Maximizing the Value of Your Alarm Business

Confidential Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Summary

• Introduction • Value drivers • Valuation Methodologies • Historical valuations and current market conditions • Impact of entry of cable and phone companies • Valuation of new RMR-generating services • Data-tracking: What to track, how to track it, how it effects valuation • Lessons for buyers and sellers • Q&A

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. INTRODUCTION

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Henry Edmonds

• 30 years of capital markets experience, over 20 years in the alarm industry • Wall Street investment banker (1985-1990) – $2B in transactions in the airline industry • Co-Founder (1990) and CEO of SLP Capital (thru 2004) – Largest lender to alarm industry when sold to CapitalSource in 2004 – Over $400M of alarm loans • Started Edmonds Group in 2004 • MBA, Harvard Business School • BS, with distinction, civil engineering, University of Virginia

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. The Edmonds Group

• One of the top investment banks in the security alarm/PERS industries • Services include capital raising, M&A advisory, strategic consulting • Work with dealers that have $100,000 in RMR and up – Including some of industry’s largest companies: ADT, Vivint, Monitronics, Security Networks • TEG has closed deals with over $3 billion in value – Broad experience representing sellers, buyers, borrowers and capital providers

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Who We Are Not

• We do not have gray beards • We do not run an industry conference • We are not a large investment bank that dabbles in the industry, takes on multiple deals simultaneously, staffs them with junior personnel, and executes indifferently for clients • We do not throw things up against the wall and hope they stick

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. VALUE DRIVERS

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. What Determines Your Valuation? • Market conditions – Time your exit/sale • Size of transaction – Bigger is better • Key operational metrics – Quality of operations/ability to generate cash flow

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Key Metrics that Determine Value • Margin on existing customers • Attrition rate • Growth rate • Creation cost

Taken together, they will allow us to determine expected CASH FLOW over time

Dealers must have the ability to provide good data on these metrics if they are going to maximize value!

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Other Value Drivers

• Company reputation • Quality of account and financial data • Credit score profile • RMR per account • Critical mass per market/geography • Ease of reprogramming/line swing • Sales model for generating customers • Install quality/service call rates • Contracts (term, organization, renewals disclaimers) • Billing profile (auto debit vs. invoice) • Age of accounts • Type of RMR (residential vs. commercial)

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. VALUATION METHODOLOGIES

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Valuation Methodologies • Discounted cash flow analysis – This is the most commonly used as primary approach • Multiple of earnings – Adjusted EBITDA and SSFCF for the alarm industry • Multiples of assets – RMR multiple for alarm industry • Multiple of book value of equity

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Valuation Methodologies

• Multiple of earnings – Could be net income, EBITDA or cash flow – Based on comparable companies, either completed transactions or publically traded – For alarm companies: • Adjusted EBITDA – Earnings (Net Income) before interest, taxes, depreciation and amortization – Additional adjustment – add back all costs related to creating new accounts • Steady State Free Cash Flow (SSFCF) – Start with Adjusted EBITDA and add back creation costs (expenses) required to replace attrition • Multiples of assets – Based on comparable companies, either completed transactions or publically traded – For alarm companies: • Multiple of RMR • Multiple of book value of equity – Based on comparable companies, either completed transactions or publically traded – Not typically applicable for alarm companies as most have negative net worth

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Discounted Cash Flow Analysis • Buyer will develop key assumptions based on target company’s past performance • Determine a capital structure – Influenced by market conditions including cost and availability of debt • Buyer will do a financial model for target company – 5+ years into the future – Key metrics (creation cost, margin, attrition, growth rate) will drive model cash flow

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Discounted Cash Flow Analysis • Buyer’s required return on investment (“ROI”) will determine what buyer CAN pay – Required ROI driven by buyer’s strategy, its investors, market conditions, “next best alternative” • Negotiation will determine what buyer WILL pay – Buyers never pay more than they think they have to • The multiple (of RMR, Adjusted EBITDA, SSFCF) is an outcome of the valuation and is used as a reference point

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Sensitivity Analysis

• Buyers will start with a base case valuation – Typically a scaled back version of projections provided by seller • Run scenarios to determine how sensitive the results are to different assumptions – Slower growth, lower margins, higher attrition etc. – Will also look at upside scenarios • Confidence in the assumptions and impact of sensitivities influence the purchase price

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Acquisition Process

• Preliminary purchase price is provided in a letter of intent (“LOI”) – Based on initial information from seller – Non binding and subject to due diligence • Buyer conducts due diligence to verify information and assumptions – Confirm there are not undisclosed problems, liabilities • Often will make adjustments to preliminary purchase price – Poor quality data (more on that later) – Metrics worse than reported (higher attrition, unreported costs, slower growth/weaker sales pipeline) – Personnel issues, undisclosed liabilities, tax problems • Adjustments are never in seller’s favor! – The more/better information provided by seller (before LOI), the better seller’s negotiating position will be • Documentation and closing

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. HISTORICAL VALUATIONS AND CURRENT MARKET CONDITIONS

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Security Alarm RMR Sale Multiples 10 Year Average 2003-2012 45.0x 42.5x 40.0x 36.9x 37.2x 34.1x 35.0x 30.0x 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x Under $50K RMR $50-100K RMR $101K-500K RMR Over $500K RMR

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Source: Barnes Associates Security Alarm RMR Sale Multiples 55.0x Max & min yearly averages 2003-2012 50.0x 50.8x

45.0x

40.0x 39.9x 40.2x 36.1x 35.0x 34.2x 34.7x 31.1x 30.0x 28.9x 25.0x

20.0x Under $50K RMR $50-100K RMR $101K-500K RMR Over $500K RMR

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Source: Barnes Associates Major M&A Transactions 2013 YTD Buyer/ Investor Acquired RMR RMR (millions) mult.

SAFE Security Pinnacle (accounts) $1.9 30’s

Central Security Group SecureNet $.7 40’s

Goldman Sachs/The NorthStar $1.0+ 46x Beekman Group ADT Security Services Devcon International $3.6 41x

Ascent Security Networks $8.8 58x Media/Monitronics SAFE Security CastleRock (accounts) $0.7 30’s

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Major M&A Transactions 2012

Buyer/ Investor Acquired RMR (millions) RMR mult.

BV Investment Partners DTT $1.5 60x

Interface Westec $1.7 32x Norwest Venture Partners ACA $3.6 50x

Ascent Media/Monitronics Pinnacle $4.4 30x Blackstone Group Vivint $31.6 57x

Protection 1 Vintage Security ~$.4 DND

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. State of the Market

• Currently a “seller’s market” • Capital markets conditions are very favorable – Lots of capital available, low cost, flexible terms – Lenders are competing on growth, not worried about portfolio problems • Many interested buyers with pressure to grow/put money to work – Public companies like ADT, Ascent/Monitronics, Stanley – Private equity backed companies like Protection 1, CSG, ASG, ACA – Private equity firms on the sidelines looking to get into the industry • However, most buyers are knowledgeable/sophisticated – Can identify quality and are willing to pay a higher price for it

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Debt Markets

• Middle market senior debt (under $250M facility) – lending multiples 18-26x RMR – Stretch Senior multiples 26-28x RMR – Subordinated debt up to 30x RMR • Large debt transactions ($250M+) – Total debt/RMR availability in the 30’s – Only a few data points • Monitronics • Vivint • Protection One • ADT

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Private Equity

• 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

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Strategic Buyers

• Large alarm industry firms are acquisitive – ADT, Protection One, Monitronics, Stanley • Midsize firms too – SAFE, ACA, ASG, CSG, Guardian, Vector • Private Equity is doing more alarm industry deals – Blackstone, GTCR, Goldman, Beekman, BV • Non-industry strategics too – Ascent Media bought Monitronics (2012), SN (2013) – Stanley bought HSM (2007), Sonitrol (2008), Niscayah (2011) – Philips bought Lifeline (2004), HealthWatch (2007) – Phone companies, cable companies Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. What People Hear Isn’t Always What You Think

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Valuations

Expected valuations for companies with average performance metrics: • Less than $50k in RMR – high 20s to low 30s • $50k to $100k in RMR – low to mid 30s • $100k to $500k in RMR – low to mid 40s • $500k to $2M in RMR – mid to high 40s • $2M+ - 50’s

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. IMPACT OF ENTRY OF CABLE AND PHONE COMPANIES

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Cable and Phone Company Entrants • 7 of top 10 cable companies in the alarm industry • 5 of top 10 phone companies in alarm industry • Why are they entering? • How big a threat are they to alarm companies? • Will they stay? • What is overall impact?

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Top U.S. Cable Television Companies Company Approximate # of Security Date of Entry subscribers Product into Security (millions) Offering? Comcast Corp. 23.0 Yes 2010 DirecTV 21.0 Yes 2013 Dish Network Corp 14.0 No Time Warner Cable 12.0 Yes 1995 Cox Communications 4.6 Yes 2011 Verizon 4.6 Yes, but no 2011 monitoring AT&T 4.3 Yes 2013 Charter Communications 4.2 No Cablevision Systems Corp 3.2 No

BrightConfidential House - Not Networks to be relied upon, forwarded or duplicated without consent2.5 of YesThe Edmonds Group, LLC.2012 Top U.S. Phone Companies

Company Approximate # of Security Product Offering? Date of subscribers Entry into (millions) Security Verizon 139.7 Yes, but no monitoring 2011 AT&T 137.1 Yes 2013 Sprint 62.4 No T-Mobile US 44.0 No CenturyLink 13.2 Yes 1997 U.S. Cellular 5.0 No Windstream 1.8 Yes, but no monitoring Frontier Not reported Yes – ADT and P1 partnerships 2011 FairPoint .9 No Cincinnati Bell .9 Yes – through Guardian Alarm 2001

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Selected Entrants vs. ADT

Company Revenue Annual ad Total Customers Monthly Customer (billions) spend (millions) Revenue/cus attrition rate (billions) tomer AT&T $127 $1.9 137.1 $110.82 16.2% Verizon $116 $1.6 139.7 $84.8 17.5% Comcast $63 $1.6 23.0 $103.25 DirectTV $30 21.0 $70.22 18.1% Time $29 $1.3 12.0 $158.61 Warner Cox $10 Not 4.6 $138.89 reported ADT $3 $0.2 6.4 $39.06 13.8%

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Phone/Cable Company Entrants Co. Approx. entry Description of entry Product Offering

AT&T Early 2013 Staged roll-out Home security and home automation Bright House March 2012 Gradual rolled-out through Home security and Networks markets automation Century Link 1997 Acquisition of two small Traditional wired and alarm companies in wireless security system Monroe, LA with monitoring Cincinnati Bell 2001 Sold alarm business in 2011 Home Security plus other to Guardian Alarm, now Guardian Alarm offerings marketing partnership with (PERS) Guardian

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Phone/Cable Company Entrants Co. Approx. date Description of entry Product Offering of entry Comcast Mid 2010 Started in Houston, Total home security and home control (incl. added 6 markets in automation, energy mgmt, video) 2011, today offered in more, but not all markets Cox 2011 in Roll-out in selected Home Security, video and Home Automation Tucson, AZ markets DirecTV 2nd Q 2013 Acquisition of Self-installed, professionally monitored, LifeShield wireless digital security system Frontier 2008 Tried “go-it-alone” in ADT services in NY, Protection1 services in PA one market in 2008, 2011 started partnerships

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Phone/Cable Company Entrants Co. Approx. Description of Product Offering date of entry entry Time Warner 1995 traditional security Professionally installed and monitored on the east coast – system offers remote connection to expansion in 2011 thermostats, lights, video feeds and more Verizon January Staged roll-out No professional monitoring. Allow end 2011 at users to bundle phone, Internet, cable, CES in Las home automation and security features like Vegas motion detectors, remote access control from Schlage, and surveillance cameras. Windstream Roll-out in selected DIY “Security Man” equipment offered, but Communications markets no monitoring or installation

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Why are They Entering? • Pressure on their existing businesses – Margins shrinking (e.g. cable co’s spending more on programming; competition among cellular co’s) – Losing customers (e.g. rapidly shrinking landline business; cable losing video customers to internet offerings) • Believe alarm customers will be higher margin and lower attrition than their existing businesses – Will help them attract new customers to whom they can sell other (existing) services – Will have halo effect – help them retain more existing customers

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. What Are They Saying?

“50% of security customers are new to Comcast”

“96 percent of Xfinity home customers buy at least two other Comcast services and two-thirds of these customers have never bought home security before”

Comcast Xfinity Home SVP Mitch Bowling

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. What Are They Saying?

“Time Warner Cable, which serves 12 million video customers, has 30,000 subscribers for its security business”

Time Warner Cable Chief Executive Rob Marcus

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. What Are They Saying?

“Price is emerging as a key battlefield, with Comcast, Cox and Time Warner Cable offering discounts if customers combine home security with other services.”

Liana B. Baker, Reuters

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. What Are They Saying?

“Home security and automation is a low-churn, high-margin business that compliments DirecTV's video business.”

DirecTV Chief Revenue and Marketing Officer Paul Guyardo

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. How Big a Threat?

• Strengths – Significant resources – Advertising/selling synergies – Lots of existing customers – Alarms use their communication pathways – Can choose to offer security at low cost • Weaknesses – Poor reputation for customer service – Disliked my many people (5 of 15 most disliked co’s in US) – Large, bureaucratic, slow moving – Few operational synergies – Alarm industry may not be big enough to make an impact

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Phone Company Service

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Most Disliked Companies The 15 Most Disliked Companies In America (By Business Insider – June 29, 2012) – # 4 - Comcast • ….Comcast has been blasted for early withdrawals, faulty equipment and unprofessional service technicians… – # 6 - Time Warner Cable • …. disastrous customer service and high rates….. "TWC has destroyed my business and doesn't give a damn”

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Most Disliked Companies – # 7 - Cox Communications • “…higher rates and fees are sapping customer satisfaction” – # 11 - CenturyLink • “….one user recently called the company "the devil," and said that "they lie about everything and do nothing.” – #14 - DirectTV • “….thousands of customers complain about how the company changes contract details without notifying customers, …hiking prices without authorization.”

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. 2013 Customer Service Ratings

“The bottom of the barrel in this survey is a who's who of TV and Internet providers: Charter, Cox, TWC, Comcast, Verizon, AT&T...” (CNET, August 21, 2013)

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Will They Stay?

• Some will execute poorly and exit • But many will likely stay – Even if they don’t achieve scale they are looking for, accretive to offer as part of a bundle • Of those, some will go it alone, some will acquire and some will partner with existing industry companies • Many currently outsourcing monitoring • Some outsourcing everything except lead generation

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Overall Impact?

• Raise awareness for security • Expand market size by increasing penetration • Will be particularly competitive for “marginal” customers – Those with only mild interest in security – Low service expectations • Some will be more acquisitive once they determine to stay – Will want to gain greater scale – Security needs separate operating infrastructure • Biggest threat: could push down prices/margins – Only if they decide to rely less on security to benefit other lines of business

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Google Acquisition of Nest • $3.2 billion transaction • Nest started by former Apple engineers/designers • Currently markets smart thermostats and smoke detectors – Stylish design – Learns from experience – Remotely programmable by smart phone • Nest has built a following thanks to "smart" devices, which memorize users' habits to predict what they want

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Nest

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Nest

“The machine learning aspect is really powerful. It observes your presence. It figures you out, and makes your home more comfortable” Zach Supalla, CEO Spark

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Acquisition Rational?

• Google's special sauce is the way it responds and adapts to human behaviors and environments as we search and surf the Internet • Not about hardware – Google will let Nest operate as an independent company – Google gives away its Android operating system to smartphone makers and outsources construction of Google-branded Nexus and Chromebook products • It’s about data – Google continues to build massive data base on consumer behavior – Data collected from home (e.g. power consumption habits) says a lot • Google's acquisition of Nest isn't just about creating new revenue opportunities - it's about expanding the nodes and sensors it uses to collect data on our world

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Implications for Alarm Industry • Google enjoys a positive reputation – Concerns about Big Brother • Unlikely to want to be in the alarm business • However, “Nest-like” products will continue to drive DYI market – Becoming a more significant segment every day • Just as industry in broadening product offering, easier for customers to do more themselves • We need to make sure our offerings remain competitive

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. VALUATION NEW RMR-GENERATING SERVICES

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Beyond Alarms

• Home Automation – Arm/disarm/view system status remotely – Remotely lock/unlock doors, lights on/off, open/close garage door – Video surveillance • Energy Management – Remote thermostats – Remote lights • Home Health – Traditions (static) PERS – Mobile PERS – Mobile health • Monitoring and/0r alerts for activity, biological/vital signs, medication compliance, data integration with health care providers

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Valuation of “New” RMR • It’s all about the metrics – Valued the same as traditional RMR as long as attributes and metrics are similar • Needs to be truly recurring • Typically bundled with traditional monitoring services • Must have similar margins – Can be somewhat lower as long as overall RMR margin stays within industry normal range of 50%+ • Can enhance overall valuation if new services lower overall attrition – Margin deterioration can offset benefit Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Home Health/PERS

• Can be as valuable as security alarm RMR, but metrics are very different – Similar margins – Lower creation costs – Much higher attrition (churn) • Important to track alarm and PERS metrics separately – Combined metrics muddy the waters and could hurt valuation

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Alarm vs. PERS Metrics

Metric Alarm PERS (Industry Average) (Industry Average) Margins 70% 80% Creation Cost - Gross 28.5x 15x Creation Cost - Net 25x 12x Attrition 12% 30% Growth 8% 15%

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. DATA-TRACKING: WHAT TO TRACK, HOW TO TRACK IT, AND HOW IT EFFECTS VALUATION

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Key Valuation Metrics

• Margin from existing customers – Adjusted EBITDA and SSFCF • Attrition rate – Total lost RMR on a TTM or trailing 6 mo basis divided by average RMR outstanding – Canceled and change in over 90 days • Creation cost of new customers – 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 • Growth rate – Revenue, Adjusted EBITDA, SSFCF, RMR – Not relevant in bulk account sale

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. How Data-Tracking Effects Valuations • Need to track consistently and have as much history as possible • A buyer needs these key metrics to determine the value of your business to them • If they can’t be clearly evaluated, buyers will assume the worst – Their job is to be skeptical – Only way to evaluate is with good long-term data • The result will be a lower valuation – Could be significantly lower

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Data-Tracking: How to Improve it • Good accounting systems are a starting point – However, accountants don’t care about operational metrics (buyers do!) • Set up your accounting system so that it is easy to report by business segment – Margin from existing customers, creation cost, overhead – Must tie back to financials • Carefully track RMR and attrition – Not accounting measures – Often alarm-company software doesn’t do this well – Need your own roll-forward and static pool analysis Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Reporting All Alarm Companies Should Produce and Use • Detailed monthly financial statements – Balance sheet, income statement, statement of cash flow • Monthly calculation of creation costs – Gross and net • Monthly roll-forward (both RMR and units) – Must capture all components: RMR increase, decreases, resigns, etc. – Must tie out – be auditable • Static pool attrition – Looks at each vintage individually (e.g. Jan 2009, Feb 2009 etc.) – Tracks attrition over time – month 1 up to most recent month – Compares pools – Key approach to building accurate projections

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Roll-Forward

• Roll-forward for Units and RMR: – Beginning – Added – Attrition (including change in >90 customers) – Sold (excluded from calculation) – Price increases/decreases (RMR only) – Ending • Attrition calculations – Monthly: (Attrition / (Beg + End)/2 ) x 12 – Rolling six month: ((Cumulative Attrition for six months) / (Beg +End)/2 ) x 2

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Roll-Forward example

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Units: Beginning Units 1,000 1,006 1,009 1,013 1,018 1,037 1,062 993 1,013 1,035 1,060 1,079 1,000 Units Added 10 15 10 20 25 30 35 40 35 30 25 25 300 Units Sold (100) Unit Attrition (4) (12) (6) (15) (6) (5) (4) (20) (13) (5) (6) (10) (106) Ending Units 1,006 1,009 1,013 1,018 1,037 1,062 993 1,013 1,035 1,060 1,079 1,094 1,094

RMR: Beginning RMR $ 35,000 $ 35,231 $ 35,365 $ 35,525 $ 35,739 $ 36,454 $ 37,389 $ 35,346 $ 36,126 $ 36,966 $ 37,906 $ 38,619 $ 35,000 RMR Added $ 370 $ 555 $ 370 $ 740 $ 925 $ 1,110 $ 1,295 $ 1,480 $ 1,295 $ 1,110 $ 925 $ 925 $ 11,100

RMR Increases $ 1 $ 3 $ 5 $ 9 RMR Decreases $ (1) $ (1) $ (1) $ (2) $ (5) RMR from Unit Attrition $ (140) $ (420) $ (210) $ (525) $ (210) $ (175) $ (140) $ (700) $ (455) $ (175) $ (210) $ (350) $ (3,710) RMR Attrition $ (139) $ (421) $ (210) $ (526) $ (210) $ (175) $ (138) $ (700) $ (455) $ (170) $ (212) $ (350) $ (3,706)

RMR Sold $ (3,200) $ (3,200) Ending RMR $ 35,231 $ 35,365 $ 35,525 $ 35,739 $ 36,454 $ 37,389 $ 35,346 $ 36,126 $ 36,966 $ 37,906 $ 38,619 $ 39,194 $ 39,194

Average Ending RMR $ 35.02 $ 35.05 $ 35.07 $ 35.11 $ 35.15 $ 35.21 $ 35.60 $ 35.66 $ 35.72 $ 35.76 $ 35.79 $ 35.83

Monthly RMR Attrition % annualized 4.8% 14.3% 7.1% 17.7% 7.0% 5.7% 4.6% 23.5% 14.9% 5.4% 6.6% 10.8% Rolling 6 mos Attrition % annualized 9.3% 9.5% 11.0% 12.2% 10.0% 9.9% 10.6% Annual Attrition 10.0% Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Static Pool “Survivor” Example

Percentage of each vintage surviving at the end of the year (vintages across the top, years since installation down the side)

2007 2008 2009 2010 2011 2012 0 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 1 93.0% 94.0% 94.5% 96.0% 95.5% 95.0% 2 84.6% 87.4% 87.4% 91.2% 90.4% 89.3% 3 78.7% 80.9% 79.5% 86.4% 85.0% 4 68.5% 69.9% 67.6% 78.3% 5 60.9% 62.2% 60.5% 6 56.7% 56.6% 7 52.4%

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Static Pool “Survivor” example

% survivors since installation by vintage 100% 90%

80% 70% 2007 60% 2008 50% 2009 40% 30% 2010

Surviving % account 20% 2011 10% 2012 0% 0 1 2 3 4 5 6 7 Years since installation

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Static Pool example

Attrition by installation vintage 16% 14%

12% 2007 10% 2008 8% 2009 6% 2010 4% Annual Attrition % Attrition Annual 2011 2% 2012 0% 1 2 3 4 5 6 7 Years since installation

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. LESSONS FOR BUYERS AND POTENTIAL SELLERS

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Lessons for Sellers

• Track key metrics accurately • Use them to manage your business • Start now, not at the time you want to sell – Hire someone to help you implement – Not something your accountant is likely to know/do well • Market timing and deal size matter • Buyers never pay more than they think they have to – Negotiation will determine what buyer WILL pay • Hire someone (like us ) to help – You will only sell once (or twice) – We do this all the time

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Lessons for Buyers

• Do very thorough due diligence • Bring in experts to help – RMR and attrition verification, quality of earnings, PCI compliance, legal, tax • Know your target return on investment • Develop detailed projections model to determine what price you can pay • Market timing and deal size matter • Don’t pay any more than you have to • Hire someone (like us ) to help – You need an expert/quarterback to manage this process – We do this all the time

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Would You Do This Yourself?

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. QUESTIONS AND ANSWERS

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC. Contact Information

Henry Edmonds The Edmonds Group, LLC 16 Lenox Place St. Louis, MO 63108 Ph: 314.422.4649 Email: [email protected] Website: www.theedmondsgroup.com Facebook: www.facebook.com/TheEdmondsGroup Twitter: TheEdmondsGroup

Confidential - Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.