Protection One, Inc.

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Protection One, Inc.

600 Corporate Pointe, 12th Floor
Culver City, California 90230
U.S.A.
Telephone: (310) 342-6300
Toll Free: (800) 738-4255
Fax: (310) 649-1385
Web site: http://www.protectionone.com

Public Subsidiary of Western Resources, Inc.
Incorporated: 1991
Employees: 4,577
Sales: $421.1 million (1998)
Stock Exchanges: New York
Ticker Symbol: POI
NAIC: 561621 Security Systems Services (Except Locksmiths) (pt); 561612 Security Guards and Patrol Services; 23531 Electrical Contractors

Protection One, Inc. provides security monitoring services to more than 1.5 million customers in the United States, Canada, the United Kingdom, and Western Europe. As one of the leading home security companies in the United States, Protection One installs security systems, monitors the systems, and also provides such services as paging, smoke detectors, and patrol and alarm response. The company has grown significantly in the late 1990s as a result of an aggressive acquisition and growth strategy. The majority of the firm’s subscribers are residential customers, and the bulk of its revenue comes from the monitoring of security systems. Western Resources, Inc., a consumer services company with major interests in energy and monitored services, owns approximately 84 percent of Protection One.

Formative Years in the Late 1980s and Early 1990s

Protection One was born in 1988 when electric utility company PacifiCorp, Inc. decided to form a security company. As the utility industry faced flat growth in the late 1980s, many utility companies turned to diversification, something the Portland, Oregon-based PacifiCorp was familiar with—in the 1950s the company expanded its operations to include telecommunications and mining, which by the late 1980s contributed more than half of PacifiCorp’s total earnings. Because of stagnant sales in electric utilities and telecommunications, PacifiCorp decided to invest in the security alarm business, an as yet untapped market.

The newly formed Protection One Alarm Services opened a branch in Burbank, California, in August 1988 to better serve the rapidly growing California market. In the course of a year Protection One built a subscriber base in southern California counties ranging from Ventura to San Diego. In September 1989 the company opened a Home Builder Services Division in southern California. The division developed contacts with real estate developers and offered programs to put security systems in homes being built.

In 1991 PacifiCorp spun off the security unit in the wake of regulatory conflicts. Protection One was acquired by an investor group of alarm industry executives, including James M. Mackenzie, Jr., John E. Mack, III, John W. Hesse, and Thomas K. Rankin, and incorporated on June 21, 1991. James Mackenzie took on the roles of president and CEO, and the company headquarters was established in Culver City, California.

Exponential Growth Through Acquisitions in the Mid-1990s

Protection One failed to turn a profit during the early 1990s, but the security industry showed immense promise, and Protection One enjoyed increasing revenues—sales grew from $17.6 million in 1992 to $21.9 million the following year. The company had grown through small acquisitions and the purchase of customer accounts. According to William C. Cunningham, president of a security consulting firm, the private security industry in the United States generated sales of about $64.4 billion in 1993. “The security industry as a whole is experiencing fairly robust growth,” Cunningham told the Portland Oregonian. “It is one of the fastest-growing segments of the service sector.”

By mid-May 1994 Protection One had more than 71,700 subscribers spread throughout Washington, Oregon, California, Arizona, and Nevada. More than 80 percent of the company’s subscribers were residential customers. Protection One’s IPO took place in September 1994. The company traded on the NASDAQ under the symbol ALRM.

The U.S. security market was highly fragmented and filled with independent, regional operators, but Protection One sought to consolidate, hoping to become one of the nation’s top providers of security systems. To meet its ambitious goal, Protection One began a flurry of acquisition activities, focusing initially on increasing its presence in familiar markets. In November 1994 the company acquired the alarm monitoring accounts of Knight Protective Industries Inc., gaining about 9,200 residential accounts, 85 percent of which were in California. The Knight purchase marked Protection One’s largest account acquisition to date. A week later, the company bought the security alarm monitoring accounts of AAA Alarm Systems, bringing Protection One’s subscriber count to more than 95,000. By the end of 1994 the company had more than 98,000 subscribers, an increase of 73 percent over the previous year.

Protection One continued to grow through acquisitions in 1995, beginning the year with the purchase of Custom House Security Inc. Protection One gained about 6,500 subscriber accounts and became the largest residential alarm monitoring company in the Seattle, Washington area. The company also boosted its account base in Portland, Oregon, through the acquisition. Protection One’s total number of subscribers rose to more than 103,000, generating monthly recurring revenue of $3.3 million. In May the firm gained about 22,700 additional subscribers through the $18.5 million purchase of Alert Centre Inc.’s accounts in Oregon, Washington, Arizona, California, and Nevada. Alert, one of the largest alarm monitoring companies in the United States, continued its operations in the Southeast and Southwest. In December Protection One grew larger once again through the acquisition of the subscriber base of San Francisco Bay Area-based Bolt Security. The move expanded Protection One’s presence in the San Francisco Bay Area region—the second most attractive residential security alarm market on the West Coast, according to Protection One. The company also acquired the residential subscriber base of Wells Fargo Alarm Services Inc. Most of the subscribers were located in southern California and Arizona. In combination, the two acquisitions added about 6,000 subscribers to Protection One’s account base, bringing the total to more than 129,000, a 52 percent rise over the previous year.

For the fiscal year ended September 30, 1995, Protection One reported revenues of $55.9 million, up 62 percent from fiscal 1994 sales of $34.5 million. Net losses increased as well, however, reaching $18.5 million, compared with $9.2 million in fiscal 1994. Protection One noted that about $8.9 million was due to an extraordinary charge and remained confident that earnings would increase. CEO Mackenzie indicated satisfaction with fiscal 1995 results in a company statement and stated, “We believe fiscal 1995 results affirm the soundness of the Protection One strategy—the pursuit of subscriber growth in the residential security alarm market, clustered around the company’s branch areas.”

Protection One continued to pursue its growth strategy in 1996. In March the company acquired about 18,000 additional alarm monitoring subscribers from Intercap Funds Joint Venture dba (doing business as) Security Data Group and Eagle Sentry Inc. The $18 million purchase consisted primarily of residential subscribers situated in southern California and Las Vegas. The acquisition significantly increased Protection One’s presence in the Las Vegas area; Jim Mackenzie noted in a prepared statement, “With the acquisition of the subscribers and assets of Eagle Sentry, we estimate Protection One today has in excess of 30% market share in the residential security alarm market in Las Vegas, and the next largest competitor has no more than 5% market share.” In May Protection One paid about $15 million for Metrol Security Services, Inc., an alarm company with about 19,000 alarm monitoring subscribers in Arizona and New Mexico, a new region for Protection One. Metrol also had about 5,500 customers using its alarm response services. The acquisition gave Protection One a leadership position in the Arizona market. At the end of 1996 Protection One added to its subscriber base in Portland, Oregon, through the acquisition of Phillips Electronics Inc. for $14.5 million. Phillips had about 12,000 subscribers, 70 percent of whom were residential customers, and the acquisition made Protection One four times larger than its closest rival in the Portland region.

Innovative marketing was another means for Protection One to expand its subscriber base. The company did not have its own sales force but sold security systems through an authorized dealer network. Protection One also pursued marketing deals with other businesses, such as electric utility companies. In October 1996 Protection One announced a marketing venture with former parent PacifiCorp in which Protection One offered home security systems to residential and small business customers served by PacifiCorp’s Pacific Power and Utah Power operations. The agreement gave Protection One access to new territory, namely Utah. Matt De Voll, Protection One’s vice-president of marketing, explained the company’s expansion strategy in Enterprise: “Our strategy has been to expand continuously … and the Utah market, obviously being a high growth market—very family oriented with a lot of homeowners—is a very appealing market for us.”

Company Perspectives:

Our vision is to be the most trusted provider of peace of mind through extraordinary monitored security systems and services, protecting people and the things they care about, wherever and whenever needed.

National and International Expansion in the Late 1990s

Protection One, which had built up its business to become the largest provider of security alarm systems on the West Coast, went nationwide in November 1997 when it acquired the home security businesses of WestSec, Inc., Westar Security, Inc., and Centennial Security Holdings, Inc., subsidiaries of Kansas-based electric and gas utility company Western Resources, Inc. The deal made Protection One one of the largest security companies in the United States, boosting its subscriber base to about 670,000 customers in 48 states, and gave Western Resources an 82.4 percent stake in Protection One. Western Resources had entered the security industry only a few years earlier and had quickly grown to become the third largest security company in the United States. In 1996 Western Resources purchased Westinghouse Security Systems from Westinghouse Electric Corporation, substantially increasing its number of subscriber accounts. The agreement with Protection One, then the seventh largest U.S. provider of home security services, was part of Western Resources’ diversification strategy.

According to Morgan Stanley Dean Witter & Co., the U.S. security alarm industry grew five percent in 1997 to become a $14 billion market. The industry also showed tremendous growth potential, as only about 11 percent of U.S. households subscribed to security alarm services. Analysts believed the industry could grow to about 50 percent of households. Protection One and its new majority shareholder, Western Resources, hoped to take full advantage of the industry possibilities and continued to pursue acquisitions aggressively. At the beginning of 1998 Protection One purchased Network Multifamily Security Corporation for about $180 million. The alarm company had a subscriber base of about 200,000 customers and provided alarm monitoring services to apartment complexes and other multifamily residences. Protection One then acquired the tenth largest monitored alarm company in the United States, Multimedia Security Services, Inc., from Gannett Co., Inc., for about $220 million in March. Multimedia served about 140,000 subscribers in such states as California, Florida, Kansas, Oklahoma, and Texas. Also in March, Protection One acquired Comsec Narragansett Security, Inc. and its 30,000 customers for $65 million.

In May Protection One made its first overseas investment when it acquired Hambro Countrywide Security, one of the largest security companies in the United Kingdom, for about $18 million. The company also moved into Canada when it purchased Rogers CanGuard, Inc., a subsidiary of Rogers Ca-blesystems Limited, in June. Rogers was the fifth largest security services provider in Canada and served about 38,000 subscribers. Protection One made another move in Europe through the acquisition of a 65.6 percent stake in Compagnie Eu-ropéenne de Télésecurité (CET), a French security alarm business. CET had offices in Germany, Switzerland, Belgium, and The Netherlands in addition to offices in France. CET’s subscriber base of about 60,000 customers securely pushed Protection One’s subscriber numbers to more than 1.4 million.

Protection One made a move from the NASDAQ to the New York Stock Exchange in November 1998. The company experienced its first profitable quarter since incorporating during the third quarter that ended September 30, 1998, earning $2.8 million on sales of $103.3 million. For the same quarter of 1997 the company reported a loss of $6.8 million on revenue of $32.8 million. For the fiscal year ended December 31, 1998, Protection One reported sales of $421.1 million and $10.4 million of net income, up from $144.77 million and a loss of $49.3 million in 1997.

Protection One’s financial situation may have appeared more stable and promising, but 1999 was not to be a good year. In October 1998 the company announced plans to purchase Lifeline Systems, Inc. for $174 million. Lifeline provided emergency response and personal security monitoring services in the United States, and the acquisition would have expanded Protection One’s roster of services. The deal was put on hold, however, as the Securities and Exchange Commission (SEC) began to question Protection One’s accounting and amortization methods. Protection One agreed to restate its financial results for 1997 and the first three quarters of 1998. As a result, Protection One’s previously reported $10.4 million of net income in 1998 was revised to a loss of $2.46 million, and the previous year’s net loss of $49.3 million was revised to $42.73 million. The SEC investigation sparked several lawsuits against Protection One, and many industry analysts began to question whether the company’s aggressive acquisition and expansion strategy had not created a burden of debt too immense to overcome. In mid-August the company’s stock plummeted to a 52-week low of $3.38.

In addition to financial problems, Protection One faced challenges on its service front. Customer attrition began to rise as service glitches frustrated subscribers. By November 1999 Protection One’s annualized attrition rate had shot up to 16 percent. The company explained that the service problems, which included long response times and false alarms, were due to upgrading and consolidation efforts in the company’s call centers. To improve service, Protection One hired 150 customer service representatives in the second quarter of 1999 and focused efforts on improving training.

Despite struggles and challenges, Protection One fought to survive. CEO Mackenzie resigned in March and was replaced by John Mack. Western Resources, concerned over Protection One’s poor performance, placed some of its officers in Protection One’s management in hopes of a turnaround. Annette M. Beck, a senior officer with Western Resources, was appointed president and chief operating officer of Protection One in July, and Tony Somma, a Western Resources executive director of finance, became Protection One’s chief financial officer.

Key Dates:

1988:: PacifiCorp, Inc., establishes Protection One Alarm Services.
1991:: PacifiCorp spins off security alarm division as Protection One.
1994:: Protection One goes public and is traded on the NASDAQ.
1997:: Acquires the security alarm operations of Western Resources, Inc.; Western Resources becomes a majority owner of Protection One.
1998:: Protection One expands into Europe and moves to the New York Stock Exchange.

In August Protection One sold its Mobile Services Group to ATX Technologies, Inc. for about $28 million. Protection One continued to provide security tracking systems for ATX through a reseller arrangement. ATX and Protection One provided mobile services and systems to such automobile companies as Mercedes-Benz North America, Ford Motor Company, and Nissan Motor Company. In September Protection One signed an agreement with Paradigm Direct LLC, a direct marketing company, to acquire new security accounts. Protection One hoped to gain 50,000 new accounts in the first year. Western Resources owned a 40 percent share of Paradigm Direct.

Western Resources and Protection One announced in October 1999 that financial alternatives for Protection One were being explored. These alternatives included the possibility that Protection One would be sold. Western Resources indicated in a prepared statement, “Western Resources believes it’s important to address ways to eliminate the negative effect of Protection One’s losses on Western Resources’ income statement.” For the nine months ended September 30, 1999, reported revenues were about $175.4 million, a 63.3 percent increase over the comparable period of 1998. Net income of $2.34 million, however, became a net loss of $53.45 million.

Although Protection One’s future seemed uncertain, the company planned to carry on, focusing on improving customer service and reducing attrition rather than growing its subscriber accounts. By late 1999 Protection One was the second largest home security company in the United States, serving more than 1.5 million subscribers through its network of 57 North American service branches, 11 satellite offices, and 51 European service branches. With rapidly expanding European operations and a U.S. security alarm market growing up to 15 percent annually, demand for services offered by Protection One was one thing that appeared definite.