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Securing legal pot: What's the risk?

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Friday, September 20, 2013

As some know, the world of alarm monitoring can have murky legal waters, and it’s sometimes difficult to tell what risks you’re exposed to as a company until it’s too late. Even exculpatory provisions don’t necessarily make you immune to legal repercussions. If contracts aren’t worded with sufficient clarity or designed with the correct protective provisions in place, the exculpatory clauses may be unenforceable.

Clearly it’s best to err on the side of caution, and to ensure, if possible, that contracts are designed under the guidance of legal professionals with alarm industry expertise. A question posed today on Ken Kirschenbaum’s newsletter illustrates some of these good instincts. And it touched on a growing vertical that’s created something of an industry buzz: marijuana.

In summary, the questioner asked what kind of legal risks securing a marijuana dispensary or growing facility entails for an alarm company. Of course, with the substance being legal in certain states but illegal federally, it’s unrealistic to imagine that risks are the same across the board. From a legal standpoint, the most interesting sub-question, posed by the same questioner, follows below in paraphrase:

What if, for example, a driver under the influence of illegally stolen marijuana gets behind the wheel under the influence of the stolen substance and strikes a pedestrian, killing them? Would the alarm company to any extent be culpable?

In his response, Kirschenbaum said all businesses, illegal or legal, carry some kind of risk, and marijuana dispensaries or growing facilities are no exception. If an alarm system is well-maintained, functioning properly and code-compliant, risk is minimized considerably. “Why should the alarm company care what’s going on in the subscriber’s premises when that alarm signal comes in?” he asked. “The decision is whether to dispatch and to which agency, police department or fire.”

The marijuana example was merely the kernel which Kirschenbaum convincingly expanded into a much broader topic about what alarm companies can and can’t control. “I don’t think the alarm company is responsible for subscriber activity,” he noted. These words from an industry attorney should, if anything, be a source of comfort for alarm companies, who may not have to worry about another front opening up in the war against legal liability.

Still, some caution is advised. But what's Kirschenbaum’s advice for having dispensaries or other high-risk premises as subscribers? “If you get a call to alarm a pot dispensary, take the job and price it right,” he said. “At least you don’t have to compete against ADT."

Polk goes PE, Pagnani takes over at Capital One

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Wednesday, September 18, 2013

There’s news in the finance and investment world today. Bill Polk, who’s been running the security division of Capital One since its inception in August of 2011, is moving into the private equity world.

Polk is joining Egis Capital Partners, an investor in alarm.com. ECKey and, as of last May, CSSN. Here’s a video interview I did with Egis founder Robert Chefitz in June.

Tom Pagnani, who has worked with Polk at Capital One and at CapitalSource before that, is taking over as managing partner at Capital One.

I spoke to all three this morning.

“We continue to see enormous opportunities at all levels of the capital  structure. … From my point of view [there is great] equity opportunity with fast-growing younger companies. [Working together with Robert] is something he and I have talked about for a long time. And I think it's a great opportunity to move forward,” Polk said.

Polk noted that lately the private equity community “has had a sharp focus” on the security sector, but most in PE groups are generalist who lack expertise in the physical security business. Young companies looking for PE partners can benefit from working with a group, like Egis, that has that expertise, he said.
 
Chefitz said that Egis likes to “work closely with management teams and with private equity funds that want to invest in the business.” He said he’s ecstatic that Polk is joining Egis full time, noting that Polk brings experience and relationships with management teams of target investments and relationships as with other PE funds.

Chefitz said Egis is excited to continue working with Capital One.

Founded by Chefitz in 2007, Egis targets companies with enterprise values of $30 million to $200 million “that require a total investment between $10 million and $40 million.”  In addition to its investment in alarm.com, Egis closed in May on an investment in CSSN, a company that does passport and drivers license authentication and identification. “And we did that with the well-regarded Insight Venture Partners,” he said, adding that Insight has a brand new $2.5 billion fund as of this past April. Insight is an investor in Twitter and LinkedIN. “They have a tremendous brand name in technology and it’s interesting that [they’re investing in] security,” Chefitz said.

Egis has also “worked with Joe Grillo [former CEO of HID and Assa Abloy’s global technology division] in his business activities at ACRE,” Chefitz said.  

Tom Pagnani said that this move is a logical transition for Polk and said that it’s an opportunity for himself and John Robuck to “continue to make the Capital One name known in the security alarm industry.”

“Egis is going to be quite active,” Pagnani said. He called Polk is a key addition to the Egis operation. "We’re excited about the prospect of doing deals with Egis,” Pagnani said.

PERS: What we know, what we don't

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Wednesday, September 18, 2013

The projected expansion of the PERS market will be fueled by several realities playing in its favor. First and foremost, the demographics, highlighted by an aging baby boomer population, are compatible with growth in the PERS space. Similarly, PERS devices make seniors better equipped to remain in their homes and possibly reap considerable cost savings. The market is relatively resilient. The technology is simple. One of the biggest barriers to entry may be tapping into the right marketing channel, Josh Garner, CEO of AvantGuard Monitoring Centers, told me in a conversation we had earlier this year on the state of the PERS industry. The marketing hurdle is not to be underestimated. But it also seems far less an obstacle than, say, mastering the technical ins and outs of a product truly difficult to integrate or install.

These are all PERS-relevant realities of which the industry already has a fairy sound understanding. While much is known, many questions still linger with respect to the future of the market. That much became clear in a recent conversation with Barry Epstein, president of Dallas-based Vertex Capital.

One question with many ramifications for the market: what will reduce the annual attrition rates for PERS devices? Will it simply come down to a broader (and younger) customer demographic? Metrics are far from perfect, and the market is still green from an acquisition standpoint, but Epstein says the attrition rate for PERS devices hovers somewhere between 24 and 36 percent. Even at the lower end of that spectrum, these rates are not conducive to huge RMR value, and they could make private equity firms leery about getting involved, at least right now. A huge ancillary question to the one posed above will be what kind of innovations, on either the dealer or manufacturer end, can companies make to reduce these less than sterling rates.

Another question: Can smaller alarm companies do PERS? Or is the market going to remain the province of larger dealers or wholesale monitoring companies who can afford to support a PERS-only division? To what extent will traditional alarm companies have a share in the space at all? Epstein, who recently moderated a panel at the PERS Summit in Park City, Utah, said the conference naturally featured an abundance of PERS dealers, but only a small fraction of them had alarm accounts.  

The development of this market will be worth watching closely. When will the acquisition tipping point occur? What will be the force behind it? What factors, as yet undeveloped, stand to drive the market’s upward trajectory? And what about mobile PERS units?

In a broad sense, we're mostly sure where the PERS industry is going. But regarding specifics, questions abound.

The Washington Navy Yard shootings—and mass notification?

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Wednesday, September 18, 2013

After a gunman killed 12 people at the Washington Navy Yard on Monday, news reports say Defense Secretary Chuck Hagel will be reviewing physical security and access at all Defense Department installations around the world.

Presumably, he’ll be looking at whether those facilities have mass notification systems (MNS)—because it’s not clear whether the Navy yard had one. Even if it did, it may need improvement, because news reports indicate that only fire alarms were sounding and people inside the building were running out not knowing that a man with mental health problems, Aaron Alexis, 34, a civilian contractor and military veteran, was spraying the place with bullets.

For example, NBC News reported:

[A] worker there, Todd Brundidge, said he heard a fire alarm go off and later saw the gunman come around the corner.

"He turned our way and started firing, and we ran downstairs to get out of the building," Brundidge said. "No words. He raised the gun and started firing."

And USA Today reported:

Terrie Durham, an executive assistant at Naval Sea Systems Command, said a fire alarm sounded and she was trying to leave with a group of people when they encountered a shooter.

"We couldn't see his face, but we could see him with the rifle," Durham said. "He raised and aimed at us and fired. And he hit high on the wall."

In this case, sounding a fire alarm and having occupants leave that building may have been the right response … or would it have been better to have them shelter in place? A well-designed MNS, using the fire alarm system as its backbone, affords different options for different situations.

I’ve written before—in a story on the need for MNS, also known as an emergency communication system or ECS, in schools to protect students and staff from shooters there—that the military developed mass notification systems. The need for them became apparent after a 1996 terrorist bombing at a multi-story building in Saudi Arabia where American military personnel were housed. The only way to alert building occupants was the fire alarm, but lives were lost because evacuating in response to the fire alarm meant walking into the area where the bomb exploded.

The Department of Defense concluded an alert system was needed that could send a variety of messages in different kinds of emergencies, not just fires.

If the Navy yard didn’t have an MNS that could have helped in this situation, that would be sadly ironic.

 

TrendNet: A Cautionary Tale?

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Wednesday, September 11, 2013

Hundreds of TrendNet customers found out the hard way that products they purchased, billed as home security cameras, weren’t all that secure. In January 2012, a hacker was able to breach TrendNet’s website, circumvent security credentials and access some 700 live-camera feeds monitoring inside customers' homes. Many of the videos were then disseminated on the Internet, a curious fact by itself in light of the complaint filed by the Federal Trade Commission, which said security flaws in the cameras allowed for the “unauthorized surveillance of infants sleeping in their cribs, young children playing, and adults engaging in typical daily activities.” The online community continues to recover from the trauma of being exposed to such tedium.

But for obvious reasons, customers were unnerved. The FTC wasn't happy either. The oversight committee’s complaint alleging that TrendNet misrepresented its software as secure and failed to adequately protect its customers resulted in a settlement, which was reached last week, according to multiple reports.

The story reached mainstream news. Unsurprisingly, it’s on the alarm monitoring industry’s radar as well, as I discovered in a short conversation with Stephen Doyle, executive vice president and CEO of CSAA. Doyle said he just returned from an Alarm Industry Communications Committee meeting in which 65 industry members were briefed by an industry lawyer on the legal ins and outs of the TrendNet snafu.

In terms of pertinence to the industry, the case seems fringy in some respects, relevant in others. It’s true, after all, that TrendNet cameras are unattached to alarms, and designed specifically for remote monitoring of homes via smartphones and other mobile devices. But it's relevant to the industry insofar as it deals with a few topics in the forefront of people's minds.

One of those topics is the viability and security of do-it-yourself monitoring systems. Another is cloud security, a topic that stands to grow in significance with the spread of IP panels, and as more companies migrate information and services to the cloud. Whether a company’s data becomes more or less secure when it’s transferred to the cloud is a hot-button industry debate with little consensus. Cloud adoption is likely to expand, but that doesn’t mean there won’t be skeptics. Either way, the TrendNet case perhaps intensifies the debate.

At TechSec 2014, Jeremy Brecher, VP of technology, electronic security at Diebold, will tackle some issues in this vein as part of the educational program, while also exploring ways security companies can thrive in an increasingly cloud-based environment.

Surveillance video ‘incriminating’ in murder case against ex-NFL star Hernandez

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Wednesday, September 11, 2013

I’ve written here before about news reports saying that security cameras in the home of former New England Patriots tight end Aaron Hernandez recorded him with a gun both hours before—and minutes after—his friend was shot to death.

Now a recent story about Hernandez in Rolling Stone magazine details other surveillance and cellphone information that the article says constitutes “a honey pot of incriminating evidence” against Hernandez, who is charged with murder in the death of Odin Lloyd, a 27-year-old Boston semi-professional football player.

Lloyd’s body, riddled with bullets, was found June 17 in an industrial park about a mile from Hernandez's home.

Among the claims made in the fascinating Rolling Stone article is that “according to family friends, Hernandez was using angel dust and was so paranoid he always carried a gun.”

The article also says that surveillance video captured Lloyd and Hernandez arguing outside a nightclub two days before his shooting. Hernandez was angry that Lloyd spoke with another man at the club who was at odds with Hernandez, according to the story.

“… Hernandez was enraged," the article said. “Club security cameras allegedly capture the two men squabbling, showing Hernandez, six-two and a rippled 250, facing off with the five-11 Lloyd. The friends stopped short of throwing punches, though cameras mounted outside the club show the argument resuming in the street.”

Here’s what happened next, according to the article:
 

... Two days after the spat with Lloyd, [Hernandez] was nursing his rubbed-raw grievance. “You can’t trust anyone anymore!” he’s heard screaming on the footage of his home-security system. Sometime that night, he reached out to a couple of Bristol [Connecticut] goons, Ernest Wallace and Carlos Ortiz – two stumble-bum crooks with long sheets of priors and no job or fixed address to lay their heads – and ordered them to take the two-hour drive to Boston on the double, telling one of them, Hurry ur ass up here …

… Around 1:10 a.m., Hernandez set off with Wallace and Ortiz in a rented Nissan Altima to pick up Odin Lloyd. Hernandez’s security cams show him with what looks like a Glock .45 in hand, pacing in his living room. On the 30-mile drive to Fayston Street, a war-zone block in the Dorchester neighborhood of Boston, where Lloyd lived with his mother and younger sister (he’d been forced to move home after losing his job at the local utility company), the three men stopped to buy a pack of blue cotton-candy Bubblicious and a cheap cigar, the type used to roll blunts. Usually, that was Lloyd’s job – Hernandez fondly called him the Bluntmaster. Making do without him, they got to Lloyd’s house at 2:33 a.m., where a surveillance camera posted across the street showed Lloyd getting into the back seat of the Nissan. It fast became clear to Lloyd, though, that this wouldn’t be a night of hot-sheet fun. He began firing texts off to his sister, sending distress flares every few minutes. U saw who I’m with... Nfl... just so u know...

The last one reached her at 3:23 a.m. Minutes later, Lloyd got out of the car in an industrial park in North Attleborough. He seemed to know what was coming, but decided to make a stand: The driver’s side mirror of the Nissan was broken off, a sign that he might have gone down swinging. On a sand-and-gravel patch, Lloyd raised his arms in defense of the first shot, and was then hit in the back twice as he turned away and fell to the ground. The gunman pumped two more rounds into his chest for good measure. The next day, cops lifted tire tracks near the body that matched the Nissan. Tracing the car back to the rental agency, police would eventually recover a .45 shell case and a wad of cotton-candy Bubblicious. And though Hernandez would monkey with his home-security system, getting rid of six hours of key recordings, and smash up the cellphone he’d turn in to cops, he’d neglect to scrub all the data they contained, handing police a honey pot of incriminating evidence.

 

 

A chat with SIAC’s Stan Martin

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Friday, September 6, 2013

This morning I had the opportunity to chat with Stan Martin, executive director of the Security Industry Alarm Coalition. He proved to be a valuable font of information about the current state of the alarm industry, in particular the three-pronged relationship involving alarm monitoring companies, law enforcement and municipal governments—all of which play huge collaborative roles in responding to legitimate alarms and mitigating false ones.

When I asked him what he considers an ideal alarm ordinance, it became abundantly clear just what kind of challenges an effective alarm ordinance has to address. A whole constellation of considerations go into curbing false alarms. 

“We’ve studied alarm management issues for twenty plus years, and we know what best practices will reduce these unnecessary dispatches,” Martin said. “We list them in our model ordinance.”

A model ordinance, Martin said, should require all alarm systems to be registered with local police. It should mandate the use of Enhanced Call Verification, or two-call verification, a protocol that requires alarm monitoring stations to attempt to confirm a signal is valid before requesting dispatch. It should require that panels feature the newest equipment standards, meaning they are compliant with the ANSI/SIA CP-01 Control Panel Standard – Features for false alarms—a standard that minimizes the single biggest cause of false alarms: human error.

Martin also emphasized the tremendous importance of strict enforcement of an alarm ordinance, but acknowledged that enforcement measures vary by municipality, and are often dictated by local politics—particularly with respect to the number of free responses permitted. The SIAC recommends no more than one or two free responses. It also recommends suspending response once a fixed number, generally between the range of six and 10, has been surpassed. 

Martin says this curtails chronic abuse and holds some of the larger commercial entities accountable. “You do need to stop responses,” he said. “Otherwise, the higher-end clients, commercial clients, banks in particular, will just write the check. They consider that easier. It’s the cost of doing business. But when police say they’re not going to come any longer, they have to take some kind of corrective action.”

ASG, guard company team up?

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Thursday, September 5, 2013

I received an announcement today from Davis Mergers and Acquisitions Group about super-regional security company ASG establishing a strategic relationship with Ray Cannedy Security & Investigations (RCSI), a guard company based in Wichita Falls, Texas. According to their website, RCSI is a provider of: patrol service, armed and unarmed guard service, courier service, and armored car service. Davis Mergers and Acquisitions Group represented RCSI in the transaction, the announcement said.

Integration companies partnering with guard companies is a trend we've seen lately. Securitas and Convergint partnered in 2011. Here's that story. Stanley partnered with U.S. Security Associates in April. Here's that story. And in 2009 guarding giant G4S got into integration with the acquisition of Adesta. Here's that story.  So I assumed at first that this was the same sort of partnership, except on a much limited basis. However, I just spoke to Ralph Masino, CFO at ASG, and he clarified that the deal was, in fact, a  small account acquisition deal.  RCSI historically has done both guarding and some limited alarm monitoring, he said. The company decided to shed its  alarm monitoring accounts, which were acquired by ASG, Masino said. RCSI is still continuing with all of its guard services.

 

 

Does RMR tell the whole story?

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Wednesday, September 4, 2013

Today, Ken Kirschenbaum, an industry attorney, broached the topic of valuation in the alarm industry in his email to subscribers. In the monitoring space, a company’s valuation is based “exclusively on a multiple of RMR,” Kirschenbaum explains. A reason for this is that, in a sale, an alarm company isn't selling its ongoing business so much as its subscriber accounts. 

While the RMR multiple can shed light on the value of a company on the verge of a sale, it doesn’t tell everything. In fact, as Kirschenbaum explains in the preface to an article by Dorsie Mosher of the Davis Group, RMR multiples can fall into a wide range based on several variables, such as contract stipulations, as well as financing and accounting decisions within the company. 

This is why investors and financial institutions tend to prefer EBITDA—earnings before interest, taxes, depreciation and amortization—to RMR. They regard the former as the more telling valuation metric, says Mosher, because, simply put, the figure is less prone to flux due to uncontrollable variables. Through EBITDA, investors can get a better idea of how much cash will be generated to pay debts and finance future growth. 

“A company can have $1 million in RMR and still be losing money, which is certainly not what the investor is looking for,” Mosher writes.

Kirschenbaum, for his part, believes EBITDA is not about to replace RMR multiples as the primary valuation metric in the alarm monitoring space. But when it comes to mergers, acquisitions and financing, it’s worth keeping in mind that RMR isn’t the only valuation category all parties are taking into account. 

Another shake-up at the top for DEFENDER Direct

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Wednesday, September 4, 2013

Just last year, I wrote about leadership changes at DEFENDER Direct, the country’s leading ADT dealer, when longtime employee Marcia Barnes took over as CEO and president, replacing company founder David Lindsey, who was stepping down to do philanthropic work.

Now, about 15 months later, Barnes is out and Lindsey is back in his old job, according to a recent news release from the Indianapolis-based company.

Here’s some of what the company had to say:
 

Lindsey replaces Marcia Barnes, who has left the company to pursue other business interests. …  “The board and I are grateful for Marcia’s 13 years of leadership in the company, which helped us achieve our strong growth,” said Lindsey.  “Our company is at an exciting point in its journey and I look forward to continuing that momentum.”

The release also said that, “the company has named Brad Cumings as chief marketing officer and has promoted Scott DeNardin to the role of regional VP of its HVAC business division.”

Founded in 1998, DEFENDER bills itself as the nation’s leading ADT dealer. It has more than 2,400 employees in 50 states and more than 140 branch offices, according to the company. Its residential services include offerings from Williams Comfort Air, a heating, cooling and plumbing company.

Barnes had been with the company since its early years and worked closely with Lindsey, rising to the rank of president before she became CEO. I’ve got a call in to DEFENDER to learn more about what the latest leadership change will mean for the company. Stay posted!

 

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