Presentation to Alarm Association of Greater St.

Louis
January 17, 2012

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Summary

Introduction Industry Overview M&A Activity Alarm Industry Market Values Current Capital Market Conditions Buying/Selling Alarm Businesses Q&A

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INTRODUCTION

Henry Edmonds

Over 26 years of capital markets experience Started Edmonds Group in 2004 Founder (2005) and past Chairman of APB Services Co-Founder (1990) and CEO of SLP Capital

Largest lender to alarm industry when sold to CapitalSource in 2004 Over $400M of alarm loans $2B in transactions in the airline industry

Wall Street investment banker (1985-1990)

MBA, Harvard Business School BS, with distinction, civil engineering, University of Virginia
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The Edmonds Group

Investment banking services

Capital raising and mergers/acquisitions advisory Average transaction size about $50 million Sweet spot $10 million to $300 million

Approximately 40 transactions closed

$2.0 billion transaction value Focused on security alarm industry Broad experience representing buyers, sellers, borrowers and capital providers High level of client service

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ALARM INDUSTRY OVERVIEW

North American Alarm Industry

20% household penetration

36 million households of 180 million 3 million businesses of 6 million

50% business market penetration

Total industry revenue estimated to be $43.9 billion for 2011

Sales and installation - $26.8 billion Shrinking at 8% for 2010 and 2% for 2011 Growth in 2012? Monitoring services - $17.1 billion Growing at 10% for 2010 and 3% for 2011 Continued slow growth for 2012?
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Total Alarm Industry Revenue

60 50 40 30
$22.3 $29.5 $24.1 $25.4 $25.5 $32.3
(methodology change between 2007 and 2008)

$48.5

$44.7

$43.9

$43.9
estimated

($ billions)

20 10 0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: SDM Magazine

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Security Monitoring and Service Revenue

$18 $16 $14 $12
($ billions) $17.0 $15.2
estimated

$16.7

$17.1

$10 $8 $6 $4 $2 $0

$10.3

$10.7
(methodology change between 2007 and 2008)

2006

2007

2008

2009

2010

2011

Source: SDM Magazine 9

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North American Alarm Industry

Very fragmented - over 15,000 local and regional providers Top five companies control only 39% of the market 20th largest company has about $3 million in RMR

86,000 customers

Companies 95 to 100 in the SDM 100 average just over:

$200,000 in RMR 5,000 customers Would be on the list if they did

A number of companies dont submit data to SDM

Companies with less than $200,000 in RMR control almost 50% of the market
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North American Alarm Industry Recurring Revenue Market Share

2010 Estimated Market Share
ADT Security Services 29%

Other 49%

Protection One 3% Monitronics Int. 3%

6-100 12% Stanley 2%

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Vivint 2%

SDM 100 Ranked by RMR Top 10

Source: http://www.sdmmag.com

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SDM 100 Ranked by RMR Second 10

Source: http://www.sdmmag.com

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SDM 100 Ranked by RMR Last 10

Source: http://www.sdmmag.com

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Tyco/ADT

Tyco breaking into public companies

ADT North America Residential - $3.1B in revenue Also includes small commercial Fire and Safety - $10.2B in revenue Large commercial, all international and product companies (Simplex Grinnell; Software House etc.) Flow Control - $3.7B in revenue Quarterly growth expectation for Wall Street

Likely means each will be more acquisitive

More transparent public data How long with ADT NA Residential stay public

Public market discount for RMR business Takeover target

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ALARM INDUSTRY M&A ACTIVITY

Liquidity/Secondary Market Activity

Active secondary market for buying/selling alarm companies or just contracts Hundreds of transactions occur every year

Entire companies Dealer programs Bulk sales of accounts only

Larger (more efficient) buyers get predictable and significant economies of scale by acquiring Transactions trade based on buyers cash flow not seller

Hence RMR multiples Still all about cash flow

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Major M&A Transactions

2012

BV Capital Partners - DTT Bain Capital Securitas Direct (Europe) Stanley Works Niscayah (Europe), Microtech (Canada) Tyco/ADT Signature Security (Australia) Ascent Media Monitronics RockBridge Connect America (PERS), Protect America Summit Partners Central Security Group Oak Hill Security Networks ADT - Broadview GTRC Protection One
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2011

2010

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Dealer Programs/Bulk Sales

Significant factor in the industry today Approximately 1 million accounts purchased in 2011

Doesnt include company acquisitions (like Broadview) Weekly or monthly closings Typically newly created accounts Accounts only Aged accounts Usually one off transaction Seller stays in business

Dealer program purchases

Bulk sales

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Dealer Programs/Bulk Sales

Number of accounts purchased (in 000s)

1,000 800 600 400 200 0 2006 2007 2008 2009 690 710 620 740

1,000 850

2010

2011

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ALARM INDUSTRY VALUATIONS

Key Valuation Metrics

Cash flow margin from existing customers

Adjusted EBITDA and SSCF Total lost RMR on a TTM or trailing 6 mo basis divided by average RMR outstanding Total direct and indirect cost associated with new account creation, less upfront revenue, divided by newly created RMR Net Creation Cost before allocation of corp. overhead Gross Creation Cost after allocating corp. overhead

Attrition rate

Creation cost of new customers

Growth rate

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Cash Flow

Adjusted EBITDA Reported EBITDA - earnings before interest, depreciation, amortization and taxes Adjusted to exclude all creation costs Example: Monitronics vs. ADT Adjusted EBITDA margin EBITDA as a % of revenue

Steady State Cash Flow

Adjusted EBITDA reduced by the cost to replace attrition This is the sustainable or steady state cash flow the business is generating SSCF margin SSCF as a % of revenue After all investment in creation
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Free Cash Flow

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Average Industry Metrics

Margins on existing customers

Adjusted EBITDA of 50% to 65% for companies with scale 8% to 12% Gross Creation Cost 25x to 35x Net Creation cost 20x to 30x 10% to 30% organic Summer programs - can be much faster Dealer programs can be much faster
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Attrition rate

Creation cost

Growth rate

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Other Valuation Drivers

Size of transaction Company reputation Ease of reprogramming/line swing Sales approach to generation customers Credit score profile/amount of upfront payment RMR per account Volume of account generation Critical mass per market/geography Quality of account and financial data

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Other Valuation Drivers (cont.)

Scanned and original contracts Standard contract form and term

Automatic renewals, appropriate disclaimers

Quality of installs Service call rates Billing profile Homogeneity of accounts Age of accounts Type of RMR (residential vs. commercial)

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RMR Multiples for Alarm Sale Transactions

(minimum, average and maximum multiples paid 2002-2012)

70.0x 60.0x 50.0x 40.0x 30.0x 20.0x 10.0x 0.0x < $50K $50K-$100K $101K-$500K $ RMR per transaction 38.0x 32.8x 25.0x 45.0x 37.4x 30.0x 45.0x 38.4x 27.0x

64.0x

42.9x 30.8x

> $500K

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Under 50k in RMR Transactions

Fewer than 2,000 accounts Buyers are typically local or regional companies Too small for national buyers or PE firms

Not enough scale to support financial reporting requirements Friends and family

Angel investors provide equity to the extent available

Multiples in the 20s for smaller end, low 30s for larger end 71% of all deals involve fewer than 300 accounts (SDM)

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$50k to $100k in RMR Transactions

2,000 to 4,000 accounts Very similar buyers to under $50k transactions

Local/regional firms

Too small for national buyers or PE firms Angel investors provide equity to the extent available

Friends and family Occasionally approaching 40x in frothy markets

Multiples typically in the 30s

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$100k to $500k in RMR Transactions

4,000 to 20,000 accounts Sweet spot for regional consolidators Smaller PE firms also like this size transaction

Equity checks of $2M to $8M Big enough to afford CFO $200k and up - good size for industry focused lenders If they buy, typically just for accounts Shut down sellers operations Depends on market conditions Quality of management and accounts
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Nationals take an interest in these deals

Multiples mid 30s to mid 40s

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Over $500k in RMR transactions

Over 20,000 customers Buyers are nationals, non-industry strategics and larger PE firms Nationals still likely to consolidate or shut down operations Non-industry strategics and PE firms keep operation and management

Becomes a platform for add-on acquisitions

Multiples over 40x unless distressed or underperforming operation

Not many data points each year, so significant swings in the data

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CAPITAL MARKET CONDITIONS

Debt Markets

Very favorable for middle market and lower middle market transactions

Loan facilities under $250 million Banks, specialty finance companies, hedge funds

Lots of experienced and interested industry lenders

However, most industry leaders require a minimum deal size of $5 million to $10 million

Alarm Financial Services (AFS) - $200,000 to $1.5 million CapitalSource - will go as low as $3 million if transaction is very straight forward Lack of industry understanding low advance rates
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Local/regional banks will lend smaller amounts

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Typical Experienced Lender Deal

2-3 year revolver

Some facilities term out over five to seven years Stretch senior advance rates up to 30x

Borrowing base with advance rate of 22-26x RMR

Pricing 4% to 6% (LIBOR + 300 to 500 with 1% floor) Covenants typically include:

Debt/RMR Permitted attrition rate Permitted creation cost Debt service coverage Capital expenditure

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Typical Subordinated Debt Deal

5 to 7 year term debt

Bullet maturity or amortization beginning in year 5

Maximum advance rate of 26-32x RMR Current coupon 8-12% Additional PIK interest of 2% to 4% May required warrants or other yield enhancement

Designed to push all-in return to 15% to 20%

Unsecured or second lien position Similar covenants to senior debt with an additional cushion

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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.

Equity Markets

Also very favorable Over 2,000 private equity firms in the US

Firms come in all sizes

Close to $500 billion in money to spend Many more PE firms interested in the alarm industry

Industry performed well through 2008/2009 recession Viewed as safe harbor with good upside potential

Favorable debt market conditions help valuations Not many public alarm companies

Very expensive to be a small public company (market capitalization of less than $500 million) Markets dont really understand alarm industry accounting
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Strategic Buyers

Large alarm industry firms are acquisitive

ADT, Protection One, Monitronics, Stanley Security Networks, ASG, CSG, Guardian, Vector Ascent Media bought Monitronics Stanley entered the alarm market several years ago Phone companies, cable companies dabbling again

Midsize firms too

Non industry strategics looking more closely

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BUYING/SELLING ALARM BUSINESSESS/ACCOUNTS

Key Considerations

Market timing

Timing makes a huge difference Good data, good performance Investment bankers Accountants/due diligence experts Lawyers If seller, could leave a lot of money on the table If buyer, might not get what you think youre getting or pay too much
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Be prepared

Benefit from experienced advisors

Mistakes can be very costly

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Key Considerations

Valuations very much affected by capital market conditions Debt and private equity markets are currently very favorable

Supply and demand very health supply at the moment Cost and terms

Need to know what your business is worth if youre selling Need to know what the market is and what youre getting if youre buying ITS A SELLERS MARKET TODAY

Still good opportunities for buyers if selective

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QUESTIONS AND ANSWERS

Contact Information

Henry Edmonds The Edmonds Group, LLC 16 Lenox Place St. Louis, MO 63108 Ph: 314.422.4649 Email: hedmonds@theedmondsgroup.com Website: www.theedmondsgroup.com

The Edmonds Group, LLC Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.