UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2005

 

or

 

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

1-12181-01		1-12181
(Commission File Number)		(Commission File Number)
PROTECTION ONE, INC.		PROTECTION ONE ALARM MONITORING, INC.
(Exact Name of Registrant		(Exact Name of Registrant
As Specified In its Charter)		As Specified In its Charter)
Delaware		Delaware
(State or Other Jurisdiction		(State of Other Jurisdiction
Of Incorporation or Organization)		Of Incorporation or Organization)
93-1063818		93-1064579
(I.R.S. Employer Identification No.)		(I.R.S. Employer Identification No.)
1035 N 3rd Street, Suite 101		1035 N 3rd Street, Suite 101
Lawrence, Kansas 66044		Lawrence, Kansas 66044
(Address of Principal Executive Offices,		(Address of Principal Executive Offices,
Including Zip Code)		Including Zip Code)
(785) 856-5500		(785) 856-5500
(Registrant’s Telephone Number,		(Registrant’s Telephone Number,
Including Area Code)		Including Area Code)

 

Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that such registrants were required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes 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 May 10, 2005, Protection One, Inc. had outstanding 18,198,571 shares of Common Stock, par value $0.01 per share. As of such date, Protection One Alarm Monitoring, Inc. had outstanding 110 shares of Common Stock, par value $0.10 per share, all of which shares were owned by Protection One, Inc. Protection One Alarm Monitoring, Inc. meets the conditions set forth in General Instructions H(1)(a) and (b) for Form 10-Q and is therefore filing this form with the reduced disclosure format set forth therein.

 

 

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.  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, 2004 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.

 

INTRODUCTION

 

Unless the context otherwise indicates, all references in this report to the “Company,” “Protection One,” “we,” “us” or “our” or similar words are to Protection One, Inc., its direct wholly owned subsidiary, Protection One Alarm Monitoring, Inc., and Protection One Alarm Monitoring’s wholly owned subsidiaries.  Protection One’s sole asset is Protection One Alarm Monitoring and Protection One Alarm Monitoring’s wholly owned subsidiaries, and accordingly, there are no separate financial statements for Protection One Alarm Monitoring, Inc.  Each of Protection One and Protection One Alarm Monitoring is a Delaware corporation organized in September 1991.

 

In February 2005, we completed a one-share-for-fifty-shares reverse stock split of our outstanding shares of common stock.  All prior share and per share amounts included in this report give retroactive effect to the reverse stock split.

 

Stockholders and other security holders or buyers of our securities or our other creditors should not assume that material events subsequent to the date of this report have not occurred.

 

Change in Majority Owner

 

On February 17, 2004, our former majority stockholder, Westar Industries, Inc., a wholly owned subsidiary of Westar Energy, Inc., which we refer to collectively as Westar, consummated the sale of approximately 87% of our common stock to POI Acquisition I, Inc., which was formed by Quadrangle Capital Partners LP, Quadrangle Select Partners LP, Quadrangle Capital Partners-A LP and Quadrangle Master Funding Ltd, which we refer to collectively as Quadrangle.  The transaction also included the assignment of Westar’s rights and obligations as the lender under our revolving credit facility to POI Acquisition, L.L.C.

 

On November 12, 2004, we entered into a debt-for-equity exchange agreement with Quadrangle that provided for the principal balance outstanding under the Quadrangle credit facility to be reduced by $120.0 million in exchange for the issuance to Quadrangle of 16 million shares of our common stock.  The exchange was completed on February 8, 2005 and was accompanied by a one-share-for-fifty-shares reverse stock split of the Company’s outstanding shares of common stock.  The newly issued shares, together with shares already owned by Quadrangle, resulted in Quadrangle owning approximately 97.3% of the Company’s common stock.

 

New Basis of Accounting

 

As a result of Quadrangle’s increased ownership interest from the February 8, 2005 debt-for-equity exchange, we have ‘‘pushed down’’ Quadrangle’s basis to a proportionate amount of our underlying assets and liabilities acquired based on the estimated fair market values of the assets and liabilities. These estimates of fair market value are preliminary and are therefore subject to further refinement.  The “push-down” accounting adjustments did not impact cash flows.  The primary changes to the balance sheet reflect (1) the reduction of deferred customer acquisition costs and revenues, which have been subsumed into the estimated fair market value adjustment for customer accounts; (2) adjustments to the carrying values of debt to estimated fair market value (or Quadrangle basis in the case of the credit facility);  (3) adjustments to historical goodwill to reflect goodwill arising from the push down accounting adjustments; (4) the recording of a value for our tradenames; and (5) an increase to the equity section from these adjustments.  The primary changes to the income

 

2

 

statement include (1) the reduction in other revenue due to a lower level of amortization from the reduced amortizable base of deferred customer acquisition revenues; (2)  the reduction in other costs of revenue and selling expenses due to a lower level of amortization from the reduced amortizable base of deferred customer acquisition costs; (3) an increase in interest expense due to amortization of debt discounts arising from differences in fair values and carrying values of our debt instruments; and (4) the reduction in amortization related to the reduction in the amortizable base of customer accounts.

 

Due to the impact of the changes resulting from the push down accounting adjustments described above, the income statement presentation separates our results into two periods:  (1) the period ending with the February 8, 2005 consummation of the exchange transaction and (2) the period beginning after that date utilizing the new basis of accounting.  The results are further separated by a heavy black line to indicate the effective date of the new basis of accounting.  Similarly, the current and prior period amounts reported on the balance sheet are separated by a heavy black line to indicate the application of a new basis of accounting between the periods presented.

 

3

 

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)

 

		March 31,			December 31,
		2005			2004
		(See Note 1)
ASSETS
Current assets:
Cash and cash equivalents		$	13,053		$	52,528
Restricted cash		930			926
Receivables, net		24,323			24,219
Inventories, net		4,954			5,228
Prepaid expenses		5,370			5,793
Other miscellaneous receivables		119			5,494
Other		3,624			2,375
Total current assets		52,373			96,563
Property and equipment, net		25,052			31,152
Customer accounts, net		260,136			176,155
Goodwill		12,160			41,847
Trade name		25,812			—
Deferred customer acquisition costs		43,724			107,310
Other		9,994			8,017
Total Assets		$	429,251		$	461,044
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Current portion of long-term debt, including $201,000 due to related parties at December 31, 2004		$	—		$	395,417
Accounts payable		3,020			2,266
Accrued liabilities		20,558			37,088
Due to related party		219			335
Deferred revenue		36,273			34,017
Total current liabilities		60,070			469,123
Long-term debt, net of current portion, including $78,000 due to related parties at March 31, 2005		324,709			110,340
Deferred customer acquisition revenue		22,260			57,433
Other liabilities		1,693			1,757
Total Liabilities		408,732			638,653
Commitments and contingencies (see Note 7)
Stockholders’ equity:
Preferred stock, $.10 par value, 5,000,000 shares authorized		—			—
Common stock, $.01 par value, 150,000,000 shares authorized, 18,198,571 shares issued at March 31, 2005 and 2,562,512 shares issued at December 31, 2004		182			26
Additional paid-in capital		159,939			1,380,728
Accumulated other comprehensive income		—			162
Deficit		(139,602		)	(1,523,913		)
Treasury stock, at cost, 596,858 shares at December 31, 2004		—			(34,612		)
Total stockholders’ equity (deficiency in assets)		20,519			(177,609		)
Total Liabilities and Stockholders’ Equity (Deficiency in Assets)		$	429,251		$	461,044

 

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

 

4

 

PROTECTION ONE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS

 

(Dollars in thousands, except for per share amounts)

(Unaudited)

 

		2005							2004
		February 9 – March 31			January 1 – February 8				January 1 – March 31
		(See Note 1)			(See Note 1)
Revenues:
Monitoring and related services		$	35,123		$		26,455		$	61,875
Other		1,788			2,088				5,257
Total revenues		36,911			28,543				67,132
Cost of revenues (exclusive of amortization and depreciation shown below):
Monitoring and related services		9,928			7,400				17,470
Other		2,425			3,314				7,342
Total cost of revenues (exclusive of amortization and depreciation shown below)		12,353