownership interests in us by Westar Industries, Inc., a wholly owned subsidiary of Westar Energy, Inc., which we refer to collectively as Westar, our former majority owner that beneficially owned approximately 88% of our common stock, to POI Acquisition, L.L.C. and POI Acquisition I, Inc., entities formed by Quadrangle Capital Partners L.P., Quadrangle Select Partners L.P., Quadrangle Capital Partners-A L.P. and Quadrangle Master Funding Ltd., which we refer to collectively as Quadrangle, and the assignment of Westar’s rights and obligations as the lender under our revolving credit facility to POI Acquisition, L.L.C., resulted in a $285.9 million non-cash charge against our income in the first quarter of 2004 to establish a valuation allowance for deferred tax assets that we believed were not not realizable, and the sale is expected to further materially adversely affect our financial position, results of operations and liquidity.  If we do not consummate the Quadrangle debt restructuring described in this 10-Q, we would likely be forced to seek a different out-of-court debt restructuring and/or seek the protection of federal bankruptcy laws to reorganize our indebtedness, and in connection with any such restructuring or reorganization, the interests represented by currently outstanding shares of our common stock would likely be substantially diluted or cancelled in whole or in part and our creditors may receive less than 100% of the face value of their claims.  Statements made in the Form 10-Q regarding the sale by Westar, the planned Quadrangle debt restructuring and the possible effect of these matters on us also constitute forward-looking statements.  The forward-looking statements included herein are made only as of the date of this report and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.  Please refer to “Risk Factors” in our Form 10-K for the year ended December 31, 2003 for more information regarding risks and uncertainties that may cause our actual results to differ materially from the results anticipated in our forward-looking statements.

 

 

Unless the context otherwise indicates, all references in this report to the “Company,” “Protection One,” “we,” “us,” “our” or similar words are to Protection One, Inc., its direct wholly owned subsidiary, Protection One Alarm Monitoring, Inc., and Monitoring’s wholly owned subsidiaries.  Protection One’s sole asset is, and Protection One operates solely through, Monitoring and Monitoring’s wholly owned subsidiaries.  Both Protection One and Monitoring are Delaware corporations organized in September 1991.

 

2

 

PART I
FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS.

 

PROTECTION ONE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for per share amounts)
(Unaudited)

 

		September 30,				December 31,
		2004				2003
ASSETS
Current assets:
Cash and cash equivalents		$		21,531		$			35,203
Restricted cash		1,781				1,810
Receivables, net of reserve of $5,961 and $6,899 at September 30, 2004 and December 31, 2003, respectively		23,809				23,670
Inventories, net		5,389				6,221
Prepaid expenses		3,210				5,522
Tax receivable from Westar		26,088				26,088
Deferred tax assets		30				33,899
Other		8,557				3,955
Total current assets		90,395				136,368
Property and equipment, net		29,122				31,921
Customer accounts, net		193,302				244,744
Goodwill		41,847				41,847
Deferred tax assets, net of current portion		46				252,411
Tax receivable from Westar, net of current portion		7,933				—
Deferred customer acquisition costs		104,710				94,225
Other		7,663				7,506
Total Assets		$	475,018			$		809,022
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Current portion of long-term debt, including $215,500 due to related parties		$		547,022		$	215,500
Accounts payable		3,396				5,314
Accrued liabilities		31,347				31,258
Deferred revenue		33,592				33,253
Total current liabilities		615,357				285,325
Long-term debt, net of current portion		—				331,874
Deferred customer acquisition revenue		54,191				44,209
Other liabilities		1,835				1,440
Total Liabilities		671,383				662,848
Commitments and contingencies (see Note 6)
Stockholders’ equity:
Preferred stock, $.10 par value, 5,000,000 shares authorized		—				—
Common stock, $.01 par value, 150,000,000 shares authorized, 128,125,584 shares issued at September 30, 2004 and December 31, 2003		1,281				1,281
Additional paid-in capital		1,379,474				1,379,434
Accumulated other comprehensive income		150				78
Deficit		(1,542,658			)	(1,200,007				)
Treasury stock, at cost, 29,842,905 shares at September 30, 2004 and December 31, 2003		(34,612			)	(34,612				)
Total stockholders’ equity (deficiency in assets)		(196,365			)	146,174
Total Liabilities and Stockholders’ Equity (Deficiency in Assets)		$		475,018		$	809,022

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

PROTECTION ONE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS

 

(Dollars in thousands, except for per share amounts)
(Unaudited)

 

		Nine Months Ended September 30,
		2004					2003
Revenues:
Monitoring and related services		$			185,974		$		193,555
Other		15,959					15,230
Total revenues		201,933					208,785
Cost of revenues (exclusive of amortization and depreciation shown below):
Monitoring and related services		52,252					55,427
Other		23,085					21,232
Total cost of revenues		75,337					76,659
Gross profit (exclusive of amortization and depreciation shown below)		126,596					132,126
Operating expenses:
Selling		24,047					23,847
General and administrative		74,535					59,880
Amortization and depreciation		58,881					60,295
Total operating expenses		157,463					144,022
Operating loss		(30,867				)	(11,896				)
Other (income) expense:
Interest expense		20,021					18,821
Related party interest		13,399