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Index to Financial Statements

As filed with the Securities and Exchange Commission on October 28, 2003

Registration No. 333-            

 


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM S-4

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 


 

MONITRONICS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

Texas   7380   74-2719343

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code)

 

(I.R.S. employer

identification no.)

12801 Stemmons Freeway

Suite 821

Dallas, Texas 75234

(972) 243-7443

(Address, including zip code,

and telephone number, including area code, of Registrant’s principal executive offices)

     

Michael R. Meyers

Vice President and Chief Financial Officer

12801 Stemmons Freeway

Suite 821

Dallas, Texas 75234

(972) 243-7443

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


 

Copies to:

Christine A. Hathaway, Esq.

Vinson & Elkins L.L.P.

3700 Trammell Crow Center

2001 Ross Avenue

Dallas, Texas 75201-2975

Telephone: (214) 220-7700

 


 

Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effective date of this Registration Statement

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.    ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 


 

CALCULATION OF REGISTRATION FEE

 


Title of Each Class of

Securities to be Registered

   Amount
to be
Registered
  

Proposed
Maximum

Offering Price

Per Note(1)

  Proposed
Maximum
Aggregate
Offering Price
  

Amount of

Registration
Fee(2)


11¾% Senior Subordinated Notes Due 2010

   $160,000,000    100%   $160,000,000    $12,944

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f)(2) under the Securities Act of 1933 (the “Securities Act”).
(2) Registration fee calculated pursuant to Rule 457(f)(2) under the Securities Act.

 


 

The Registrant hereby amends this Registration Statement on such dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED OCTOBER 28, 2003

 

PROSPECTUS

 

LOGO

 

Offer to Exchange up to

$160,000,000 11¾% Senior Subordinated Notes due 2010

that have been registered under the Securities Act of 1933

 

for

 

$160,000,000 11¾% Senior Subordinated Notes due 2010

 

Terms of the Exchange Offer

•      We are offering to exchange up to $160,000,000 of our 11¾% Senior Subordinated Notes due 2010 that have been registered under the Securities Act of 1933 and are freely tradable, which we refer to herein as the “new notes,” for our outstanding 11¾% Senior Subordinated Notes due 2010, which we refer to herein as the “old notes.” The new notes and the old notes have substantially identical terms.

 

•      We will exchange an equal principal amount of new notes for all outstanding old notes that you validly tender and do not validly withdraw before the exchange offer expires.

 

•      The exchange offer expires at 5:00 p.m., New York City time, on                     , 2003, unless extended. We do not currently intend to extend the exchange offer.

 

•      Tenders of outstanding old notes may be withdrawn at any time prior to the expiration of the exchange offer.

 

•      The exchange of new notes for old notes will not be a taxable event for U.S. federal income tax purposes.

 

•      We will not receive any proceeds from the exchange offer.

Terms of the New 11¾% Senior Subordinated Notes Offered in the Exchange Offer

Maturity

 

•      The new notes will mature on September 1, 2010.

 

Interest

 

•      Interest on the new notes is payable on March 1 and September 1 of each year, beginning March 1, 2004.

 

•      Interest will accrue from August 25, 2003.

 

Redemption

 

•      Prior to September 1, 2007, we may redeem some or all of the new notes by paying a specified “make-whole” premium.

 

•      On or after September 1, 2007, we may redeem some or all of the new notes pursuant to the redemption prices specified under the caption “Description of New Notes—Optional Redemption.”

 

•      In addition, on or prior to September 1, 2006, we may redeem up to 25% of the aggregate principal amount of the old notes and the new notes using the net proceeds of certain equity offerings.

 

Change of Control

 

•      Upon a change of control, you may require us to repurchase all or a portion of your notes at a purchase price of 101% of their principal amount, plus accrued and unpaid interest.

 

Ranking

 

•      The new notes will be our unsecured senior subordinated obligations ranking equally with all of our other existing and future unsecured senior subordinated debt.

 

•      The new notes will rank junior to all of our existing and future senior indebtedness. The new notes will be guaranteed on a senior subordinated basis by our future restricted domestic subsidiaries.

 

•      Our future subsidiaries will guarantee the new notes.

 

See “ Risk Factors” beginning on page 13 for a discussion of the risks of an investment in the new notes.

 

These securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is                     , 2003


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TABLE OF CONTENTS

 

     Page

FORWARD-LOOKING STATEMENTS

   ii

PROSPECTUS SUMMARY

   1

RISK FACTORS

   13

EXCHANGE OFFER

   21

USE OF PROCEEDS

   32

CAPITALIZATION

   33

SELECTED HISTORICAL FINANCIAL DATA

   34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   37

BUSINESS

   45

MANAGEMENT

   56

SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT

   60

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   63

DESCRIPTION OF INDEBTEDNESS

   65

DESCRIPTION OF NEW NOTES

   67

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

   102

PLAN OF DISTRIBUTION

   102

LEGAL MATTERS

   103

EXPERTS

   103

WHERE YOU CAN FIND OTHER INFORMATION

   103

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1

 

This prospectus incorporates important business and financial information about Monitronics International, Inc. that is not included in or delivered with this prospectus. Such information is available without charge to holders of old notes upon written or oral request made to the office of the Corporate Secretary, Monitronics International, Inc., 12801 Stemmons Freeway, Suite 821, Dallas, Texas 75234 (Tel. 972-243-7443). To obtain timely delivery of any requested information, holders of old notes must make any request no later than         , 2003, which date is five business days prior to the expiration date of the exchange offer.

 

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FORWARD-LOOKING STATEMENTS

 

All statements other than statements of historical facts included in this prospectus, including without limitation, statements under the captions “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” and located elsewhere in this prospectus regarding the prospects of our industry and our prospects, plans, financial position and business strategy, may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “believe” or “continue” or the negatives of these terms or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations are disclosed in this prospectus, including in conjunction with the forward-looking statements included in this prospectus and under “Risk Factors.” These forward-looking statements speak only as of the date of this prospectus. Factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected include, among others, the following:

 

  our high degree of leverage;

 

  our anticipated growth strategies;

 

  anticipated trends and conditions in our business, including trends in the market;

 

  our ability to acquire and integrate additional accounts;

 

  our expected rate of subscriber attrition;

 

  our ability to continue to control costs and maintain quality;

 

  our ability to compete;

 

  the impact of “false alarm” ordinances on our results of operations;

 

  the expectation that we will realize the benefit of our deferred tax assets; and

 

  our ability to obtain additional funds to grow our business.

 

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties and assumptions described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking statements in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this prospectus.

 

Our forward-looking statements speak only as of the date made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless the securities laws require us to do so.

 

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PROSPECTUS SUMMARY

 

The following summary highlights information about us and the offering of the new notes contained elsewhere in this prospectus. It is not complete and may not contain all of the information that may be important to you. For a more complete understanding of us and the offering of the new notes, we urge you to read this entire prospectus carefully, including the “Risk Factors” section, our financial statements and the notes to those financial statements. Throughout this prospectus, when we refer to “us,” “we,” “our,” or the “company,” we are describing Monitronics International, Inc.

 

The Company

 

We are a leading national provider of security alarm monitoring services, with the ability to monitor signals from nearly all types of security systems. We monitor signals arising from burglaries, fires and other events for over 389,000 subscribers under contracts that are typically three years in duration and have automatic annual renewal provisions. Through these contracts, our high quality subscriber base provides us with high margin, monthly recurring revenues that result in predictable and stable cash flow. Our business model differentiates us from other security alarm companies. We utilize our exclusive nationwide dealer network to sell and install the security systems we monitor. We purchase monitoring contracts from these dealers and provide our subscribers with a full spectrum of security alarm services including monitoring services, customer service and technical support. We dispatch our dealers to provide on-site technical service to subscribers, which they require, on average, only once every six years due to our ability to resolve a significant percentage of our subscribers’ technical inquiries over the telephone. For the fiscal year ended June 30, 2003, we generated revenues of $126.4 million, operating income of $31.8 million and EBITDA of $88.8 million, representing an EBITDA margin of 70.3%. See footnote 7 of “Selected Historical Financial Data” for a discussion of EBITDA.

 

We purchase monitoring contracts from our dealer network only after a comprehensive examination of the dealers, the subscribers and the contracts. We conduct thorough due diligence on our dealers to ensure we are partnering with reliable dealers that can consistently provide us with high quality accounts. We perform extensive due diligence on our subscribers to maintain our high quality subscriber base. Our subscribers are geographically diversified in 46 states and are primarily homeowners, whom we believe are more likely than renters to maintain long-term accounts with us. We believe our rigorous account acquisition due diligence process results in a subscriber base that is less likely to terminate monitoring contracts with us, thereby improving contract life and lowering attrition. We also believe that we maximize retention of our subscribers through our dedication to providing our high quality subscriber base with high quality customer service.

 

Our contracts with our dealers and subscribers result in a stable, recurring revenue base. We have exclusive agreements with over 400 dealers in more than 40 states. Through these agreements, we typically have rights of first refusal to purchase all monitoring contracts sold by the dealers for three years. Our subscriber contracts are typically three years in duration, have automatic annual renewal provisions and allow for periodic rate increases. To protect us against the loss of the investment associated with acquiring subscriber accounts, we require our dealers to guarantee the accounts against cancellations, typically for a period of 12 months following the date of purchase. If an account is canceled during the guarantee period, the dealer must compensate us for the lost monthly recurring revenue and either replace the account or refund the purchase price associated with the account. To help ensure the dealers’ obligations under the guarantee, we typically withhold a portion of the purchase price of each contract we purchase.

 

According to Security Distribution & Marketing, or SDM, a leading industry journal, the electronic security market, which consists of the sale, installation, servicing and monitoring of security systems, generated total revenues of approximately $22.4 billion in 2002, an increase of 9.7% from 2001. Total industry revenues have

 

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increased in each of the last 11 years and have grown at an annual rate of 7.4% in that period. Monitoring services accounted for approximately $3.8 billion, or 17.0%, of total industry revenue in 2002. We believe that a number of factors have contributed to this increase, including heightened concern about crime, discounts given by insurance companies to homeowners with security systems, the installation of security systems as part of new home construction, the aging of the population in general and an increase in the number of two-income families resulting in more children being left at home alone. In addition, we believe industry revenues will continue to grow in weak economic times because of the increased crime levels that are generally experienced in those periods and the minimal net cost of owning a security system after accounting for the lower premiums charged by insurance companies. Despite the steady growth of the security industry and increased demand for security services, the percentage of homes with dealer-installed security systems was only 18% in 2001 according to the 2001 Home Security Forecast by Parks Associates, an independent market research and consulting firm. Parks Associates estimates that the penetration rate of dealer-installed security systems will increase to 31% by 2009. However, because of the growth in new homes built over that period, the number of homes without monitored security systems is projected to drop by only approximately 1% on a compounded annual basis. As a result, despite a substantial increase in the penetration rate, the size of our potential market will remain significant.

 

Our Strengths

 

We believe our focused business model differentiates us from other security alarm companies. We focus on providing monitoring services to our subscribers, which we believe is a higher margin business than selling and installing security alarm systems. Consequently, we are able to grow our subscriber base without employing a national sales and installation force. We also outsource on-site technical support to our dealer network, further reducing our cost structure and infrastructure requirements. Our differentiated business model results in recurring high margin revenue streams.

 

Predictable Recurring Revenue. For the fiscal year ended June 30, 2003, approximately 97% of our revenues consisted of recurring monthly payments under security alarm monitoring contracts. Our contracts are typically three years in duration, have annual automatic renewal provisions and allow for periodic rate increases. Our dealer contracts provide that if a subscriber cancels prior to the initial twelve-month period of the contract, the dealer must replace the lost monthly revenue attributable to the canceled contract and either replace the lost account or refund our purchase price for the account.

 

Strong Cash Flow Generated By Subscribers. Once we acquire a subscriber contract, our recurring revenue streams generate strong cash flow as a result of our high EBITDA margins and the minimal capital expenditures they require. In the fiscal year ended June 30, 2003, our EBITDA margin was 70.3% and our capital expenditures were $1.2 million, not including our purchases of subscriber accounts. The contribution margin of a subscriber account, which represents revenue less direct costs, excluding sales, marketing and other corporate overhead costs, was in excess of 83% for the fiscal year ended June 30, 2003. We believe this strong cash flow is due to several factors:

 

  Our operations are focused on providing high margin monitoring services to subscribers. We utilize our dealer network to sell and install security alarm systems, which we believe is a lower margin business. As a result, we do not employ a large national sales and installation force.

 

  We have a proprietary centralized information system that has enabled us to satisfy 85% of our subscribers’ technical inquiries over the telephone. If a field service call is required, we outsource the service to a member of our national network of independent service dealers. Consequently, we avoid the costs associated with employing service technicians and maintaining the infrastructure required to provide these services ourselves.

 

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  We provide all services, including monitoring, 24-hour telephone support, data entry, remote services and billing, from a single location. We believe this centralized operation allows us to maximize our economies of scale.

 

Highly Disciplined Account Acquisition Program. Since inception, we have implemented a disciplined account acquisition program focused on balanced growth, profitability and return on investment. The core of our account acquisition process is an extensive examination of every subscriber prior to acquisition, including a credit score report, proof of first month’s payment and, in substantially all cases, a telephonic survey of the subscriber’s satisfaction with its security system. We also conduct diligence on our dealers through a comprehensive six-step process to qualify them for participation in our program, including legal and background checks, as well as references from industry participants. We believe that this approach reduces the likelihood that a subscriber will terminate its contract with us, thereby maximizing retention of our subscribers and our return on investment.

Industry Leading Customer Service. We believe we provide our high quality subscriber base with the highest quality service in our industry through our rapid response to alarm signals, fast handling of support calls and quick solutions to subscriber issues. We have developed a proprietary information system that quickly and accurately makes available to our operators a substantial amount of technical information regarding our subscribers and their security systems. This system enables us to resolve 85% of our subscribers’ technical requests over the telephone, resulting in quick customer service, fewer false alarms and higher subscriber satisfaction. To ensure we maintain our high quality customer service, our system tracks key factors that contribute to service quality such as response time and call duration. We also monitor the quality of our services with regular operator evaluations, customer satisfaction forms and follow-up quality assurance calls.

 

Proven Management Team. Many of our executive officers have been with us since our inception in 1994 and have significant prior experience in related industries. Many of our executive officers possess technical backgrounds, which we believe contribute to the highly analytical approach we have developed for analyzing accounts and dealers. The average experience of our executive officers in management positions is 24 years and average tenure with us is seven years.

 

Strong Equity Sponsorship. Private equity firms have invested over $105 million of equity in our company since 1994. These firms have an aggregate of over $5 billion under management. We believe that the financial support of these investors enabled us to focus on the growth of our company and the implementation of our business strategy.

 

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Business Strategy

 

The key components of our operating strategy are listed below.

 

Maximize Subscriber Retention. We seek to maximize subscriber retention by continuing to acquire high quality accounts and to increase the average life of an account through the following initiatives:

 

  Maintain the high quality of our subscriber base by continuing to implement our highly disciplined account acquisition program;

 

  Continue to incentivize our dealers to sell us only high-quality accounts by requiring a twelve-month guarantee and purchase price holdback requirements;

 

  Continue to provide the highest level of customer service on the telephone and in the field; and

 

  Actively identify subscribers who are relocating, the number one reason for account cancellations, and target retention of such subscribers.

 

Maximize Economics of Business Model. As we continue to grow our subscriber base, we believe the attractiveness of our business model will increase. Due to the scalability of our operations and the fixed costs inherent in our cost structure, we believe our EBITDA margins will increase as these costs are spread over larger recurring revenue streams. We believe our EBITDA will also benefit from our continued efforts to increase subscriber retention rates and reduce response times, call duration and false alarms. In addition, we have begun requiring dealers to charge subscribers an alarm activation fee. This fee offsets the account purchase price we pay to the dealers thereby reducing our net account acquisition costs.

 

Expand Our Network of Dealers. To enter a new market or increase penetration in an existing market without incurring the costs of establishing a physical presence there, we plan to expand our dealer network by targeting dealers that can benefit from our dealer program services and who can generate high quality subscribers for us. We believe we are an attractive partner for dealers for the following reasons:

 

  We provide our dealers with a full range of services designed to assist them in all aspects of their business, including sales training, comprehensive on-line account access, detailed weekly account summaries, sales support materials and discounts on security system hardware purchased through our strategic alliances with security system manufacturers;

 

  We allow individual dealers to retain local name recognition and responsibility for day-to-day sales and installation efforts, thereby supporting the entrepreneurial culture at the dealer level and allowing us to capitalize on the considerable local market knowledge, goodwill and name recognition of our dealers; and

 

  Because we do not install or sell security systems, we do not compete against the dealers from whom we purchase contracts.

 


 

We were incorporated in 1994 as a Texas corporation. Our executive offices are located at 12801 Stemmons Freeway, Suite 821, Dallas, Texas 75234 and our telephone number is (972) 243-7443.

 

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The Exchange Offer

 

On August 25, 2003, we completed a private offering of the old notes. We entered into a registration rights agreement with the initial purchasers in the private offering in which we agreed to effect this exchange offer.

 

Exchange Offer

We are offering to exchange new notes for old notes.

 

Expiration Date

The exchange offer will expire at 5:00 p.m. New York City time, on                     , 2003, unless we decide to extend it. We do not currently intend to extend the exchange offer.

 

Condition to the Exchange Offer

The registration rights agreement does not require us to accept old notes for exchange if the exchange offer or the making of any exchange by a holder of the old notes would violate any applicable law or interpretation of the staff of the Securities and Exchange Commission. A tender of a minimum aggregate principal amount of old notes is not a condition to the exchange offer.

 

Procedures for Tendering Old Notes

To participate in the exchange offer, you must complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal, and transmit it together with all other documents required by the letter of transmittal, including the old notes that you wish to exchange, to The Bank of New York Trust Company of Florida, N.A., as exchange agent, at the address indicated on the cover page of the letter of transmittal. In the alternative, you can tender your old notes by following the procedures for book-entry transfer described in this prospectus.

 

 

If your old notes are held through The Depository Trust Company and you wish to participate in the exchange offer, you may do so through the automated tender offer program of The Depository Trust Company. If you tender under this program, you will agree to be bound by the letter of transmittal that we are providing with the prospectus as though you had signed the letter of transmittal.

 

 

If a broker, dealer, commercial bank, trust company or other nominee is the registered holder of your old notes, we urge you to contact that person promptly to tender your old notes in the exchange offer.

 

 

For more information on tendering your old notes, please refer to the sections in the prospectus entitled “Exchange Offer—Terms of the Exchange Offer,” “—Procedures for Tendering” and “—Book Entry Transfer.”

 

Guaranteed Delivery Procedures

If you wish to tender your old notes and you cannot submit your required documents to the exchange agent on time, you may tender your old notes according to the guaranteed delivery procedures described in “Exchange Offer—Guaranteed Delivery Procedures.”

 

Withdrawal of Tenders

You may withdraw your tender of old notes at any time prior to the expiration date. To withdraw, you must have delivered a written or

 

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facsimile transmission notice of withdrawal, in compliance with the requirements of Rule 14d-7 of the Securities Exchange Act of 1934, to the exchange agent at its address indicated on the cover page of the letter of transmittal before 5:00 p.m. New York City time on the expiration date of the exchange offer.

 

Acceptance of Old Notes and Delivery of New Notes

If you fulfill all conditions required for proper acceptance of old notes, we will accept any and all old notes that you properly tender in the exchange offer on or before 5:00 p.m. New York City time on the expiration date. We will return any old notes that we do not accept for exchange to you without expense promptly after the expiration date. We will also deliver the new notes promptly after the expiration date. Please refer to the section in this prospectus entitled “Exchange Offer—Terms of the Exchange Offer.”

 

Accrued Interest on New Notes and Old Notes

The new notes will bear interest from August 25, 2003. Holders of old notes whose old notes are accepted for exchange will be deemed to have waived the right to receive any payment in respect of interest on such old notes accrued from August 25, 2003 to the date of the issuance of the new notes. Consequently, holders who exchange their old notes for new notes will receive the same interest payment on March 1, 2004 (the first interest payment date with respect to the old notes and the new notes) that they would have received had they not accepted the exchange offer.

 

Resale

We believe that the new notes issued pursuant to the exchange offer may be offered for resale, resold and otherwise transferred by you (unless you are an “affiliate” of ours within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, so long as you are acquiring the new notes in the ordinary course of your business and you have not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the new notes.

 

 

Each participating broker-dealer that receives new notes for its own account under the exchange offer in exchange for old notes that were acquired by the broker-dealer as a result of market-making or other trading activity must acknowledge that it will deliver a prospectus in connection with any resale of the new notes. Please refer to the section in this prospectus entitled “Plan of Distribution.”

 

 

Any holder of old notes who:

 

    is our affiliate,

 

    does not acquire new notes in the ordinary course of its business, or

 

    exchanges old notes in the exchange offer with the intention to participate, or for the purpose of participating, in a distribution of new notes

 

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must, in the absence of an exemption, comply with the registration and prospectus delivery requirements of the Securities Act in connection with the resale of the new notes.

 

Fees and Expenses

We will bear all expenses related to the exchange offer. Please refer to the section in this prospectus entitled “Exchange Offer—Fees and Expenses.”

 

Use of Proceeds

The issuance of the new notes will not provide us with any new proceeds. We are making this exchange offer solely to satisfy our obligations under our registration rights agreement. Please refer to the section entitled “Use of Proceeds” for a discussion of our use of the proceeds from the issuance of the old notes.

 

Consequences of Failure to Exchange Old Notes

If you do not exchange your old notes in this exchange offer, you will no longer be able to require us to register the old notes under the Securities Act except in the limited circumstances provided under our registration rights agreement. In addition, you will not be able to resell, offer to resell or otherwise transfer the old notes unless we have registered the old notes under the Securities Act, or unless you resell, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act.

 

United States Federal Income Tax Considerations

The exchange of new notes for old notes in the exchange offer will not be a taxable event for U.S. federal income tax purposes. Please read “Certain United States Federal Income Tax Considerations.”

 

Exchange Agent

We have appointed The Bank of New York Trust Company of Florida, N.A. as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or the letter of transmittal and requests for the notice of guaranteed delivery to the exchange agent by telephone at (800) 548-5075.

 

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TERMS OF NEW NOTES

 

The new notes will be identical to the old notes except that the new notes are registered under the Securities Act and will not have restrictions on transfer, registration rights or provisions for additional interest. The new notes will evidence the same debt as the old notes, and the same indenture will govern the new notes and the old notes.

 

The following summary contains basic information about the new notes and is not intended to be complete. It does not contain all the information that is important to you. For a more complete understanding of the new notes, please refer to the section of this prospectus entitled “Description of New Notes.”

 

Issuer

Monitronics International, Inc.

 

Securities Offered

$160 million aggregate principal amount of senior subordinated notes due 2010.

 

Maturity

September 1, 2010.

 

Interest

Annual rate: 11 3/4%. Payment frequency: every six months on March 1 and September 1. First payment: March 1, 2004.

 

Ranking

The new notes will be our unsecured senior subordinated obligations. Accordingly, they will rank:

 

    behind all of our existing and future senior debt, including our new senior secured credit facility;

 

    equally with any of our future senior subordinated debt; and

 

    senior to any of our debt that expressly provides that it is subordinated to the new notes.

 

After giving effect to the Refinancing Transactions (see “Use of Proceeds”), as of June 30, 2003, we would have had $370.5 million of indebtedness, of which $191.0 million would have been senior secured debt and $20.4 million would have been subordinated to the new notes. See “Capitalization.”

 

Guarantees

The new notes will be guaranteed by our future domestic restricted subsidiaries on an unsecured senior subordinated basis. Accordingly, the guarantees will rank behind all future senior debt of the guarantors. We currently have no subsidiaries.

 

Optional Redemption

At any time on or after September 1, 2007, we may redeem the new notes, in whole or in part, at the redemption prices described in the section “Description of New Notes—Optional Redemption.” At any time before September 1, 2007, we may redeem the new notes, in whole or in part, at a redemption price equal to their principal amount plus a “make-whole” premium as described in the section “Description of New Notes—Optional Redemption,” in each case together with accrued and unpaid interest to the date of redemption.

 

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In addition, on or before September 1, 2006, we may redeem up to 25% of the aggregate principal amount of the old notes and the new notes (including any additional notes issued under the indenture) with the net cash proceeds from certain equity offerings at a redemption price of 111.750% of their principal amount plus accrued and unpaid interest. However, we may only make such redemptions if at least 75% of the original aggregate principal amount of old notes and the new notes (including any additional notes issued under the indenture) remains outstanding after such redemption.

 

Change of Control

If we experience a change of control, we must offer to purchase the new notes at 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.

 

Certain Covenants

The indenture governing the new notes will contain covenants that limit our ability and the ability of our future restricted subsidiaries to, among other things:

 

    borrow money;

 

    pay dividends on or redeem or repurchase stock;

 

    make investments;

 

    create liens;

 

    sell stock in our restricted subsidiaries;

 

    restrict dividends or other payments from subsidiaries;

 

    enter into transactions with affiliates; and

 

    sell assets or merge with other companies.

 

 

These covenants contain important exceptions. For more details, see the section “Description of New Notes.”

 

Transfer Restrictions; Absence of a Public Market for the New Notes

The new notes generally will be freely transferable, but will also be new securities for which there will not be a market. There can be no assurance as to the development or liquidity of any market for trading. We do not intend to apply for a listing of the new notes on any securities exchange or any automated dealer quotation system.

 

You should refer to the section “Risk Factors” beginning on page 13 for an explanation of some risks of investing in the new notes.

 

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Index to Financial Statements

SUMMARY HISTORICAL FINANCIAL DATA

 

The following summary historical financial data for each of the five fiscal years in the period ended June 30, 2003 have been derived from our financial statements, which have been audited by Ernst & Young LLP, independent auditors. The following financial information should be read in conjunction with our financial statements, and the related notes to those statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     Fiscal Year Ended June 30,

 
     1999(1)

    2000

    2001

    2002

    2003

 
     Restated(2)

    Restated(2)

    Restated(2)

    Restated(2)

       
     (dollars in thousands)  

Results of Operations Data:

                                        

Revenues

   $ 49,837     $ 82,046     $ 100,198     $ 111,339     $ 126,406  

Cost of services

     6,371       10,472       11,819       13,522       14,592  
    


 


 


 


 


Gross profit

     43,466       71,574       88,379       97,817       111,814  

Selling, general and administrative

     11,045       15,660       17,979       20,570       23,014  

Depreciation

     668       1,297       1,634       1,923       2,067  

Amortization(3)

     15,544       29,112       38,423       45,968       54,885  
    


 


 


 


 


Operating income

     16,209       25,505       30,343       29,356       31,848  

Interest expense

     11,757       22,064       27,951       20,941       23,268  

Other expense

     —         —         —         504       —    
    


 


 


 


 


Income before income taxes

     4,452       3,441       2,392       7,911       8,580  

Provision for income taxes

     1,661       1,275       893       3,024       3,383  
    


 


 


 


 


Net income

   $ 2,791     $ 2,166     $ 1,499     $ 4,887     $ 5,197  
    


 


 


 


 


Other Operating and Financial Data:

                                        

Subscriber accounts owned at period end(4)

     213,397       265,816       304,360       335,390       389,905  

Subscriber accounts purchased(5)

     68,990       82,197       78,248       71,755       97,486  

Purchases of subscriber accounts(4)(5)

   $ 72,459     $ 93,290     $ 92,859     $ 79,276     $ 106,521  

Cash flow from operating activities

     16,839       27,694       37,103       48,263       60,029  

Cash flow from financing activities

     128,211       66,826       58,531       33,404       47,988  

Cash flow from investing activities

     (144,724 )     (94,938 )     (95,683 )     (81,654 )     (107,700 )

EBITDA(6)

     32,421       55,914       70,400       76,743       88,800  

Capital expenditures

     2,265       1,648       2,824       2,378       1,179  

Ratio of earnings to fixed charges(7)

     1.39x       1.16x       1.09x       1.38x       1.38x  
                       As of June 30, 2003

 
                       Actual

    As Adjusted

 
                       (dollars in thousands)  

Balance Sheet Data:

                                        

Cash and cash equivalents

                           $ 334     $ 14,671  

Working capital (deficit)

                             (11,840 )     5,632  

Total assets

                             471,991       495,838  

Total debt

                             337,973       370,501  

Redeemable preferred stock, including accrued dividends

                             154,935       154,935  

Total shareholders’ net capital deficiency

                             (40,152 )     (45,755 )(8)

(1) Our results of operations for fiscal 1999 include the acquisition of approximately 60,000 subscriber accounts from Dealer’s Monitoring Acceptance Corporation (“DMAC”) on March 9, 1999.

 

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(2) We restated our financial statements for the fiscal years ended June 30, 1999, 2000, 2001 and 2002 to properly record deferred revenue related to billings to our subscribers. The restatements reduced previously reported revenues and net income for fiscal 1999, 2000, 2001 and 2002 as follows:

 

     1999

   2000

     Previously
Reported


   Adjustment

    Adjusted
Balance


   Previously
Reported


   Adjustment

    Adjusted
Balance


     (dollars in thousands)    (dollars in thousands)

Revenue

   $ 50,491    $ (654 )   $ 49,837    $ 82,831    $ (785 )   $ 82,046

Net Income

   $ 3,196    $ (405 )   $ 2,791    $ 2,653    $ (487 )   $ 2,166
     2001

   2002

     Previously
Reported


   Adjustment

    Adjusted
Balance


   Previously
Reported


   Adjustment

    Adjusted
Balance


     (dollars in thousands)    (dollars in thousands)

Revenue

   $ 100,799    $ (601 )   $ 100,198    $ 111,881    $ (542 )   $ 111,339

Net Income

   $ 1,872    $ (373 )   $ 1,499    $ 5,223    $ (336 )   $ 4,887

 

(3) Primarily represents the amortization of subscriber accounts and goodwill. We capitalize all direct external costs associated with the purchase of subscriber accounts and amortize them over ten years on a straight line basis. In addition, as part of previous acquisitions including DMAC, we began amortizing goodwill. Effective July 1, 2001, with the adoption of Statement of Financial Accounting Standards No. 142, we no longer amortize goodwill. For fiscal years 1999, 2000 and 2001, $46,905, $228,225 and $773,000, respectively, of our amortization expense related to the amortization of goodwill.
(4) Does not include non-owned accounts for which we provide third-party contract monitoring services to independent dealers.
(5) Purchases of subscriber accounts in fiscal 1999 excludes our acquisition of approximately 60,000 subscriber accounts from DMAC.
(6) EBITDA represents earnings before interest, taxes, depreciation and amortization (including the amortization of subscriber accounts). EBITDA is a key performance measure used in the security alarm monitoring industry and is one of the financial measures, subject to adjustments, by which our covenants are calculated under the agreements governing our debt obligations. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, should not be construed as an alternative to net income and is indicative neither of our operating performance nor of cash flows available to fund all of our cash needs. Set forth below is the calculation of EBITDA and the reconciliation of EBITDA to net income and cash flow from operating activities:

 

     Fiscal Year Ended June 30,

 
     1999

    2000

    2001

    2002

    2003

 
     Restated(2)

    Restated(2)

    Restated(2)

    Restated(2)

       
     (dollars in thousands)  

Net income

   $ 2,791     $ 2,166     $ 1,499     $ 4,887     $ 5,197  

Interest expense

     11,757       22,064       27,951       20,941       23,268  

Provision for income taxes

     1,661       1,275       893       3,024       3,383  

Depreciation

     668       1,297       1,634       1,923       2,067  

Amortization

     15,544       29,112       38,423       45,968       54,885  
    


 


 


 


 


EBITDA

   $ 32,421     $ 55,914     $ 70,400     $ 76,743     $ 88,800  

Interest expense less amortization

     (11,457 )     (21,641 )     (27,428 )     (19,736 )     (21,491 )

Change in current assets and liabilities

     (633 )     (1,758 )     (549 )     516       2,149  

Current income taxes and other

     (3,492 )     (4,821 )     (5,320 )     (9,260 )     (9,429 )
    


 


 


 


 


Cash flow from operating activities

   $ 16,839     $ 27,694     $ 37,103     $ 48,263     $ 60,029  
    


 


 


 


 


 

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(7) For purposes of computing the ratio of earnings to fixed charges, earnings consist of income before income taxes for such period plus fixed charges deducted in calculating income before income taxes for such period. Fixed charges consist of interest incurred, amortization of deferred financing costs, and an amount representing the interest factor included in rental expense. On a pro forma basis, for the year ended June 30, 2003, earnings would have been insufficient to cover fixed charges by $4.0 million.
(8) Reflects the write-off of deferred financing costs related to our existing credit facility in the amount of $3.8 million, net of tax. Also reflects fees of $1.8 million, net of tax, related to prepayment penalties associated with the retirement of a portion of our existing subordinated notes. It does not, however, reflect the payment that may be made subsequent to June 30, 2003 to repurchase 400,000 shares of our Class A common stock held by our chief executive officer if he exercises his right to sell the shares to us at a purchase price of $1 million in cash pursuant to an agreement he entered into with us (see “Certain Relationships and Related Transactions”).

 

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RISK FACTORS

 

An investment in the new notes is subject to a number of risks. You should carefully consider the following factors, as well as the more detailed descriptions referred to in this prospectus and the other matters described in this prospectus before making an investment in the new notes.

 

Risks Relating to the New Notes

 

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the new notes.

 

We have now and will continue to have a significant amount of indebtedness. After giving effect to the Refinancing Transactions (see “Use of Proceeds”), as of June 30, 2003, our total indebtedness would have been $370.5 million, of which $191.0 million would have been senior secured debt.

 

Our substantial indebtedness could have important consequences to you. For example, it could:

 

  make it more difficult for us to satisfy our obligations with respect to the new notes;

 

  increase our vulnerability to general adverse economic and industry conditions;

 

  limit our ability to fund future subscriber account purchases, working capital, capital expenditures and other general corporate requirements;

 

  require a substantial portion of our cash flow from operations for debt payments;

 

  limit our flexibility to plan for, or react to, changes in our business and the industry in which we operate;

 

  place us at a competitive disadvantage compared to our competitors that have less debt; and

 

  limit our ability to borrow additional funds.

 

Any of the above listed factors could materially adversely affect us. See “Description of New Notes—Repurchase at the Option of Holders Upon a Change of Control” and “Description of Indebtedness.”

 

Despite our current levels of indebtedness, we still may be able to incur substantially more debt. This could further increase the risks described above.

 

We may be able to incur substantial additional indebtedness in the future. The terms of the indenture relating to the new notes permit us to incur additional indebtedness. After giving effect to the Refinancing Transactions (see “Use of Proceeds”), as of June 30, 2003, our credit facility would have included a $145 million revolving credit facility, of which $129 million would have been undrawn at June 30, 2003 and available for future borrowing subject to the satisfaction of applicable covenants. If new debt is added to our current debt levels, the related risks that we now face could intensify. See “Capitalization,” “Selected Historical Financial Data,” “Description of Indebtedness” and “Description of New Notes.”

 

We have significant intangible assets, which may not be adequate to satisfy our obligations in the event of a liquidation.

 

If we default on our debt or are liquidated, we cannot assure you that the value of our assets will be sufficient to satisfy our obligations, including our obligations with respect to the new notes. We have a significant amount of intangible assets. At June 30, 2003, 97% of our assets were intangible assets, comprising primarily subscriber accounts, as well as goodwill and deferred tax assets. The value of our subscriber accounts will depend significantly on the success of our business. At June 30, 2003, we had a net tangible book value deficit of $501 million.

 

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To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

 

Our ability to make payments on and to refinance our indebtedness, including the new notes, and to fund planned capital expenditures and acquisitions of new subscriber accounts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations, that we will realize operating improvements on schedule or that future borrowings will be available to us under our credit facility in an amount sufficient to enable us to pay our indebtedness, including the new notes, or to fund our other liquidity needs. Our indebtedness under our credit facility and our subordinated notes will each mature prior to the new notes. We may need to refinance all or a portion of our indebtedness, including the new notes, on or before maturity. We might not be able to refinance any of our indebtedness, including indebtedness under our credit facility and the new notes, on commercially reasonable terms or at all.

 

Your right to receive payments on the new notes is junior to our existing senior indebtedness and possibly most of our future borrowings.

 

The new notes will rank behind all of our existing indebtedness other than $20.5 million of subordinated debt and all of our future borrowings, except any future indebtedness that expressly provides that it ranks equal with, or is subordinated in right of payment to, the new notes. As a result, upon any distribution to our creditors in a bankruptcy or similar proceeding, the holders of our senior debt will be entitled to be paid in full in cash before any payment may be made with respect to the new notes.

 

In addition, all payments on the new notes will be blocked in the event of a payment default on Designated Senior Debt (as defined in “Description of New Notes”) and may be prohibited for up to 179 days each year in the event of certain non-payment defaults on Designated Senior Debt.

 

In the event of a bankruptcy, liquidation or reorganization or similar proceeding, holders of the new notes will participate with all other holders of our subordinated indebtedness in the assets remaining after we have paid all of our senior debt. In any of these cases, we may not have sufficient funds to pay all of our creditors; therefore, holders of the new notes may receive ratably less than trade creditors. As of June 30, 2003, after giving effect to the Refinancing Transactions (see “Use of Proceeds”), our senior secured debt was $191.0 million and we would have had $129 million of availability under the revolving credit facility portion of our credit facility subject to the satisfaction of applicable covenants. See “Description of New Notes—Subordination” and “Description of Indebtedness—Credit Facility.” If we create or acquire any subsidiaries, we may be required to have such subsidiaries guarantee the new notes; however, any such guarantees will be subordinated to senior debt of the guarantors to the same extent that the new notes are subordinated to senior debt.

 

Our credit facility, the indenture and our existing indebtedness impose many restrictions on us.

 

The agreements governing our indebtedness restrict our ability to, among other things:

 

  incur additional indebtedness;

 

  pay dividends and make distributions;

 

  issue common and preferred stock of any future subsidiaries;

 

  make certain investments;

 

  repurchase stock;

 

  create liens;

 

  enter into transactions with affiliates;

 

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Index to Financial Statements
  enter into sale and leaseback transactions;

 

  merge or consolidate; and

 

  transfer and sell assets.

 

In addition, we must comply with certain financial covenants under our credit facility and our existing indebtedness, including those that relate to capital expenditure limits, maximum total debt to EBITDA, maximum total senior liabilities to EBITDA, senior debt interest coverage and fixed charge coverage. If we cannot comply with such financial covenants, we may not be able to borrow under the credit facility. In addition, failure to comply with the restrictions contained in the credit facility or our existing indebtedness could lead to an event of default, which could result in an acceleration of indebtedness. Such an acceleration would also constitute an event of default under the indenture governing the new notes. See “Description of Indebtedness.”

 

The interests of our significant shareholders may not be aligned with the interests of the holders of the new notes.

 

Currently, affiliates of Austin Ventures beneficially own approximately 40.1% of our fully-diluted equity, and they have the right to designate four out of eight members of our board of directors. As a result, Austin Ventures currently has the ability to significantly influence the outcome of matters submitted for approval of our shareholders and directors, including the election of directors, the approval of any merger, consolidation or sale of all or substantially all of our assets and the incurrence of additional indebtedness. See “Security Ownership of Principal Shareholders and Management.” Certain decisions concerning our operations or financial structure may present conflicts of interest between the holders of our equity and the holders of the new notes. For example, equity investors may have an interest in pursuing acquisitions, divestitures, financings or other transactions that in their judgment could enhance their equity interest, even though such transactions might involve risk to the holders of the new notes.

 

We may not have the ability to raise the funds necessary to finance the change of control offer required by the indenture governing the new notes.

 

Upon the occurrence of certain change of control events, we will be required to offer to repurchase all outstanding new notes. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of new notes or that restrictions in our credit facility will not allow these repurchases.

 

Federal and state statutes allow courts, under specific circumstances, to void guarantees, subordinate claims in respect of the new notes and require holders of the new notes to return payments received from guarantors.

 

We currently have no subsidiaries. However, any future domestic restricted subsidiaries that we form or acquire will be required to guarantee the new notes on a senior subordinated basis. Under the federal bankruptcy laws and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor, if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:

 

  received less than reasonably equivalent value or fair consideration for the incurrence of the guarantee;

 

  was insolvent or rendered insolvent by reason of the incurrence;

 

  was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or

 

  intended to incur, or believed that it would incur, debts beyond its ability to pay the debts as they mature.

 

In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor or to a fund for the benefit of the creditors of the guarantor.

 

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  The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:

 

  the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;

 

  the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

  it could not pay its debts as they become due.

 

If you do not properly tender your old notes, you will continue to hold unregistered old notes and your ability to transfer old notes will be adversely affected.

 

We will only issue new notes in exchange for old notes that you timely and properly tender. Therefore, you should allow sufficient time to ensure timely tender of the old notes and carefully follow the instructions on how to tender your old notes. Neither we nor the exchange agent are required to tell you of any defects or irregularities with respect to your tender of the old notes.

 

If you do not exchange your old notes for the new notes pursuant to the exchange offer, the old notes you hold will continue to be subject to the existing transfer restrictions. In general, you may not offer or sell the old notes except under an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not plan to register old notes under the Securities Act unless our registration rights agreement with the initial purchasers of the old notes requires us to do so. Further, if you continue to hold any old notes after the exchange offer is consummated, you may not be able to sell the old notes because there will be fewer old notes outstanding.

 

If an active trading market does not develop for the new notes, you may be unable to sell the new notes or to sell the new notes at a price that you deem sufficient.

 

The new notes will be new securities for which there currently is no established trading market. Although we will register the new notes under the Securities Act, we do not intend to apply for listing of the new notes on any securities exchange or for quotation of the new notes in any automated dealer quotation system. In addition, although the initial purchasers of the old notes have informed us that they intend to make a market in the new notes after the exchange offer, the initial purchasers may stop making a market at any time. Finally, if a large number of holders of old notes do not tender old notes or tender old notes improperly, the limited amount of new notes that would be issued and outstanding after we consummate the exchange offer could adversely affect the development of a market for these new notes.

 

Risks Relating to Our Business

 

Attrition of subscriber accounts could materially adversely affect our operations.

 

We experience attrition of subscriber accounts as a result of several factors, including:

 

  relocation of subscribers;

 

  adverse financial and economic conditions; and

 

  competition from other alarm monitoring companies.

 

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Index to Financial Statements

In addition, we may lose subscriber accounts if we do not service those accounts adequately or do not successfully assimilate new subscriber accounts into our operations. A significant increase in attrition of subscriber accounts could have a material adverse effect on us.

 

When acquiring subscriber accounts, we usually require the dealer to provide a guarantee against account cancellations for a period (typically 12 months) following the account acquisition, and we usually withhold a portion of the purchase price as a partial reserve against any subscriber attrition in the first year. If the actual attrition rate for the subscriber accounts acquired is significantly greater than the rate we assumed at the time of the acquisition, and we are unable to recover our damages through the replacement of an account under the dealer guarantee or from the portion of the purchase price we held back from the dealer, the attrition could have a material adverse effect on us. If the subscriber cancels the contract after the dealer guarantee period, we no longer have any recourse against the dealer and our only recourse is against the subscriber for the value of the remaining term of the contract. In addition, our subscriber contracts are typically only three years in duration and if a subscriber cancels the contract at or soon after the end of the three-year period, we would likely not have recovered our cost of purchasing the contract. If we fail to enforce the subscriber contract or collect on any payments owed by the subscriber to us, we may also not recover our cost of purchasing the contract. We cannot assure you that the actual attrition rate for acquired subscriber accounts will not be greater than the attrition rate that we assumed or that we have historically experienced. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Attrition.”

 

We may be unable to manage our growth effectively.

 

A principal element of our business strategy is to grow through the acquisition of subscriber accounts purchased through our authorized dealer program. This expansion has placed and will continue to place substantial demands on our management and operational resources, including our information systems. Our future operating results will depend in large part on our ability to grow and manage this growth effectively. We experience loss of dealers from our dealer program due to various factors, such as dealers becoming inactive or discontinuing their electronic security business, non-renewal of our dealer contracts and competition from other alarm monitoring companies. We actively engage in the development of our dealer network and in maintaining and expanding our dealer program. However, if we experience a significant loss of dealers from our dealer program or if we are unable to replace or recruit dealers in accordance with our business plans, our future operating results may be adversely affected.

 

We face risks in acquiring and integrating subscriber accounts.

 

Acquisitions of subscriber accounts involve a number of special risks, including the possibility of unanticipated problems that were not discovered prior to the acquisition and account attrition. We face competition from other alarm monitoring companies, including companies that have more capital than we have and that may offer higher prices and more favorable terms to dealers for subscriber accounts purchased, or lower prices for monitoring services provided. This competition could reduce the acquisition opportunities available to us, thus slowing our rate of growth, and/or increase the price we pay for such account acquisitions, thus reducing our return on investment. We cannot assure you that we will be able to purchase subscriber accounts on favorable terms in the future. See “Risk Factors—The high level of competition in our industry could adversely affect our business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Attrition.”

 

The purchase price we pay for a subscriber account is affected by the monthly recurring revenue generated by that account as well as several other factors, including our prior experience with accounts purchased from the dealer, the geographic location of the account, the number of accounts purchased and the type of security equipment used by the subscriber. In purchasing accounts, we have relied on management’s knowledge of the industry, due diligence procedures and representations and warranties of the dealers. We cannot assure you that in all instances the representations and warranties made by the dealers are true and complete or, if the

 

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Index to Financial Statements

representations and warranties are inaccurate, that we will be able to recover damages from the dealers in an amount sufficient to fully compensate us for any resulting losses. We expect that future account acquisitions will present the same risks to us as our prior account acquisitions. See “Business—Operations—Dealer Program.”

 

We depend on our relationships with alarm system manufacturers and suppliers. If we are not able to maintain or renew these strategic alliances, or enter into new alliances, we may be unable to fully implement our growth strategy.

 

We currently have agreements with certain alarm system manufacturers and suppliers of hardware to offer purchase discounts to our dealers. These relationships:

 

  provide important introductions to prospective dealers, which helps us in our dealer recruiting process;

 

  provide an additional source of prospective subscriber accounts; and

 

  enhance our existing dealer relationships.

 

We may not be able to maintain or renew our existing strategic alliances on terms and conditions favorable to us or enter into alliances with additional manufacturers and suppliers. If we are unable to maintain or renew our existing strategic alliances or enter into new alliances, we may be unable to fully implement our growth strategy.

 

We may be unable to obtain additional funds to grow our business.

 

In fiscal 2001, 2002 and 2003 we invested a total of approximately $278.7 million in acquisitions of subscriber accounts. We used a combination of proceeds from issuances of preferred stock, borrowings under our old credit facility, issuances of senior subordinated and subordinated notes and cash flow from operations to fund our investing activities during those fiscal years. We intend to continue to pursue growth through the acquisition of subscriber accounts through our authorized dealer program. To continue our growth strategy, we will be required to make additional drawdowns under our credit facility or seek additional financing through new loans or from the possible sale of additional securities in the future, which may lead to higher leverage. Any inability we have to obtain funding through external financing is likely to adversely affect our ability to continue or accelerate our subscriber account acquisition activities. We cannot assure you that we will be able to obtain external funding on attractive terms or at all.

 

“False alarm” ordinances could adversely affect our operations.

 

Significant concern has arisen in certain municipalities about the high incidence of false alarms. This concern could cause a decrease in the likelihood or timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain alarm monitoring services.

 

An increasing number of local governmental authorities have considered or adopted various measures aimed at reducing the number of false alarms. Such measures could include:

 

  subjecting alarm monitoring companies to fines or penalties for transmitting false alarms;

 

  imposing fines on alarm subscribers for false alarms;

 

  imposing limitations on the number of times the police will respond to alarms at a particular location after a specified number of false alarms; and

 

  requiring further verification of an alarm signal, such as a visual verification, before the police will respond.

 

Enactment of these measures could adversely affect our future business and operations. For example, the cities of Las Vegas and Salt Lake City have implemented verified response ordinances and Los Angeles is

 

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considering the adoption of a similar policy for residential and commercial burglar alarms. A verified response policy means that police officers generally do not respond to an alarm until someone else (e.g., the resident, a neighbor or a security guard) first verifies that it is valid. Some alarm monitoring companies operating in these cities hire security guards or use third-party guard firms to verify an alarm. If we need to hire security guards or use third-party guard firms, it could have a material adverse effect on our margins. Although we have less than 5,000 subscribers in Los Angeles, Las Vegas and Salt Lake City, a more widespread adoption of such a policy or similar policies in other cities or municipalities could adversely affect our business.

 

Future government regulations could adversely affect our operations.

 

Our operations are subject to a variety of laws, regulations and licensing requirements of federal, state and local authorities. In certain jurisdictions, we are required to obtain licenses or permits, to comply with standards governing monitoring station employee selection and training and to meet certain standards in the conduct of our business. The loss of these licenses in jurisdictions where we have significant business, or the imposition of conditions to the granting or retention of these licenses, could have a material adverse effect on us. See “Business—Regulatory Matters.”

 

Risks of liability from our operations are significant.

 

The nature of the services we provide potentially exposes us to greater risks of liability for employee acts or omissions or system failure than may be inherent in other businesses. Substantially all of our alarm monitoring contracts contain provisions limiting our liability to subscribers and dealers in an attempt to reduce this risk. However, in the event of litigation with respect to these matters, we cannot assure you that these limitations will be enforced, and the costs of such litigation could have a material adverse effect on us. See “Business—Legal Proceedings.”

 

We carry insurance of various types, including general liability insurance and errors and omissions insurance. Our loss experience, and the loss experience of other alarm monitoring companies, may affect the availability and cost of our insurance. Certain of our insurance policies and the laws of some states may limit or prohibit insurance coverage for punitive or certain other types of damages or liability arising from gross negligence.

 

The high level of competition in our industry could adversely affect our business.

 

The security alarm monitoring industry is highly competitive and highly fragmented. We compete with several companies that have account acquisition and loan programs for independent dealers and some of those competitors are larger than we are and have more capital than we do. Some of the major firms we compete against include ADT Operations Inc., a subsidiary of Tyco International Ltd.; Protection One, Inc., a subsidiary of Westar Energy, Inc.; Brinks Home Security Inc., a subsidiary of The Pittston Company; and Honeywell Security, a division of Honeywell, Inc. Increased competition from other alarm monitoring companies could require us to increase the purchase price we pay for subscriber accounts, decrease the monitoring fees we charge our subscribers and take other measures that could reduce our margins. These increases, decreases and other measures could have a material adverse effect on us. See “Business—Competition.”

 

A loss of one of our executive officers could adversely affect us.

 

The success of our business is largely dependent upon the active participation of our executive officers, including our founder and chief executive officer, James R. Hull. The loss of the services of Mr. Hull or other key members of our management for any reason may have a material adverse effect on our business. Our ability to manage our anticipated growth will depend on our ability to identify, hire and retain additional qualified management personnel. We may be unsuccessful in attracting and retaining these personnel and this failure could materially adversely affect us. See “Management.”

 

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We could experience system failure as a result of a catastrophic event or natural disaster that could harm our business and reputation.

 

Our Underwriters Laboratories (“UL”) listed central monitoring facility is housed in three buildings that are all within a very close proximity to one another. Although our central monitoring facility has back-up computer and power systems, if there is a catastrophic event or natural disaster affecting all three buildings comprising the central monitoring facility, the service that we provide our subscribers would be interrupted until such time as we were able to migrate our operations to another facility.

 

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EXCHANGE OFFER

 

Purpose and Effect of the Exchange Offer

 

In connection with the issuance of the old notes, we entered into a registration rights agreement under which we agreed to:

 

  within 90 days after the issue date of the old notes, file a registration statement with the Securities and Exchange Commission with respect to a registered offer to exchange the old notes for new notes of ours having terms substantially identical in all material respects to the old notes except with respect to transfer restrictions;

 

  use our reasonable best efforts to cause the registration statement to be declared effective under the Securities Act within 210 days after the issue date of the old notes;

 

  use our best efforts to consummate the exchange offer on the earliest practicable date after the registration statement is declared effective, but in no event later than 240 days after the issue date of the old notes;

 

  keep the exchange offer open for not less than 20 days (or longer if required by applicable law) after the date notice of the exchange offer is mailed to the holders of the old notes; and

 

  to file a shelf registration for the resale of the old notes if we cannot consummate the exchange offer within the time period listed above and certain other circumstances described in this prospectus.

 

For each old note tendered to us pursuant to the exchange offer, we will issue to the holder of such old note a new note having a principal amount equal to that of the surrendered old note. Interest on each new note will accrue from the last interest payment date on which interest was paid on the old note surrendered in exchange therefor, or, if no interest has been paid on such old note, from the date of its original issue.

 

Under existing interpretations of the staff of the Securities and Exchange Commission issued to third parties, the new notes will be freely transferable by holders other than our affiliates after the exchange offer without further registration under the Securities Act if the holder of the new notes represents to us in the exchange offer that it is acquiring the new notes in the ordinary course of its business, that it has no arrangement or understanding with any person to participate in the distribution of the new notes and that it is not our affiliate, as such terms are interpreted by the Securities and Exchange Commission; provided, however that broker-dealers receiving new notes in the exchange offer will have a prospectus delivery requirement with respect to resales of such new notes. The staff of the Securities and Exchange Commission has taken the position in interpretations issued to third parties that participating broker-dealers may fulfill their prospectus delivery requirements with respect to new notes (other than a resale of an unsold allotment from the original sale of the old notes) with the prospectus contained in the registration statement covering the new notes. Each broker-dealer that receives new notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. See “Plan of Distribution.”

 

Under the registration rights agreement, we are required to allow participating broker-dealers and other persons, if any, with similar prospectus delivery requirements to use the prospectus contained in the registration statement in connection with the resale of the new notes for 180 days following the effective date of such registration statement (or such shorter period during which participating broker-dealers are required by law to deliver such prospectus).

 

A holder of old notes (other than certain specified holders) who wishes to exchange old notes for new notes in the exchange offer will be required to represent that any new notes to be received by it will be acquired in the ordinary course of its business and that at the time of the commencement of the exchange offer it has no arrangement or understanding with any person to participate in the distribution (within the meaning of the

 

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Securities Act) of the new notes and that it is not our “affiliate,” as defined in Rule 405 of the Securities Act, or if it is an affiliate, that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable.

 

In the event that:

 

  any change of law or in applicable interpretations thereof by the staff of the Securities and Exchange Commission issued to third parties do not permit us to effect an exchange offer;

 

  for any reason the exchange offer is not consummated within 240 days after the date of the original issuance of the old notes; or

 

  any holder of old notes notifies us prior to the 20th day following the date of the consummation of the exchange offer that such holder is prohibited by applicable law or Securities and Exchange Commission policy from participating in the exchange offer;

 

then we will, at our cost, file and use our reasonable best efforts to have declared effective a shelf registration statement covering resales of the old notes as promptly as practicable (but in no event more than 90 days after the occurrence of any of the events set forth above).

 

We will use our reasonable best efforts to cause the shelf registration statement to be declared effective under the Securities Act and use our best efforts to keep the shelf registration statement continuously effective for a period until the earlier of (i) the expiration of the period referred to in Rule 144(k) under the Securities Act (or any successor rule) with respect to the old notes or (ii) such shorter period that will terminate when all the old notes covered by such shelf registration statement have been sold pursuant to such shelf registration statement. We will, if we file a shelf registration statement, among other things, provide to each holder for whom such shelf registration statement was filed copies of the prospectus which is a part of the shelf registration statement, notify each such holder when the shelf registration statement has become effective and take certain other actions as are required to permit unrestricted resales of the old notes or the new notes, as the case may be. A holder selling such old notes or new notes pursuant to the shelf registration statement generally would be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the registration rights agreement which are applicable to such holder (including certain indemnification obligations).

 

The registration rights agreement obligates us to pay special interest (“Special Interest”) on the principal amount of the old notes and the new notes (in addition to the stated interest on the old notes and the new notes) upon the occurrence of any of the following events:

 

  on or prior to the 90th day following the date of original issuance of the old notes, the exchange offer registration statement has not been filed with the Securities and Exchange Commission;

 

  on or prior to the 45th day after the obligation to file the shelf registration statement has arisen, the shelf registration statement has not been filed with the Securities and Exchange Commission;

 

  on or prior to the 210th day following the date of original issuance of the old notes, the exchange offer registration statement has not been declared effective;

 

  on or prior to the 90th day after the obligation to file the shelf registration statement has arisen, the shelf registration statement has not been declared effective;

 

  on or prior to the 240th day following the date of original issuance of the old notes, the registered exchange offer has not been consummated; or

 

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  after either the exchange offer registration statement or the shelf registration statement has been declared effective, such registration statement thereafter ceases to be effective or fail to be usable in connection with the resales of old notes in accordance with and during the periods specified in the registration rights agreement without being succeeded immediately by a post-effective amendment to such registration statement that cures such failure and that is itself immediately declared effective.

 

We refer herein to any of the foregoing occurrences as a registration default.

 

Special Interest will accrue on the principal amount of the old notes and the new notes (in addition to the stated interest on the old notes and the new notes) from and including the date on which any registration default shall occur to but excluding the date on which all registration defaults have been cured. Special Interest will accrue at a rate of .25% per annum during the 90-day period immediately following the occurrence of a registration default and shall increase by .25% per annum at the end of each subsequent 90-day period, but in no event shall such rate exceed 1.5% per annum.

 

All references in the indenture, in any context, to any interest or other amount payable on or with respect to the old notes or new notes shall be deemed to include any Special Interest pursuant to the registration rights agreement.

 

Resale of New Notes

 

Based on no action letters of the staff of the Securities and Exchange Commission issued to third parties, we believe that new notes may be offered for resale, resold and otherwise transferred by you without further compliance with the registration and prospectus delivery provisions of the Securities Act if:

 

  you are not our “affiliate” within the meaning of Rule 405 under the Securities Act;

 

  such new notes are acquired in the ordinary course of your business; and

 

  you do not intend to participate in the distribution of such new notes.

 

The staff of the Securities and Exchange Commission, however, has not considered the exchange offer for the new notes in the context of a no action letter, and the staff of the Securities and Exchange Commission may not make a similar determination as in the no action letters issued to these third parties.

 

If you tender in the exchange offer with the intention of participating in any manner in a distribution of the new notes:

 

  you cannot rely on such interpretations by the Securities and Exchange Commission staff issued to third parties; and

 

  you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.

 

Unless an exemption from registration is otherwise available, any security holder intending to distribute new notes should be covered by an effective registration statement under the Securities Act. This registration statement should contain the selling security holder’s information required by Item 507 of Regulation S-K under the Securities Act. This prospectus may be used for an offer to resell, resale or other retransfer of new notes only as specifically described in this prospectus. Only broker-dealers that acquired the old notes as a result of market-making activities or other trading activities may participate in the exchange offer. Each broker-dealer that receives new notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the new notes. Please read the section captioned “Plan of Distribution” for more details regarding the transfer of new notes.

 

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Terms of the Exchange Offer

 

Subject to the terms and conditions described in this prospectus and in the letter of transmittal, we will accept for exchange any old notes properly tendered and not withdrawn prior to the expiration date. We will issue new notes in principal amount equal to the principal amount of old notes surrendered under the exchange offer. Old notes may be tendered only for new notes and only in integral multiples of $1,000.

 

The exchange offer is not conditioned upon any minimum aggregate principal amount of old notes being tendered for exchange.

 

As of the date of this prospectus, $160,000,000 aggregate principal amount of the old notes is outstanding. This prospectus and the letter of transmittal are being sent to all registered holders of old notes. There will be no fixed record date for determining registered holders of old notes entitled to participate in the exchange offer.

 

We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement, the applicable requirements of the Securities Act and the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission. Old notes that the holders thereof do not tender for exchange in the exchange offer will remain outstanding and continue to accrue interest. These old notes will be entitled to the rights and benefits such holders have under the indenture relating to the old notes and the registration rights agreement.

 

We will be deemed to have accepted for exchange properly tendered old notes when we have given oral or written notice of the acceptance to the exchange agent and complied with the applicable provisions of the registration rights agreement. The exchange agent will act as agent for the tendering holders for the purposes of receiving the new notes from us.

 

If you tender old notes in the exchange offer, you will not be required to pay brokerage commissions or fees or, subject to the letter of transmittal, transfer taxes with respect to the exchange of old notes. We will pay all charges and expenses, other than certain applicable taxes described below, in connecting with the exchange offer. It is important that you read the section labeled “—Fees and Expenses” for more details regarding fees and expenses incurred in the exchange offer.

 

We will return any old notes that we do not accept for exchange for any reason without expense to their tendering holder promptly after the expiration or termination of the exchange offer.

 

Each broker-dealer that receives new notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. See “Plan of Distribution.”

 

Expiration Date

 

The exchange offer will expire at 5:00 p.m. New York City time on                      unless, in our sole discretion, we extend it.

 

Extensions, Delays in Acceptance, Termination or Amendment

 

We expressly reserve the right, at any time or various times, to extend the period of time during which the exchange offer is open, subject to the thirty business day maximum offering period. We may delay acceptance of any old notes by giving oral or written notice of such extension to their holders if the exchange offer is so extended. During any such extensions, all old notes previously tendered will remain subject to the exchange offer, and we may accept them for exchange upon the expiration of the extended exchange offer.

 

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In order to extend the exchange offer, we will notify the exchange agent orally or in writing of any extension. We will notify the registered holders of old notes of the extension no later than 9:00 a.m., New York City time, on the business day after the previously scheduled expiration date.

 

If any of the conditions described below under “—Conditions to the Exchange Offer” have not been satisfied, we reserve the right, in our sole discretion

 

  to delay accepting for exchange any old notes,

 

  to extend the exchange offer, or

 

  to terminate the exchange offer,

 

by giving oral or written notice of such delay, extension or termination to the exchange agent. However, we may not delay acceptance for exchange of any old notes after the expiration of the exchange offer. Subject to the terms of the registration rights agreement, we also reserve the right to amend the terms of the exchange offer in any manner.

 

Any such delay in acceptance, extension, termination or amendment will be followed promptly by oral or written notice thereof to the registered holders of old notes. If we amend the exchange offer in a manner that we determine to constitute a material change, we will promptly disclose such amendment by means of a prospectus supplement. The supplement will be distributed to the registered holders of the old notes. Depending upon the significance of the amendment and the manner of disclosure to the registered holders, we will extend the exchange offer if the exchange offer would otherwise expire during such period.

 

Conditions to the Exchange Offer

 

We will not be required to accept for exchange, or exchange any new notes for, any old notes if the exchange offer, or the making of any exchange by a holder of old notes, would violate applicable law or any applicable interpretation of the staff of the Securities and Exchange Commission. Similarly, we may terminate the exchange offer as provided in this prospectus before accepting old notes for exchange in the event of such a potential violation.

 

In addition, we will not be obligated to accept for exchange the old notes of any holder that has not made to us the representations described under “—Purpose and Effect of the Exchange Offer,” “—Procedures for Tendering” and “Plan of Distribution” and such other representations as may be reasonably necessary under applicable Securities and Exchange Commission rules, regulations or staff interpretations to allow us to use an appropriate form to register the new notes under the Securities Act.

 

We expressly reserve the right to amend or terminate the exchange offer, and to reject for exchange any old notes not previously accepted for exchange, upon the occurrence of any of the conditions to the exchange offer specified above. We will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the old notes as promptly as practicable.

 

These conditions are for our sole benefit, and we may assert them or waive them in whole or in part at any time prior to or on the expiration of the exchange offer in our sole discretion. If we fail at any time to exercise any of these rights, this failure will not mean that we have waived our rights. Each such right will be deemed an ongoing right that we may assert at any time prior to or on the expiration of the exchange offer.

 

In addition, we will not accept for exchange any old notes tendered, and will not issue new notes in exchange for any such old notes, if at such time any stop order has been threatened or is in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture relating to the new notes under the Trust Indenture Act of 1939.

 

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Procedures for Tendering

 

How to tender generally

 

Only a holder of old notes may tender such old notes in the exchange offer. To tender in the exchange offer, a holder must:

 

  complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal;

 

  have the signature on the letter of transmittal guaranteed if the letter of transmittal so requires; and

 

  mail or deliver such letter of transmittal or facsimile to the exchange agent prior to the expiration date; or

 

  comply with the automated tender offer program procedures of The Depository Trust Company, or DTC, described below.

 

In addition, either:

 

  the exchange agent must receive old notes along with the letter of transmittal;

 

  the exchange agent must receive, prior to the expiration date, a timely confirmation of book-entry transfer of such old notes into the exchange agent’s account at DTC according to the procedure for book-entry transfer described below or a properly transmitted agent’s message; or

 

  the holder must comply with the guaranteed delivery procedures described below.

 

To be tendered effectively, the exchange agent must receive any physical delivery of the letter of transmittal and other required documents at its address indicated on the cover page of the letter of transmittal. The exchange agent must receive such documents prior to the expiration date.

 

The tender by a holder that is not withdrawn prior to the expiration date will constitute an agreement between the holder and us in accordance with the terms and subject to the conditions described in this prospectus and in the letter of transmittal.

 

The method of delivery of old notes, the letter of transmittal and all other required documents to the exchange agent is at your election and risk. Rather than mail these items, we recommend that you use an overnight or hand delivery service. In all cases, you should allow sufficient time to assure delivery to the exchange agent before the expiration date. You should not send the letter of transmittal or old notes to us. You may request your brokers, dealers, commercial banks, trust companies or other nominees to effect the above transactions for you.

 

How to tender if you are a beneficial owner

 

If you beneficially own old notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender those notes, you should contact the registered holder promptly and instruct it to tender on your behalf. If you are a beneficial owner and wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your old notes, either:

 

  make appropriate arrangements to register ownership of the old notes in your name; or

 

  obtain a properly completed bond power from the registered holder of old notes.

 

The transfer of registered ownership may take considerable time and may not be completed prior to the expiration date.

 

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Signatures and signature guarantees

 

You must have signatures on a letter of transmittal or a notice of withdrawal (as described below) guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an “eligible guarantor institution” within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934. In addition, such entity must be a member of one of the recognized signature guarantee programs identified in the letter of transmittal. Signature guarantees are not required, however, if the notes are tendered:

 

  by a registered holder who has not completed the box entitled “Special Issuance Instructions” or “Special Delivery Instructions” on the letter of transmittal; or

 

  for the account of a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an eligible guarantor institution.

 

When you need endorsements or bond powers

 

If the letter of transmittal is signed by a person other than the registered holder of any old notes, the old notes must be endorsed or accompanied by a properly completed bond power. The bond power must be signed by the registered holder as the registered holder’s name appears on the old notes. A member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an eligible guarantor institution must guarantee the signature on the bond power.

 

If the letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, those persons should so indicate when signing. Unless waived by us, they should also submit evidence satisfactory to us of their authority to deliver the letter of transmittal.

 

Tendering through DTC’s automated tender offer program

 

The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC’s system may use DTC’s automated tender offer program to tender. Participants in the program may, instead of physically completing and signing the letter of transmittal and delivering it to the exchange agent, transmit their acceptance of the exchange offer electronically. They may do so by causing DTC to transfer the old notes to the exchange agent in accordance with its procedures for transfer. DTC will then send an agent’s message to the exchange agent.

 

The term “agent’s message” means a message transmitted by DTC, received by the exchange agent and forming part of the book-entry confirmation, to the effect that:

 

  DTC has received an express acknowledgment from a participant in its automated tender offer program that it is tendering old notes that are the subject of such book-entry confirmation;

 

  such participant has received and agrees to be bound by the terms of the letter of transmittal or, in the case of an agent’s message relating to guaranteed delivery, that such participant has received and agrees to be bound by the applicable notice of guaranteed delivery; and

 

  the agreement may be enforced against such participant.

 

Determinations under the exchange offer

 

We will determine in our sole discretion all questions as to the validity, form, eligibility, time of receipt, acceptance of tendered old notes and withdrawal of tendered old notes. Our determinations will be final and

 

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binding. We reserve the absolute right to reject any old notes not properly tendered or any old notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular old notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, all defects or irregularities in connection with tenders of old notes must be cured within such time as we shall determine. Although we intend to notify holders of defects or irregularities with respect to tenders of old notes, neither we, the exchange agent nor any other person will incur any liability for failure to give such notification. Tenders of old notes will not be deemed made until such defects or irregularities have been cured or waived. Any old notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned to the tendering holder, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date.

 

When we will issue new notes

 

In all cases, we will issue new notes for old notes that we have accepted for exchange under the exchange offer only after the exchange agent timely receives:

 

  old notes or a timely book-entry confirmation of such old notes into the exchange agent’s account at DTC; and

 

  a properly completed and duly executed letter of transmittal and all other required documents or a properly transmitted agent’s message.

 

Return of old notes not accepted or exchanged

 

If we do not accept any tendered old notes for exchange or if old notes are submitted for a greater principal amount than the holder desires to exchange, the unaccepted or non-exchanged old notes will be returned without expense to their tendering holder. In the case of old notes tendered by book-entry transfer in the exchange agent’s account at DTC according to the procedures described below, such non-exchanged old notes will be credited to an account maintained with DTC. These actions will occur promptly after the expiration or termination of the exchange offer.

 

Your representations to us

 

By signing or agreeing to be bound by the letter of transmittal, you will represent to us that, among other things:

 

  any new notes that you receive will be acquired in the ordinary course of your business;

 

  you have no arrangement or understanding with any person or entity to participate in the distribution of the new notes within the meaning of the Securities Act;

 

  if you are not a broker-dealer that you are not engaged in and do not intend to engage in the distribution of the new notes;

 

  if you are a broker-dealer that will receive new notes for your own account in exchange for old notes, you acquired those notes as a result of market-making activities or other trading activities and you will deliver a prospectus, as required by law, in connection with any resale of such new notes; and

 

  you are not our “affiliate,” as defined in Rule 405 of the Securities Act or if you are our “affiliate” that you will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable.

 

Book-Entry Transfer

 

The exchange agent will establish an account with respect to the old notes at DTC for purposes of the exchange offer promptly after the date of this prospectus. Any financial institution participating in DTC’s system may make book-entry delivery of old notes by causing DTC to transfer such old notes into the exchange agent’s

 

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account at DTC in accordance with DTC’s procedures for transfer. Holders of old notes who are unable to deliver confirmation of the book-entry tender of their old notes into the exchange agent’s account at DTC or all other documents required by the letter of transmittal to the exchange agent on or prior to the expiration date must tender their old notes according to the guaranteed delivery procedures described below.

 

Guaranteed Delivery Procedures

 

If you wish to tender your old notes but your old notes are not immediately available or you cannot deliver your old notes, the letter of transmittal or any other required documents to the exchange agent or comply with the applicable procedures under DTC’s automated tender offer program prior to the expiration date, you may tender if:

 

  the tender is made through a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an eligible guarantor institution,

 

  prior to the expiration date, the exchange agent receives from such member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., commercial bank or trust company having an office or correspondent in the United States, or eligible guarantor institution either a properly completed and duly executed notice of guaranteed delivery by facsimile transmission, mail or hand delivery or a properly transmitted agent’s message and notice of guaranteed delivery:

 

  setting forth your name and address, the registered number(s) of your old notes and the principal amount of old notes tendered,

 

  stating that the tender is being made thereby, and

 

  guaranteeing that, within three New York Stock Exchange trading days after the expiration date, the letter of transmittal or facsimile thereof, together with the old notes or a book-entry confirmation, and any other documents required by the letter of transmittal will be deposited by the eligible guarantor institution with the exchange agent, and

 

  the exchange agent receives such properly completed and executed letter of transmittal or facsimile thereof, as well as all tendered old notes in proper form for transfer or a book-entry confirmation, and all other documents required by the letter of transmittal, within three New York Stock Exchange trading days after the expiration date.

 

Upon request to the exchange agent, a notice of guaranteed delivery will be sent to you if you wish to tender your old notes according to the guaranteed delivery procedures described above.

 

Withdrawal of Tenders

 

Except as otherwise provided in this prospectus, you may withdraw your tender at any time prior to the expiration date.

 

For a withdrawal to be effective:

 

  the exchange agent must receive a written notice of withdrawal at the address indicated on the cover page of the letter of transmittal, or

 

  you must comply with the appropriate procedures of DTC’s automated tender offer program system.

 

Any notice of withdrawal must:

 

  specify the name of the person who tendered the old notes to be withdrawn, and

 

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  identify the old notes to be withdrawn, including the principal amount of such old notes.

 

If old notes have been tendered under the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with withdrawn old notes and otherwise comply with the procedures of DTC.

 

We will determine all questions as to the validity, form, eligibility and time of receipt of notice of withdrawal. Our determination shall be final and binding on all parties. We will deem any old notes so withdrawn not to have been validly tendered for exchange for purposes of the exchange offer.

 

Any old notes that have been tendered for exchange but that are not exchanged for any reason will be returned to their holder without cost to the holder. In the case of old notes tendered by book-entry transfer into the exchange agent’s account at DTC according to the procedures described above, such old notes will be credited to an account maintained with DTC for the old notes. This return or crediting will take place as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. You may retender properly withdrawn old notes by following one of the procedures described under “—Procedures for Tendering” above at any time on or prior to the expiration date.

 

Fees and Expenses

 

We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, we may make additional solicitation by telegraph, telephone or in person by our officers and regular employees and those of our affiliates.

 

We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and reimburse it for its related reasonable out-of-pocket expenses.

 

We will pay the cash expenses to be incurred in connection with the exchange offer. They include:

 

  Securities and Exchange Commission registration fees;

 

  fees and expenses of the exchange agent and trustee;

 

  accounting and legal fees and printing costs; and

 

  related fees and expenses.

 

Transfer Taxes

 

We will pay all transfer taxes, if any, applicable to the exchange of old notes under the exchange offer. The tendering holder, however, will be required to pay any transfer taxes, whether imposed on the registered holder or any other person, if:

 

  certificates representing old notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of old notes tendered;

 

  tendered old notes are registered in the name of any person other than the person signing the letter of transmittal; or

 

  a transfer tax is imposed for any reason other than the exchange of old notes under the exchange offer.

 

If satisfactory evidence of payment of any transfer taxes payable by a note holder is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to that tendering holder.

 

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Index to Financial Statements

Consequences of Failure to Exchange

 

If you do not exchange new notes for your old notes under the exchange offer, you will remain subject to the existing restrictions on transfer of the old notes. In general, you may not offer or sell the old notes unless they are registered under the Securities Act or unless the offer or sale is exempt from the registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the old notes under the Securities Act.

 

Accounting Treatment

 

We will record the new notes in our accounting records at the same carrying value as the old notes. This carrying value is the aggregate principal amount less the original issue discount of the old notes, as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes in connection with the exchange offer. The expenses of the exchange offer will be amortized over the term of the new notes.

 

Other

 

Participation in the exchange offer is voluntary, and you should carefully consider whether to accept. You are urged to consult your financial and tax advisors in making your own decision on what action to take.

 

We may in the future seek to acquire untendered old notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. We have no present plans to acquire any old notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered old notes.

 

Each broker-dealer that receives new notes for its own account in exchange for old notes, where such were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. See “Plan of Distribution.”

 

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Index to Financial Statements

USE OF PROCEEDS

 

The exchange offer is intended to satisfy our obligations under the registration rights agreement. We will not receive any cash proceeds from the issuance of the new notes in the exchange offer. In consideration for issuing the new notes as contemplated by this prospectus, we will receive old notes in a like principal amount. The form and terms of the new notes are identical in all respects to the form and terms of the old notes, except the new notes are registered under the Securities Act and will not have restrictions on transfer, registration rights or provisions for additional interest. Old notes surrendered in exchange for the new notes will be retired and cancelled and will not be reissued. Accordingly, the issuance of the new notes will not result in any increase in our outstanding indebtedness.

 

On August 25, 2003, we completed a series of refinancing transactions that included (i) issuing $160.0 million aggregate principal amount of the old notes and (ii) entering into a new $320 million senior secured credit facility. The new credit facility consists of a $175.0 million term loan facility that matures in 2009 and a $145.0 million revolving loan facility that matures in 2008. The proceeds from the old notes offering and the new credit facility were used to (1) repay the $298.6 million outstanding under our previous credit facility, (2) repay $12.0 million in aggregate principal amount of senior subordinated notes, (3) repay $20.5 million principal amount of our subordinated notes at a repurchase price of approximately $23.2 million, and (4) pay approximately $16.0 million of related fees and expenses. The remainder of the proceeds, consisting of approximately $0.3 million, were used for general corporate purposes. The offering of the old notes, the entry into our new credit facility and the use of the net proceeds from the offering of the old notes and borrowings under our new credit facility, as discussed above, are referred to collectively herein as the “Refinancing Transactions.”

 

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Index to Financial Statements

CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization at June 30, 2003 (i) on an actual basis and (ii) as adjusted to give effect to the Refinancing Transactions. This table should be read together with the other financial information appearing elsewhere in this prospectus.

 

     June 30, 2003

 
     Actual

     As Adjusted

 
     (dollars in thousands)  

Cash and cash equivalents

   $ 334      $ 14,671 (1)
    


  


Long-term debt, including current portion

                 

Credit facility

     285,085        191,000  

Notes offered hereby(2)

     —          159,057  

Existing senior subordinated notes

     12,000        —    

Existing subordinated notes

     40,888        20,444  
    


  


Total long-term debt, including current portion

     337,973        370,501  

Redeemable preferred stock

     154,935        154,935  

Total shareholders’ net capital deficiency

     (40,152 )      (45,755 )(3)
    


  


Total capitalization

   $ 452,756      $ 479,681  
    


  



(1) $1 million will be used for the repurchase of shares of common stock from a member of management (see “Certain Relationships and Related Transactions”).
(2) Reflects proceeds from the issuance of $160 million in notes less the original issue discount of $943,000.
(3) Reflects the write-off of deferred financing costs related to our prior credit facility in the amount of $3.8 million, net of tax. Also reflects fees of $1.8 million, net of tax, related to prepayment penalties associated with the retirement of a portion of our subordinated notes in connection with the Refinancing Transactions. It does not, however, reflect the payment that may be made subsequent to June 30, 2003 to repurchase 400,000 shares of our Class A common stock held by our chief executive officer pursuant to an agreement he entered into with us (see “Certain Relationships and Related Transactions”).

 

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Index to Financial Statements

SELECTED HISTORICAL FINANCIAL DATA

 

The following table presents our selected historical financial data for each of the five fiscal years in the period ended June 30, 2003 and selected historical balance sheet data as of June 30, 1999, 2000, 2001, 2002 and 2003. The selected historical financial data as of June 30, 1999, 2000, 2001, 2002 and 2003 and for each of the five fiscal years ended June 30, 2003 have been derived from our financial statements, which have been audited by Ernst & Young LLP, independent auditors. The following financial information should be read in conjunction with our financial statements, and the related notes to those statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     Fiscal Year Ended June 30,

 
     1999(1)

    2000

    2001

    2002

    2003

 
     Restated(2)

    Restated(2)

    Restated(2)

    Restated(2)

       
     (dollars in thousands)  

Results of Operations Data:

                                        

Revenues

   $ 49,837     $ 82,046     $ 100,198     $ 111,339     $ 126,406  

Cost of services

     6,371       10,472       11,819       13,522       14,592  
    


 


 


 


 


Gross profit

     43,466       71,574       88,379       97,817       111,814  

Selling, general and administrative

     11,045       15,660       17,979       20,570       23,014  

Depreciation

     668       1,297       1,634       1,923       2,067  

Amortization(3)

     15,544       29,112       38,423       45,968       54,885  
    


 


 


 


 


Operating income

     16,209       25,505       30,343       29,356       31,848  

Interest expense

     11,757       22,064       27,951       20,941       23,268  

Other expense

     —         —         —         504       —    
    


 


 


 


 


Income before income taxes

     4,452       3,441       2,392       7,911       8,580  

Provision for income taxes

     1,661       1,275       893       3,024       3,383  
    


 


 


 


 


Net income

   $ 2,791     $ 2,166     $ 1,499     $ 4,887     $ 5,197  
    


 


 


 


 


Preferred dividends accrued(4)

   $ (1,412 )   $ (2,940 )   $ (4,603 )   $ (15,020 )   $ (18,457 )

Accretion of redeemable convertible preferred stock discount

     (31 )     (102 )     (114 )     (193 )     (214 )

Issuance of Series C-1 preferred stock to Series C preferred shareholders

     —         —         (4,950 )     —         —    
    


 


 


 


 


Net income (loss) available to common shareholders

   $ 1,348     $ (876 )   $ (8,168 )   $ (10,326 )   $ (13,474 )
    


 


 


 


 


Other Operating and Financial Data:

                                        

Subscriber accounts owned at period end(5)

     213,397       265,816       304,360       335,390       389,905  

Subscriber accounts purchased(6)

     68,990       82,197       78,248       71,755       97,486  

Purchases of subscriber accounts(5)(6)

   $ 72,459     $ 93,290     $ 92,859     $ 79,276     $ 106,521  

Cash flow from operating activities

     16,839       27,694       37,103       48,263       60,029  

Cash flow from financing activities

     128,211       66,826       58,531       33,404       47,988  

Cash flow from investing activities

     (144,724 )     (94,938 )     (95,683 )     (81,654 )     (107,700 )

EBITDA(7)

     32,421       55,914       70,400       76,743       88,800  

Capital expenditures

     2,265       1,648       2,824       2,378       1,179  

Ratio of earnings to fixed charges(8)

     1.39x       1.16x       1.09x       1.38x       1.38x  
     As of June 30,

 
     1999

    2000

    2001

    2002

    2003

 
     Restated(2)

    Restated(2)

    Restated(2)

    Restated(2)

       
     (dollars in thousands)  

Balance Sheet Data:

                                        

Cash and cash equivalents

   $ 471     $ 53     $ 4     $ 17     $ 334  

Working capital (deficit)

     (9,328 )     (7,917 )     (28,028 )     (6,667 )     (11,840 )

Total assets

     242,957       307,936       368,560       412,891       471,991  

Total debt

     191,674       259,731       269,631       288,785       337,973  

Redeemable preferred stock, including accrued dividends

     39,021       42,055       101,198       136,264       154,935  

Total shareholders’ net capital deficiency

     (7,312 )     (8,190 )     (16,357 )     (26,678 )     (40,152 )

(1) Our results of operations for fiscal 1999 include the acquisition of approximately 60,000 subscriber accounts from Dealer’s Monitoring Acceptance Corporation (“DMAC”) on March 9, 1999.

 

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Index to Financial Statements
(2) We restated our financial statements for the fiscal years ended June 30, 1999, 2000, 2001 and 2002 to properly record deferred revenue related to billings to our subscribers.The restatements reduced previously reported revenues and net income for fiscal 1999, 2000, 2001 and 2002 as follows:

 

     1999

   2000

     Previously
Reported


   Adjustment

    Adjusted
Balance


   Previously
Reported


   Adjustment

    Adjusted
Balance


     (dollars in thousands)    (dollars in thousands)

Revenue

   $ 50,491    $ (654 )   $ 49,837    $ 82,831    $ (785 )   $ 82,046

Net Income

   $ 3,196    $ (405 )   $ 2,791    $ 2,653    $ (487 )   $ 2,166
     2001

   2002

     Previously
Reported


   Adjustment

    Adjusted
Balance


   Previously
Reported


   Adjustment

    Adjusted
Balance


     (dollars in thousands)    (dollars in thousands)

Revenue

   $ 100,799    $ (601 )   $ 100,198    $ 111,881    $ (542 )   $ 111,339

Net Income

   $ 1,872    $ (373 )   $ 1,499    $ 5,223    $ (336 )   $ 4,887

 

(3) Primarily represents the amortization of subscriber accounts and goodwill. We capitalize all direct external costs associated with the purchase of subscriber accounts and amortize them over ten years on a straight line basis. In addition, as part of previous acquisitions including DMAC, we began amortizing goodwill. Effective July 1, 2001, with the adoption of Statement of Financial Accounting Standards No. 142, the Company no longer amortizes goodwill. For fiscal years 1999, 2000 and 2001, $46,905, $228,225 and $773,000, respectively, of our amortization expense related to the amortization of goodwill.
(4) We are currently accruing cumulative dividends on each series of our preferred stock at varying rates, but our ability to pay these dividends in cash will be limited by the terms of the notes.
(5) Does not include non-owned accounts for which we provide third-party contract monitoring services to independent dealers.
(6) Purchase of subscriber accounts in fiscal 1999 excludes our acquisition of approximately 60,000 subscriber accounts from DMAC.
(7) EBITDA represents earnings before interest, taxes, depreciation and amortization (including the amortization of subscriber accounts). EBITDA is a key performance measure used in the security alarm monitoring industry and is one of the financial measures, subject to adjustments, by which our covenants are calculated under the agreements governing our debt obligations. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, should not be construed as an alternative to net income and is indicative neither of our operating performance nor of cash flows available to fund all of our cash needs. Set forth below is the calculation of EBITDA and the reconciliation of EBITDA to net income and cash flow from operating activities:

 

     Fiscal Year Ended June 30,

 
     1999

    2000

    2001

    2002

    2003

 
     Restated(2)

    Restated(2)

    Restated(2)

    Restated(2)

       
     (dollars in thousands)  

Net income

   $ 2,791     $ 2,166     $ 1,499     $ 4,887     $ 5,197  

Interest expense

     11,757       22,064       27,951       20,941       23,268  

Provision for income taxes

     1,661       1,275       893       3,024       3,383  

Depreciation

     668       1,297       1,634       1,923       2,067  

Amortization

     15,544       29,112       38,423       45,968       54,885  
    


 


 


 


 


EBITDA

   $ 32,421     $ 55,914     $ 70,400     $ 76,743     $ 88,800  

Interest expense less amortization

     (11,457 )     (21,641 )     (27,428 )     (19,736 )     (21,491 )

Change in current assets and liabilities

     (633 )     (1,758 )     (549 )     516       2,149  

Current income taxes and other

     (3,492 )     (4,821 )     (5,320 )     (9,260 )     (9,429 )
    


 


 


 


 


Cash flow from operating activities

   $ 16,839     $ 27,694     $ 37,103     $ 48,263     $ 60,029  
    


 


 


 


 


 

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Index to Financial Statements
(8) For purposes of computing the ratio of earnings to fixed charges, earnings consist of income before income taxes for such period plus fixed charges deducted in calculating income before income taxes for such period. Fixed charges consist of interest incurred, amortization of deferred financing costs, and an amount representing the interest factor included in rental expense. On a pro forma basis, for the year ended June 30, 2003, earnings would have been insufficient to cover fixed charges by $4.0 million.

 

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Table of Contents
Index to Financial Statements

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

We are a leading national provider of security alarm monitoring services. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Historical Financial Data” and our financial statements, and the related notes to those financial statements, included elsewhere in this prospectus. Those statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical in nature should be considered to be forward-looking statements that are inherently uncertain. See “Forward-Looking Statements.”

 

Overview

 

Nearly all of our revenues are derived from monthly recurring revenues under security alarm monitoring contracts purchased from independent dealers in our exclusive nationwide network. Our alarm monitoring contracts generally have an initial term of three years, generally allow for periodic price increases and provide for automatic renewals for a fixed period (typically one year) unless we or the subscriber elect not to renew the contract. Revenues are recognized as the related monitoring services are provided. Other revenues are derived primarily from the provision of third-party contract monitoring services and from field technical repair services.

 

Cost of services primarily consists of direct labor associated with monitoring and servicing subscriber accounts and expenses related to field technical repair services. Selling, general and administrative expenses primarily includes the cost of personnel conducting sales and administrative activities and other costs related to sales, administration and operations. All direct external costs associated with the purchase of subscriber accounts are capitalized and amortized over ten years on a straight-line basis. Internal costs, including all personnel and related support costs incurred solely in connection with subscriber account acquisitions and transitions, are expensed as incurred.

 

Restatement of Prior Year Financial Statements

 

We have restated our historical financial statements to properly record deferred revenue related to billings to our subscribers. The restatements reduced previously reported revenues and net income for fiscal 2002 and 2001 as follows:

 

     2002

   2001

     (dollars in thousands)    (dollars in thousands)
    

Previously

Reported


   Adjustment

    

Adjusted

Balance


  

Previously

Reported


   Adjustment

     Adjusted
Balance


Revenue

   $ 111,881    $ (542 )    $ 111,339    $ 100,799    $ (601 )    $ 100,198

Net Income

   $ 5,223    $ (336 )    $ 4,887    $ 1,872    $ (373 )    $ 1,499

 

The restatement has not caused us to be in default under our credit agreement. Moreover, we believe that recording deferred revenue in the future as described above will not materially affect our ability to comply with our financial covenants under our credit agreement or to incur indebtedness under the indenture governing our senior subordinated notes.

 

Attrition

 

We purchase subscriber contracts from our exclusive network of independent dealers. These contracts with our subscribers are typically three-year non-cancelable contracts with an automatic annual renewal provision. A portion of our subscriber base can be expected to cancel its service every year. Subscribers may choose not to renew or terminate their contract for a variety of reasons, including relocation, cost, switching to our competitors’ service, and service issues. A majority of canceled accounts result from subscriber relocation or the inability to contact the subscriber.

 

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Index to Financial Statements

Account cancellation, otherwise referred to as subscriber attrition, has a direct impact on the number of subscribers we serve and hence our financial results, including revenues, operating income and cash flow. We define our attrition rate as the number of canceled accounts in a given period divided by the average of the beginning and ending balance of subscribers for that period. We consider an account canceled when a subscriber terminates in accordance with the terms of the contract or if payment from the subscriber is deemed uncollectible. We adjust the number of canceled accounts by excluding those that are contractually guaranteed by our dealers. Our typical dealer contract provides that if a subscriber cancels in the first year of its contract, the dealer must replace the lost monthly revenue attributable to the canceled contract and either replace the canceled account with a new one or refund our purchase price. To help ensure the dealers’ obligation to us, we typically holdback approximately 10% of the purchase price for every account we purchase. In some cases, the amount of the purchase holdback may be less than actual attrition experience. In recent years, a substantial portion of the accounts that canceled within this initial 12-month period were replaced by the dealers at no additional cost to us.

 

The table below presents subscriber data for the last three fiscal years.

 

     Fiscal Year Ended June 30,

 
     2001

    2002

    2003

 

Beginning balance of accounts

   265,816     304,360     335,390  

Accounts purchased(1)

   78,248     71,755     97,486  

Accounts canceled(1)

   (39,704 )   (40,725 )   (42,971 )

Ending balance of accounts

   304,360     335,390     389,905  

Attrition rate

   13.9 %   12.7 %   11.8 %

(1) Net of canceled accounts that are contractually guaranteed by the dealer.

 

We also analyze our attrition by classifying our accounts into annual pools based on the year of purchase. We then track the number of accounts that cancel as a percentage of the initial number of accounts purchased for each pool for each year subsequent to its purchase. Based on the average cancellation rate across our pools, we achieve nearly 0% attrition in the first year net of canceled accounts that are contractually guaranteed by the dealers. In the next three years, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool gradually increases and historically has peaked between the third and fourth years. The peak between the third and fourth years is primarily a result of the buildup of subscribers that moved or no longer had need for the service prior to the third year but did not cancel their service until the end of their three-year contract. After the fourth year, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool declines every year. As a result, we believe our attrition rate decreases as the age of our accounts increase. Our pool analysis also indicates that, on average, over 30% of each pool remains by the end of the tenth year.

 

Results of Operations

 

The following table sets forth operating results and certain operating data as a percentage of revenues for the periods indicated.

 

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Index to Financial Statements
       Fiscal Year Ended June 30,

 
       2001

    2002

    2003

 
       (percentage of revenues)  

Revenue

     100 %   100 %   100 %

Cost of services

     12     12     12  
      

 

 

Gross profit

     88     88     88  

Selling, general and administrative expense

     18     19     18  

Depreciation

     2     2     2  

Amortization

     38     41     43  
      

 

 

Operating income

     30     26     25  

Interest expense

     28     19     18  

Other expense

     —       —       —    
      

 

 

Income before other expense

     2     7     7  

Provision for income taxes

     1     3     3  
      

 

 

Net income

     1 %   4 %   4 %
      

 

 

 

Fiscal 2003 Compared to Fiscal 2002

 

Revenues. Total revenues increased $15.1 million, or 14%, to $126.4 million in fiscal year 2003 from $111.3 million in fiscal year 2002. This increase was primarily attributable to an increase in the number of subscriber accounts to 389,905 as of June 30, 2003 from 335,390 as of June 30, 2002.

 

Cost of services. Cost of services increased $1.1 million, or 8%, to $14.6 million in fiscal 2003 from $13.5 million in fiscal 2002. As a percentage of revenues, cost of services remained at 12% in fiscal 2003 and 2002.

 

Selling, general and administrative. Selling, general and administrative (“SG&A”) increased $2.4 million, or 12%, to $23.0 million in fiscal 2003 from $20.6 million in fiscal 2002. As a percentage of revenues, SG&A decreased to 18% in fiscal 2003 from 19% in fiscal 2002. This decrease was primarily attributable to operating efficiencies realized by spreading additional revenues over a relatively fixed cost base. For fiscal 2003 the provision for uncollectible accounts was $4.1 million or 3.2% of revenue compared to $2.5 million or 2.2% of revenue in fiscal 2002. The increase as a percentage of revenue was primarily the result of a third-party collection vendor declaring bankruptcy and the resulting disruption to the collection process and loss of unremitted funds collected by the third-party collection vendor.

 

Amortization. Amortization of intangibles increased $8.9 million, or 19%, to $54.9 million in fiscal 2003 from $46.0 million in fiscal 2002. The increase was attributable to growth in our purchased subscriber accounts through our authorized dealer program.

 

Interest expense. Interest expense increased $2.3 million, or 11%, to $23.2 million in fiscal 2003 from $20.9 million in fiscal 2002. The increase is primarily due to the increase in our average long-term debt outstanding throughout the year incurred to fund our purchase of accounts.

 

Net income. Net income increased $0.3 million, or 6%, to $5.2 million in fiscal 2003 from $4.9 million in fiscal 2002. The increase was primarily attributable to the increase in revenues that resulted from the increase in our subscriber accounts.

 

Fiscal 2002 Compared to Fiscal 2001

 

Revenues. Total revenues increased $11.1 million, or 11%, to $111.3 million in fiscal 2002 from $100.2 million in fiscal 2001. This increase was primarily attributable to an increase in the number of subscriber accounts to 335,390 as of June 30, 2002 from 304,360 as of June 30, 2001.

 

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Index to Financial Statements

Cost of services. Cost of services increased $1.7 million, or 14%, to $13.5 million in fiscal 2002 from $11.8 million in fiscal 2001. As a percentage of revenues, cost of services remained at 12% in fiscal 2002 and 2001.

 

Selling, general and administrative expense. SG&A increased $2.6 million, or 14%, to $20.6 million in fiscal 2002 from $18.0 million in fiscal 2001. As a percentage of revenues, SG&A increased to 19% in fiscal 2002 from 18% in fiscal 2001.

 

Amortization. Amortization of intangibles increased $7.6 million, or 20%, to $46.0 million in fiscal 2002 from $38.4 million in fiscal 2001. The increase was primarily attributable to growth in our purchased subscriber accounts through our authorized dealer program, partially offset by the elimination of goodwill amortization for fiscal 2002 ($773,000 in fiscal 2001).

 

Interest expense. Interest expense decreased $7.0 million, or 25%, to $21.0 million in fiscal 2002 from $28.0 million in fiscal 2001. The decrease was primarily due to lower average interest rates for borrowings in fiscal 2002 as compared to fiscal 2001.

 

Net income. Net income increased $3.4 million, or 227%, to $4.9 million in fiscal 2002 from $1.5 million in fiscal 2001. The increase was principally attributable to favorable interest rates for borrowings in fiscal 2002 as compared to fiscal 2001.

 

Liquidity and Capital Resources

 

General. Our operating strategy requires the availability of significant funds to finance growth through subscriber account purchases. Additional cash requirements include debt service and capital expenditures. We have financed our growth from a combination of long-term borrowings, issuance of preferred stock and cash flows provided by operations.

 

For the fiscal years ended 2003, 2002 and 2001, we had working capital deficits of $11.8 million, $6.7 million and $28.0 million respectively. Our working capital deficits were primarily due to purchase holdbacks and deferred revenues for fiscal 2003 and 2002. For fiscal 2001, our working capital deficit was primarily due to purchase holdbacks, deferred revenues and the current portion of long-term debt. See “Business—Operations” for a discussion of purchase holdbacks.

 

Net cash provided by operating activities for fiscal 2003 was $60.0 million, as compared to $48.3 million for fiscal 2002 and $37.1 million for fiscal 2001. The significant increase in cash provided by operating activities for fiscal 2003 and 2001 primarily resulted from growth in our subscriber base and the resulting increased revenues.

 

For fiscal 2002 the significant increase in cash provided by operating activities primarily resulted from growth in our subscriber base and lower interest expense.

 

Net cash used in investing activities for fiscal 2003 was $107.7 million, compared to $81.7 million for fiscal 2002 and $95.7 million for fiscal 2001. For fiscal 2003, 2002 and 2001, capital expenditures were $1.2 million, $2.4 million and $2.8 million, respectively. Capital expenditures were primarily for our equipment for our central monitoring station, telephone systems, computer systems and refurbishment of offices. Annual capital expenditures are expected to vary based on the growth of our subscriber account base. Purchases of subscriber accounts consist of all direct external payments associated with the purchase of subscriber accounts. The portion of the purchase holdback paid to dealers at the end of the guarantee period is included in this amount when paid. For fiscal 2003, we significantly increased account purchases through our nationwide dealer program. For fiscal 2003, 2002, and 2001, purchases of subscriber accounts were $106.5 million, $79.3 million and $92.9 million. During fiscal 2002, we slowed our account acquisition program in advance of a recapitalization.

 

Our net cash provided by financing activities for fiscal 2003 was $48.0 million, compared to $33.4 million for fiscal 2002 and $58.5 million for fiscal 2001.

 

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Under our prior credit facility, for fiscal 2003, 2002 and 2001 we had borrowings of $74.4 million, $42.2 million and $59.9 million, respectively. Repayments for fiscal 2003, 2002 and 2001 were $26.1 million, $63.0 million and $50.0 million, respectively. As of June 30, 2003, we had $285.1 million of revolving loans outstanding under our prior credit facility, bearing interest at a weighted average rate for the year ending June 30, 2003, of approximately 5.4% per annum and we had approximately $44.4 million in borrowing availability under our prior revolving credit line. In addition, as of June 30, 2003 we had $52.9 million in principal amount outstanding of senior subordinated and subordinated notes.

 

Since inception we have raised approximately $106.8 million of gross cash proceeds from the issuance of 10.7 million shares of preferred stock to private investors. These equity funds have been utilized to fund the growth of operations and assist with acquisitions. We are obligated to accrue cumulative dividends on each series of our preferred stock at varying rates, but we are prohibited from paying these dividends under the terms of our credit facility and the indenture governing the notes if an event of default exists or would result from such payment. Accordingly, we do not expect to pay any of the dividends over the next one to three years.

 

On August 25, 2003, we issued $160.0 million of senior subordinated notes at 11.75% with a maturity date of September 1, 2010. Interest payments are to be made semi-annually in cash in arrears on March 1 and September 1 of each year beginning on March 1, 2004. Further, we entered into a new credit facility agreement comprised of a $175.0 million term loan that matures in 2009 and a $145.0 million revolving credit facility that matures in 2008. Payments under the term loan are payable in quarterly installments from December 31, 2003 through June 30, 2009. The quarterly payment is calculated based upon the amount of the original facility multiplied by 0.25% for the quarters ended December 31, 2003 through September 30, 2006, 1.25% for the quarters ended December 31, 2006 through September 30, 2007 and 3.00% for the quarters ended December 31, 2007 through June 30, 2009 with the remaining balance due at maturity. We used the borrowings primarily to repay our prior credit facility, to repay all of our $12 million senior subordinated notes, and to repurchase $20.5 million principal amount of our subordinated notes at a repurchase price of approximately $23.2 million. As a result of the repayments, we expensed our previously capitalized deferred financing costs totaling $6.0 million. The maturity date of our remaining subordinated notes was extended to March 1, 2010.

 

We will require substantial cash flow to fully implement our business strategy and meet our principal and interest obligations with respect to the notes and our other indebtedness. We anticipate that cash flow generated from operations, together with the net proceeds from the offering of our senior subordinated notes in August 2003 and borrowings under our new credit facility, will provide sufficient liquidity to fund these requirements for the foreseeable future. However, our ability to meet our debt service and other obligations depends on our future performance, which in turn is subject to general economic conditions and other factors, certain of which are beyond our control. If we are unable to generate sufficient cash flow from operations or otherwise to comply with the terms of the indenture governing the senior subordinated notes or our other debt instruments, we may be required to refinance all or a portion of our existing debt or obtain additional financing. Further, the agreements or indentures governing our new credit facility, our senior subordinated notes and subordinated notes contain financial covenants relating to capital expenditure limits, maximum total debt to annualized quarterly EBITDA, maximum total senior debt to annualized quarterly EBITDA, interest coverage and fixed charge coverage that may impact our ability to refinance all or a portion of our existing debt or obtain additional financing.

 

Scheduled maturities (as defined) of long-term debt at June 30, 2003, utilizing the required payment schedule of the senior subordinated notes and our new credit facility, are as follows (dollars in thousands):

 

Contractual Cash Commitments


   2004

   2005

   2006

   2007

   2008

   Thereafter

   Total

Long-Term Debt Obligations

   $ 1,313    $ 1,750    $ 1,750    $ 7,000    $ 17,937    $ 308,223    $ 337,973

Operating Lease Obligations

   $ 501    $ 493    $ 262    $ 23    $ —      $ —      $ 1,279
    

  

  

  

  

  

  

Total

   $ 1,814    $ 2,243    $ 2,012    $ 7,023    $ 17,937    $ 308,223    $ 339,252
    

  

  

  

  

  

  

 

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Critical Accounting Policies

 

Our discussion and analysis of results of operations and financial condition are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”). The preparation of financial statements in accordance with GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. We base our estimates and assumptions on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions are evaluated on an ongoing basis. Due to the nature of certain assets and liabilities, there are uncertainties associated with some of the judgments, assumptions and estimates which are required to be made. Reported results could have been materially different under a different set of assumptions and estimates for certain accounting principle applications.

 

Note 1 of the notes to our financial statements included elsewhere in this prospectus includes a summary of significant accounting policies and methods used in the preparation of financial statements. The following is a brief description of the more significant accounting policies and methods.

 

Long Lived Assets—Subscriber Accounts. Subscriber accounts relate to the cost of acquiring portfolios of monitoring service contracts from independent dealers. The subscriber accounts are recorded at cost. All direct external costs associated with the purchase of subscriber accounts are capitalized. Internal costs, including all personnel and related support costs, incurred solely in connection with subscriber account acquisitions and transitions are expensed as incurred. The cost of subscriber account pools are amortized using the straight line method over a 10-year period.

 

In October 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS 121 and Accounting Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves implementation issues related to SFAS 144. In accordance with SFAS 144, management reviews the subscriber accounts for impairment or a change in amortization period whenever events or changes indicate that the carrying amount of the asset may not be recoverable or the life should be shortened. If management determines that an impairment has occurred, it writes the subscriber accounts down to their fair value.

 

The determination of amortization of subscriber accounts is based on historical performance of our subscriber base. The realizable value and remaining useful lives of these assets could be impacted by changes in subscriber attrition rates, which could have an adverse effect on our earnings.

 

Other amortization methodologies could include utilization of a different amortization period or application of an accelerated amortization method. For example, if we use an accelerated amortization method such as the double-declining balance method to amortize our subscriber accounts, it could result in increased amortization expense, a reduction in our net income and a lower carrying value for subscriber accounts on our balance sheet.

 

Income Taxes and Deferred Tax Assets. As part of preparing our financial statements, significant management judgment is required in determining our provision for income taxes and our deferred tax assets and liabilities. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, especially the amortization of subscriber accounts, which are amortized using a 10-year straight-line method for financial reporting purposes and are amortized using a 15-year straight-line method for tax purposes. These differences have resulted in deferred tax assets totaling $23.4 million at June 30, 2003.

 

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Since there is no absolute assurance that these assets will be ultimately realized, management periodically reviews our deferred tax position to determine if it is more likely than not that such assets will be realized. Such periodic reviews include, among other things, the expected timing when certain assets will be realized and our expected future earnings. If, after conducting such a review, management determines that the realization of the tax asset does not meet the “more-likely-than-not” criteria, an offsetting valuation allowance is recorded, thereby reducing net earnings and the deferred tax asset in that period. No valuation allowance has been established because of the expectation that it is more likely than not that these deferred tax assets will be realized.

 

Goodwill. As of June 30, 2003 we had goodwill of $14.8 million, which represents 3.1% of our total assets. We test goodwill annually for impairment and record an impairment charge if the carrying amount exceeds the fair value. We use a discounted cash flow approach as well as other methods to determine the fair value used in our test for impairment of goodwill. The results of this methodology depend upon a number of estimates and assumptions relating to cash flows, discount rates and other matters. Accordingly, such testing is subject to certain uncertainties, which could cause the fair value of goodwill to fluctuate from period to period.

 

We performed our annual goodwill impairment analysis as of June 2003. This analysis used a fair-value based approach and resulted in no impairment of goodwill. In the event that we are not able to achieve expected cash flow levels, or other factors indicate that goodwill is impaired, we may need to write off all or part of our goodwill, which would adversely impact our operating results and financial position.

 

Quantitative and Qualitative Disclosures About Market Risk

 

We have interest rate risk, in that borrowings under our prior credit facility were, and borrowings under our new credit facility will be, based on variable market interest rates. To control our exposure to interest rates under the prior facility, we utilized interest rate caps as required by our prior credit facility. As of June 30, 2003, these interest rate caps provided that the interest rate on approximately $145 million of borrowings under our existing credit facility cannot exceed an interest rate of 10%. A hypothetical 10% increase in our prior credit facility’s weighted average interest rate of 5.4% for the year ending June 30, 2003 would correspondingly decrease our earnings and operating cash flows by approximately $1.4 million.

 

Our privately issued $12 million senior subordinated notes and $40 million subordinated notes have a fixed interest rate of 12% and 13.5%, respectively, but have exposure to changes in the debt’s fair value. On August 25, 2003, we repaid in full our $12 million senior subordinated notes and paid $20.5 million aggregate principal amount of our $40 million subordinated notes.

 

Recent Accounting Pronouncements

 

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in an entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. We are still evaluating whether the adoption of FIN 46 will have a material impact on our financial position or on our results of operations.

 

In May 2003, the FASB issued Financial Accounting Standards No. 150 (“SFAS 150”)—“Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS 150 established standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first fiscal period

 

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beginning after December 15, 2003 and must be applied prospectively by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS 150 and still existing at the beginning of the interim period of adoption. Upon adoption of SFAS 150, we may be required to reclassify our redeemable preferred stock to a long-term liability as “Shares Subject to Mandatory Redemption” on the balance sheet. Issuance costs previously recognized as a reduction of the carrying amount of the redeemable preferred shares would then be reclassified to a deferred charge on the balance sheet in accordance with the standard. After the initial period of adoption, preferred stock dividends would be classified as interest expense on the statement of income.

 

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BUSINESS

 

Overview

 

We are a leading national provider of security alarm monitoring services, with the ability to monitor signals from nearly all types of security systems. We monitor signals arising from burglaries, fires and other events for over 389,000 subscribers under contracts that are typically three years in duration and have automatic annual renewal provisions. Through these contracts, our high quality subscriber base provides us with high margin, monthly recurring revenues that result in predictable and stable cash flow. Our business model differentiates us from other security alarm companies. We utilize our exclusive nationwide dealer network to sell and install the security systems we monitor. We purchase monitoring contracts from these dealers and provide our subscribers with a full spectrum of security alarm services including monitoring services, customer service and technical support. We dispatch our dealers to provide on-site technical service to subscribers, which they require, on average, only once every six years due to our ability to resolve a significant percentage of our subscribers’ technical inquiries over the telephone. For the fiscal year ended June 30, 2003, we generated revenues of $126.4 million, operating income of $31.8 million and EBITDA of $88.8 million, representing an EBITDA margin of 70.3%. See footnote 7 of “Selected Historical Financial Data” for a discussion of EBITDA.

 

We purchase monitoring contracts from our dealer network only after a comprehensive examination of the dealers, the subscribers and the contracts. We conduct thorough due diligence on our dealers to ensure we are partnering with reliable dealers that can consistently provide us with high quality accounts. We perform extensive due diligence on our subscribers to maintain our high quality subscriber base. Our subscribers are geographically diversified in 46 states and are primarily homeowners, whom we believe are more likely than renters to maintain long-term accounts with us. We believe our rigorous account acquisition due diligence process results in a subscriber base that is less likely to terminate monitoring contracts with us, thereby improving contract life and lowering attrition. We also believe that we maximize retention of our subscribers through our dedication to providing our high quality subscriber base with high quality customer service.

 

Our contracts with our dealers and subscribers result in a stable, recurring revenue base. We have exclusive agreements with over 400 dealers in more than 40 states. Through these agreements, we typically have rights of first refusal to purchase all monitoring contracts sold by the dealers for three years. Our subscriber contracts are typically three years in duration, have automatic annual renewal provisions and allow for periodic rate increases. To protect us against the loss of the investment associated with acquiring subscriber accounts, we require our dealers to guarantee the accounts against cancellations, typically for a period of 12 months following the date of purchase. If an account is canceled during the guarantee period, the dealer must compensate us for the lost monthly recurring revenue and either replace the account or refund the purchase price associated with the account. To help ensure the dealers’ obligations under the guarantee, we typically withhold a portion of the purchase price of each contract we purchase.

 

According to Security Distribution & Marketing, or SDM, a leading industry journal, the electronic security market, which consists of the sale, installation, servicing and monitoring of security systems, generated total revenues of approximately $22.4 billion in 2002, an increase of 9.7% from 2001. Total industry revenues have increased in each of the last 11 years and have grown at an annual rate of 7.4% in that period. Monitoring services accounted for approximately $3.8 billion, or 17.0%, of total industry revenue in 2002. We believe that a number of factors have contributed to this increase, including heightened concern about crime, discounts given by insurance companies to homeowners with security systems, the installation of security systems as part of new home construction, the aging of the population in general and an increase in the number of two-income families resulting in more children being left at home alone. In addition, we believe industry revenues will continue to grow in weak economic times because of the increased crime levels that are generally experienced in those periods and the minimal net cost of owning a security system after accounting for the lower premiums charged by insurance companies. Despite the steady growth of the security industry and increased demand for security services, the percentage of homes with dealer-installed security systems was only 18% in 2001 according to the

 

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2001 Home Security Forecast by Parks Associates, an independent market research and consulting firm. Parks Associates estimates that the penetration rate of dealer-installed security systems will increase to 31% by 2009. However, because of the growth in new homes built over that period, the number of homes without monitored security systems is projected to drop by only approximately 1% on a compounded annual basis. As a result, despite a substantial increase in the penetration rate, the size of our potential market will remain significant.

 

Our Strengths

 

We believe our focused business model differentiates us from other security alarm companies. We focus on providing monitoring services to our subscribers, which we believe is a higher margin business than selling and installing security alarm systems. Consequently, we are able to grow our subscriber base without employing a national sales and installation force. We also outsource on-site technical support to our dealer network, further reducing our cost structure and infrastructure requirements. Our differentiated business model results in recurring high margin revenue streams.

 

Predictable Recurring Revenue. For the twelve months ended June 30, 2003, approximately 97% of our revenues consisted of recurring monthly payments under security alarm monitoring contracts. Our contracts are typically three years in duration, have annual automatic renewal provisions and allow for periodic rate increases. Our dealer contracts provide that if a subscriber cancels prior to the initial twelve-month period of the contract, the dealer must replace the lost monthly revenue attributable to the canceled contract and either replace the lost account or refund our purchase price for the account.

 

Strong Cash Flow Generated By Subscribers. Once we acquire a subscriber contract, our recurring revenue streams generate strong cash flow as a result of our high EBITDA margins and the minimal capital expenditures they require. In the fiscal year ended June 30, 2003, our EBITDA margin was 70.3% and our capital expenditures were $1.2 million, not including our purchases of subscriber accounts. The contribution margin of a subscriber account, which represents revenue less direct costs, excluding sales, marketing and other corporate overhead costs, was in excess of 83% for the fiscal year ended June 30, 2003. We believe this strong cash flow is due to several factors:

 

  Our operations are focused on providing high margin monitoring services to subscribers. We utilize our dealer network to sell and install security alarm systems, which we believe is a lower margin business. As a result, we do not employ a large national sales and installation force.

 

  We have a proprietary centralized information system that has enabled us to satisfy 85% of our subscribers’ technical inquiries over the telephone. If a field service call is required, we outsource the service to a member of our national network of independent service dealers. Consequently, we avoid the costs associated with employing service technicians and maintaining the infrastructure required to provide these services ourselves.

 

  We provide all services, including monitoring, 24-hour telephone support, data entry, remote services and billing, from a single location. We believe this centralized operation allows us to maximize our economies of scale.

 

Highly Disciplined Account Acquisition Program. Since inception, we have implemented a disciplined account acquisition program focused on balanced growth, profitability and return on investment. The core of our account acquisition process is an extensive examination of every subscriber prior to acquisition, including a credit score report, proof of first month’s payment and, in substantially all cases, a telephonic survey of the subscriber’s satisfaction with its security system. We also conduct diligence on our dealers through a comprehensive six-step process to qualify them for participation in our program, including legal and background checks, as well as references from industry participants. We believe that this approach reduces the likelihood that a subscriber will terminate its contract with us, thereby maximizing retention of our subscribers and our return on investment.

 

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Industry Leading Customer Service. We believe we provide our high quality subscriber base with the highest quality service in our industry through our rapid response to alarm signals, fast handling of support calls and quick solutions to subscriber issues. We have developed a proprietary information system that quickly and accurately makes available to our operators a substantial amount of technical information regarding our subscribers and their security systems. This system enables us to resolve 85% of our subscribers’ technical requests over the telephone, resulting in quick customer service, fewer false alarms and higher subscriber satisfaction. To ensure we maintain our high quality customer service, our system tracks key factors that contribute to service quality such as response time and call duration. We also monitor the quality of our services with regular operator evaluations, customer satisfaction forms and follow-up quality assurance calls.

 

Proven Management Team. Many of our executive officers have been with us since our inception in 1994 and have significant prior experience in related industries. Many of our executive officers possess technical backgrounds, which we believe contribute to the highly analytical approach we have developed for analyzing accounts and dealers. The average experience of our executive officers in management positions is 24 years and average tenure with us is seven years.

 

Strong Equity Sponsorship. Private equity firms have invested over $105 million of equity in our company since 1994. These firms have an aggregate of over $5 billion under management. We believe that the financial support of these investors enabled us to focus on the growth of our company and the implementation of our business strategy.

 

Business Strategy

 

The key components of our operating strategy are listed below.

 

Maximize Subscriber Retention. We seek to maximize subscriber retention by continuing to acquire high quality accounts and to increase the average life of an account through the following initiatives:

 

  Maintain the high quality of our subscriber base by continuing to implement our highly disciplined account acquisition program;

 

  Continue to incentivize our dealers to sell us only high-quality accounts by requiring a twelve-month guarantee and purchase price holdback requirements;

 

  Continue to provide the highest level of customer service on the telephone and in the field; and

 

  Actively identify subscribers who are relocating, the number one reason for account cancellations, and target retention of such subscribers.

 

Maximize Economics of Business Model. As we continue to grow our subscriber base, we believe the attractiveness of our business model will increase. Due to the scalability of our operations and the fixed costs inherent in our cost structure, we believe our EBITDA margins will increase as these costs are spread over larger recurring revenue streams. We believe our EBITDA will also benefit from our continued efforts to increase subscriber retention rates and reduce response times, call duration and false alarms. In addition, we have begun requiring dealers to charge subscribers an alarm activation fee. This fee offsets the account purchase price we pay to the dealers thereby reducing our net account acquisition costs.

 

Expand Our Network of Dealers. To enter a new market or increase penetration in an existing market without incurring the costs of establishing a physical presence there, we plan to expand our dealer network by targeting dealers that can benefit from our dealer program services and who can generate high quality subscribers for us. We believe we are an attractive partner for dealers for the following reasons:

 

  We provide our dealers with a full range of services designed to assist them in all aspects of their business, including sales training, comprehensive on-line account access, detailed weekly account summaries, sales support materials and discounts on security system hardware purchased through our strategic alliances with security system manufacturers;

 

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  We allow individual dealers to retain local name recognition and responsibility for day-to-day sales and installation efforts, thereby supporting the entrepreneurial culture at the dealer level and allowing us to capitalize on the considerable local market knowledge, goodwill and name recognition of our dealers; and

 

  Because we do not install or sell security systems, we do not compete against the dealers from whom we purchase contracts.

 

Operations

 

Dealer Program

 

Our authorized independent dealers are typically single-location businesses that sell and install alarm systems but do not provide monitoring services. There are in excess of 14,000 independent dealers located throughout the U.S. We target those dealers that serve local markets and typically install 30 to 40 systems per month. These dealers focus on the sale and installation of security systems and generally do not monitor the systems due to the large capital expenditures required to build a monitoring station. These dealers typically outsource the monitoring function or sell the contracts to companies who have built monitoring stations. We have the ability to monitor signals from nearly all types of residential security systems. We generally enter into exclusive contracts with these dealers under which the dealers sell and install security systems and we have a right of first refusal to purchase the associated alarm monitoring contracts. We seek to attract dealers from throughout the U.S. rather than focusing on local or regional markets in order to maximize our revenues.

 

Our typical dealer contract is an exclusive contract with an initial term of three years and automatic successive one-year renewal periods. The purchase price that we pay for a subscriber account purchased from a dealer is primarily a function of the monthly recurring revenue generated by that account as well as several other factors, including:

 

  our prior experience with accounts purchased from the dealer;

 

  the number of accounts purchased; and

 

  the type of security equipment used by the subscriber.

 

To protect us against the loss of acquired subscriber accounts, we typically require the dealer to provide guarantees against cancellations, both on an account and revenue basis, for a period following the acquisition. Presently, the guarantee period is typically one year from the date of purchase. In addition to requiring a guarantee period from a dealer, we usually withhold a designated percentage of the purchase price when we purchase subscriber accounts from a dealer. If a subscriber account is canceled or stops regular payments during the guarantee period, a replacement subscriber account must be delivered by the dealer or a portion of the holdback amount is retained by us to offset the lost monthly recurring revenue and our initial investment in the defaulted subscriber account. At the end of the guarantee period, the dealer is paid the balance of the holdback amount or is liable for any deficit.

 

As part of our strategy, the independent dealer is responsible for the sale and installation of the security system, and we provide monitoring services and customer and technical support. Because we do not compete with our dealers for system sales, installations and services, our dealers have the ability to maintain their identity in their respective markets and generate additional revenues from add-on sales and repair services. We believe that the ability of a dealer to capitalize on our name recognition and reputation positively impacts a dealer’s ability to obtain referrals for additional subscribers.

 

We provide a full range of services designed to support the success of our dealers. In addition to providing sales and business training, we provide dealers with access to account information over the Internet, detailed electronic weekly reports summarizing account purchase activity and accurate and timely information concerning

 

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their account replacement status and financial position. See “Management Information Systems.” We provide dealers with standardized sales and monitoring contracts, window decals, yard signs and other sales support materials. This provides us with an opportunity to increase our brand name awareness by pairing the Monitronics name and logo with the dealers’ names.

 

Due Diligence

 

In evaluating the quality of potential participants in our dealer program, we conduct a due diligence review and analysis of each dealer. This process includes:

 

  lien searches and reference checks on the dealer; and

 

  a review of the dealer’s licensing status and creditworthiness.

 

We believe our profitability is largely dependent on the quality of the accounts we purchase. Once we approve a dealer for participation in our authorized dealer program, we conduct a review of the accounts to be purchased from the dealer. This process includes:

 

  subscriber credit reviews;

 

  telephone surveys to determine subscribers’ overall satisfaction with their security systems;

 

  proof of first month’s payment;

 

  an individual review of each alarm monitoring contract; and

 

  confirmation that the customer is a homeowner.

 

We also verify that each monitored system has been programmed to our central monitoring station prior to purchase.

 

Following our purchase of a subscriber account, the subscriber receives a letter from us explaining the sale and transition and providing brochures, service instructions, window decals and other materials with the Monitronics name. We believe that this activity reinforces and enhances subscriber identification with Monitronics as the service provider, increases Monitronics’ brand name recognition, helps to ensure timely payments to us during and immediately following the transition period and helps to maintain overall subscriber satisfaction.

 

Monitoring Services

 

Security systems include devices installed at subscribers’ premises that are designed to detect and react to various occurrences or conditions, such as an intrusion or the presence of fire or smoke. These devices are connected to an electronic control panel that communicates through telephone lines to our central monitoring station. In most security systems, control panels can identify the nature of the alarm and the areas within a home or building where the system was activated and can transmit this information to the central monitoring station. The basic security system sold and installed by our dealers varies, but may include protection of the front and back doors of a home, one or more accessible windows, one interior motion detection device, a control panel with the ability to communicate signals to our central monitoring station, a panic button, a siren, window decals and a yard sign. The subscriber may elect to purchase additional equipment from the dealer customized to the subscriber’s specific needs. Such equipment add-ons include additional perimeter and interior protection, fire protection devices (heat and smoke detectors), environmental protection devices (freeze sensors and water detectors), additional panic buttons, two way voice monitoring and home automation devices (lighting or appliance controls).

 

Our subscriber contracts have initial terms that are generally three years, and provide for automatic renewals for a fixed period (typically one year) unless either we or the subscriber elects not to renew the contract.

 

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We monitor all of our subscriber accounts at our central monitoring station in Dallas, Texas. The central monitoring station employs advanced telecommunications and computer systems that route incoming alarm signals and telephone calls to operators. Each operator is seated in front of a computer terminal that provides immediate information concerning the nature of the alarm signal, the subscriber whose alarm has been activated and the location of the alarm signal. After receiving an alarm signal, our operators follow standard procedures to notify the subscriber or take other appropriate action. If the situation requires, our operators contact local emergency service providers. We do not dispatch our own alarm response personnel to the subscriber’s premises.

 

Our central monitoring station can provide two-way voice monitoring in addition to standard alarm monitoring services. In the event of an alarm activation, two-way voice monitoring enables our operator to listen and speak to persons at the monitored premises from the service center through speakers and microphones located within the premises. This feature allows our personnel to verify if an emergency exists, to reassure the subscriber and, if needed, to expedite the response of local emergency service providers, even if the subscriber is unable to reach a telephone. Two-way voice monitoring capability also assists us in quickly determining if the alarm was activated inadvertently, thereby reducing the number of false dispatches and potential fees or penalties assessed by state and local jurisdictions against both the subscriber and us. We believe that we are one of the leading providers of two-way voice monitoring services in the country. At June 30, 2003, approximately 16% of our subscriber accounts used two-way voice monitoring services.

 

We also provide third-party contract monitoring services to independent dealers through our central monitoring station. These dealers retain ownership of the monitoring contracts but, because they do not have their own monitoring capability, they subcontract monitoring services to us. The dealers are responsible for every other aspect of the relationship with customers, including billing and field repair service. We provided third-party contract services for approximately 34,000 subscriber accounts as of June 30, 2003. For the fiscal year ended June 30, 2003, revenues from third-party contract monitoring services totaled $1.6 million, representing approximately 1.2% of our revenues. Our third-party contract monitoring service provides us with an additional source of revenues and prospective acquisition targets. Independent dealers who subcontract monitoring services to us are familiar with the quality of our monitoring and related services, an important consideration for a prospective seller of subscriber accounts.

 

Our central monitoring station is UL listed as a protective signaling service station. A central monitoring station earns and maintains a UL listing through a series of ongoing inspections and operational tests. UL specifications for protective signaling service stations include building integrity, back-up computer and power systems, adequate staffing and standard operating procedures. In many jurisdictions, applicable law requires the security alarms for certain buildings to be monitored by a UL listed facility. In addition, such listing is required by certain commercial subscribers’ insurance companies as a condition to insurance coverage or by residential subscribers’ insurance companies as a requirement for insurance discounts. Our telephone systems utilize high capacity, high quality, digital circuits backed up by conventional telephone lines.

 

Our central monitoring station operates 24 hours per day, 365 days a year. Each operator completes 80 hours of formal classroom training provided by us at our headquarters. This training is designed to teach the operator the proper operating procedures to respond to alarms and to familiarize the operator with the software used to monitor security systems, types of signals received and types of security systems commonly installed in subscribers’ homes and businesses. Upon completion of classroom training, operators must pass an examination administered by us before beginning a 90-day supervised on-the-job training program.

 

Customer and Technical Service

 

We believe that we can increase customer satisfaction and retention by directly controlling customer and technical service. We maintain a national customer service center at our headquarters to handle all general

 

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inquiries from subscribers, including those related to subscriber information changes, basic alarm troubleshooting, alarm verification, technical service requests and requests to enhance existing services. Customer service representatives also respond to dealer inquiries relating to subscriber accounts previously purchased or being contractually monitored by us.

 

To ensure that technical service requests are handled promptly and professionally, all requests for service are routed through the customer service center. Customer service representatives who are trained in the operation of installed security systems listen to the customer and determine the proper action to be taken. If the problem cannot be resolved by the customer service representative, the call is directed to a technical support representative with extensive technical training who will dial into the alarm panel through the telephone line and attempt to resolve the issue. We have a proprietary centralized information system that enables us to satisfy 85% of our customer technical inquiries over the telephone. If a field service call is required, we dispatch a member of our national network of independent service dealers. When we select service technicians, we first consider dealers within our authorized dealer program in order to provide them with an additional source of revenues, but if an authorized dealer fails to meet our repair standards, an independent service technician is dispatched. We monitor repair services with customer satisfaction forms and follow-up quality assurance calls.

 

Management Information Systems

 

We utilize software that fully integrates the central monitoring station, billing and collections, customer service and accounting functions. We use a number of customized management information systems to accumulate statistical data regarding dealers and subscribers and to support our monitoring, customer and technical services. We have developed a comprehensive portfolio management system and procedures that we use to:

 

  perform due diligence on new dealers and subscribers;

 

  assimilate new subscribers; and

 

  monitor the performance of each dealer and subscriber account.

 

This system and the procedures provide for an extensive due diligence review process that ensures the thoroughness and consistency of the review. The system also aids in the assimilation of new subscribers by providing a means to confirm that the new subscriber has been introduced to us, is provided with materials about us and receives follow-up customer satisfaction calls. The system also helps monitor dealer and subscriber account performance by providing management with timely information regarding potential problems.

 

We have developed a software program that allows a dealer to access our central monitoring station activity reports on a daily basis. Through another software program, we are able to verify system installation and connection to the central monitoring station prior to the purchase of a subscriber’s account.

 

Internet Websites

 

We operate two web sites. Monitronics.net serves both prospective and existing authorized dealers. Monitronics.com serves prospective and existing monitored customers.

 

Monitronics.net is a promotional tool that provides prospective dealers background on us as well as information on the benefits of our dealer program. As an information hub, monitronics.net provides tools to help current dealers manage their business and improve their productivity. Authorized dealers are able to review up-to-date subscriber account information, download forms, order marketing materials and stay current on the latest news and events regarding Monitronics.

 

Monitronics.com is our consumer web site that has informational as well as promotional features. For potential subscribers, the web site provides important things to consider when looking to purchase a monitored

 

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alarm system. The site positions Monitronics as the clear choice for fast response, accuracy, reliability and service. For existing subscribers, the web site provides helpful information regarding our billing services, technical support, monitoring call center and response procedures. For both audiences, the site provides background about us as well as information on false alarm prevention.

 

Sales and Marketing

 

General

 

We believe that demand for security alarm systems is driven by a customer’s peace of mind regarding the safety of themselves, their family and their property. This demand is typically event driven, where some occurrence stimulates the customer’s concern and causes them to want to purchase an alarm system. Other factors, such as insurance discounts or requirements, may also add to the demand for a system. The purchase of an alarm system has the potential to satisfy the customer’s need for peace of mind for many years, and is a very infrequent purchase that may occur only a few times during a person’s life.

 

With the growing concern for safety, the U.S. market for alarm systems is increasing at an estimated rate of 9.7% per year, according to SDM. The percentage of homes with dealer installed security systems was only 18% in 2001 according to the 2001 Home Security Forecast by Parks Associates, an independent market research and consulting firm. Because of minimal purchasing experience, consumers rely heavily on referrals from friends, family, neighbors and associates when selecting their alarm system.

 

We believe our nationwide network of authorized dealers is the most effective way for us to market alarm systems, due to the nature of the demand and the market characteristics described above. Our dealers are an integral part of the communities they serve, and they understand the desires of their market and how to best satisfy local needs. By combining the dealer’s local presence and reputation with our high quality service and support, we believe that these dealers will have success in growing their businesses and the number of our monitoring customers.

 

Agreements with dealers provide for our purchase of the dealer’s subscriber accounts on an ongoing basis. The dealers install Monitronics-approved alarm systems and arrange for subscribers to enter into a multi-year alarm monitoring agreement in a form acceptable to us. The dealer then submits this monitoring agreement to us for our due diligence review and purchase.

 

Dealer Network Development

 

Since our inception, we have focused on expanding our network of dealers in the U.S. To do so, we have established a dealer program that provides participating dealers with a variety of support services to assist them as they grow their businesses. Dealers can use the Monitronics brand name in their sales and marketing activities and on the products they sell and install. Our dealers benefit from their affiliation with us and our national reputation for high customer satisfaction, as well as the support they receive from us as authorized dealers. We also provide central station monitoring services on a subcontract basis for other independent alarm companies that do not have the capability to monitor systems for their customers. Authorized dealers benefit by generating operating capital and profits from the sale of their accounts to us. We also provide our dealers with sales literature, co-branded marketing materials, sales leads, private labeled security equipment, equipment purchase discounts, and management support. We believe that these services and cost savings would not be available to security alarm dealers on an individual basis.

 

Currently, we employ eight sales representatives to promote the authorized dealer program, find account acquisition opportunities and sell our monitoring services. We target independent alarm dealers across the U.S. that can benefit from our dealer program services and can generate high quality monitoring customers for us. We use a variety of marketing techniques to promote our dealer program and our related services. These activities include direct mail, trade magazine advertising, trade shows, internet web site marketing, publicity and telemarketing.

 

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In addition to the development of our dealer network, we occasionally acquire alarm monitoring accounts from other alarm companies on a one-time basis. Our management’s extensive experience in identifying potential opportunities and in negotiating previous account acquisitions helps facilitate the negotiation and execution of new acquisitions in a timely manner.

 

Dealer Marketing Support

 

We provide our authorized dealers with an extensive marketing support program. We focus on developing professionally designed sales and marketing materials that will help dealers market alarm systems and monitoring services with maximum effectiveness. Materials offered to authorized dealers include:

 

  sales brochures and flyers;

 

  yard signs;

 

  window decals;

 

  customer forms and agreements;

 

  sales presentation binders;

 

  door hangers;

 

  lead boxes;

 

  vehicle graphics;

 

  lobby signage;

 

  trade show booths; and

 

  clothing bearing the Monitronics brand name.

 

Our fulfillment center processes web site and telephone orders for these materials, which are made available to our dealers at prices that our management believes would not be available to dealers on an individual basis.

 

Our sales materials promote both the Monitronics brand and the dealer’s status as a Monitronics authorized dealer. Dealers typically sell and install alarm systems which display the Monitronics logo and telephone number, which further strengthens consumer recognition of their status as Monitronics authorized dealers. Our management believes that the dealers’ use of the Monitronics brand to promote their affiliation with one of the nation’s largest alarm monitoring companies boosts the dealers’ credibility and reputation in their local markets and also assists in supporting their sales success.

 

Customer Integration and Marketing

 

The customer’s awareness and identification of the Monitronics brand as the monitoring service provider is further supported by the distribution of Monitronics-branded materials by the dealer to the customer at the point of sale. Such materials may include Monitronics yard signs, brochures, instruction cards, and other promotional items. Monitronics’ dealers typically introduce customers to Monitronics in the home when describing Monitronics’ central station.

 

New customers are introduced to us through a program designed to maximize their awareness of, and satisfaction with, the Monitronics brand. Upon our purchase of a monitoring agreement from a dealer, the customer is sent a letter describing the sale, together with contact information regarding customer support, Monitronics window decals, Monitronics telephone number stickers, a monitoring service brochure, and a customer ID Card. All materials focus on the Monitronics brand and our role as the single source of support for the customer. Later, we contact each new customer by telephone in order to address any questions or concerns the customer may have, as well as to verify information about the customer. In addition, all billing statements are

 

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issued under the Monitronics brand name in order to reinforce our support services, as well as provide special customer messages.

 

Our management believes the awareness and relationship management activities described above contribute to our reputation and recognition with consumers, and that these activities will increase the sales success of our authorized dealers in their local markets.

 

Competition

 

The security alarm industry is highly competitive and highly fragmented. We compete with major firms, including ADT Operations Inc., a subsidiary of Tyco International Ltd.; Protection One, Inc., a subsidiary of Westar Energy, Inc.; Brinks Home Security Inc., a subsidiary of The Pittston Company; and Honeywell Security, a division of Honeywell, Inc. In addition, we compete with numerous smaller providers. Certain other alarm service companies have adopted a strategy similar to ours that entails the aggressive purchase of alarm monitoring accounts both through acquisitions of account portfolios and through dealer programs. See “Risk Factors—The high level of competition in our industry could adversely affect our business.”

 

Competition in the security alarm industry is based primarily on reputation for quality of service, market visibility, services offered, price and the ability to identify prospective dealers and subscriber accounts. We believe that we compete effectively with other national, regional and local alarm monitoring companies due to our reputation for reliable monitoring, customer and technical services, the high quality services and benefits we offer to dealers in our authorized dealer program, our low cost structure and our marketing alliances.

 

Regulatory Matters

 

A number of local governmental authorities have adopted or are considering various measures aimed at reducing the number of false alarms. Such measures include:

 

  subjecting alarm monitoring companies to fines or penalties for false alarms;

 

  imposing fines to alarm subscribers for false alarms;

 

  imposing limitations on the number of times the police will respond to alarms at a particular location after a specified number of false alarms; and

 

  requiring further verification of an alarm signal, such as visual verification, of an alarm signal before the police will respond.

 

Our operations are subject to a variety of other laws, regulations and licensing requirements of federal, state and local authorities. In certain jurisdictions, we are required to obtain licenses or permits, to comply with standards governing employee selection and training and to meet certain standards in the conduct of our business. Many jurisdictions also require certain of our employees to obtain licenses or permits.

 

The security industry is also subject to requirements imposed by various insurance, approval, listing and standards organizations. Depending upon the type of subscriber served, the type of security service provided and the requirements of the applicable local governmental jurisdiction, adherence to the requirements and standards of such organizations is mandatory in some instances and voluntary in others. See “Operations—Monitoring Services.”

 

Our alarm monitoring business utilizes telephone lines and radio frequencies to transmit alarm signals. The cost of telephone lines, and the type of equipment which may be used in telephone line transmission, are currently regulated by both federal and state governments. The operation and utilization of radio frequencies are regulated by the Federal Communications Commission and state public utility commissions.

 

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Intellectual Property

 

We have a registered service mark for the Monitronics name and we have a service mark for the Monitronics logo. We own certain proprietary software applications that we use to provide services to our dealers and subscribers.

 

Legal Proceedings

 

We experience routine litigation in the normal course of our business. We do not believe that any pending or threatened litigation will have a material adverse effect on our operations or financial position.

 

Employees

 

At June 30, 2003, we employed approximately 520 individuals. Currently, none of our employees are represented by a labor union or covered by a collective bargaining agreement. We believe that our relations with our employees are good.

 

Facility

 

Our executive offices, central monitoring station and administrative offices, consist of approximately 46,000 square feet, and are located in Dallas, Texas. We have entered into several leases with respect to this space with all leases expiring on December 31, 2005.

 

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MANAGEMENT

 

Directors and Executive Officers

 

The following table sets forth information with respect to our directors and executive officers. All directors are elected annually by our shareholders and serve until their successors are duly elected and qualified. Executive officers are elected by and serve at the will of our board of directors.

 

Name


   Age

  

Position


James R. Hull

   65    President, Chief Executive Officer and Chairman of the Board

Michael R. Meyers

   46    Vice President, Chief Financial Officer and Assistant Secretary

Robert N. Sherman

   56    Vice President, Operations, and Secretary

Stephen M. Hedrick

   44    Vice President, Finance, and Treasurer

Michael D. Gregory

   45    Vice President, Sales and Marketing

Barry P. Johnson

   58    Vice President, Dealer Services

Rick L. Hudson

   52    Vice President, Customer Services

Kenneth P. DeAngelis

   51    Director

John Dirvin

   43    Director

Jay M. Grossman

   44    Director

Stephen M. Jenks

   44    Director

Peter S. Macdonald

   44    Director

Blaine F. Wesner

   39    Director

 

James R. Hull has served as president, chief executive officer and one of our directors since October 1994. Prior to that time, Mr. Hull served as a consultant to and subsequently, president of, My Alarm, Inc., a security alarm monitoring company in Dallas, Texas for approximately four years. During the same period, Mr. Hull also assisted in the establishment of Financial Security Services, Inc., a private company which provides collateralized financing to the security industry, and served as its chairman. Mr. Hull also served as president for approximately five years of Network Multi-Family Security, Inc., a private company in Dallas, Texas, which Mr. Hull helped build from a concept to a company monitoring approximately 150,000 security alarm systems installed in multi-family projects in 35 states. In addition, Mr. Hull has over 30 years of senior management experience at the vice president and general management levels with companies in the high-tech and consumer related fields such as Control Data Corporation, Litton Medical Systems, Inc. and Parker Pen Company. Mr. Hull holds a B.S. in electrical engineering.

 

Michael R. Meyers joined us as a vice president and chief financial officer in July 1996. Prior to joining us, Mr. Meyers served as treasurer and vice president of Tyler Corporation, a diversified public holding company. He also served as senior vice president of Forest City Auto Parts, a 65-store auto parts retail division of Tyler Corporation. Prior to that time, Mr. Meyers served as director of finance for a paging subsidiary operation of PacTel Personal Communications, a cellular and paging company. Mr. Meyers is a certified public accountant and has over 20 years of accounting, finance and operations experience with Fortune 500, medium and small companies. Mr. Meyers holds a B.A. in economics, a B.B.A. in business and an M.B.A.

 

Robert N. Sherman joined us as our vice president, operations, and secretary in October 1994. From 1991 to 1994, Mr. Sherman served as vice president of My Alarm, Inc. Prior to that time, Mr. Sherman served as vice president of Network Multi-Family Security, Inc., which Mr. Sherman helped build from a concept to a company monitoring approximately 150,000 security alarm systems installed in multi-family projects in 35 states. Mr. Sherman holds a B.S. in electrical engineering, a M.S. in computer science and an M.B.A.

 

Stephen M. Hedrick joined us as our vice president, finance, and treasurer in December 1994. Prior to joining us, Mr. Hedrick served as director of finance and accounting for Access Communication (acquired by Shared Technologies-Fairchild), a shared tenant telecommunications provider. Prior to that time, Mr. Hedrick

 

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also served as vice president, finance and administration, for Terra Marine Engineering, Inc. (acquired by Geco-Prakla, a division of Schlumberger Limited), which developed a patented oil exploration technology. Mr. Hedrick is a certified public accountant and has over 20 years of accounting and business administration experience with both Fortune 500 and small, high-growth companies in the manufacturing, high-tech and telecommunications industries. Mr. Hedrick holds a B.B.A. in accounting.

 

Michael D. Gregory joined us as our vice president, marketing in February 1995. Prior to joining us, Mr. Gregory served as vice president of sales and marketing for Genstar Rentals, Inc. from 1993 to 1995. Prior to that time, Mr. Gregory was employed by GE Capital in various sales and marketing management positions. Mr. Gregory has 15 years experience in sales and marketing management and holds a B.S. in mechanical engineering and an M.B.A.

 

Barry P. Johnson joined us as director of dealer services in February 2000 and was promoted to vice president of dealer services in April 2001. Mr. Johnson has over 30 years of business management experience with companies such as Jones & Laughlin Steel Corp., Taylor Publishing Company and AXA Advisors and holds a B.B.A. in marketing and an M.B.A.

 

Rick L. Hudson joined us in October 1995 as director of customer service and was promoted to vice president, customer services, in April 2001. Prior to joining us, Mr. Hudson served as director of service for Multi Technology Systems from 1993 to 1994 and director of service and installation for My Alarm, Inc. from 1991 to 1993. Prior to that time, Mr. Hudson served as vice president of customer services for Network Multi-Family. Mr. Hudson holds a B.S. in telecommunications.

 

Kenneth P. DeAngelis is a general partner of Austin Ventures, L.P. and has been associated with this firm for the past 20 years. Mr. DeAngelis has served as one of our directors since October 1994 and serves on the board of directors of several privately owned companies.

 

John Dirvin is a partner of Austin Ventures and has been associated with this firm since 1997. Prior to joining Austin Ventures, Mr. Dirvin spent 13 years working in a variety of marketing and financial management roles in the TI Software and UNIX Computer businesses. Mr. Dirvin has served as one of our directors since April 2001.

 

Jay M. Grossman is a partner of ABRY Partners, LLC and has been associated with this firm since 1996. Prior to joining ABRY, Mr. Grossman was an investment banker specializing in media and entertainment at Kidder Peabody and at Prudential Securities. Mr. Grossman currently serves on the board of directors of several privately owned companies.

 

Stephen M. Jenks is a partner of Capital Resource Partners II, L.P., the general partner of Capital Resource, a venture capital firm. Mr. Jenks has been associated with Capital Resource Partners since November 1993. From 1990 until November 1993, Mr. Jenks was an associate with Norwest Venture Capital Management, a venture capital investment firm. Mr. Jenks has served as one of our directors since May 1996 and also serves on the board of directors of several privately owned companies.

 

Peter S. Macdonald is managing director, and a founding partner, of Windward Capital Management and has been associated with this firm since 1994. From 1987 until 1994, Mr. Macdonald served in various capacities for Credit Suisse First Boston’s mergers and acquisitions group. Mr. Macdonald has served as one of our directors since March 1999 and also serves on the board of directors of several privately owned companies.

 

Blaine F. Wesner is a general partner of Austin Ventures. Mr. Wesner joined the firm in 1990 and focuses on the firm’s communications investment area. Previously, Mr. Wesner was with Goldman Sachs & Co. in New York and was also the co-founder of Wesner Publications, a chain of suburban and community newspapers located throughout Oklahoma and Texas. Mr. Wesner has served as one of our directors since October 1994 and serves on the board of directors of several privately owned companies.

 

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Executive Compensation

 

The following table contains summary information concerning the total compensation for the fiscal year ended June 30, 2003 paid to our chief executive officer and our four other most highly compensated executive officers serving in this capacity as of June 30, 2003, whose total salary and bonus exceeded $100,000 for that fiscal year. We refer to these persons as our “named executive officers.”

 

Summary Compensation Table

 

          Annual Compensation(1)

   All Other
Compensation


 

Name and Principal Position


   Year

   Salary

   Bonus($)

  

James R. Hull

President and Chief Executive Officer

  

2003

  

371,204.62

  

25,000.00

  

54,040.00

(2)

Michael R. Meyers

Vice President and Chief Financial Officer

  

2003

  

224,848.81

  

15,000.00

  

1,697.57

(3)

Michael D. Gregory

Vice President, Sales and Marketing

  

2003

  

137,513.68

  

15,000.00

  

948.53

(3)

Robert N. Sherman

Vice President, Operations and Secretary

  

2003

  

125,531.51

  

20,000.00

  

930.33

(3)

Rick L. Hudson

Vice President, Customer Services

  

2003

  

110,531.59

  

20,000.00

  

843.79

(3)


(1) Except as set forth above, the named executive officers did not receive any annual compensation not properly characterized as salary or bonus, except for certain perquisites or other benefits the aggregate incremental cost of which did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for each such officer. We have a medical and health benefits plan and we provide term life insurance for our employees, however, such plans do not discriminate in scope, terms or operation in favor of executive officers or directors and are generally available to all salaried employees, except for the term life insurance premium paid for James R. Hull as noted in footnote (2) below. We have a 401(k) plan, but we do not have any pension plan.
(2) Represents $2,940 in payments we made for the premium for James R. Hull’s $750,000 term life insurance policy, $2,000 in matching contributions to Mr. Hull’s 401(k) plan and $49,100 in payments for professional fees related to the preparation of Mr. Hull’s personal tax return.
(3) Represents matching contributions to the named executive officer’s 401(k) plan.

 

Employment Agreements

 

James R. Hull has an employment agreement with us that automatically renews on November 1 of each year for successive one-year periods unless prior written notice of nonrenewal is given by us. The agreement provides that we may terminate the agreement for cause and no further payments will be due to Mr. Hull. However, if termination is for “nonperformance” by Mr. Hull, which is defined as a material adverse deviation between our actual results of operations or financial condition as compared to our business plan or future plans approved by our board of directors, we are required to pay Mr. Hull an amount equal to the greater of six months’ base salary or his base salary for the unexpired portion of the current term of the agreement. If we terminate Mr. Hull without cause, we are required to pay him his base salary for 24 months. The agreement also provides for a two year non-competition covenant following termination, except in the case of termination without cause.

 

In addition, we have entered into an agreement with Mr. Hull pursuant to which we paid Mr. Hull a $2,000,000 transaction fee in cash at the closing of the Refinancing Transactions and, prior to November 23, 2003, Mr. Hull may require us to purchase 400,000 shares of his Class A common stock at a purchase price of $1,000,000 in cash. A portion of the transaction fee paid to Mr. Hull at the closing of the Refinancing Transactions must be repaid by Mr. Hull if he leaves the company voluntarily or is terminated for cause during the 18-month period following the date of the payment of the transaction fee. The agreement also provides Mr. Hull with the right to sell up to $500,000 in value of his Class A common stock to us in each of the next five

 

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fiscal years at purchase prices per share based on a multiple of our cash flow. To the extent Mr. Hull does not sell $500,000 in value of his Class A common stock to us in any given fiscal year, he can sell the difference between $500,000 and the amount he sold to us in future fiscal years through fiscal year 2008. The agreement also provides that if we establish any stock option plans for our directors or executive officers while Mr. Hull is our chief executive officer, we must award Mr. Hull options to purchase at least 10% of the shares of our capital stock available for issuance under any such plans.

 

Michael R. Meyers has an employment agreement with us which terminates on August 31, 2006 and is automatically renewable on September 1, 2006 and on September 1 of each year thereafter for successive one-year periods unless written notice of nonrenewal is given by us. The agreement may be terminated by us for cause and in that event no further amounts will be due to Mr. Meyers. However, if termination is for nonperformance by Mr. Meyers, we are required to pay an amount equal to the greater of six months’ base salary or the base salary for the unexpired portion of the current term of the agreement. If the termination is without cause, we are required to pay an amount equal to the greater of nine months’ base salary or the base salary for the unexpired portion of the current term of the agreement. The agreement also provides for a two year non-competition covenant following termination, except in the case of termination without cause.

 

Robert N. Sherman also has an employment agreement with us which automatically renews on November 1 of each year for successive one-year periods unless written notice of nonrenewal is given by us. Mr. Sherman’s employment agreement provides that we may terminate the agreement for cause and no further payments will be due to Mr. Sherman. However, if termination is for nonperformance by Mr. Sherman or without cause, we are required to pay an amount equal to the greater of six months’ base salary or the base salary for the unexpired portion of the current term of the agreement. The agreement also provides for a two year non-competition covenant following termination, except in the case of termination without cause.

 

Michael D. Gregory also has an employment agreement with us which automatically renews on February 1 of each year for successive one-year periods unless written notice of nonrenewal is given by us. The agreement may be terminated by us for cause and in that event no further amounts will be due to Mr. Gregory. If the agreement is terminated for nonperformance by Mr. Gregory, he is entitled to his base salary for three months and if it is terminated without cause, he is entitled to the greater of his base salary for six months or the base salary for the unexpired portion of the current term of the agreement. The agreement also provides for a two year non-competition covenant following termination, except in the case of termination without cause.

 

Stock Option Plan

 

Our 1999 and 2001 stock option plans provide for grants of nonqualified stock options to our directors, executive officers, employees and consultants to promote our long-term financial success and, specifically, to retain and motivate our key personnel and consultants to make contributions to our success. Both plans are administered by our board of directors. Currently, neither plan has a pre-set formula or criteria for determining the number of options that may be granted to a director, executive officer, employee or consultant. The exercise price for an option granted under either plan may not be less than 100% of the fair market value of our Class A common stock on the date of grant. Our board of directors reviews and evaluates the overall compensation package of our executive officers and employees and determines the awards based on our overall performance and the individual performance of our executive officers and employees. The total number of shares of our Class A common stock that may be subject to options under the 1999 plan is 150,000 and under the 2001 plan is 250,000. As of June 30, 2003, options to purchase 96,000 shares of our Class A common stock are outstanding under the 1999 plan. As of June 30, 2003, no options had been granted under the 2001 plan.

 

Indemnification Agreements

 

Each member of our board of directors and each executive officer has entered into an indemnification agreement with us pursuant to which we have agreed to indemnify the director or executive officer to the fullest extent permitted by the Texas Business Corporation Act against expenses, judgments, penalties, fines and settlements incurred by or on behalf of the director in connection with any proceeding arising out of their services as a director or executive officer or their service in a representative capacity at our request.

 

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SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT

 

The following table sets forth certain information with respect to the beneficial ownership of our Class A common stock as of June 30, 2003, assuming conversion of our Series A preferred stock, Series C preferred stock and Series D-1 preferred stock, each of which votes together with the Class A common stock as a single class on an as-converted basis, by each shareholder known to us to beneficially own more than five percent of our outstanding Class A common stock (assuming the conversion described above) considered as a single class, each director and named executive officer, and all executive officers and directors as a group, based on information provided to us by such persons. Our Series B preferred stock and Series C-1 preferred stock are nonvoting and are not included. Except as otherwise stated, each such person has sole investment and voting power with respect to the shares set forth in the table:

 

       Class A Common Stock(1)(2)

 

Name and Address of Beneficial Owner


     Number of
Shares


    Percent

 

AV Partners III, L.P.(3)(4)

Austin Ventures III-A, L.P.

Austin Ventures III-B, L.P.

300 West 6th Street, Suite 2300

Austin, Texas 78701

     5,066,763 (5)   40.1 %

ABRY Capital Partners, L.P.(4)

ABRY Partners IV, L.P.

ABRY Investment Partnership, L.P.

111 Huntington Avenue

Boston, Massachusetts 02199

     3,098,268 (6)   24.6 %

Windward Capital GP II, LLC(4)

Windward Capital Partners II, L.P.

Windward Capital LP II, LLC

1177 Avenue of the Americas

42nd Floor

New York, New York 10036

     2,210,806 (7)   17.6 %

Capital Resource Partners II, L.P.(4)(8)

Capital Resource Lenders II, L.P.

85 Merrimac Street

Suite 200

Boston, Massachusetts 02114

     1,308,399 (9)   9.7 %

AV Partners V, L.P.(3)(4)

Austin Ventures V, L.P.

Austin Ventures V Affiliates Fund, L.P.

300 West 6th Street, Suite 2300

Austin, Texas 78701

     1,009,393 (10)   7.4 %

The Northwestern Mutual Life Insurance Company

720 East Wisconsin Avenue

Milwaukee, Wisconsin 53202

     1,133,328 (17)   8.3 %

James R. Hull(4)(11)

Hull Family Limited Partnership

12801 Stemmons Freeway

Suite 821

Dallas, Texas 75234

     936,218     7.4 %

 

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       Class A Common Stock(1)(2)

 

Name and Address of Beneficial Owner


     Number of
Shares


     Percent

 

Blaine F. Wesner(3)(12)

300 West 6th Street, Suite 2300

Austin, Texas 78701

     —        —    

Kenneth P. DeAngelis(3)(13)

300 West 6th Street, Suite 2300

Austin, Texas 78701

     —        —    

John Dirvin(3)(18)

300 West 6th Street, Suite 2300

Austin, Texas 78701

     —        —    

Jay M. Grossman(6)(14)

111 Huntington Avenue

Boston, Massachusetts 02199

     —        —    

Peter S. Macdonald(7)(15)

1177 Avenue of the Americas

42nd Floor

New York, New York 10036

     —        —    

Stephen M. Jenks(8)(16)

85 Merrimac Street, Suite 200

Boston, Massachusetts 02114

     —        —    

Robert N. Sherman(4)

12801 Stemmons Freeway

Suite 821

Dallas, Texas 75234

     287,081      2.3 %

Michael R. Meyers(4)

12801 Stemmons Freeway

Suite 821

Dallas, Texas 75234

     125,784      *  

Michael D. Gregory(4)

12801 Stemmons Freeway

Suite 821

Dallas, Texas 75234

     71,933      *  

Rick L. Hudson

12801 Stemmons Freeway

Suite 821

Dallas, Texas 75234

     52,274      *  

All directors and executive officers as a group
(11 persons)(2)(11)(12)(13)(14)(15)(16)

     1,473,290      11.7 %

* Represents beneficial ownership of less than one percent.
(1) As of June 30, 2003, there were 1,906,409 shares of our Class A common stock outstanding, our outstanding Series A preferred stock was convertible into 5,005,005 shares of our Class A common stock, our outstanding Series C preferred stock was convertible into 2,337,138 shares of our Class A common stock, and our outstanding Series D-1 preferred stock was convertible into 3,336,596 shares of our Class A common stock.
(2) Approximately 95% of the outstanding shares of our Class A common stock and all of our Series A preferred stock, Series C preferred stock and Series D-1 preferred stock owned by the shareholders identified in this table is pledged as collateral by the holder thereof to secure payment of our credit facility. See “Description of Indebtedness—Credit Facility.”

 

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(3) AV Partners III, L.P. (“AV Partners III”) is the general partner of Austin Ventures III-A, L.P. (“AV III-A”) and Austin Ventures III-B, L.P. (“AV III-B”) (collectively, “Austin Ventures III”), which own warrants exercisable for 33,478 and 28,280 shares of our Class A common stock, respectively. These entities are affiliates of Austin Ventures V, L.P. (“AV-V”) and Austin Ventures V Affiliates Fund, L.P. (“AV Affiliates”), which own warrants exercisable for 961,327 and 48,066 shares of our Class A common stock, respectively. AV Partners V, L.P. (“AV Partners V”) is the general partner of AV-V and AV Affiliates. The shares of our Class A preferred stock and the warrants owned of record by AV III-A and AV III-B are not included in the table above for AV Partners V, AV-V, and AV Affiliates. Each of AV III-A, AV III-B, AV-V and AV Affiliates disclaims beneficial ownership of the shares and warrants owned by the other parties, and AV Partners III, and AV Partners V, disclaim beneficial ownership of any of the shares and warrants included in the table for any of the other parties except to the extent of their respective pecuniary interests. AV Partners III may be deemed to have sole voting and investment power with respect to shares held by Austin Ventures III. AV Partners V may be deemed to have sole voting and investment power with respect to shares held by AV-V and AV Affiliates.
(4) AV III-A, AV III-B, AV-V, AV Affiliates, Capital Resource Lenders II, L.P. (“Capital Resource”), ABRY Partners IV, L.P. (“ABRY IV”), ABRY Investment Partnership, L.P. (“ABRY Investment”), Windward Capital Partners II, L.P. (“Windward LP”), Windward Capital LP II, LLC (“Windward LLC”), Hull Family Limited Partnership, Michael R. Meyers, Robert N. Sherman and Michael D. Gregory are parties to a shareholders agreement, pursuant to which (1) AV III-A and AV III-B share the right to designate three members of our board of directors, (2) AV-V and AV Affiliates share the right to designate one director, (3) Capital Resource has the right to designate one director, (4) Windward LP and Windward LLC share the right to designate one director, (5) ABRY IV and ABRY Investment share the right to designate one director and (6) James R. Hull is designated as a member of our board of directors for as long as he is employed by us. Currently, AV III-A and AV III-B have exercised the right to appoint only two directors.
(5) Includes 2,168,400 shares of Series A preferred stock exercisable for 2,713,213 shares of Class A common stock and warrants exercisable for 33,478 shares of Class A common stock issuable upon the exercise of warrants owned of record by AV III-A; 1,831,600 shares of Series A preferred stock exercisable for 2,291,792 shares of Class A common stock and 28,280 shares of Class A common stock issuable upon the exercise of warrants owned of record by AV III-B.
(6) Represents 3,096,356 shares of Class A common stock issuable upon conversion of our Series D-1 preferred stock owned by ABRY IV and 1,912 shares of Class A common stock issuable upon conversion of our Series D-1 preferred stock owned by ABRY Investment. ABRY Capital Partners, L.P. is the general partner of ABRY IV. ABRY Investment is an affiliate of ABRY IV.
(7) Represents 2,096,116 shares of Class A common stock issuable upon conversion of our Series C preferred stock owned by Windward LP and 114,690 shares of Class A common stock issuable upon conversion of our Series C preferred stock owned by Windward LLC. Windward Capital GP II, LLC is the general partner of Windward LP. Windward LLC is an affiliate of Windward LP.
(8) Capital Resource Partners II, L.P. is the general partner of Capital Resource Lenders.
(9) Represents 126,332 shares of Class A common stock issuable upon conversion of our Series C preferred Stock, 238,328 shares of Class A common stock issuable upon conversion of our Series D-1 preferred stock and 943,739 shares of Class A common stock issuable pursuant to warrants.
(10) Represents 961,327 shares of Class A common stock issuable upon the exercise of warrants owned of record by AV-V and 48,066 shares of Class A common stock issuable upon the exercise of warrants owned of record by AV Affiliates.
(11) Hull Family Limited Partnership owns 936,218 shares of Class A common stock. James Hull Management Trust is the general partner of Hull Family Limited Partnership. James R. Hull is the sole trustee of James Hull Management Trust and, therefore, is deemed to also beneficially own these shares.
(12) Mr. Wesner is an Assignee of AV Partners III and a General Partner of AV Partners V. As an Assignee of AV Partners III and a General Partner of AV Partners V, Blaine F. Wesner may be deemed to have shared voting and investment power with respect to shares held by Austin Ventures III, AV-V, and AV Affiliates. Blaine F. Wesner disclaims beneficial ownership except to the extent of its pecuniary interest.

 

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(13) Mr. DeAngelis is a General Partner of AV Partners III and AV Partners V. As a General Partner of AV Partners III and AV Partners V, Kenneth P. DeAngelis may be deemed to have shared voting and investment power with respect to shares held by Austin Ventures III, AV-V and AV Affiliates. Kenneth P. DeAngelis disclaims beneficial ownership except to the extent of its pecuniary interest.
(14) Mr. Grossman is a vice president of ABRY Capital Partners, L.P., the general partner of ABRY IV, and a vice president of ABRY Investment GP, LLC, the general partner of ABRY Investment. Mr. Grossman disclaims beneficial ownership of any of the shares owned by ABRY IV or ABRY Investment.
(15) Mr. Macdonald is the managing member of Windward Capital GP II, LLC, the general partner of Windward LP, and the managing member of Windward LLC. Mr. Macdonald disclaims beneficial ownership of any of the shares, including Series C-1 preferred stock, owned by Windward LP or Windward LLC.
(16) Mr. Jenks is a partner of Capital Resource Partners II, L.P., the general partner of Capital Resource. Mr. Jenks disclaims beneficial ownership of any of the shares, including Series B preferred stock, Series C-1 preferred stock, Series D-1 preferred stock or warrants, beneficially owned by Capital Resource.
(17) Represents 1,133,328 shares of Class A common stock issuable upon the exercise of warrants.
(18) While John Dirvin is not a partner of AV Partners III or AV Partners V, he is a participant in the AV Partners V profit sharing plan and disclaims beneficial ownership except to the extent of its pecuniary interest therein.

 

Recapitalization

 

We are in discussions with some of our equity sponsors to sell a new series of preferred stock to these sponsors and to use the proceeds from the sale to repurchase up to all of our outstanding Series C and Series C-1 preferred stock. In connection with the new equity financing, we may issue additional shares of the new series of preferred stock in exchange for all of our outstanding preferred stock other than the Series C and Series C-1 preferred stock to be repurchased for cash such that, following the new equity financing and the exchange, we will have only one series of preferred stock outstanding. These discussions are at a preliminary stage and no definitive agreement has been reached. We cannot assure you that any such transaction will be consummated or as to the final terms of such transaction.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

On January 18, 2002, we borrowed an aggregate of $40 million from The Northwestern Mutual Life Insurance Company (“Northwestern Mutual”) pursuant to a subordinated note and warrant purchase agreement. The subordinated notes were due and payable on January 18, 2009. We also issued warrants currently exercisable for 1,133,328 shares of Class A common stock at an exercise price of $0.01 per share in connection with the subordinated notes. A portion of the proceeds of the Refinancing Transactions were used to repay $20.5 million principal amount of the subordinated notes outstanding at a repurchase price of $23.2 million. The remaining $20.5 million principal amount of subordinated notes were amended and the maturity extended to March 1, 2010. In connection with the repurchase and amendment of the subordinated notes, Northwestern Mutual received a fee of approximately $205,000.

 

On October 21, 1994, AV III-A and AV III-B purchased an aggregate of 2,000,000 shares of our Series A preferred stock for $1.00 per share and subsequently acquired 2,000,000 additional shares of our Series A preferred stock at a purchase price of $1.00 per share.

 

On May 19, 1997, AV-V purchased 4,000,000 shares of our Series B preferred stock for $1.00 per share and Capital Resource purchased 1,000,000 shares of our Series B preferred stock for $1.00 per share. AV-V and Capital Resource also acquired warrants currently exercisable for 1,009,393 shares and 252,348 shares, respectively, of our Class A common stock with an exercise price of $0.01 per share, in connection with their acquisition of Series B Preferred Stock. AV-V subsequently transferred 190,476 shares of our Series B preferred

 

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stock and warrants currently exercisable for 48,066 shares of Class A common stock to AV Affiliates. See “Description of Capital Stock—Preferred Stock” for a further discussion.

 

On March 9, 1999, Windward LP purchased 1,253,096 shares of our Series C preferred stock for $19.689579 per share, Windward LLC purchased 80,097 shares of our Series C preferred stock for $19.689579 per share and Capital Resource purchased 76,182 shares of our Series C preferred stock for $19.689579 per share. Windward LLC subsequently transferred 10,935 shares of our Series C preferred stock to Windward LP On April 27, 2001, the 1,409,375 shares of our Series C preferred stock issued and outstanding were exchanged for 1,409,375 shares of our newly issued Series C preferred stock and 251,420 shares of our newly issued Series C-1 preferred stock.

 

On April 27, 2001, ABRY IV purchased 49,959.9 shares of our Series D-1 preferred stock for $1,000 per share and ABRY Investment purchased 40.10 shares of our Series D-1 preferred stock for $1,000 per share. On January 18, 2002, ABRY IV purchased an additional 14,987.97 shares of Series D-1 preferred stock, ABRY IV purchased 12.03 shares of Series D-1 preferred stock and Capital Resource purchased 5,000 shares of Series D-1 preferred stock each at $1,000 per share.

 

Each of AV III-A, AV III-B, AV-V, AV Affiliates, Capital Resource and Northwestern Mutual has the contractual preemptive right to purchase its pro rata share, based on the number of warrants or warrant shares owned by each of them in relation to the fully diluted outstanding shares of our Class A common stock, of any subordinated debt, with certain exceptions, proposed to be issued by us at any time prior to the closing of a firm commitment underwritten public offering of shares of our Class A common stock meeting certain criteria, which we refer to in this prospectus as a “qualified public offering.”

 

Each of AV III-A, AV III-B, AV-V, AV Affiliates, Windward LP, Windward LLC, Capital Resource, ABRY IV, ABRY Investment, Northwestern Mutual and Hull Family Limited Partnership have the additional contractual preemptive right to purchase a pro rata share, based on the number of shares of our common stock beneficially held by them in relation to the fully diluted outstanding shares of our common stock (assuming conversion, exercise or exchange of all outstanding equity securities of the company), of any equity securities, with certain exceptions, proposed to be issued by us at any time prior to the closing of a qualified public offering.

 

The holders of two-thirds of our shares of Class A common stock issuable upon conversion of our Series A preferred stock and Series C preferred stock may each at any time request, on two separate occasions, that we register for public resale the shares of our Class A common stock owned by them. Following an initial public offering of our securities, the holders of two-thirds of the outstanding Series C preferred stock, and the holders of two-thirds of the outstanding Series D-1 preferred stock may each at any time request, on two separate occasions, that we register for public resale the shares of our Class A common stock owned by them upon conversion of their respective preferred stock. Following an initial public offering of our securities, the holders of two-thirds of the outstanding warrants held by Northwestern Mutual may at any time request on one occasion that we register for public resale the shares of our Class A common stock owned by them upon exercise of their warrants. After an initial public offering of our securities, each of AV III-A, AV III-B, AV-V, AV Affiliates, Capital Resource, Windward LP, Windward LLC, ABRY IV, ABRY Investment and Northwestern Mutual has the right, subject to certain conditions, to request, on two occasions in any 12-month period, that we register for public resale the shares of our Class A common stock owned by them. AV III-A, AV III-B, AV-V, AV Affiliates, Capital Resource, Hull Family Limited Partnership, Windward LP, Windward LLC, ABRY IV, ABRY Investment and Northwestern Mutual also have the right to include shares of our Class A common stock owned by them in any registration statement proposed to be filed by us to register any of our securities provided the form of registration statement may be used for registration of their shares, and subject to certain other rights we may have to not include their shares. We have agreed to pay all expenses of the foregoing registration statements, other than underwriting fees, discounts or commissions.

 

We have entered into an agreement with James R. Hull, our president and chief executive officer, pursuant to which we paid Mr. Hull a $2 million transaction fee in cash at the closing of the Refinancing Transactions

 

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and, prior to November 23, 2003, Mr. Hull may require us to purchase 400,000 shares of his Class A common stock at a purchase price of $1 million in cash. The agreement also gives Mr. Hull the right to sell up to $500,000 in value of his Class A common stock to us in each of the next five fiscal years at purchase prices per share based on a multiple of our cash flow. See “Management—Employment Agreements” for a more complete discussion of the terms of Mr. Hull’s agreement.

 

We paid an advisory fee of $2.7 million to ABRY Partners LLC, an affiliate of ABRY Capital Partners, L.P., in connection with the Refinancing Transactions. See “Use of Proceeds.” An affiliate of ABRY Capital Partners, L.P. purchased old notes in the offering related to the Refinancing Transactions.

 

DESCRIPTION OF INDEBTEDNESS

 

Credit Facility

 

General

 

We have entered into a senior secured credit facility with Fleet National Bank (“Fleet”), as administrative agent, Bank of America, N.A., as syndication agent and a syndicate of lenders, including Fleet and Bank of America, N.A. The following summary is not complete and is subject to, and qualified in its entirety by reference to, the Credit Agreement, which is an exhibit to the prospectus.

 

The senior secured credit facility provides for an aggregate principal amount of $320 million, consisting of a $145 million revolving credit facility and a $175 million term loan facility. The facility also provides for the possibility, subject to the satisfaction of various conditions, that it may be increased in an additional amount of up to $150 million. Our ability to increase our credit facility will be subject to our compliance with the financial covenants under the indenture governing the notes. The revolving credit facility matures on August 25, 2008, and the term loan facility matures on August 26, 2009.

 

Security

 

Indebtedness under our senior secured credit facility is secured by all of our assets, including alarm monitoring contracts, service agreements, non-compete agreements and alarm purchase agreements.

 

Interest

 

Indebtedness under our credit facility bears interest at a floating rate based, at our option, upon (a) Fleet’s base rate, or (b) the London Interbank Offered Rate, which we refer to herein as “LIBOR,” plus the applicable LIBOR or base rate margin. Fleet’s base rate is the annual rate of interest announced from time to time by Fleet as its base rate. The base rate margin applicable to the revolving credit facility will vary from 2.25% to 3.00% and the LIBOR margin applicable to the revolving credit facility will vary from 3.25% to 4.00%, in each case, depending on the ratio of our total debt to our annualized quarterly net operating income, as defined in the documentation applicable to the credit facility. The term loan will bear interest at LIBOR plus 4.50%. Interest periods for LIBOR based loans shall be, at our option, one, two, three and six months. Interest on base rate loans is payable quarterly in arrears and interest on LIBOR loans is payable on the last day of the interest period therefor and, if longer than three months, at three month intervals. At any time when we are in default under our credit facility, indebtedness under the credit facility shall bear interest at 2.00% above the rate that would otherwise be applicable.

 

Commitment Fee

 

We will be required to pay a commitment fee, payable quarterly in arrears, on the unused portion of our new revolving credit facility based upon the sum of the average unused portion of the revolving credit facility during

 

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the quarter, equal to either .75% if we borrow less than 50% of the total amount available to us under such credit facility or .5% if we borrow more than 50% of the total amount available to us under such credit facility.

 

Repayment

 

The revolving credit facility provides for commitment reductions of 5% per quarter beginning on December 31, 2006. The term loan facility provides for scheduled amortization of 1% per year during years one through three of the term loan facility, 5% per year in year four of the term loan facility, and 12% per year in year five of the term loan facility, in each case, payable quarterly.

 

The credit facility provides for mandatory prepayments:

 

  upon certain asset dispositions by us or certain casualty events affecting our properties;

 

  upon certain issuances of our capital securities; and

 

  with proceeds of certain issuances of debt securities.

 

Amounts under our credit facility may be voluntarily prepaid without premium or penalty subject to three business days written notice. All costs associated with early termination of LIBOR loans will be borne by us.

 

Covenants

 

The credit facility requires us to meet certain financial tests, including:

 

  a minimum interest coverage ratio;

 

  a maximum total senior debt to annualized quarterly net operating income ratio;

 

  a maximum total debt to annualized quarterly net operating income ratio;

 

  an annual limit on our capital expenditures of $4.5 million per fiscal year, but we may carry forward up to $400,000 of permitted but unused capital expenditures from the immediately preceding year; and

 

  a minimum fixed charge coverage ratio.

 

Our credit facility also contains customary negative covenants that, among other things, limit:

 

  the incurrence of additional indebtedness except the credit facility, permitted debt, certain purchase money obligations, capital leases, trade obligations in the ordinary course of business and certain other debt;

 

  the creation of additional liens on our assets;

 

  mergers, business combinations, acquisitions, investments and formation of subsidiaries;

 

  dividends or other restricted payments in respect of our capital stock;

 

  transactions with affiliates;

 

  sales of assets other than assets sold or disposed of in the ordinary course of business other than permitted dispositions in a maximum amount per year; and

 

  changes in our lines of business.

 

Events of Default

 

Our credit facility contains customary events of default, including:

 

  payment defaults;

 

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  breach of representations or warranties and non-performance of covenants and obligations, subject to certain cure periods;

 

  defaults on other indebtedness;

 

  bankruptcy and insolvency;

 

  impairment of security;

 

  unsatisfied judgments;

 

  certain change of control events;

 

  failure to obtain or cessation of material authorizations or licenses; and

 

  actual or asserted invalidity of loan documentation.

 

Subordinated Notes

 

We have $20.5 million principal amount of 13.5% subordinated notes due 2010 outstanding. These notes are unsecured and will be subordinated in right of payment to our new senior secured credit facility and the new notes. Interest on the subordinated notes is payable semiannually in arrears on June 30 and December 31, with payment to be made in cash for interest accrued on the notes at the rate of 12% per annum, with the remaining 1.5% per annum (2.5% per annum on and after December 15, 2003, which new rate will apply retroactively to August 25, 2003 if the subordinated notes are not repurchased by December 15, 2003) added to the outstanding principal amount of the subordinated notes. The subordinated notes are redeemable at our option, in whole or in part, at a redemption price of 105% of their principal amount (declining annually each January 19 by 1% to 100% on January 19, 2008) plus accrued and unpaid interest. A change of control would require us to offer to prepay the subordinated notes at such redemption prices.

 

The agreement governing the subordinated notes contains events of default, some of which could occur without an event of default occurring under the indenture governing the notes to be issued in connection with this offering. If an event of default occurs and is continuing, holders of 66 2/3% of the outstanding principal amount of subordinated notes may declare the subordinated notes payable at the redemption prices discussed above, together with all accrued and unpaid interest.

 

The agreement under which the subordinated notes were issued contains various covenants substantially similar to the covenants under our credit facility. The agreement also contains certain restrictive covenants that restrict our ability to, among other things, issue additional debt, incur additional liens, incur lease obligations, assume or guarantee debt of other persons, merge or transfer assets, make distributions, enter into transactions with affiliates and make capital expenditures.

 

DESCRIPTION OF NEW NOTES

 

The form and terms of the new notes are the same as the form and terms of the old notes, except that the new notes have been registered under the Securities Act, will not bear legends restricting the transfer thereof, will not be entitled to registration rights under the registration rights agreement, and will not contain provisions relating to additional interest. The terms of the new notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939.

 

You can find the definitions of terms used in this description under the subheading “Definitions.” In this description, the word “Notes” refers to the new notes.

 

We will issue the Notes under the same indenture as the old notes, which is dated as of August 25, 2003 (the “Indenture”) and is between the Company and The Bank of New York Trust Company of Florida, N.A., as trustee (the “Trustee”).

 

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Subject to the covenant described below under “Covenants—Limitation on Incurrence of Additional Debt and Issuance of Capital Stock” and other applicable laws, the Company may issue additional notes under the Indenture. The old notes, the new notes and any additional notes issued from time to time in accordance with the terms of the Indenture will constitute a single class of debt securities under the Indenture. If the exchange offer is consummated, holders of old notes who do not exchange new notes for their old notes will vote together with holders of the new notes and, if applicable, any holders of additional notes for all relevant purposes under the Indenture. Accordingly, in determining whether the required holders have given any notice, consent or waiver or taken any other action permitted under the Indenture, any old notes that remain outstanding after the exchange offer will be aggregated with the new notes and, if applicable, any additional notes, and the holders of the old notes, the new notes and the additional notes will vote together as a single class. All references in this prospectus to specified percentages in aggregate principal amount of the notes that are outstanding means, at any time after the exchange offer is consummated, the percentage in aggregate principal amount of the old notes, the new notes and the additional notes then outstanding.

 

The following description is a summary of the provisions of the Indenture that we believe to be material and of interest to you and does not restate that agreement in its entirety. We encourage you to read the Indenture because that agreement, and not this description, will define your rights as a holder of the notes. Any references in this summary to dollar amounts are to U.S. dollars and include the foreign currency equivalent of that amount determined at the relevant time to the extent proceeds, transactions or other amounts are denominated, in whole or in part, in a currency other than U.S. dollars.

 

Principal, Maturity and Interest

 

The Notes will be senior subordinated unsecured obligations of the Company. The Company will initially issue approximately $160.0 million aggregate principal amount of new notes in this offering in exchange for the old notes.

 

The Notes will mature on September 1, 2010. Interest on the Notes will accrue at a rate of 11 3/4% per annum and will be payable semi-annually in arrears on March 1 and September 1, commencing on March 1, 2004. We will pay interest to those Persons who were holders of record on the February 15 or August 15 immediately preceding each interest payment date.

 

Interest on the Notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months.

 

The Company will make all payments on the Notes at the office or agency of the paying agent and registrar within the City and State of New York. The trustee will initially act as paying agent and as registrar for the notes. The Company may change the paying agent or registrar without prior notice to the trustee or noteholders. Subject to compliance with any applicable laws or regulations, the Company or any of its Subsidiaries may act as paying agent or registrar.

 

We currently have no subsidiaries. It is expected that any subsidiaries we create in the future will be “Restricted Subsidiaries.” The Notes will be guaranteed by each of the Company’s future Domestic Restricted Subsidiaries (the “Guarantors”). These subsidiary guarantees (the “Note Guarantees”) will be joint and several obligations of the Guarantors. Each Note Guarantee will be subordinated to the prior payment in full of all Senior Debt of that Guarantor. We anticipate that the Guarantors will also guarantee all obligations under the Credit Agreement, and each Guarantor will grant a security interest in all or substantially all of its assets to secure the obligations under the Credit Agreement. The obligations of each Guarantor under its Note Guarantee will be limited to prevent that Note Guarantee from constituting a fraudulent conveyance under applicable law.

 

Under the circumstances described below under the subheading “Restrictive Covenants—Limitation on Restricted Payments,” we will be permitted to designate certain of our subsidiaries as “Unrestricted

 

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Subsidiaries.” Unrestricted Subsidiaries will not be subject to many of the restrictive covenants in the Indenture. Unrestricted Subsidiaries will not guarantee the Notes.

 

Transfer and Exchange

 

A holder may transfer or exchange Notes in accordance with the Indenture and compliance with applicable securities laws. Each of the Company, registrar and trustee may require a holder to, among other things, furnish appropriate endorsements and transfer documents in connection with a transfer or exchange of notes. The Company may require a holder to pay any transfer or other taxes and governmental or other fees payable in connection with a transfer or exchange of Notes. The Company is not required to transfer or exchange any Note for a period of 15 days before a selection of Notes to be redeemed.

 

The registered holder of a note will be treated as owning the note for all purposes.

 

Subordination

 

The Notes:

 

  will be senior subordinated unsecured obligations of the Company and will rank equally with all senior subordinated Indebtedness of the Company;

 

  will be subordinated in right of payment to all existing and future Senior Debt of the Company; and

 

  will be senior in right of payment to all existing and any future subordinated Indebtedness of the Company.

 

The payment of principal, premium, interest and all other amounts payable with respect to the Notes will be subordinated to the prior payment in full in cash of all Senior Debt of the Company as described below.

 

The holders of Senior Debt will be entitled to receive payment in full in cash of all obligations due in respect of Senior Debt before the Holders of the Notes will be entitled to receive any payment with respect to the Notes (except that Holders of Notes may receive and retain Permitted Junior Securities and payment made from the trust described under the caption “Defeasance”), in the event of any payment or distribution to creditors of the Company:

 

(1) in a liquidation, dissolution or winding up of the Company or any Guarantor;

 

(2) in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company, any Guarantor or its property;

 

(3) in an assignment for the benefit of creditors; or

 

(4) in any marshalling of the assets and liabilities of the Company or any Guarantor.

 

The Company also may not make any payment in respect of the Notes (except in Permitted Junior Securities or from the trust described under the caption “Defeasance”) if:

 

(1) a payment default on Designated Senior Debt occurs and is continuing; or

 

(2) any other default occurs and is continuing on Designated Senior Debt that permits holders of the Designated Senior Debt to accelerate its maturity and the Trustee receives a notice of such default (a “Payment Blockage Notice”) from the Company or the holders or representatives of any Designated Senior Debt.

 

The Company is obligated to resume payments on the Notes:

 

(1) in the case of a payment default, upon the date on which such default is cured or waived; and

 

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(2) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Debt has been accelerated.

 

No new Payment Blockage Notice may be delivered unless and until 360 days have elapsed since the delivery of the immediately prior Payment Blockage Notice and all scheduled payments on the Notes have been paid in full in cash.

 

No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such first nonpayment default shall have been cured or waived for a period of not less than 90 days.

 

The Company must promptly notify holders of Senior Debt if payment of the Notes is accelerated because of an Event of Default.

 

As a result of the subordination provisions described above, in the event of a bankruptcy, liquidation or reorganization of the Company, Holders of these Notes may recover less ratably than other creditors of the Company, including those who are holders of Senior Debt.

 

After giving effect to Refinancing Transactions, as of June 30, 2003, the Company would have had $370.5 million of Indebtedness outstanding, $191.0 million of which would have been Senior Debt and $20.4 million would have been subordinated to the Notes.

 

Optional Redemption

 

The Company may choose to redeem the Notes at any time. If it does so, it may redeem all or any portion of the Notes, at once or over time, after giving the required notice under the Indenture.

 

To redeem the Notes prior to September 1, 2007, the Company must pay a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus the Applicable Premium as of, and accrued and unpaid interest, if any, to, the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

 

“Applicable Premium” means, with respect to any Note on any redemption date, the greater of (1) 1.0% of the principal amount of such Note and (2) the excess of (a) the present value at such redemption date of (i) the redemption price of such Note at September 1, 2007 (such redemption price being set forth in the table below) plus (ii) all required interest payments due on such Note through September 1, 2007 (exclusive of interest accrued but unpaid to the date of redemption), computed using a discount rate equal to the Treasury Rate on such redemption date, plus 50 basis points, over (b) the principal amount of such Note.

 

“Treasury Rate” means, as of any redemption date, the yield to maturity as of such redemption date of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two business days prior to the redemption date (or, if such statistical release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from the redemption date to September 1, 2007; provided, however, that if the period from the redemption date to September 1, 2007 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used.

 

Beginning on September 1, 2007, the Notes may be redeemed at the redemption prices set forth below, plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). The following prices are for

 

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Notes redeemed during the 12-month period commencing on September 1 of the years set forth below, and are expressed as percentages of principal amount:

 

Year


   Percentage

 

2007

   108.000 %

2008

   102.938 %

2009

   100.000 %

 

In addition, on or prior to September 1, 2006, the Company may, at its option, redeem up to 25% of the aggregate principal amount of Notes issued under the Indenture (including additional Notes, if any, issued subsequent to this offering) at a redemption price equal to 111.750% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, with the net cash proceeds of one or more offerings of Capital Stock (other than Disqualified Stock) of the Company or of a Holding Company (to the extent, in the case of a Holding Company, that the net cash proceeds thereof are used to purchase Capital Stock (other than Disqualified Stock), or are contributed to the common equity capital, of the Company); provided that (1) at least 75% of the original aggregate principal amount of old notes and the Notes (including additional notes, if any, issued subsequent to this offering) remain outstanding immediately after the occurrence of any such redemption (excluding old notes or Notes held by the Company and its Subsidiaries) and (2) such redemption shall occur within 90 days of the date of the closing of such offering.

 

Sinking Fund

 

There will be no mandatory sinking fund payments for the Notes.

 

Repurchase at the Option of Holders Upon a Change of Control

 

If a Change of Control occurs, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple of $1,000) of that Holder’s Notes pursuant to the offer described below (the “Change of Control Offer”) on the terms set forth in the Indenture. In the Change of Control Offer, the Company will offer a payment (the “Change of Control Payment”) in cash equal to 101% of the aggregate principal amount of Notes repurchased plus accrued and unpaid interest, if any, to the date of purchase. Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the Change of Control Payment Date specified in the notice, which date will be no earlier than 30 days and no later than 90 days from the date such notice is mailed, pursuant to the procedures required by the Indenture and described in such notice. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the Change of Control provisions of the Indenture, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Change of Control provisions of the Indenture by virtue of such conflict.

 

On the Change of Control Payment Date, the Company will, to the extent lawful:

 

(1) accept for payment all Notes or portions of Notes properly tendered pursuant to the Change of Control Offer;

 

(2) deposit with the paying agent an amount equal to the Change of Control Payment in respect of all Notes or portions of Notes properly tendered; and

 

(3) deliver or cause to be delivered to the trustee the Notes properly accepted together with an officers’ certificate stating the aggregate principal amount of Notes or portions of Notes we are purchasing.

 

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The paying agent will promptly mail to each Holder of Notes properly tendered the Change of Control Payment for such Notes, and the trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each new Note will be in a principal amount of $1,000 or an integral multiple of $1,000.

 

Prior to complying with any of the provisions of this “Change of Control” covenant, but in any event within 90 days following a Change of Control, the Company will either repay all outstanding Senior Debt or obtain the requisite consents, if any, under all agreements governing outstanding Senior Debt to permit the repurchase of Notes required by this covenant. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date.

 

The provisions described above that require the Company to make a Change of Control Offer following a Change of Control will be applicable whether or not any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction.

 

The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Company and purchases all Notes properly tendered and not withdrawn under the Change of Control Offer.

 

The definition of Change of Control includes a phrase relating to the direct or indirect sale, lease, transfer, conveyance or other disposition of “all or substantially all” of the properties or assets of the Company and its Restricted Subsidiaries taken as a whole. Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of Notes to require the Company to repurchase its Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Restricted Subsidiaries taken as a whole to another Person or group may be uncertain.

 

Restrictive Covenants

 

Limitation on Debt and Issuance of Disqualified Stock. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, “incur”) any Indebtedness (including Acquired Debt), and the Company will not, and will not permit any of its Restricted Subsidiaries to, issue any Disqualified Stock (other than to the Company or a Wholly Owned Restricted Subsidiary); provided, however, that the Company and any Guarantor may incur Indebtedness (including Acquired Debt) and issue shares of Disqualified Stock if the Company’s Leverage Ratio at the time of the incurrence of such Indebtedness or issuance of such Disqualified Stock, after giving pro forma effect thereto (including a pro forma application of the use of proceeds therefrom), is less than 4.5 to 1.0.

 

The first paragraph of this covenant will not prohibit the incurrence of any of the following items of Indebtedness or issuance of Disqualified Stock (collectively, “Permitted Debt”):

 

(1) the incurrence by the Company and the Guarantors of Indebtedness pursuant to the Credit Agreement (including letter of credit obligations) in an aggregate principal amount outstanding under this clause (1) at any one time not to exceed $320 million, less the aggregate amount of all Net Proceeds of Asset Sales applied by the Company or any Restricted Subsidiary to repay any Indebtedness under the Credit Agreement (and, in the case of any revolving credit Indebtedness under the Credit Agreement, to effect a corresponding commitment reduction thereunder) pursuant to the “Limitation on Asset Sales” covenant;

 

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(2) the incurrence by the Company of Existing Indebtedness;

 

(3) the incurrence by the Company of Indebtedness represented by the Notes issued on the date of the Indenture and any guarantees of such Notes by the Guarantors;

 

(4) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by the Indenture to be incurred under the first paragraph of this covenant or clauses (2), (3), (4) and (8) of this paragraph, or the issuance by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Disqualified Stock in exchange for, or the net proceeds of which are used to refund, refinance or replace Disqualified Stock (other than intercompany Disqualified Stock) that was permitted by the Indenture to be issued;

 

(5) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries; provided, however, that (i) if the Company or any Guarantor is the obligor, such Indebtedness must be unsecured, evidenced by a promissory note and expressly subordinated to the prior payment in full in cash of all obligations under the Notes, and (ii) (a) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Restricted Subsidiary of the Company and (b) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary of the Company shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (5);

 

(6) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations, provided that such obligations are entered into for bona fide hedging purposes and not for speculative purposes;

 

(7) the incurrence by the Company and its Restricted Subsidiaries of additional Indebtedness in an aggregate amount not to exceed $25.0 million at any one time outstanding (which amount may, but need not, be incurred under the Credit Agreement);

 

(8) the incurrence by the Company or its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Restricted Subsidiary at the time of such incurrence (whether through a direct purchase of assets or the Capital Stock of any Person owning solely those assets) in an aggregate principal amount not to exceed $10.0 million at any time outstanding; and

 

(9) the guarantee by the Company or any Guarantor of Indebtedness of the Company or a Restricted Subsidiary of the Company that was permitted to be incurred by another provision of this covenant.

 

For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (1) through (9) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company may, in its sole discretion,

 

(i) at the time the proposed Indebtedness is incurred, classify all or a portion of that item of indebtedness on the date of its incurrence under either the first paragraph of this covenant or under any category of Permitted Debt described in clauses (1) through (9) above; and

 

(ii) reclassify at any later date all or a portion of that or any other item of Indebtedness as being or having been incurred in any manner that complies with this covenant;

 

provided, that, in each case, Indebtedness under the Credit Agreement outstanding on the date the Notes are first issued under the Indenture is deemed to be incurred pursuant to clause (1) of the second paragraph of this covenant.

 

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Accrual of interest, accretion or amortization of original issue discount and the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms will not be deemed to be an incurrence of Indebtedness for purposes of this covenant.

 

Limitation on Restricted Payments. The Company will not make, and will not permit any Restricted Subsidiary to make, directly or indirectly, any Restricted Payment unless at the time of, and after giving effect to, such proposed Restricted Payment:

 

(1) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence of the proposed Restricted Payment;

 

(2) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable Latest Full Fiscal Quarter, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the test set forth in the first paragraph of the covenant described under the caption “Limitation on Debt and Issuance of Disqualified Stock”; and

 

(3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the Closing Date (excluding Restricted Payments permitted by clauses (2), (3), (5), (7), (8) and (9) of the next succeeding paragraph), is less than the sum, without duplication, of

 

(a) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) beginning October 1, 2003 to the end of the Company’s most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus

 

(b) 100% of the aggregate net proceeds, including the fair market value of property other than cash as determined by the Board of Directors in good faith, received by the Company since the Closing Date (i) from the issue or sale of Equity Interests of the Company (other than Disqualified Stock) (including, without limitation, in a merger, consolidation, acquisition of property or any other form of transaction involving the issue or sale of Capital Stock (other than Disqualified Stock)), (ii) from the issue or sale of Disqualified Stock or debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Restricted Subsidiary of the Company), and (iii) from other capital contributions to the Company (including, without limitation, through the merger or consolidation of a Person with and into the Company not involving the issuance or delivery of securities or any other consideration by the Company or any Restricted Subsidiary), plus

 

(c) the amount equal to the net reduction in Investments (other than Permitted Investments) made by the Company or any of its Restricted Subsidiaries in any Person after the Closing Date resulting from, and without duplication (i) repurchases or redemptions of such Investments by such Person, proceeds realized upon the sale of such Investment to an unaffiliated purchaser and repayments of loans or advances or other transfers of assets by such Person to the Company or any Restricted Subsidiary of the Company or (ii) the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of “Investment”), not to exceed the amount of Investments previously made by the Company or any of its Restricted Subsidiaries, which amount was included in the calculation of Restricted Payments; provided, however, that no amount shall be included under this clause (c) to the extent it is already included in Consolidated Net Income.

 

The preceding provisions will not prohibit:

 

(1) the payment of any dividend or the making of any distribution within 60 days after the date of declaration thereof, if at the date of declaration the payment or distribution complied with the provisions of the Indenture;

 

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(2) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness or Capital Stock of the Company or any warrants, options or other rights to acquire shares of any such Capital Stock either (a) solely in exchange for Equity Interests of the Company other than Disqualified Stock, (b) through the application of the net proceeds of a substantially concurrent sale for cash (other than to a Restricted Subsidiary of the Company) of Equity Interests of the Company other than Disqualified Stock or (c) in the case of Disqualified Stock, solely in exchange for, or through the application of the net proceeds of a substantially concurrent sale for cash (other than to a Restricted Subsidiary of the Company) of, Permitted Refinancing Disqualified Stock; provided, in each case, that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (3)(b) of the preceding paragraph;

 

(3) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness, in exchange for or with the net cash proceeds from, an incurrence of Permitted Refinancing Indebtedness;

 

(4) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or a Holding Company held by any member of the Company’s, Holding Company’s, or any of the Company’s Subsidiaries’ management or board of directors or family partnerships, trusts or other entities or investment vehicles created for the benefit of any of the foregoing; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $2.5 million in any twelve-month period;

 

(5) payments by the Company to fund the payment by a Holding Company of audit, accounting, legal or other similar expenses, to pay franchise or other similar taxes and to pay other corporate overhead expenses, including directors’ fees, indemnifications and similar arrangements, so long as such dividends are paid as and when needed by a Holding Company so long as the aggregate amount of payments pursuant to this clause (5) does not exceed $500,000 in any calendar year;

 

(6) payments to enable the Company or a Holding Company to make cash payments to holders of its Capital Stock in lieu of issuance of fractional shares of its Capital Stock so long as the aggregate amount of payments pursuant to this clause (6) does not exceed $100,000 in any calendar year;

 

(7) repurchases of Capital Stock deemed to occur upon the exercise of stock options or warrants if such Capital Stock represents all or a portion of the exercise price thereof;

 

(8) repayment of subordinated Indebtedness (including any early redemption premium) of the Company on the Closing Date;

 

(9) repurchase, redemption or other acquisition or retirement of Preferred Stock outstanding on the date of the Indenture in an amount not to exceed $15.0 million; and

 

(10) Restricted Payments in the amount of $10.0 million,

 

provided, however, that in each case, no Event of Default shall have occurred or be continuing at the time of such payment or as a result thereof. In determining the aggregate amount of Restricted Payments made subsequent to the Closing Date, amounts expended pursuant to clauses (1), (4), (6) and (10) shall be included in such calculations.

 

Notwithstanding anything to the contrary in this “Limitation on Restricted Payments” covenant, the Company will not effect any repurchase, redemption, defeasance, other acquisition or retirement of the Subordinated Notes other than in exchange for or with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness.

 

The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined in good faith by the Board of Directors whose resolution with

 

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respect thereto shall be delivered to the Trustee. The Board of Directors’ determination must be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if the fair market value exceeds $7.5 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers’ Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this “Limitation on Restricted Payments” covenant were computed, together with a copy of any fairness opinion or appraisal required by the Indenture.

 

The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary in accordance with the terms of the Indenture if such designation would not cause a Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation as determined in good faith by the Board of Directors. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.

 

Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolution of the Board of Directors giving effect to such designation and an Officers’ Certificate certifying that such designation complied with the foregoing conditions. If, at any time, any Unrestricted Subsidiary would fail to meet the definition of an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption “Limitation on Debt and Issuance of Disqualified Stock,” the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (1) such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if such Indebtedness is permitted under the covenant described under the caption “Limitation on Debt and Issuance of Disqualified Stock,” calculated on a pro forma basis as if such designation had occurred at the beginning of the relevant Latest Full Fiscal Quarter and, to the extent such Indebtedness is secured by a Lien, such Lien is permitted under the “Limitation on Liens” covenant, (2) all outstanding Investments owned by such Unrestricted Subsidiary will be deemed to be made as of the time of such designation and such designation shall only be permitted if such Investments would be permitted under the “Limitation on Restricted Payments” covenant, and (3) no Default or Event of Default would be in existence immediately following such designation.

 

Limitation on Liens. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Indebtedness on any asset now owned or hereafter acquired, or any income or profits therefrom or assign or convey any right to receive income therefrom, except Permitted Liens, unless contemporaneously therewith effective provision is made, in the case of the Company, to secure the Notes and all other amounts due under the Indenture, and in the case of a Restricted Subsidiary which is a Guarantor, to secure such Restricted Subsidiary’s Note Guarantee and all other amounts due under the Indenture, equally and ratably with such Indebtedness (or, in the event that such Indebtedness is subordinated in right of payment to the Notes or such Subsidiary’s Note Guarantee, prior to such Indebtedness) with a Lien on the same properties and assets securing such Indebtedness for so long as such Indebtedness is secured by such Lien.

 

Limitation on Asset Sales. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless:

 

(1) the Company or such Restricted Subsidiary receives consideration at the time of the Asset Sale at least equal to the fair market value of the assets or Equity Interests issued or sold or otherwise disposed of;

 

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(2) the fair market value is determined in good faith by the management of the Company or, if such Asset Sale involves consideration in excess of $5 million, by the Board of Directors as evidenced by a board resolution; and

 

(3) at least 75% of the consideration paid to the Company or such Restricted Subsidiary in connection with such Asset Sale is in the form of Qualified Consideration.

 

Within 365 days after the receipt of any Net Proceeds from an Asset Sale, the Company or such Restricted Subsidiary may apply such Net Proceeds, at its option:

 

(1) to repay Senior Debt of the Company or any Guarantor, or any Indebtedness of any Restricted Subsidiary that is not a Guarantor (and, in the case of revolving credit Indebtedness, to reduce commitments with respect thereto); or

 

(2) to the acquisition of a majority of the assets of a Permitted Business, or a majority of the Voting Stock of a Person engaged in a Permitted Business (provided that such Person will become on the date of acquisition thereof a Restricted Subsidiary), the making of a capital expenditure or the acquisition of other long-term assets (including, without limitation, security monitoring accounts or agreements) that are used or useful in a Permitted Business.

 

Pending application of Net Proceeds pursuant to this covenant, the Company may temporarily reduce revolving credit borrowings or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture.

 

Any Net Proceeds from Asset Sales that are not applied or invested as provided in the preceding paragraph will be deemed to constitute “Excess Proceeds.” When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will be required to make an offer to all holders of Notes and other Indebtedness ranking on a parity with the Notes containing provisions similar to those set forth in the Indenture with respect to offers to purchase with the proceeds of sales of assets (an “Asset Sale Offer”) to purchase the maximum principal amount of Notes and other Indebtedness ranking on a parity with the Notes, pro rata, that may be purchased out of the Excess Proceeds at an offer price in cash in an amount equal to 100% of the principal amount thereof (or the accreted value of such Indebtedness, if such other Indebtedness is issued at a discount), plus accrued and unpaid interest, if any, thereon to the date of purchase, in accordance with the procedures set forth in the Indenture. To the extent that any Excess Proceeds remain after consummation of an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of Notes and other Indebtedness ranking on a parity with the Notes tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and other Indebtedness ranking on a parity with the Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero.

 

The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to the covenant described hereunder. To the extent that the provisions of any securities laws or regulations conflict with provisions of the covenant described hereunder, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the covenant described in this section.

 

Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the right of any Restricted Subsidiary to:

 

(1) pay dividends or make any other distributions on its Capital Stock to the Company or any of its Restricted Subsidiaries or pay any indebtedness owed to the Company or its Restricted Subsidiaries;

 

(2) make loans or advances to the Company or any of its Restricted Subsidiaries; or

 

(3) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries.

 

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The foregoing limitations will not apply to encumbrances or restrictions existing under or by reason of:

 

(1) Existing Indebtedness as in effect on the date of the Indenture;

 

(2) agreements existing on the date of the Indenture, and any amendments, modifications, restatements, renewals, extensions, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, extensions, supplements, refundings, replacements or refinancings are no more restrictive, taken as a whole, with respect to dividend and other payment restrictions than those contained in agreements as in effect on the date of the Indenture, as determined in good faith by the Board of Directors;

 

(3) the Indenture and the Notes;

 

(4) applicable law;

 

(5) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness or Capital Stock was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Indenture to be incurred;

 

(6) customary non-assignment provisions in leases, licenses and other agreements entered into in the ordinary course of business;

 

(7) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (3) of the preceding paragraph on the property so acquired;

 

(8) any agreement for the sale of a Restricted Subsidiary (whether by stock sale, asset sale, merger, consolidation or otherwise) that restricts distributions by such Restricted Subsidiary pending its sale;

 

(9) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole (as determined in good faith by the Board of Directors), than those contained in the agreements governing the Indebtedness being refinanced;

 

(10) secured Indebtedness otherwise permitted to be incurred pursuant to the provisions of the covenant described under the caption “Limitation on Liens” that limits the right of the debtor to dispose of the assets securing such Indebtedness;

 

(11) customary provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements entered into in the ordinary course of business;

 

(12) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business;

 

(13) restrictions relating to Preferred Stock of any Guarantor that require that due and payable dividends thereon be paid in full prior to dividends on such Guarantor’s common stock; or

 

(14) restrictions on the assets of any Guarantor imposed by any agreement or charter provision evidencing Indebtedness or Capital Stock of such Guarantor that is otherwise permitted under the Indenture; provided, however, that the provisions relating to such encumbrance or restriction contained in such agreement or charter provision are not less favorable to the Company in any material respect as determined in good faith by the Board of Directors of the Company than the provisions relating to such encumbrance or restriction contained in the Indenture.

 

Limitation on Transactions with Affiliates. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend, renew or

 

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extend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an “Affiliate Transaction”), unless:

 

(1) such Affiliate Transaction is on terms that are no less favorable to the Company or such Restricted Subsidiary than those that might reasonably have been obtained in a comparable arm’s-length transaction by the Company or such Restricted Subsidiary with an unrelated Person;

 

(2) if such Affiliate Transaction or series of related Affiliate Transactions involves aggregate consideration in excess of $5.0 million, either (x) the Board of Directors (including a majority of the disinterested members of the Board of Directors) approves such Affiliate Transaction and, in its good faith judgment, believes that such Affiliate Transaction complies with clause (1) of this paragraph as evidenced by a resolution of the Board of Directors promptly delivered to the Trustee or (y) if there are no disinterested members of the Board of Directors, the Company complies with the fairness opinion requirement of clause (3) of this paragraph with respect to such Affiliate Transaction; and

 

(3) if such Affiliate Transaction or series of related Affiliate Transactions involves aggregate consideration in excess of $10.0 million, the Company delivers to the Trustee an opinion as to the fairness to the Company or such Restricted Subsidiary of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing.

 

The following items shall not be deemed to be Affiliate Transactions and, therefore, will not be subject to the provisions of the prior paragraph:

 

(1) any employment agreement, employee benefit plan or stock option plan entered into by the Company or any of its Restricted Subsidiaries or the issuance of securities or other payments, awards or grants in cash, securities or otherwise pursuant thereto in the ordinary course of business that has been approved by a majority of the disinterested members of the Board of Directors;

 

(2) transactions between or among the Company and its Restricted Subsidiaries;

 

(3) Restricted Payments that are permitted by the provisions of the Indenture described above under the caption “Limitation on Restricted Payments”;

 

(4) reasonable and customary directors’ fees, indemnification and similar arrangements and payments thereunder by the Company or any of its Restricted Subsidiaries;

 

(5) loans or advances to employees of the Company or any of its Restricted Subsidiaries in the ordinary course of business, provided that the aggregate amount of all such loans and advances at any time outstanding shall not exceed $2.0 million;

 

(6) any agreement as in effect as of the date of the Indenture or any amendment thereto (so long as any such amendment, taken as a whole, is not disadvantageous to the holders of the Notes in any material respect) or any transaction contemplated thereby;

 

(7) the issuance of Capital Stock or other Equity Interests of the Company (other than Disqualified Stock) or the making of other capital contributions to the Company; and

 

(8) payment of $2.0 million to James R. Hull and the payment of $2.7 million to ABRY Partners LLC.

 

Limitation on Issuances and Sales of Equity Interests in Restricted Subsidiaries. The Company will not transfer, convey, sell, lease or otherwise dispose of, and will not permit any of its Restricted Subsidiaries to issue, transfer, convey, sell, lease or otherwise dispose of any Equity Interests in any Restricted Subsidiary of the Company (other than the issuance of directors’ qualifying shares or an immaterial number of shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary and excluding any pledge of Equity Interests of any Restricted Subsidiary) to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company), except:

 

(1) if, immediately after giving effect to such issuance, transfer, conveyance, sale, lease or other disposition, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any

 

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Investment in such Person remaining after giving effect to such issuance or sale would have been permitted to be made under the “Limitation on Restricted Payments” covenant if made on the date of such issuance or sale;

 

(2) sales of Common Stock of a Restricted Subsidiary by the Company or a Restricted Subsidiary, provided that the Company or such Restricted Subsidiary complies with the “Limitation on Asset Sale” covenant; or

 

(3) sales of Disqualified Stock or Preferred Stock of a Guarantor by the Company or a Guarantor that are otherwise permitted under the “Limitation on Debt and Issuance of Disqualified Stock” covenant, provided that the Company or such Guarantor complies with the “Limitation on Asset Sale” covenant.

 

Additional Note Guarantees. If (1) the Company or any of its Domestic Restricted Subsidiaries shall acquire or create another Domestic Restricted Subsidiary or (2) an Unrestricted Subsidiary of the Company is redesignated as a Restricted Subsidiary or otherwise ceases to be an Unrestricted Subsidiary and thereafter is a Domestic Restricted Subsidiary, then such newly acquired, created or redesignated Domestic Restricted Subsidiary shall execute a supplemental Indenture becoming a Guarantor in accordance with the terms of the Indenture.

 

In addition, the Company will not permit any of its Restricted Subsidiaries, directly or indirectly, to Guarantee or pledge any assets to secure the payment of any other Indebtedness of the Company or any Guarantor unless such Restricted Subsidiary is a Guarantor or simultaneously executes and delivers a supplemental indenture providing for the Guarantee of the payment of the Notes by such Restricted Subsidiary, which Guarantee shall be senior to or pari passu with such Subsidiary’s Guarantee of or pledge to secure such other Indebtedness unless such other Indebtedness is Senior Debt, in which case the Guarantee of the Notes may be subordinated to the Guarantee of such Senior Debt to the same extent as the Notes are subordinated to such Senior Debt.

 

A Guarantor may not sell or otherwise dispose of all or substantially all of its assets to, or consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another Person, other than the Company or another Guarantor, unless:

 

(1) immediately after giving effect to that transaction, no Default or Event of Default exists; and

 

(2) either:

 

(a) the Person acquiring the property in any such sale or disposition or the Person formed by or surviving any such consolidation or merger (if other than the Guarantor) is a corporation, partnership, limited liability company or business trust organized or existing under the laws of the United States, any state thereof or the District of Columbia and assumes all the obligations of that Guarantor under the Indenture, its Note Guarantee and the registration rights agreement pursuant to a supplemental indenture satisfactory to the Trustee; or

 

(b) such sale or other disposition complies with the “Limitation on Asset Sale” covenant of the Indenture, including the application of the Net Proceeds therefrom.

 

The Note Guarantee of a Guarantor will be released:

 

(1) in connection with any sale of all of the Capital Stock of a Guarantor to a Person that is not (either before or after giving effect to such transaction) the Company or a Restricted Subsidiary of the Company, if the sale of all such Capital Stock of that Guarantor complies with the “Limitation on Asset Sales” covenant of the Indenture; or

 

(2) if the Company properly designates any Restricted Subsidiary that is a Guarantor as an Unrestricted Subsidiary.

 

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No Senior Subordinated Debt. The Company will not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt of the Company and senior in any respect in right of payment to the Notes. No Guarantor will incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt of such Guarantor and senior in any respect in right of payment to such Guarantor’s Note Guarantee. No Indebtedness of the Company or any Guarantor shall be deemed to be subordinated in right of payment to any other Indebtedness of the Company or such Guarantor solely by virtue of being unsecured.

 

Business Activities. The Company will not, and will not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses, except to such extent as would not be material to the Company and its Restricted Subsidiaries taken as a whole.

 

Payments for Consent. Neither the Company nor any of its Restricted Subsidiaries will, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such consideration is offered to be paid or is paid to all holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement.

 

Merger, Consolidation and Sale of Assets

 

The Company will not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless:

 

(1) the Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation, partnership, limited liability company or business trust organized or existing under the laws of the United States, any state thereof or the District of Columbia;

 

(2) the Person formed by or surviving any such consolidation or merger (if other than the Company) or the Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee;

 

(3) immediately after such transaction no Default or Event of Default exists; and

 

(4) except in the case of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of the Company, immediately after giving effect to such transaction on a pro forma basis, the Company or the Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made:

 

(a) will have Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction; and

 

(b) will, on the date of such transaction after giving pro forma effect thereto and any related financing transactions as if such transaction had occurred at the beginning of the applicable Latest Full Fiscal Quarter, be permitted to incur at least $1.00 of additional Indebtedness under clause (1) of the first paragraph of the “Limitation on Debt and Issuance of Disqualified Stock” covenant,

 

provided, however, that clause (4) above shall not apply if the principal purpose of such transaction is to change the state of incorporation of the Company and any such transaction shall not have as one of its purposes the evasion of the foregoing limitations.

 

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Securities and Exchange Commission Reports

 

Whether or not required by the Securities and Exchange Commission, so long as any Notes are outstanding, the Company will furnish to the Holders of Notes, within the time periods specified in the Securities and Exchange Commission’s rules and regulations:

 

(1) all quarterly and annual financial information that would be required to be contained in a filing with the Securities and Exchange Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and, with respect to the annual information only, a report on the annual financial statements by the Company’s certified independent accountants; and

 

(2) all current reports that would be required to be filed with the Securities and Exchange Commission on Form 8-K if the Company were required to file such reports.

 

In addition, whether or not required by the Securities and Exchange Commission, the Company will file a copy of all of the information and reports referred to in clauses (1) and (2) above with the Securities and Exchange Commission for public availability within the time periods specified in the Securities and Exchange Commission’s rules and regulations (unless the Securities and Exchange Commission will not accept such a filing). In addition, the Company and the Guarantors have agreed that, for so long as any Notes remain outstanding, they will furnish to the Holders, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.

 

If the Company has designated any of its Subsidiaries as Unrestricted Subsidiaries, then the quarterly and annual financial information required by the preceding paragraph shall include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes thereto, and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Company.

 

Events of Default

 

Each of the following constitutes an Event of Default under the Indenture:

 

(1) default for 30 days in the payment when due of interest on the Notes (whether or not prohibited by the subordination provisions of the Indenture);

 

(2) default in payment when due of the principal of, or premium, if any, on the Notes (whether or not prohibited by the subordination provisions of the Indenture);

 

(3) failure by the Company or any of its Restricted Subsidiaries to comply with the provisions described under the captions “—Repurchase at the Option of Holders Upon a Change of Control,” “Limitation on Asset Sales” (whether or not prohibited by the subordination provisions of the Indenture) or “Merger, Consolidation and Sale of Assets”;

 

(4) failure by the Company or any of its Restricted Subsidiaries to comply with any of its other agreements in the Indenture or the Notes, which default continues for a period of 30 days after the Company receives written notice thereof specifying the default from the Trustee or holders of at least 25% in aggregate principal amount of outstanding Notes;

 

(5) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, if that default:

 

(a) is caused by a failure to pay at the stated maturity the principal of, or interest or premium, if any, on such Indebtedness (a “Payment Default”); or

 

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(b) results in the acceleration of such Indebtedness prior to its stated maturity,

 

and, in each case, the principal amount of any such Indebtedness, together with the aggregate principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10.0 million or more;

 

(6) failure by the Company or any of its Significant Subsidiaries to pay final, non-appealable judgments aggregating in excess of $10.0 million (which are not covered by insurance as to which the insurer has not disclaimed coverage) that remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days;

 

(7) default by any Guarantor that is a Significant Subsidiary or by a group of Guarantors that, taken together, would be a Significant Subsidiary in the performance of any covenant set forth in its or their Note Guarantee(s), written repudiation by any Guarantor that is a Significant Subsidiary of its obligations under its Note Guarantee or by a group of Guarantors that, taken together, would be a Significant Subsidiary of their Note Guarantees, or the judicial determination that any Note Guarantee is unenforceable against a Guarantor that is a Significant Subsidiary or against a group of Guarantors that, taken together, would constitute a Significant Subsidiary; and

 

(8) certain events of bankruptcy or insolvency with respect to the Company, any Significant Subsidiary or any Group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary.

 

If any Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately by notice in writing to the Company and the Trustee specifying the respective Event of Default and that it is a “notice of acceleration.” In the event of a declaration of acceleration of the Notes because an Event of Default described in clause (5) above has occurred and is continuing, the declaration of acceleration of the Notes shall be automatically annulled if the event of default or payment default triggering such Event of Default pursuant to clause (5) shall be remedied or cured by the Company or a Restricted Subsidiary of the Company or waived by the holders of the relevant Indebtedness within 20 days after the declaration of acceleration of the Notes with respect thereto and if (A) the annulment of the acceleration of the Notes would not conflict with any judgment or decree of a court of competent jurisdiction and (B) all existing Events of Default, except nonpayment of principal, premium or interest on the Notes that became due solely because of the acceleration of the Notes, have been cured or waived. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company, any Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal, premium, if any, or interest) if it determines that withholding notice is in their interest.

 

At any time after a declaration of acceleration with respect to the Notes as described in the preceding paragraph, the holders of a majority in principal amount of the Notes then outstanding (by notice to the Trustee) may rescind and cancel such declaration and its consequences if:

 

(1) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction;

 

(2) all existing Defaults and Events of Default have been cured or waived except nonpayment of principal of or interest on the Notes that has become due solely by such declaration of acceleration;

 

(3) to the extent the payment of such interest is lawful, interest (at the same rate specified in the Notes) on overdue installments of interest and overdue payments of principal, premium, if any, and interest which has become due otherwise than by such declaration of acceleration, has been paid;

 

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(4) the Company has paid the Trustee its reasonable compensation and reimbursed the Trustee for its reasonable expenses, disbursements and advances; and

 

(5) in the event of the cure or waiver of a Default or Event of Default of the type described in clause (8) of the first paragraph under this caption, the Trustee has received an Officers’ Certificate and opinion of counsel that such Default or Event of Default has been cured or waived.

 

The holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of principal of or interest on the Notes.

 

The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default.

 

Amendments and Waivers

 

Subject to exceptions, the Indenture may be amended with the consent of the registered holders of a majority in aggregate principal amount of the Notes then outstanding (including consents obtained in connection with a purchase of, or tender offer or exchange offer for, the Notes) and any past default or compliance with any provisions may also be waived (except a default in the payment of principal, premium or interest and certain covenants and provisions of the Indenture which cannot be amended without the consent of each holder of an outstanding Note) with the consent of the registered holders of at least a majority in aggregate principal amount of the Notes then outstanding (including consents obtained in connection with a purchase of, or tender offer or exchange offer for, the Notes). However, without the consent of each holder affected thereby, no amendment may, among other things:

 

(1) reduce the amount of Notes whose holders must consent to an amendment, supplement or waiver;

 

(2) reduce the principal of or change the fixed maturity of any Note or change the date on which any Notes may be subject to redemption or repurchase, reduce the redemption or repurchase price of the Notes, or waive any payment with respect to the redemption of the Notes (except as would otherwise be permitted under clause (9) hereof);

 

(3) reduce the rate of or change the time for payment of interest on any Note;

 

(4) waive a Default or Event of Default in the payment of principal of, or premium or interest on, the Notes (except a rescission of acceleration of the Notes by the holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration);

 

(5) make any Note payable in money other than U.S. dollars;

 

(6) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of holders of Notes to receive payments of principal of, or premium or interest on, the Notes;

 

(7) release any Guarantor from any of its obligations under its Note Guarantee or the Indenture, except in accordance with the terms of the Indenture;

 

(8) impair the right to institute suit for the enforcement of any payment on or with respect to the Notes or the Note Guarantees;

 

(9) after the Company’s obligation to purchase the Notes arises under the Indenture, amend, change or modify the obligation of the Company to make and consummate an Asset Sale Offer with respect to any Asset Sale in accordance with the “Limitation on Asset Sales” covenant or the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control in accordance with the “Repurchase at the Option of Holders Upon a Change of Control” covenant, including, in each case, amending, changing or modifying any definition relating thereto;

 

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(10) amend or modify any of the provisions of the Indenture or the related definitions affecting the subordination or ranking of the Notes or any Note Guarantee in any manner adverse to the holders of the Notes or any Note Guarantee; or

 

(11) make any change in the foregoing amendment and waiver provisions.

 

Without the consent of any holder of the Notes, the Company and the Trustee may amend the Indenture to:

 

  cure any ambiguity, omission, defect or inconsistency;

 

  provide for uncertificated Notes in addition to or in place of certificated Notes;

 

  provide for the assumption of the Company’s obligations to holders of Notes in the case of a merger or consolidation or sale of all or substantially all of the Company’s assets;

 

  make any change that would provide any additional rights or benefits to the holders of Notes or that does not adversely affect the legal rights under the Indenture of any such holder in any material respect;

 

  comply with requirements of the Securities and Exchange Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act; or

 

  reflect the release of any Guarantor from its Note Guarantee or add any Guarantor pursuant to and in the manner provided by the Indenture.

 

Defeasance

 

The Company may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding Notes and all obligations of the Guarantors discharged with respect to their Note Guarantees (“Legal Defeasance”) except for:

 

(1) the rights of holders of outstanding Notes to receive payments in respect of the principal of, or interest or premium on such Notes when such payments are due from the trust referred to below;

 

(2) the Company’s obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payment and money for security payments held in trust;

 

(3) the rights, powers, trusts, duties and immunities of the Trustee, and the Company’s and the Guarantor’s obligations in connection therewith; and

 

(4) the Legal Defeasance provisions of the Indenture.

 

In addition, the Company may, at its option and at any time, elect to have the obligations of the Company and the Guarantors released with respect to certain covenants that are described in the Indenture (“Covenant Defeasance”) and thereafter any omission to comply with those covenants will not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under “Events of Default” will no longer constitute an Event of Default with respect to the Notes.

 

In order to exercise either Legal Defeasance or Covenant Defeasance:

 

(1) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the holders of the Notes, cash in U.S. dollars, non-callable U.S. Government Obligations, or a combination of cash in U.S. dollars and non-callable U.S. Government Obligations, in amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, or interest and premium, if any, on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date;

 

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(2) in the case of Legal Defeasance, the Company has delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (a) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (b) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel will confirm that, the holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred;

 

(3) in the case of Covenant Defeasance, the Company has delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner at the same times as would have been the case if such Covenant Defeasance had not occurred;

 

(4) no Default or Event of Default has occurred and is continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 123rd day after the date of deposit;

 

(5) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound;

 

(6) the Company must deliver to the Trustee an Officers’ Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others;

 

(7) if the Notes are to be redeemed prior to their stated maturity, the Company must deliver to the Trustee irrevocable instructions to redeem all of the Notes on the specified redemption date; and

 

(8) the Company must deliver to the Trustee an Officers’ Certificate and an opinion of counsel, each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance have been complied with.

 

An opinion of counsel required by clauses (2) and (3) above need not be delivered if all Notes not previously delivered to the Trustee for cancellation:

 

  have become due and payable;

 

  will become due and payable on the maturity date within one year; or

 

  are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company.

 

Governing Law

 

The Indenture and the Notes are governed by the laws of the State of New York.

 

The Trustee

 

The Bank of New York Trust Company of Florida, N.A. is the Trustee under the Indenture.

 

Except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. During the existence of an Event of Default, the Trustee will exercise such of the rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person’s own affairs.

 

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No Personal Liability of Directors, Officers, Employees, Incorporators and Shareholders

 

No director, officer, employee, incorporator or shareholder of the Company, as such, shall have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes.

 

Definitions

 

Set forth below is a summary of the defined terms used in the Description of Notes above. Reference is made to the Indenture for the full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided.

 

“Acquired Debt” means, with respect to any specified Person:

 

(1) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Restricted Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Restricted Subsidiary of such specified Person; and

 

(2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person.

 

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control.

 

“Asset Sale” means:

 

(1) the sale, lease, conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback and excluding any pledge of, or the creation, incurrence, assumption or sufferance to exist of any other Lien on assets by the Company or any of its Restricted Subsidiaries), other than sales of inventory in the ordinary course of business, and

 

(2) the issue or sale by the Company or any of its Subsidiaries of Equity Interests in any of the Company’s Restricted Subsidiaries (excluding directors’ qualifying shares or an immaterial number of shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary and excluding any pledge of Equity Interests of the Company or any of its Restricted Subsidiaries),

 

in the case of either clause (1) or (2), whether in a single transaction or a series of related transactions that have a fair market value in excess of $3.0 million.

 

Notwithstanding the foregoing, the following items shall not be deemed to be Asset Sales:

 

(1) a transfer of assets by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another Restricted Subsidiary;

 

(2) an issuance of Equity Interests by a Restricted Subsidiary to the Company or to a Wholly Owned Restricted Subsidiary of the Company;

 

(3) the sale of excess or obsolete assets, in the ordinary course of business;

 

(4) a Restricted Payment that is permitted by the covenant described above under the caption “Restricted Payments”;

 

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(5) transactions covered by the “Merger, Consolidation or Sale of Assets” covenant;

 

(6) any transaction that constitutes a Change of Control;

 

(7) dispositions or foreclosure in connection with Permitted Liens; and

 

(8) the licensing or sublicensing of intellectual property or other general intangibles and licenses, leases or subleases of other property in the ordinary course of business and which do not materially interfere with the business of the Company and its Restricted Subsidiaries.

 

“Board of Directors” means the board of directors of the Company or a Holding Company, as applicable, or any duly authorized and constituted committee thereof.

 

“Capital Lease Obligation” means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP.

 

“Capital Stock” means (1) in the case of a corporation, capital stock, (2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of capital stock, (3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (4) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.

 

“Cash Equivalents” means:

 

(1) United States dollars;

 

(2) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than one year from the date of acquisition, unless such securities are deposited by the Company to defease any Indebtedness;

 

(3) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers’ acceptances with maturities not exceeding one year and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $250 million and outstanding debt which is rated “A” (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act);

 

(4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2) and (3) above entered into with any financial institution meeting the qualifications specified in clause (3) above;

 

(5) commercial paper having the highest rating obtainable from Moody’s or S&P and in each case maturing within six months after the date of acquisition;

 

(6) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within six months from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either S&P or Moody’s; and

 

(7) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (1) through (6) of this definition.

 

“Change of Control” means the occurrence of any of the following events:

 

(1) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole or the Holding Company and its Subsidiaries

 

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taken as a whole to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a “Group”), other than to the Permitted Holders;

 

(2) the acquisition by any Person or Group (other than the Permitted Holders or a Holding Company) of the power, directly or indirectly, to vote or direct the voting of securities having more than 50% of the ordinary voting power for the election of directors of the Company or, if the Company is a Subsidiary of a Holding Company, such Holding Company;

 

(3) the first day on which a majority of the members of the Board of Directors of the Company or a Holding Company are not Continuing Directors; or

 

(4) a “change in control” event occurs under the terms of the Subordinated Notes while such Subordinated Notes are outstanding or a “change in control” or “change in management” event occurs under the terms of the Credit Agreement.

 

Solely for purposes of determining whether a Change of Control has occurred under clause (2) above, if the Company becomes a Subsidiary of a Holding Company and thereafter ceases to be a wholly-owned Subsidiary of such Holding Company, then the acquisition or ownership by any Person or Group (other than the Permitted Holders or a subsequent Holding Company) of the power, directly or indirectly, to vote or direct the voting of securities having any percentage of the ordinary voting power for the election of directors of the former Holding Company (the “Holdings Percentage”) shall be deemed to be the acquisition or ownership of that percentage of the ordinary voting power for the election of directors of the Company equal to the product of the Holdings Percentage multiplied by the percentage of the ordinary voting power for the election of directors of the Company held by the former Holding Company.

 

“Closing Date” means the date on which the Notes are originally issued under the Indenture.

 

“Commission” means the Securities and Exchange Commission.

 

“Consolidated Cash Flow” means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus, to the extent deducted in computing such Consolidated Net Income:

 

(1) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries;

 

(2) consolidated interest expense of such Person and its Restricted Subsidiaries, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers’ acceptance financings, and net costs (if any) pursuant to Hedging Obligations); and

 

(3) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charges to the extent that it represents an accrual of or reserve for cash payments to be made in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries.

 

Notwithstanding the foregoing, the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Restricted Subsidiaries.

 

“Consolidated Net Income” means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis determined in accordance with GAAP; provided that

 

(1) the Net Income of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the specified Person or a Restricted Subsidiary thereof;

 

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(2) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its equityholders;

 

(3) the Net Income of any Person acquired during the specified period for any period prior to the date of such acquisition shall be excluded;

 

(4) any extraordinary gain or loss, together with any related provision for taxes on such gain or loss, shall be excluded;

 

(5) any gain or loss resulting from Asset Sales (without regard to the $3.0 million limitation set forth in the definition thereof) or abandonments or reserves relating thereto and the related tax effects shall be excluded;

 

(6) any gain or loss from foreign exchange transactions shall be excluded;

 

(7) the cumulative effect of a change in accounting principles shall be excluded;

 

(8) the Net Income (but not loss) of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the specified Person or one of its Subsidiaries;

 

(9) any non-cash compensation expense in connection with the issuance of employee or independent contractor stock options shall be excluded; and

 

(10) any amount paid or accrued as dividends on Preferred Stock of the Company or any Guarantor owned by Persons other than the Company and any of its Restricted Subsidiaries shall be excluded.

 

Consolidated Net Worth” means, with respect to any specified Person as of any date, the sum of:

 

(1) the consolidated equity of the common stockholders of such Person and its consolidated Restricted Subsidiaries as of such date; plus

 

(2) the respective amounts reported on such Person’s balance sheet as of such date with respect to any series of Preferred Stock (other than Disqualified Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such Preferred Stock.

 

Continuing Directors” means, as of any date of determination, any member of the Board of Directors of the Company or a Holding Company, as applicable, who (1) was a member of the Board of Directors on the date of the Indenture or (2) was nominated for election or elected to the Board of Directors with the approval of a majority of the Continuing Directors who were members of the Board of Directors at the time of such nomination or election or (3) was a Permitted Holder or a representative of a Permitted Holder.

 

Credit Agreement” means that certain credit agreement to be entered into as of the date of the Indenture, by and among the Company, certain lenders and other financial institutions and Fleet National Bank, as administrative agent for such lenders and financial institutions, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, restated, renewed, refunded, replaced or refinanced from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including by way of adding Restricted Subsidiaries of the Company as borrowers or guarantors thereunder) all of or a portion of the Indebtedness under such agreement or any such successor or replacement agreement and whether by the same or any other agent, lender or group of lenders (or other institutions) or otherwise.

 

Default” means any event which is, or after notice or passage of time or both would be, an Event of Default.

 

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Designated Senior Debt” means (1) Indebtedness outstanding under the Credit Agreement and (2) any other Senior Debt which, at the date of determination, has an aggregate principal amount outstanding of, or under which, at the date of determination, the holders thereof are committed to lend up to, at least $20.0 million and is specifically designated by the Company in the instrument evidencing or governing such Senior Debt as “Designated Senior Debt” for purposes of the Indenture.

 

“Disqualified Stock” means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, at the option of the holder thereof), or upon the happening of any event other than an initial public offering of Equity Interests matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is 91 days after the earlier of the stated maturity date of the Notes or the date on which no Notes remain outstanding; provided that only the portion of Capital Stock which so matures or is mandatorily redeemable or is so redeemable at the sole option of the holder thereof prior to such date shall be deemed Disqualified Capital Stock; provided, further, that any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require the Company to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock, if the terms of such Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock pursuant to such provisions prior to the Company’s repurchase of such Notes as are required to be repurchased pursuant to the “Limitation on Asset Sales” and “Repurchase at the Option of Holders Upon a Change of Control” covenants. Notwithstanding the foregoing, the Capital Stock in the Company owned by James R. Hull on the date of the Indenture shall not constitute Disqualified Stock by reason of his right to require the Company to repurchase such Capital Stock pursuant to the terms of his agreement with the Company dated August 18, 2003.

 

“Domestic Restricted Subsidiary” of a Person means, at any date of determination, any Restricted Subsidiary of such Person that (1) is organized under the laws of the United States, any State thereof or the District of Columbia as of such date or (2) is not so organized but, due to an election or otherwise, for any taxable year (or a portion thereof) that includes such date (a) is treated as a domestic entity for United States federal income tax purposes or (b) is treated as a partnership or a division of a domestic entity for United States federal income tax purposes.

 

“Equity Interests” means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock).

 

“Event of Default” has the meaning set forth under the caption “Events of Default.”

 

“Exchange Act” means the Securities Exchange Act of 1934.

 

“Existing Indebtedness” means Indebtedness of the Company and its Restricted Subsidiaries (other than Indebtedness under the Credit Agreement and Indebtedness being repaid on the date of the Indenture) in existence on the date of the Indenture, until such amounts are repaid.

 

“GAAP” means generally accepted accounting principles as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or the Securities and Exchange Commission or in such other statements by such other entity as have been approved by a significant segment of the accounting profession.

 

“Guarantee” means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness.

 

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“Guarantors” means each Subsidiary that executes a Note Guarantee in accordance with the provisions of the Indenture and their respective successors and assigns until released from their obligations under their Guarantees in accordance with the terms of the Indenture.

 

“Hedging Obligation” of any Person means the obligations of such Person under:

 

(1) interest rate protection agreements, interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, interest rate futures and interest rate options;

 

(2) other agreements or arrangements designed to protect such Person against fluctuations in interest rates; and

 

(3) any foreign exchange contract, currency swap agreement or other similar agreement or arrangement.

 

“Holder” means the registered owner of any Note.

 

“Holding Company” means any company as to which the Company is, directly or indirectly, a wholly-owned Subsidiary.

 

“Indebtedness” means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of:

 

(1) borrowed money;

 

(2) evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof);

 

(3) banker’s acceptances;

 

(4) Capital Lease Obligations;

 

(5) the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable; or

 

(6) any Hedging Obligations;

 

if and to the extent any of the preceding items (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP. In addition, the term “Indebtedness” includes all Indebtedness of others secured by a Lien on any asset of the specified Person (whether or not such Indebtedness is assumed by such Person), the amount of such Indebtedness being deemed to be the lesser of the value of such property or asset or the amount of the Indebtedness so secured and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person; provided that Indebtedness shall not include:

 

(x) any amounts withheld by the Company or any Restricted Subsidiary from the purchase price paid for the purchase of subscriber accounts;

 

(y) Indebtedness in respect of letters of credit to support workers compensation obligations, performance bonds, bankers’ acceptances and surety or appeal bonds provided by the Company or any of its Restricted Subsidiaries to their customers in the ordinary course of their business; and

 

(z) Indebtedness arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any of its Restricted Subsidiaries pursuant to such agreements, in each case incurred in connection with the disposition of any business assets or Restricted Subsidiaries of the Company (other than guarantees of Indebtedness or other obligations incurred by any Person acquiring all or any portion of such business assets or Restricted Subsidiaries of the Company for the purpose of financing

 

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such acquisition) in a principal amount not to exceed the gross proceeds actually received by the Company or any of its Restricted Subsidiaries in connection with such disposition.

 

The amount of any Indebtedness outstanding as of any date shall be:

 

(1) the accreted value thereof, in the case of any Indebtedness issued with original issue discount; and

 

(2) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness.

 

“Investments” means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding (1) commission, travel and similar advances to officers and employees made in the ordinary course of business and (2) advances to customers or suppliers in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable, prepaid expenses or deposits on the balance sheet of the Company or its Restricted Subsidiaries), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities (other than Cash Equivalents), together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided, however, that Investments shall not include the purchase of subscriber accounts or amounts owed to the Company by security alarm dealers for subscriber accounts lost through attrition. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Investment in such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the third from last paragraph of the covenant described under the caption “Restricted Payments.” The acquisition by the Company or any Restricted Subsidiary of a Person that holds an Investment in a third Person shall be deemed to be an Investment by the Company or such Restricted Subsidiary in such third Person in an amount equal to the fair market value of the Investment held by the acquired Person in such third Person determined as provided in the third from last paragraph of the covenant described under the caption “Limitation on Restricted Payments.”

 

“Leverage Ratio” means the ratio of:

 

(1) the aggregate outstanding amount of Indebtedness of the Company and its Restricted Subsidiaries as of the date of determination on a consolidated basis (subject to the terms described in the paragraph below) plus the aggregate liquidation preference of all outstanding Disqualified Stock of the Company and its Restricted Subsidiaries (except Disqualified Stock issued to the Company or a Wholly Owned Restricted Subsidiary of the Company) on such date, to

 

(2) the Consolidated Cash Flow of the Company for the latest full fiscal quarter (the “Latest Full Fiscal Quarter”) for which financial statements are available on the date of determination annualized (i.e., multiplied by four).

 

For purposes of this definition, Consolidated Cash Flow shall be calculated on a pro forma basis after giving effect to (1) the incurrence of the Indebtedness of the Company and its Restricted Subsidiaries and the issuance of the Disqualified Stock of the Company and its Restricted Subsidiaries (and the application of the proceeds therefrom) giving rise to the need to make such calculation and any incurrence (and the application of the proceeds therefrom) or repayment of other Indebtedness on the date of determination, as if such incurrence or issuance (and the application of the proceeds therefrom) or the repayment, as the case may be, occurred on the first day of the Last Full Fiscal Quarter, and (2) any acquisition or disposition (including, without limitation, any acquisition giving rise to the need to make such calculation as a result of the Company or one of its Restricted Subsidiaries (including any Person that becomes a Restricted Subsidiary as a result of such acquisition) incurring,

 

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assuming or otherwise becoming liable for Indebtedness or issuing Disqualified Stock) at any time on or subsequent to the first day of the Latest Full Fiscal Quarter and on or prior to the date of determination, as if such acquisition or disposition (including the incurrence or assumption of any such Indebtedness and the issuance of such Disqualified Stock and also including any Consolidated Cash Flow associated with such acquisition or disposition) occurred on the first day of the Latest Full Fiscal Quarter. For purposes of this definition, pro forma calculations shall be made in good faith by a responsible financial or accounting officer of the Company consistent with Article 11 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation may be amended.

 

“Lien” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.

 

“Moody’s” means Moody’s Investors Service, Inc. or any successor to the rating agency business thereof.

 

“Net Income” means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP.

 

“Net Proceeds” means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including payments in respect of deferred payment obligations when received in the form of cash), net of:

 

(1) reasonable out-of-pocket expenses and fees relating to such Asset Sale, including, without limitation, legal, accounting and investment banking fees and sales commissions, recording fees, relocation costs, title insurance premiums, appraisers’ fees and costs reasonably incurred in preparation of any asset or property for sale;

 

(2) taxes paid or reasonably estimated to be payable (calculated based on the combined state, federal and foreign statutory tax rates applicable to the Company or the Restricted Subsidiary engaged in such Asset Sale after taking into account any tax credits or deductions and any tax sharing arrangements);

 

(3) all payments made on any Indebtedness of the Company or any Guarantor which is secured

by any assets subject to such Asset Sale;

 

(4) all distributions and other payments required to be made to any Person owning a beneficial interest in the assets subject to sale, or minority interest holders in Subsidiaries or joint ventures, as a result of such Asset Sale; and

 

(5) any reserves established in accordance with GAAP for adjustment in respect of the sales price of the asset or assets subject to such Asset Sale or for any liabilities associated with such Asset Sale.

 

“Non-Recourse Debt” means Indebtedness:

 

(1) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (to a guarantor or otherwise) or (c) constitutes the lender; and

 

(2) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than the Notes) of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity.

 

“Officer” means the Chief Executive Officer, the President, the Chief Financial Officer or any Executive Vice President of the Company.

 

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“Officers’ Certificate” means a certificate signed by two Officers of the Company, at least one of whom shall be the principal executive officer or principal financial officer of the Company, and delivered to the Trustee.

 

“Opinion of Counsel” means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee.

 

“Permitted Business” means any business conducted by the Company and its Restricted Subsidiaries on the date of the Indenture and other businesses reasonably related, ancillary or complementary thereto, as determined in good faith by the Company’s Board of Directors.

 

“Permitted Holders” means AV Partners III, L.P., AV Partners V, L.P., Capital Resource Partners II, L.P, ABRY Capital Partners, L.P., ABRY Partners IV, L.P., ABRY Investment Partnership, L.P., Windward Capital GP II, LLC, Windward Capital Partners II, L.P., and Windward Capital LP II, LC. or any of their Affiliates, partners or members or James R. Hull or any of his Affiliates or family partnerships, trusts or other entities or investment vehicles created for the benefit of any of the foregoing.

 

“Permitted Investment” means:

 

(1) any Investment in the Company or a Guarantor (whether existing on the Closing Date or created thereafter) or any Person that after such Investment, and as a result thereof, becomes a Guarantor;

 

(2) any Investment in Cash Equivalents;

 

(3) any Investment made as a result of the receipt of non-cash consideration from a sale of assets that was made pursuant to and in compliance with the covenant described under the caption “—Restrictive Covenants—Limitation on Asset Sales”;

 

(4) any Investments to the extent acquired in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company;

 

(5) Investments in securities of trade creditors, wholesalers, suppliers or customers received pursuant to any plan of reorganization or similar arrangement for obligations arising in the ordinary course of business;

 

(6) loans or advances to employees of the Company or any Restricted Subsidiary thereof for purposes of purchasing from the Company or a Holding Company the Company’s or a Holding Company’s Capital Stock and other loans and advances to employees, dealers or independent contractors made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary, provided that the aggregate amount of all such loans and advances at any time outstanding shall not exceed $2.0 million;

 

(7) receivables owing to the Company or any of its Restricted Subsidiaries, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms;

 

(8) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any of its Restricted Subsidiaries or in satisfaction of judgments or claims;

 

(9) Hedging Obligations incurred in compliance with “Limitation on Debt and Issuance of Disqualified Stock” and not for speculative purposes; and

 

(10) other Investments in an amount not to exceed $10.0 million.

 

“Permitted Junior Securities” of a Person means (1) Equity Interests in such Person and debt securities of such Person, in each case (whether Equity Interests or debt securities) that are subordinated to all Senior Debt and any securities (whether equity or debt) issued in exchange for Senior Debt of such Person to substantially the same extent as, or to a greater extent than, the Notes and the Note Guarantees are subordinated to Senior Debt of

 

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the Company and the Guarantors pursuant to the Indenture or (2) Equity Interests in such Person that are of the same class and series as, and have no greater contractual rights than, any Equity Interests constituting common stock in such Person issued in exchange for Senior Debt of such Person.

 

“Permitted Liens” means:

 

(1) Liens securing Senior Debt;

 

(2) Liens securing the Notes or the Note Guarantees;

 

(3) Liens in favor of the Company or any of its Wholly Owned Restricted Subsidiaries;

 

(4) Liens on property of a Person existing at the time such Person is merged into or consolidated with the Company or any Restricted Subsidiary of the Company or at the time such Person becomes a Restricted Subsidiary of the Company, provided that such Liens were in existence prior to the contemplation of such transaction and do not extend to any assets other than those of the Person merged into or consolidated with the Company or the Restricted Subsidiary;

 

(5) Liens on property existing at the time of acquisition thereof by the Company or any Restricted Subsidiary of the Company, provided that such Liens were in existence prior to the contemplation of such acquisition;

 

(6) Liens existing on the date of the Indenture;

 

(7) Liens securing Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property or assets used in the Company’s or any Restricted Subsidiary’s business or incurred to refinance any such purchase price or cost of construction or improvement, in each case incurred no later than 365 days after the date of such acquisition or the date of completion of such construction or improvement; provided that the principal amount of any Indebtedness described in this clause (7) shall not exceed $10.0 million at any time outstanding;

 

(8) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary of the Company with respect to obligations that do not exceed $5.0 million at any one time outstanding and that do not in the aggregate materially detract from the value of the property or materially impair the use thereof in the operation of business by the Company or such Restricted Subsidiary;

 

(9) Liens for property taxes, assessments and other governmental charges or levies not yet delinquent or subject to penalties for nonpayment or which are being contested in good faith by appropriate proceedings;

 

(10) Liens resulting from the deposit of funds or evidences of Indebtedness in trust for the purpose of defeasing Indebtedness of the Company or any of its Subsidiaries;

 

(11) Liens imposed by law, such as carriers’, warehousemen’s and mechanics’ Liens and other similar Liens, on the assets of the Company or any Restricted Subsidiary arising in the ordinary course of business and securing payment of obligations that are not more than 60 days past due or are being contested in good faith by appropriate proceedings;

 

(12) pledges or deposits by the Company or any Restricted Subsidiary under workmen’s compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which the Company or any Restricted Subsidiary is a party, or deposits to secure public or statutory obligations of the Company, or deposits for the payment of rent, in each case incurred in the ordinary course of business; and

 

(13) Liens on the assets of the Company or any Restricted Subsidiary to secure any Permitted Refinancing Indebtedness, in whole or in part, of any Indebtedness secured by Liens; provided, however, that any such Lien shall be limited to the same assets that secured the original Indebtedness.

 

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“Permitted Refinancing Disqualified Stock” means any Disqualified Stock of the Company or any of its Restricted Subsidiaries issued in exchange for or the net proceeds of which are used to repurchase or redeem other Disqualified Stock of the Company or such Restricted Subsidiary (other than intercompany Disqualified Stock); provided that:

 

(1) the liquidation preference of such Permitted Refinancing Disqualified Stock does not exceed the liquidation value, plus premiums, penalties and accrued dividends on, the Disqualified Stock so exchanged, repurchased or redeemed (plus the amount of reasonable expenses incurred in connection therewith);

 

(2) such Permitted Refinancing Disqualified Stock has a redemption date no earlier than the redemption date of the Disqualified Stock being exchanged, repurchased or redeemed; and

 

(3) such Permitted Refinancing Disqualified Stock is issued either by the Company or by the Restricted Subsidiary that issued the Disqualified Stock being exchanged, repurchased or redeemed.

 

“Permitted Refinancing Indebtedness” means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or such Restricted Subsidiary (other than intercompany Indebtedness); provided that:

 

(1) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus premiums, penalties and accrued interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith);

 

(2) such Permitted Refinancing Indebtedness has a final maturity date no earlier than the final maturity date, and a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity, of the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded;

 

(3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is (i) pari passu in right of payment to the Notes or any guarantee of the Notes, such Permitted Refinancing Indebtedness is pari passu with or subordinated in right of payment to the Notes or any guarantee of the Notes and (ii) subordinated in right of payment to the Notes or any guarantee of the Notes, such Permitted Refinancing Indebtedness is subordinated in right of payment to the Notes or any guarantee of the Notes, in each case on terms at least as favorable to the holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; provided that the Subordinated Notes outstanding on the Closing Date (together with any additional principal amount paid in lieu of cash interest pursuant to the terms of the Subordinated Notes on the Closing Date) may be refinanced or replaced with Indebtedness that is pari passu with the Notes; and

 

(4) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary that is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded.

 

“Person” means any individual, corporation, company (including any limited liability company), association, partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.

 

“Preferred Stock” of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation.

 

“Qualified Consideration” means, with respect to any Asset Sale (or any other transaction or series of related transactions required to comply with clause (3) of the first paragraph of the covenant described under the caption “Restrictive Covenants—Limitation on Asset Sales”), any one or more of (1) Cash Equivalents, (2) securities, notes or other obligations received by the Company or such Restricted Subsidiary from the transferee that are contemporaneously (subject to ordinary settlement periods) converted into cash, (3) Indebtedness (excluding contingent liabilities and Indebtedness that is pari passu or subordinated to the Notes or any Note

 

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Guarantees, and Indebtedness that is owed to the Company or any Affiliate of the Company) of the Company or any Restricted Subsidiary that is expressly assumed by the transferee in an Asset Sale and with respect to which the Company or the Restricted Subsidiary, as the case may be, is unconditionally released by the holder of that Indebtedness, and (4) any assets received by the Company or its Restricted Subsidiaries that would satisfy clause (2) of the second paragraph of the “Limitation on Asset Sales” covenant (provided that if such assets involve consideration in excess of $5.0 million, the valuation of such assets has been approved by a majority of the members of the Board of Directors of the Company and, provided, further that if such assets involve consideration in excess of $15 million, the Board of Directors’ determination must be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing).

 

“Restricted Investment” means an Investment other than a Permitted Investment.

 

“Restricted Payment” means:

 

(1) the declaration or payment of any dividend or other payment or distribution on account of the Company’s or any of its Restricted Subsidiaries’ Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company or any of its Restricted Subsidiaries) or to the direct or indirect holders of the Company’s or any of its Restricted Subsidiaries’ Equity Interests in their capacity as such, other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or to the Company or a Restricted Subsidiary of the Company;

 

(2) the purchase, repurchase, redemption, acquisition or retirement for value (including, without limitation, in connection with any merger or consolidation involving the Company) of any Equity Interests of the Company or any Guarantor (other than any such Equity Interests owned by the Company or any Restricted Subsidiary of the Company);

 

(3) the making of any payment on or with respect to, or the purchase, redemption, defeasance or other acquisition or retirement for value of, any Indebtedness that is subordinated to the Notes, except (a) a payment of interest or a payment of principal at Stated Maturity or (b) the purchase, redemption, defeasance or other acquisition or retirement of such subordinated Indebtedness made in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of such purchase, redemption, defeasance or other acquisition or retirement; or

 

(4) any Restricted Investment.

 

“Restricted Subsidiary” means any Subsidiary of the Company other than an Unrestricted Subsidiary.

 

“S&P” means Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., or any successor to the rating agency business thereof.

 

“Securities Act” means the Securities Act of 1933.

 

“Senior Debt” means:

 

(1) all Indebtedness of the Company or any Guarantor under the Credit Agreement;

 

(2) any other Indebtedness of the Company or any Guarantor permitted to be incurred under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Notes or any Note Guarantee; and

 

(3) all obligations with respect to the items listed in the preceding clauses (1) and (2) (including any interest accruing after the commencement of any bankruptcy proceeding at the rate specified in the applicable Senior Debt, whether or not allowed as a claim in such proceeding).

 

Notwithstanding anything to the contrary in the preceding, Senior Debt will not include:

 

(1) any liability for federal, state, local or other taxes owed or owing by such Person;

 

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(2) any Indebtedness of the Company or any Guarantor to the Company or any of its Subsidiaries or Affiliates;

 

(3) any Indebtedness of the Company or any Guarantor under the Subordinated Notes, including any Subordinated Notes paid in lieu of cash interest thereon;

 

(4) any trade payables;

 

(5) any amounts or liabilities owing to dealers from whom the Company purchases subscriber accounts; or

 

(6) any Indebtedness that is incurred in violation of the Indenture.

 

Significant Subsidiary” means any Subsidiary that would be a “Significant Subsidiary” of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the Securities and Exchange Commission.

 

Stated Maturity” means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof.

 

Subordinated Notes” means the Subordinated Notes due 2010 outstanding on the date of the Indenture, issued pursuant to the Subordinated Note and Warrant Purchase Agreement dated January 18, 2002 among the Company and the purchasers listed on Schedule A attached thereto, as amended.

 

Subsidiary” means, with respect to any Person:

 

(1) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned, directly or indirectly, by such Person; and

 

(2) any other Person (other than a corporation), including, without limitation, a partnership, joint venture or limited liability company, in which the specified Person, one or more Subsidiaries thereof or the specified Person and one or more Subsidiaries thereof, directly or indirectly, at the date of determination thereof, has or have at least a majority of the Voting Stock or other ownership interests of such Person.

 

Unrestricted Subsidiary” means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a resolution of the Board of Directors, but only to the extent that such Subsidiary:

 

(1) has no Indebtedness other than Non-Recourse Debt; and

 

(2) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (1) to subscribe for additional Equity Interests or (2) to maintain or preserve such Person’s financial condition or to cause such Person to achieve any specified levels of operating results.

 

U.S. Government Obligations” means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer’s option.

 

Voting Stock” with respect to any specified Person (1) means any class or classes of Equity Interests of the specified Person pursuant to which the holders thereof have the general voting power under ordinary

 

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circumstances to elect at least a majority of the board of directors, partners, managers or trustees of the specified Person (irrespective of whether or not, at the time, stock of any other class or classes have, or might have, voting power by reason of the happening of any contingency) that control the management and policies of such Person, and (2) if such specified Person is a limited partnership, includes the general partner and limited partner interests of such Person.

 

Weighted Average Life to Maturity” means, when applied to any Indebtedness at any date, the number of years obtained by dividing:

 

(1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by

 

(2) the then outstanding principal amount of such Indebtedness.

 

Wholly Owned Restricted Subsidiary” of any Person means a Restricted Subsidiary of such Person all the outstanding Capital Stock or other ownership interests of which (except directors’ qualifying shares) is at such time owned by such Person and its other Wholly Owned Restricted Subsidiaries.

 

Book-Entry System

 

The notes will be initially issued in the form of one or more Global Securities registered in the name of The Depository Trust Company (“DTC”) or its nominee.

 

Upon the issuance of a Global Security, DTC or its nominee will credit the accounts of Persons holding through it with the respective principal amounts of the notes represented by such Global Security purchased by such Persons in this offering. Ownership of beneficial interests in a Global Security will be limited to Persons that have accounts with DTC (“participants”) or Persons that may hold interests through participants. Any Person acquiring an interest in a Global Security through an offshore transaction in reliance on Regulation S of the Securities Act may hold such interest through Clearstream Banking, S.A. or Euroclear Bank N.V./S.A., as operator of the Euroclear System. Ownership of beneficial interests in a Global Security will be shown on, and the transfer of that ownership interest will be effected only through, records maintained by DTC (with respect to participants’ interests) and such participants (with respect to the owners of beneficial interests in such Global Security other than participants). The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to transfer beneficial interests in a Global Security.

 

Payment of principal of and interest on notes represented by a Global Security will be made in immediately available funds to DTC or its nominee, as the case may be, as the sole registered owner and the sole holder of the notes represented thereby for all purposes under the Indenture. We have been advised by DTC that upon receipt of any payment of principal of or interest on any Global Security, DTC will immediately credit, on its book-entry registration and transfer system, the accounts of participants with payments in amounts proportionate to their respective beneficial interests in the principal or face amount of such Global Security as shown on the records of DTC. Payments by participants to owners of beneficial interests in a Global Security held through such participants will be governed by standing instructions and customary practices as is now the case with securities held for customer accounts registered in “street name” and will be the sole responsibility of such participants.

 

A Global Security may not be transferred except as a whole by DTC or a nominee of DTC to a nominee of DTC or to DTC. A Global Security is exchangeable for certificated notes only if:

 

(1) DTC notifies us that it is unwilling or unable to continue as a depositary for such Global Security or if at any time DTC ceases to be a clearing agency registered under the Exchange Act;

 

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(2) we in our discretion at any time determine not to have all the notes represented by such Global Security; or

 

(3) an Event of Default entitling the noteholders to accelerate shall have occurred and be continuing with respect to the notes represented by such Global Security.

 

Any Global Security that is exchangeable for certificated notes pursuant to the preceding sentence will be exchanged for certificated notes in authorized denominations and registered in such names as DTC or any successor depositary holding such Global Security may direct. Subject to the foregoing, a Global Security is not exchangeable, except for a Global Security of like denomination to be registered in the name of DTC or any successor depositary or its nominee. In the event that a Global Security becomes exchangeable for certificated notes,

 

(1) certificated notes will be issued only in fully registered form in denominations of $1,000 or integral multiples thereof;

 

(2) payment of principal of, and premium, if any, and interest on, the certificated notes will be payable, and the transfer of the certificated notes will be registerable, at the office or agency we maintain for such purposes; and

 

(3) no service charge will be made for any registration of transfer or exchange of the certificated notes, although we may require payment of a sum sufficient to cover any tax or governmental charge imposed in connection therewith.

 

So long as DTC or any successor depositary for a Global Security, or any nominee, is the registered owner of such Global Security, DTC or such successor depositary or nominee, as the case may be, will be considered the sole owner or holder of the notes represented by such Global Security for all purposes under the Indenture and the notes. Except as set forth above, owners of beneficial interests in a Global Security will not be entitled to have the notes represented by such Global Security registered in their names, will not receive or be entitled to receive physical delivery of certificated notes in definitive form and will not be considered to be the owners or holders of any notes under such Global Security. Accordingly, each Person owning a beneficial interest in a Global Security must rely on the procedures of DTC or any successor depositary, and, if such Person is not a participant, on the procedures of the participant through which such Person owns its interest, to exercise any rights of a holder under the Indenture. We understand that under existing industry practices, in the event that we request any action of holders or that an owner of a beneficial interest in a Global Security desires to give or take any action which a holder is entitled to give or take under the Indenture, DTC or any successor depositary would authorize the participants holding the relevant beneficial interest to give or take such action and such participants would authorize beneficial owners owning through such participants to give or take such action or would otherwise act upon the instructions of beneficial owners owning through them.

 

DTC has advised us that DTC is a limited-purpose trust company organized under the Banking Law of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered under the Exchange Act. DTC was created to hold the securities of its participants and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. DTC’s participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations some of whom (or their representatives) own DTC. Access to DTC’s book-entry system is also available to others, such as banks, brokers, dealers and trust companies, that clear through or maintain a custodial relationship with a participant, either directly or indirectly.

 

Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in Global Securities among participants of DTC, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither we, nor the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

 

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

 

The following discussion summarizes certain U.S. federal income tax considerations that may be relevant to the exchange of the old notes for the new notes, but does not purport to be a complete analysis of all potential tax effects. This discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended, applicable Treasury Regulations promulgated thereunder, judicial authority and administrative interpretations, as of the date hereof, all of which are subject to change, possibly with retroactive effect, or are subject to different interpretations. This discussion does not address the tax considerations arising under the laws of any foreign, state, local, or other jurisdiction.

 

We believe that the exchange of the old notes for the new notes should not be an exchange or otherwise a taxable event to a holder for the U.S. federal income tax purposes. Accordingly, a holder should have the same adjusted issue price, adjusted basis and holding period in the new notes as it had in the old notes immediately before the exchange.

 

PLAN OF DISTRIBUTION

 

Based on interpretations by the staff of the Securities and Exchange Commission in no action letters issued to third parties, we believe that you may transfer new notes issued under the exchange offer in exchange for the old notes if:

 

  you acquire the new notes in the ordinary course of your business; and

 

  you are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such new notes.

 

You may not participate in the exchange offer if you are:

 

  our “affiliate” within the meaning of Rule 405 under the Securities Act; or

 

  a broker-dealer that acquired old notes directly from us.

 

Each broker-dealer that receives new notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for old notes where such old notes were acquired as a result of market-making activities or other trading activities. We have agreed that for a period of 180 days after the expiration date of the exchange offer, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until                                 , 2004 all dealers effecting transactions in the new notes may be required to deliver a prospectus.

 

If you wish to exchange new notes for your old notes in the exchange offer, you will be required to make representations to us as described in “Exchange Offer—Purpose and Effect of the Exchange Offer” and “—Procedures for Tendering—Your Representations to Us” in this prospectus. As indicated in the letter of transmittal, you will be deemed to have made these representations by tendering your old notes in the exchange offer. In addition, if you are a broker-dealer who receives new notes for your own account in exchange for old notes that were acquired by you as a result of market-making activities or other trading activities, you will be required to acknowledge, in the same manner, that you will deliver a prospectus in connection with any resale by you of such new notes.

 

We will not receive any proceeds from any sale of new notes by broker-dealers. New notes received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the new

 

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notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to, or through, brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such new notes. Any broker-dealer that resells new notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such new notes may be deemed to be an “underwriter” within the meaning of the Securities Act and any profit on any such resale of new notes and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, the broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.

 

For a period of 180 days after the expiration date of the exchange offer, we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the letter of transmittal. We have agreed to pay all expenses incident to the exchange offer (including the expenses of one counsel for the holders of the old notes) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the old notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act.

 

LEGAL MATTERS

 

The validity of the new notes offered in this exchange offer will be passed upon for us by Vinson & Elkins L.L.P., Dallas, Texas.

 

EXPERTS

 

Our financial statements and schedule as of June 30, 2003 and 2002 and for each of the years in the three year period ended June 30, 2003 included in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports appearing herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND OTHER INFORMATION

 

We will file annual, quarterly and current reports and other information with the Securities and Exchange Commission. Our filings with the Securities and Exchange Commission are also available to the public from the Securities and Exchange Commission’s website at http://www.sec.gov. These reports do not constitute a part of this prospectus, and we are not incorporating by reference any of the reports we file with the Securities and Exchange Commission. The public may read and copy any reports or other information that we file with the Securities and Exchange Commission’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the public reference room by calling the Securities and Exchange Commission at 1-800-SEC-0330.