SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-20770
RESPONSE USA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3088639
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11-H Princess Road, Lawrenceville, New Jersey 08648
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609)896-4500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.008 par value and Common Stock Purchase Warrants
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
any amendment to this Form 10-KSB. [X]
The issuer's gross revenues for the most recent fiscal year were $10,867,696.
The aggregate market value of the Voting Stock held by non-affiliates (based
upon the closing bid price) on October 4, 1996, was approximately $17,672,885.
As of October 4, 1996, there were 4,158,326 shares of Common Stock, Par
Value $.008 Per Share, outstanding.
Certain exhibits listed in Item 13 of Part IV have been incorporated by
reference. The index to exhibits appears on page 33.
RESPONSE USA, INC.
1996 Form 10-KSB Annual Report
TABLE OF CONTENTS
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 15
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . 23
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . 23
Item 9. Directors and Executive Officers of the Registrant . . . . . . . 24
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 28
Item 11. Security Ownership of Certain Beneficial Owners and Management . 31
Item 12. Certain Relationships and Related Transactions . . . . . . . . . 32
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 33
PART I
Item 1. Business
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General
Response USA, Inc. (the "Company"), through its wholly-owned subsidiary United
Security Systems, Inc. ("USS"), is engaged in the sale, installation, continuous
monitoring and maintenance of electronic security systems. USS provides
security alarm monitoring services for residential and small business sub-
scribers. USS is also engaged in the acquisition of subscriber account port-
folios and completed the acquisition of 28 subscriber account portfolios during
the past year totaling 8,000 subscribers. USS currently operates in the States
of New Jersey, Pennsylvania, Delaware, New York and Connecticut.
The Company, through its wholly-owned subsidiaries, Response Ability Systems,
Inc. ("Systems") and Emergency Response Systems, Inc. ("ERS"), markets a per-
sonal emergency response system, ("PERS") which enables users, such as elderly
or disabled persons, to transmit a distress signal using a portable transmitter
which is part of the PERS. Systems commenced operations in 1985; ERS was
acquired by the Company in 1994. When activated by pressing of a button, the
transmitter sends a radio signal to a receiving base installed in the user's
home. The receiving base relays the signal over telephone lines to a monitoring
station which provides continuous monitoring services. The Company's monitoring
services are provided by a third party monitoring station located in Euclid,
Ohio. The monitoring station personnel verify the nature of the emergency
and contact the appropriate emergency authorities in the user's area.
The Company's revenues consist primarily of recurring payments under written
contracts for the monitoring and servicing of security systems and PERS. The
Company currently monitors approximately 45,000 subscribers. For the fiscal
year ended June 30, 1996, monitoring, rental and service revenues represented
78% of total revenues. Monthly Recurring Revenues ( MRR ) is a term commonly
used in the alarm industry and means monthly recurring revenue that the Company
is entitled to receive under contracts in effect at the end of the period. MRR
is utilized by the alarm industry to measure the size of a company, but not as
a measure of profitability or performance, and does not include any allowance
for future attrition or allowance for doubtful accounts. EBITDA is another
term commonly utilized by the alarm industry and means earnings before interest,
taxes, depreciation and amortization. EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles. During the
past fiscal year, the Company's MRR has grown by 25% to $750,000 from approx-
imately $600,000. Total revenues have increased from $9.3 million to $10.8
million, or 16%. Revenue growth and efficiencies of operations have led to an
increase in EBITDA from ($550,000) to $1,383,000, excluding nonrecurring
charges of $430,000 during the fiscal year ended June 30, 1996, an increase of
351%.
The Company's electronic security business utilizes electronic devices
installed in customers' businesses and residences to provide detection of
events, such as intrusion or fire, surveillance, control of access and property.
The detection devices are monitored by the same third party monitoring company
as the Company's PERS. In some instances, commercial customers may monitor
these devices at their own premises or the devices may be connected to local
fire or police departments. The products and services marketed in the electronic
security services industry range from residential systems that provide basic
entry and fire protection to more sophisticated commercial systems. USS
commenced operation in March 1994, upon the acquisition of substantially all
of the assets of two companies engaged in the electronic security business.
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The Company sells its PERS products directly to the consumer and through
franchisees in the United States and a distributor in Canada under the "Instant
Response" and "Response Ability" trade names. The Company also sells and
leases PERS through its institutional division to hospitals and home health
care agencies. The Company also sells PERS and related accessories, which are
manufactured by a sub-contractor located in Florida, to independent home alarm
and other vendors under private label programs.
Electronic Security Industry
The security services industry encompasses a wide range of products and
services, which can be broadly divided into electronic monitoring products
and services which USS provides and highly labor intensive manned guarding
and patrol services which USS does not provide. Electronic monitoring products
and services consist of the sale, installation, continuous monitoring and
maintenance of electronic security systems. This business utilizes modern
electronic devices installed in customers' businesses and residences to provide
detection of events, such as intrusion or fire, surveillance, control of
access and control of articles. Event detection devices are monitored by a
monitoring center, which is linked to the customer through telephone lines.
This center is often located at remote distances from the customer's premises.
In some instances, the customer may monitor these devices at its own premises
or the devices may be connected to local fire or police departments. The
products and services marketed in the electronic security services industry
range from residential systems that provide basic entry and fire protection
to sophisticated commercial systems incorporating closed circuit television
systems and access control.
The security alarm industry is currently composed of a large number of small
providers of alarm systems and services. According to certain data concerning
the residential security alarm market prepared in 1995 by the J.P. Freeman Co.,
there are approximately 12,700 alarm dealers nationally, and the Company
estimates that there are over 3,000 in the states in which the Company operates.
The Company believes that the smaller alarm companies are at a competitive
disadvantage because of their higher overhead as a percentage of revenues and
lack of access to capital at attractive rates.
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Electronic Security Services
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Monitored Electronic Security Systems
USS' electronically monitored security systems involve the use on a customer's
premises of devices designed to detect or react to various occurrences or con-
ditions, such as intrusions, movement, fire, smoke, flooding, environmental
conditions (including temperature or humidity variations), and other hazards.
In most systems these detection devices are connected to a microprocessor based
control panel which communicates through telephone lines to a monitoring station
where alarm and supervisory signals are received and recorded. Systems may
also incorporate an emergency "panic button," which when pushed causes the con-
trol panels to transmit an alarm signal that takes priority over other alarm
signals. In most systems, control panels can identify the nature of the alarm
and the areas within a building where the sensor was activated and transmit the
information to a monitoring station. Depending upon the type of service for
which the subscriber has contracted, monitoring center personnel respond to
alarms by relaying appropriate information to the local fire or police depart-
ments, notifying the customer or taking other appropriate action. As of
June 30, 1996, the Company has approximately 21,000 alarm subscribers for which
it provides monitoring services.
Residential Systems
Residential security services consists of the sale, installation, monitoring
and maintenance of electronically monitored security systems to detect intrusion
and fire. The Company believes that the demand for residential systems results
from a general awareness of crime and security concerns. In addition, resi-
dential customers are usually able to obtain more favorable insurance rates if
an electronically monitored security system is installed in their home.
Approximately 80% of USS' customers are residential. On average, fees charged
for residential monitoring services are lower than the fees charged for
commercial monitoring services. Contracts for residential services are
generally for an initial four year term, automatically renewing on a year to
year basis thereafter, unless canceled.
Commercial
USS also provides electronic security services and products to commercial
businesses and facilities. These systems and products are tailored to
customers' specific needs and include electronic monitoring services that
provide intrusion and fire detection, as well as card or keypad activated
access control systems and closed circuit television systems. USS also markets
standard security packages for specific types of commercial customers. Certain
commercial customers require more complex electronic security systems. To meet
this demand, USS also sells integrated electronic security systems that combine
a variety of electronic security services and products. These systems are
integrated by USS to provide a single computer controlled security system.
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Products
USS sells products offered by several different manufacturers. Systems are
generally purchased by the customers, although the Company does lease a limited
number of systems. When the system is sold, the customer pays USS the purchase
price. When the system is leased, only an installation fee is charged. Customers
agree to pay monthly service charges for monitoring and may also subscribe for
maintenance services. Uniform package prices are offered to residential cus-
tomers who purchase standard security systems which includes a fixed number of
detection devices. Frequently, customers add detection devices to expand the
coverage of the system for which the Company charges an additional sales charge
when the system is purchased. Pricing depends upon the monitoring components
installed, the type of alarm transmission and other services required.
Installation, Service and Maintenance
As part of its effort to provide high quality service to its residential and
commercial customers, USS maintains a trained installation, service and main-
tenance staff. These employees are trained by the Company to install and service
the various types of commercial and residential security systems which USS
sells. USS does not manufacture any of the components used in its electronic
security service business.
Contracts
The Company's alarm monitoring subscriber contracts generally have initial
terms ranging from one to five years in duration, and provide for automatic
renewal for a fixed period, unless the Company or subscriber elects to cancel
the contract at the end of the period. The Company maintains an individual
file with a signed copy of the contract for each of its subscribers and a
computerized data base.
Substantially all of the Company s alarm monitoring agreements for the
Company's residential subscribers (which constitute approximately 80% of the
Company s alarm subscriber customer base) provide for subscriber payments of
between $20 and $32 per month. The Company s commercial subscribers typically
pay from $25 to $50 per month.
In the normal course of its business, the Company experiences customer cancel-
lations of monitoring and related services as a result of subscribers relocat-
ing, the cancellation of purchased accounts in the process of assimilation into
the Company's operations, unfavorable economic conditions, dissatisfaction with
field maintenance service and other reasons. This attrition is offset to a
certain extent by revenues from the sale of additional services to existing
subscribers, price increases, the reconnection of premises previously occupied
by subscribers, conversion of accounts previously monitored by other alarm
dealers and guarantees provided by sellers of such accounts.
SECURITY SERVICES BUSINESS STRATEGY
The Acquisition Program
The Company grows primarily by acquiring subscriber accounts, primarily from
smaller alarm companies. The Company focuses on acquisitions that allow it to
increase its subscriber density in each area in which it operates. This leads
to greater field maintenance and repair efficiencies. The Company believes that
it is an effective competitor in the acquisition market because of the
substantial experience of its management team over the past 12 months in
completing 28 acquisitions.
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Since the Company's primary consideration in making an acquisition is the
amount of EBITDA that will be derived from such new subscribers, the price paid
by the Company is customarily based upon such EBITDA. To protect the Company
against the loss of acquired accounts and to encourage the Seller of such
accounts to facilitate the transfer of the subscribers, management typically
requires the seller to provide guarantees against account cancellation for a
period following the acquisition. The Company usually holds back from the
seller a portion of the acquisition price, and has the contractual right to
utilize such holdback to recapture a portion of the purchase price based on the
lost MRR arising from the cancellation of acquired accounts.
In evaluating the quality of the accounts acquired, the Company relies pri-
marily on management s knowledge of the industry, its due diligence procedures,
its experience integrating accounts into the Company's operations, its assump-
tions as to attrition rates for the acquired accounts, and the representations
and warranties of the sellers.
The Company employs a comprehensive acquisition program to identify, evaluate,
and assimilate acquisitions of new subscriber accounts that includes three
stages: (1) the identification and negotiation stage; (2) the due diligence
stage; and (3) the assimilation stage.
The Company actively seeks to identify prospective companies and dealers
through membership in trade associations, trade magazine advertising and
contacts through various vendors and other industry participants. The Company's
use of standard form agreements and experience in identifying and negotiating
previous acquisitions, helps to facilitate the successful negotiation and
execution of acquisitions in a timely manner.
The Company conducts an extensive pre-closing review and analysis of all facets
of the seller's operations. The process includes a combination of selective
field equipment installations, individual review of substantially all of the
subscriber contracts, an analysis of all the rights and obligations under such
contracts and other types of verification of the Seller's operations.
The Company develops a specific assimilation process, in conjunction with the
Seller, for each acquisition. Assimilation programs typically include a letter,
approved by the Company, from the Seller to its subscribers, explaining the
sale and the transition, followed by one or more letters or packages that
include the Company s subscriber service brochures, field service and monitoring
service telephone number stickers, yard signs and window decals. Thereafter,
almost all new subscribers are contacted individually by telephone by a member
of the Company s customer service department for the purpose of soliciting
certain information and addressing the subscriber's questions or concerns.
The Company has completed 28 acquisitions totaling 8,000 subscribers during the
period July 1, 1995 through June 30, 1996. The Company anticipates continuing
its acquisition program during its next fiscal year. The Company typically
acquires only the subscriber accounts, and not the facilities or liabilities, of
acquired companies. As a result, the Company is able to obtain gross margins on
the monitoring of acquired subscriber accounts that are similar to those that
the Company currently generates on the monitoring of its existing subscriber
base. In addition, the Company may increase the monitoring charges paid by
those subscribers if it is determined that those currently being paid do not
reflect the market area rates.
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Dealer Program
The Company recently commenced a Dealer Program which allows it to participate
in the growth of the residential security alarm market by providing monitoring
and field service repair services to subscriber accounts generated on a monthly
basis through exclusive purchase agreements with independent alarm companies
specializing in the sale and installation of residential alarm systems.
The Dealers that the Company selects for the Dealer Program are typically small
alarm companies that specialize in installing alarm systems for residential or
small businesses in a specified geographic area. The Company enters into
exclusive contracts with such dealers that provide for the purchase by the
Company of the dealers' subscriber accounts on an ongoing basis. The dealers
install alarm systems, arrange for the subscriber to enter into USS alarm
monitoring agreements, and install USS yard signs and window decals. In addi-
tion, the Company evaluates the credit history of the prospective new subscriber
prior to purchase from the dealer. The Company is currently purchasing
approximately 100 accounts per month through its Dealer Program and anticipates
an expansion of this program during its next fiscal year.
Strategic Alliances
To evaluate other potential sources of subscriber growth, the Company has
initiated an analysis of other companies or industries that may have an
interest in entering the residential security alarm market. Certain industries
facing deregulation, such as public utilities, have expressed an interest to
the Company to provide security systems to their customers to develop more
comprehensive relationships. The Company intends to continue to pursue this
area of subscriber expansion, but at this time there are no definitive agree-
ments that have been executed.
PERS Industry
The personal emergency response industry generally consists of companies that
provide technological support services that help elderly or medically-at-risk
individuals live independently, without the need of supervised care. In the
Company's view, the recent growth of the emergency response market is strongly
linked to the belief of medical professionals that such individuals should be
encouraged to live independently for as long as possible. The Company believes
that the demand for emergency response systems may increase as the number of
people over 65 years of age, and the number of such persons living alone,
increases. Currently, two groups of individuals are perceived to be the
principal users of PERS. The first group consists of elderly people who are
capable of living independently and who are seeking ways to extend their ability
to maintain their independence. The second group consists of those who
experience short-term medical needs for whom the PERS is primarily used to
reduce the length of a hospital stay and to provide short-term assistance at
home during the recuperation period. Other potential users include "latch-key"
children and others for whom immediate, automatic access to emergency assistance
is desirable.
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PERS Products and Monitoring Services
Products. The Company's PERS is designed to monitor, identify and electronical-
ly report emergencies requiring medical, fire and police assistance. The PERS
hardware consists of two basic components: (1) a portable pendant transmitter
that is worn around the neck (the system also includes a portable, hand-held
transmitter that can be attached to the user's belt or mounted on a wall); and
(2) a receiving base that is installed in the user's home and connected to the
user's telephone line. The Company's PERS also includes a smoke detector (in
certain states) that transmits a distress signal to a monitoring station in the
event of fire, and a medical/police hand held transmitter that transmits a
medical or police distress signal to a monitoring station. Both the pendant
and medical/police hand held transmitter send a medical distress signal to a
central monitoring station, however, the hand held transmitter also sends a
police distress signal on a separate channel when activated.
The Company's PERS has a variety of safety features, including an abort func-
tion to avoid false alarms and an alternative power source which allows the
system to remain functional in the event of a generalized power failure. In
addition, once activated, the PERS "seizes" the user's telephone line to which
the receiving base is connected and dials the monitoring station until a
connection is established, regardless of whether the user's telephone is in use
or off the hook. Each PERS is tested before release for sale and is re-tested
immediately after installation in a user's home.
Monitoring Services. Users of the Company's PERS initiate a distress signal
by pressing a button on the portable transmitter included in the system. Once
activated, the transmitter sends radio signals to the receiving base (the
transmitter has an effective range of approximately 200 feet), which in turn
translates the radio signal and automatically dials a monitoring station using
a toll-free telephone number. Once telephone contact is made with the moni-
toring station, a coded signal automatically initiates the electronic retrieval
of personal data relating to the user who initiated the distress signal. Such
data includes the user's name and address, directions to the user's home,
allergies, medications, best route of entry into the user's home during an
emergency, and the doctor and family members that should be contacted. In
addition, this signal establishes two-way voice communication between the user
and monitoring station personnel directly through the PERS hardware, avoiding
any need for the user to access a telephone. Monitoring personnel verify the
nature of the emergency by speaking with the individual and, if necessary,
notify the predetermined emergency authorities in the user's area. If the
monitoring personnel are unable to establish voice communication with the user,
emergency agencies are notified immediately. As of June 30, 1996, the Company
has approximately 24,000 monitoring subscribers in approximately 45 states for
whom it provides monitoring services. The Company's monitoring service is
available only to users of the Company's PERS; PERS cannot be programmed to
permit the customer to utilize a competitor's monitoring service.
The Company provides all of its PERS users with 24-hour-a-day, 365 day-a-year
monitoring service. The monthly charge for monitoring services paid by the
subscriber is approximately $30.00. The Company's contracted monitoring
facility is located in Euclid, Ohio and is accessible by PERS users nationwide
through toll-free emergency telephone lines. The monitoring facility contains
telecommunications and computer equipment with the capacity to monitor tens of
thousands of PERS users simultaneously, and to receive and act upon a user's
emergency signal. On average, the Company receives 1,000 calls a day from its
PERS users, of which approximately 60% are made by users for test purposes.
The Company maintains a duplicate set of all customer data at its Euclid, Ohio
facility.
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Sales and Marketing
The Company sells its PERS products in the United States directly to consumers,
and through active franchisees and private label re-sellers (principally home
alarm companies). In Canada, the Company's PERS are marketed exclusively by a
Canadian distributor. Until 1991, substantially all PERS were sold through
franchisees, although the sale of new franchises was discontinued in 1987.
At the present time, the Company's direct sales are generated principally by
the Company's institutional division which commenced operations in March 1991.
The Company recently commenced, and is in the process of developing, additional
cooperative marketing programs in which the Company's products are distributed
in conjunction with another vendor's products, or using other marketing vehicles
developed by a co-participant specializing in direct sales of consumer products.
The following is asummary of the Company's current and proposed various
marketing programs.
Franchisees and Distributorship. The Company ceased offering new franchises
for sale in 1987 and has no current plans to resume selling franchises in the
future. Existing franchisees, however, are allowed to renew their franchise
annually upon payment of a $350 renewal fee. As of June 30, 1996, approximately
100 franchisees had paid their franchise renewal fee for the current year.
Franchisees are independent contractors who purchase or lease their PERS
requirements from the Company in accordance with a schedule of prices
established by the Company, and resell PERS in non-exclusive territories.
Franchisees also are required to contract with the Company to provide monitoring
services to the franchisee's customers. In addition, the Company offers billing
and collection services to franchisees. Franchisees are required to pay a
monthly fee to the Company for each customer monitored, the amount of which is
dependent upon the number of accounts serviced and the level of other services
(for instance, billing and collection) provided. The Company also sells adver-
tising and promotional materials, accessories and supplies to its franchisees
pursuant to a published price list.
Institutional Division: In March 1991, the Company established an institu-
tional division to market PERS to hospitals and home health care agencies.
Hospitals and home health care agencies may either purchase or lease/purchase
PERS for their patients, with monitoring services provided by the Company. The
consumer acquires the PERS from the home health care agency, and the Company's
obligations are limited to providing monitoring services. Additional markets
for the Company's institutional division include state and local welfare
agencies. The Company is also actively soliciting agreements with municipalities
to provide the Company's PERS services as part of the municipalities' total
health and other assistance programs.
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Retail Marketing: The Company has commenced the distribution of its PERS
through approximately 3,000 pharmacies of Revco D.S. and K-Mart Stores, Inc.
The name under which the Company's PERS is marketed is "Instant Response."
Users of PERS through such retailers are given use of the PERS for as long as
the customer pays the Company's standard monitoring fees. A portion of the
monitoring fee is then paid to the retailer.
Sponsored Marketing: The Company has recently initiated cooperative marketing
programs with other businesses and organizations whose customers or members
fall within the Company's targeted market. Under these arrangements,
the Company supplies its PERS to the "sponsor's" customers or members for a
monthly monitoring fee. The sponsoring organization receives royalties from the
Company based on the Company's monitoring revenues received from subscribers
obtained through the program. The Company intends to expand its sponsored
marketing program to include churches, synagogues, and civic and charitable
organizations.
Private Label Programs: The Company also supplies PERS for vendors under
product names owned by the vendors. Currently, sales under these programs are
limited. At the present time, all of the Company's private label vendors pro-
vide their own monitoring services. The Company's gross profit margins on sales
in its private label programs are significantly lower than margins on its direct
and franchisee sales programs.
Production
The principal materials utilized in the production of PERS consist of elec-
tronic components which are obtained from several suppliers. The sub-contractor
also purchases molded plastic, printed circuit boards and miscellaneous hard-
ware from several sources. The Company believes that the required raw materials
are not so unique to a particular vendor and that other sources could be ob-
tained, although some delays in production might result if it were necessary to
find new sources for raw materials.
Governmental Regulation
As a seller of PERS and electronic security systems and provider of monitoring
services, the Company is subject to laws and regulations administered by various
states and localities, the Federal Trade Commission, the Federal Communications
Commission and the Food and Drug Administration. The Company believes that it
has received all necessary federal licenses or permits to sell PERS and elec-
tronic security equipment and services and operate the monitoring services.
The Company also believes that it has complied with all state requirements for
sale of its products and for providing monitoring services.
Although it ceased offering new franchises for sale in 1987, the Company's
continuing relationship with its existing franchisees is subject to regulation
under state laws. Moreover, the Company continues to be bound by obligations
to franchisees under certain state consent orders regarding alleged franchise
sales practices. At various times, the Company also has been named in state
actions or inquiries related to the sales practices of its franchisees. The
Company believes it is not liable for the actions of its franchisees; however,
there can be no assurance that it will not be subject to future orders. The
Company may be subject to additional regulation in the future, and changes in
laws and regulations applicable to the Company could increase the cost of
compliance and otherwise materially and adversely affect the Company in ways
not presently foreseeable.
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Insurance
The Company maintains general liability insurance policies covering various
types of liability including products liability. The product liability
insurance has policy limits of $1,000,000 per occurrence and $5,000,000 in the
aggregate per year and the errors and omissions liability insurance policy
limits are $1,000,000 per occurrence and $5,000,000 in the aggregate per year.
These policies are subject to exclusions and other terms which the Company
believes are typical for policies of similarly situated companies. The Company
believes that its insurance coverage is adequate for its needs, but there can
be no assurance that the Company will not be subjected to claims in the future
which are not covered by its insurance or which exceed its insurance coverage.
Trademarks and Trade Names
The Company owns a federal trademark registration for the trade name "Response
Ability."
Competition
Electronic Monitoring Services
The security services business is highly competitive and new competitors are
continually entering the field. Competition is based primarily on price in
relation to quality of service. Sources of competition in the security services
business are other providers of central monitoring services, systems directly
connected to police and fire departments, local alarm systems and other methods
of protection, such as manned guarding.
The central monitoring sector of the electronic security business is
characterized by low marginal costs associated with monitoring additional
customers. Despite the opportunity for economies of scale by consolidation of
monitoring and administrative functions, the industry is highly fragmented,
with thousands of small providers. There are also a limited number of larger
competitors, including ADT Limited, Borg-Warner Security Corporation (under the
Wells Fargo and Pony Express brand names), a division of Honeywell, Inc., and
Brinks Home Security, a division of The Pittston Company.
PERS
The emergency response industry is serviced by numerous companies that provide
PERS products and services, including monitoring services. A majority of the
emergency response companies offer systems that are monitored through a central
monitoring facility. In some instances, companies which sell PERS hardware
establish agreements with local burglar alarm companies to provide the service
on a per user fee basis, or have their own monitoring capability. A number of
emergency response companies offer their products through hospitals that
distribute and monitor the systems. Several companies offer systems that utilize
a direct dial/pre-recorded telephone message to selected telephone numbers
directly without a monitoring station.
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The Company's principal competitors are other national or regional emergency
response providers and burglar alarm companies that offer medical emergency
features in addition to their home protection systems. Many of these companies
have greater financial resources than the Company and may enjoy a particular
competitive advantage due to their access to a larger client base. The Company
considers its principal competitors to be American Medical Alert Corp. and
Lifeline Systems, Inc. Methods of competition in the PERS industry consist of
quality, service and price of the PERS system. While price is a factor, the
customer's primary consideration in choosing a PERS supplier is the quality
of monitoring service provided and the reliability of the PERS system. The
Company believes that it competes favorably on all of these factors.
Employees
At June 30, 1996, the Company and its subsidiaries employed 130 full-time
employees. Of this number, 6 are engaged in sales, 8 in quality control, 8 in
telemarketing, 26 in installation, and 82 in administration. None of the
Company's employees is represented by a labor union, and the Company considers
its employee relations to be satisfactory.
Item 2. Properties
- -------
The Company leases 15,000 square feet in Lawrenceville, New Jersey for its
executive and administrative offices at an annual rental of $172,000. The
lease expires in June 1999 after which the Company has a five year renewal
option. The Company also leases (i) 2,000 square feet in Newark, Delaware, for
use as a sales and installation facility at an annual rental of $14,400. The
lease expires May, 1997 after which the Company has a one-year renewal option
at the same terms. The Company leases 2,000 square feet in Los Angeles,
California for use as a sales and installation facility, at an annual rental of
$24,000 which lease expires in October 2000; and (ii) 5,000 square feet for its
sub-contracted manufacturing facility in Florida at an annual rental of $19,200
pursuant to a lease expiring in March 1998.
The Company believes that its current facilities are adequate for its needs.
Item 3. Legal Proceedings
- -------
The Company experiences routine litigation in the normal course of its busi-
ness. The Company does not believe that any of such pending litigation will
have a material adverse effect on the financial condition or results of
operations of the Company.
-14-
In February 1996, the Company consented to the issuance of an Order Instituting
Proceedings pursuant to the Securities Act of 1933 (the Securities Act ) and
the Securities Exchange Act of 1934 and Findings and Order of the Securities
and Exchange Commission (the Finding ), without admitting or denying allega-
tions of facts contained therein. In July 1993, the Company sold 60,000 shares
of Common Stock pursuant to what it claimed to be an exemption from Registration
under Regulation S of the Securities Act. The Finding stated that such sales
were made under circumstances in which the Company knew or should have known
that such exemption was not available. Consequently, the Finding stated, the
sales were made in violation of the registration provisions of the Securities
Act. The Company consented to permanently cease and desist from committing or
causing any violation, and any future violation, of Section 5 of the Securities
Act.
Prior Proceedings:
In October 1987, Systems filed a Petition for Reorganization under Chapter 11
of the Federal Bankruptcy Act in the United States Bankruptcy Court (District
of New Jersey). In January 1990, the Bankruptcy Court confirmed Systems' Plan
of Reorganization, which became effective in February 1990. The Plan of Reor-
ganization provided for a long-term payment of approximately $2.8 million of
Systems' indebtedness to secured and unsecured pre-petition creditors and for
unpaid state and federal taxes, of which $374,058 is due through the year 2000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 7 to Notes to Consolidated Financial Statements.
Prior to its acquisition by the Company, Systems was named in a number of
civil and administrative proceedings relating to its franchise sales. The
Company does not presently offer franchises for sale; however, the Company is
bound by regulations involving its continuing relationship with franchisees.
Item 4. Submission of Matters to a Vote of Security Holders
- -------
In September 1995 the Board of Directors authorized a 1 for 10 reverse stock
split, which became effective after stockholders approval. The record date for
holders of the Company's Common Stock to vote on the proposal was September 23,
1995. A special shareholders meeting was held on November 5, 1995, at which
time the reverse stock split was approved. It was declared effective on
November 20, 1995.
-15-
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
- ------- Holder Matters
The following table sets forth the high and low "bid" and "asked" prices,
adjusted for the 1 for 10 reverse stock split as if the effective date was
July 1, 1994, published by the NASD for the Company's Common Stock. These
quotations represent inter-dealer quotations, without adjustments for retail
mark-ups, mark-downs, or other fees or commissions, and do not represent actual
transactions.
BID ASK
For Fiscal Year Ending HIGH LOW HIGH LOW
June 30, 1995 ---- --- ---- ---
-------------
First Quarter 10 6 1/4 12 1/2 8 1/8
Second Quarter 8 3/4 3 1/8 11 1/4 4 5/8
Third Quarter 4 3/8 3 1/8 6 9/16 3 3/4
Fourth Quarter 5 1 14/16 7 1/32 3 7/16
BID ASK
For Fiscal Year Ending HIGH LOW HIGH LOW
June 30, 1996 ---- --- ---- ---
-------------
First Quarter 7 3/16 3 3/4 7 13/16 4 3/8
Second Quarter 6 4 1/4 6 1/4 4 5/8
Third Quarter 6 1/8 4 3/4 6 1/4 5
Fourth Quarter 8 1/2 5 1/8 8 3/4 5 1/4
On October 4, 1996 the closing bid price for the Common Stock was $4.25, and
there were approximately 2,000 holders of record of the Common Stock.
The Company has not paid any dividends on its Common Stock since its inception.
The Company anticipates that for the foreseeable future, earnings, if any, will
be retained for use in the business or for other corporate purposes, and it is
not anticipated that dividends will be paid.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
- ------ of Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes thereto.
-16-
General
The Company's financial information for the two years ended June 30, 1995 and
June 30, 1996, respectively, reflects the following events which affected the
Company's business and had a significant impact on the Company's results of
operations and financial condition: USS's acquisition of substantially all of
the assets and certain liabilities of United Video Associates, Inc. ("UVA") and
National Security Finance Limited Partnership II ("NSF") in March 1994; the
Company's acquisition of all of the outstanding capital stock of Universal
Security Systems, Inc. ("USS") in November 1994; and the Company's acquisition
of substantially all of the assets of the Medical Alert Systems Monitoring
Division of Emergency Response Systems, Inc. ("ERS").
On November 1, 1994 the Company completed the acquisition of all the outstand-
ing capital stock of USS in exchange for 75,770 shares of the Company's common
stock, valued at $576,641, issued to the former stockholders of USS. USS is
engaged in the installation, servicing and monitoring of electronic security
systems. On November 22, 1994, the company completed the acquisition of sub-
stantially all the assets of ERS. ERS was engaged in the installation, ser-
vicing and monitoring of personal emergency response systems. In consideration
of the acquisition with a cost of $1,882,930, the Company paid ERS an aggregate
of $1,700,000 consisting of $1,550,000 in cash, a promissory note payable over
two years in the amount of $150,000, issued 10,000 shares of its common stock
valued at $100,000 to the shareholder and principals of ERS, and incurred
acquisition costs of $82,930.
Accounting Differences for Account Purchases and New Installations. A dif-
ference between the accounting treatment of the purchase of subscriber accounts
and the accounting treatment of the generation of new accounts through direct
sales by the Company s sales force has a significant impact on the Company's
results of operations. All direct external costs associated with purchases of
subscriber accounts (either through the Dealer Program or through acquisition
of subscriber account portfolios) are capitalized and amortized over 10 years
on a straight line basis for alarm accounts and five to seven years for the
purchase of PERS accounts. Included in capitalized costs are certain acquisi-
tion transition costs associated with incorporating the purchased subscriber
accounts into the Company's operations. Such costs include costs incurred by
the Company in fulfilling the Seller s pre-acquisition obligations to the
acquired subscribers, such as providing warranty repair services. In contrast,
all of the Company's costs related to the sales, marketing and installation of
new alarm monitoring systems generated by the Company's sales force are expensed
in the period in which such activities occur.
Subscriber Attrition. Subscriber attrition has a direct impact on the Company's
results of operations, since it affects both the Company's revenues and its
amortization expense. Attrition can be measured in terms of canceled subscriber
accounts and in terms of decreased MRR resulting from canceled subscriber
accounts.
-17-
Results of Operations
Fiscal Years 1995 and 1996
The following table summarizes the components of the Company's revenues and
cost of revenues for the fiscal years ending June 30, 1995 and 1996:
Years Ended June 30
-------------------------------------------------
1995 1996
---- ----
Operating revenues:
Product sales $4,520,062 48.4% $2,352,449 21.6%
Finance and Rental 1,274,952 13.7% 1,770,272 16.3%
Services 3,537,522 37.9% 6,744,975 62.1%
---------- ------ ---------- ------
$9,332,536 100.0% $10,867,696 100.0%
========== ====== ========== ======
Cost of Revenues*:
Product sales $2,635,674 28.2% $1,718,689 15.8%
Service and Rental $1,125,123 12.1% 1,779,490 16.4%
--------- ----- --------- -----
$3,760,797 40.3% $3,498,179 32.2%
========= ===== ========= =====
Gross Profit $5,571,739 59.7% $7,369,517 67.8%
========= ===== ========= =====
________________________
*As a percentage of total revenues
Results of Operations
A majority of the Company's revenues are derived from recurring payments for
the monitoring, rental and servicing of both electronic security systems and
PERS, pursuant to contracts with initial terms up to five years. Service
revenues are derived from payments under extended warranty contracts and for
service calls performed on a time and material basis. The remainder of the
Company's revenues are generated from the sale and installation of security
systems and PERS. Monitoring and service revenues are recognized as the service
is provided. Sale and installation revenues are recognized when the required
work is completed. All direct installation costs, which include materials,
labor and installation overhead, and selling and marketing costs are expensed
in the period incurred. Alarm monitoring and rental services generate signifi-
cantly higher gross margins than do the other services provided by the Company.
The Company has significantly expanded its operations for the fiscal year ended
June 30, 1996. Its alarm subscriber base has grown to over 21,000 customers,
an increase of approximately 62%. The substantial increase in operating revenues
and monitoring service revenues resulted primarily from acquisitions totalling
over 8,000 monitoring accounts from other dealers and companies, and the sale
of the Company's PERS to hospitals and home healthcare agencies. The Company's
account base totalled in excess of 45,000 monitoring subscribers as of June 30,
1996.
-18-
Operating revenues increased by $1,535,160 (16%) for the fiscal year ended
June 30, 1996 as compared to the fiscal year ended June 30, 1995. Product sales
decreased by $2,167,613 (48%) for the year ended June 30, 1996, as compared to
the prior year ended June 30, 1995. The decline in product sales was due to the
Company's primary strategy to expand through the acquisition of monitoring con-
tracts, as opposed to direct sales of security systems. Sales of electronic
security systems decreased by approximately $2.5 million for the fiscal year
ended June 30, 1996 as compared to the prior year. Revenues from the sale of
personal emergency response systems (PERS) increased by approximately $300,000
for the year ended June 30, 1996 as compared to the year ended June 30, 1995.
The significant growth in monitoring and service revenues of $3,207,453 (91%)
for the fiscal year ended June 30, 1996 as compared to the same period ended
June 30, 1995, was due to the acquisition of monitoring contracts and the
success of the Company's extended warranty program. Finance and rental income
increased by $495,320 (39%) for the year ended June 30, 1996 as compared to the
year ended June 30, 1995. This was the result of the acquisition of the Medical
Alert Systems Monitoring Division of Emergency Response Systems, Inc. (ERS) in
November 1994 and the Company's distribution of its PERS through the pharmacy
departments of national retail chains such as Revco and K-mart.
The Company is in the process of developing additional cooperative marketing
programs in which the Company's PERS products are distributed in conjunction
with another vendor's products or utilizing other marketing methods by a
co-participant specializing in direct sales to the consumer or home healthcare
agency. The Company currently distributes its PERS through approximately 3,000
pharmacy departments of national retail chains. The Company will continue to
acquire monitoring customers from other security system companies. The Company
believes the foregoing will result in a substantial increase in monitoring and
service revenues.
Gross Profit for fiscal 1996 was $7.4 million, which represents an increase of
$1.8 million, or 32.1%, over the $5.6 million of gross profit recognized in
fiscal 1995. The increase was due primarily to an increase in monitoring and
service activities, and the success of the extended warranty program, which is
concurrent with the increase in the Company's subscriber base by approximately
8,000 subscribers. Gross Profit, as a percentage of operating revenues,
increased from 59.7% for fiscal 1995 to 67.8 % for fiscal 1996. The increase
was caused primarily by an increase in service and rental revenues as a per-
centage of total revenues from 51.6% to 78.4% for the fiscal year ended June 30,
1995 and 1996, respectively. The cost of product sales rose from 58.3% for the
year ended June 30, 1995 to 73.1 % for the year ended June 30, 1996. An increase
in competition, including the advertisement of free security systems, has
resulted in a lower average selling price for the Company's security systems,
causing a decline in the Gross Profit Margin.
-19-
Selling, general, and administrative expenses rose to $6.4 million in fiscal
1996, which represents an increase of $100,000 or 1.5%, over selling, general
and administrative expenses for fiscal 1995. Included in selling, general, and
administrative expenses for fiscal 1996 were nonrecurring charges of approxi-
mately $430,000, primarily due to the write-off of obsolete inventory, accounts
receivable, and an increase in the provision for doubtful accounts. Selling,
general and administrative expenses, as a percentage of total operating
revenues, declined from 67.8% to 59.0% for the fiscal year ended June 30, 1995
and 1996, respectively. Sales and marketing expenses declined from $2.0 million
for the year ended June 30, 1995 to $0.7 million for the year ended June 30,
1996, for a decrease of $1.3 million or 65%. Sales and marketing expenses
declined due to the Company's strategy to grow through acquisitions as opposed
to new system installations. General and administrative expenses rose from $4.3
million in fiscal 1995 to $5.7 million in fiscal 1996, representing an increase
of $1.4 million or 32.6%. The increase in general and administrative expenses
was caused by increases in corporate overhead expenses incurred to support a
larger subscriber base. The percentage increase in general and administrative
expenses of 32.6% was much lower than the 76.9% increase in monitoring, service,
and rental revenues between the comparable periods, reflecting efficiencies
realized in the Company's corporate offices. The Company anticipates that its
current level of selling, general and administrative expenses, as a percentage
of sales, will continue to decrease as a result of the Company's operating
revenues increasing substantially due to increases in monitoring and service
revenues by USS.
Amortization and depreciation expenses increased by $898,686, from $1,302,208
to $2,200,894 for the fiscal year ended June 30, 1995 and 1996, respectively.
This increase in amortization expense is the result of the Company's purchase
of monitoring contracts totalling approximately $8 million.
Interest expense increased by approximately $2.0 million to $3.2 million for
the fiscal year ended June 30, 1996, from $1.2 million for the same period ended
June 30, 1995. The primary reason for the increase was additional interest
expense on long-term debt incurred by the Company in connection with its
acquisitions and purchases of monitoring contracts. On June 30, 1996 the
Company entered into a four-year revolving bank line of credit agreement,
of which $10.5 million was used to repay existing notes payable collateralized
by monitoring contracts. The Company estimates that the reduction in interest
expense from fiscal 1996 to fiscal 1997 will be approximately $2.1 million.
However, there will be a substantial increase in amortization of deferred
financing costs (non-cash interest) of approximately $1 million.
In June 1994, a key person resigned, and, according to the separation agree-
ment, he will receive annual compensation of $120,000 plus benefits through
October 31, 1997. In connection with this separation arrangement, a charge of
$409,673 was recorded as termination benefits for the year ended June 30, 1994,
representing the present value of the obligation based on an interest rate of
8.5%. During the year ended June 30, 1995, the Company renegotiated this agree-
ment, resulting in a recovery of $392,699 of termination benefits cost.
In April, 1994, the Company initiated a plan of reorganization and restructur-
ing designed to reduce costs, improve operating efficiencies and increase
overall future profitability as the Company refocused sales and marketing ef-
forts on security and fire alarm systems for residential and commercial proper-
ties. As a result, the Company streamlined its organization and closed its
manufacturing and monitoring facilities.
-20-
During the year ended June 30, 1995, the Company recorded a recovery of $52,920
of these costs resulting from an over-accrual at June 30, 1994.
The net loss for the year was $4.4 million, or $2.87 per share based on
1,536,537 shares outstanding, as compared to a net loss of $3.0 million, or
$5.02 per share based on 603,190 shares outstanding. The net loss for the
period is primarily attributable to $4.6 million in amortization and interest
expense related to the Company's acquisition of subscribers from other dealers,
and increased selling, general and administrative expenses incurred in connec-
tion with the expansion of the company's subscriber monitoring account base.
Earnings before interest, taxes, depreciation and amortization (EBITDA), ex-
cluding nonrecurring charges of $430,000 for fiscal 1996, improved by $1.9
million to $1,383,000 for the fiscal year ended June 30, 1996, as compared to
the prior fiscal year ended June 30, 1995.
Liquidity and Capital Resources
On June 30, 1996 through July 3, 1996, the Company completed a complete re-
structuring of its long-term debt. The Company obtained a $15.0 million dollar
revolving credit facility from Mellon Bank, N.A. and issued $7.5 million dollars
of its 1996 Series A Convertible Preferred Stock to institutional and individual
domestic and foreign investors. The proceeds of the financing were utilized to
repay the Company s existing long-term indebtedness and will result in a sub-
stantial decrease of the Company s future borrowing costs. As of October 4,
1996, the Company has available on its revolving credit facility the amount of
$7.25 million dollars. The credit facility bears interest at the Prime Rate,
plus 1 3/4%. The restructuring will result in an extraordinary charge of
$2,549,708 during the first quarter of the Company's next fiscal year for early
extinguishment of debt.
The Company's working capital increased by $9.5 million from a working capital
deficiency of $3.5 million at June 30, 1995 to $6.0 million at June 30, 1996.
On June 30, 1996, the Company recorded a preferred stock subscription receivable
for $6,525,000, from a Series-A Convertible Preferred Stock subscribed with a
par value of $7,500,000, net of related placement fees of $975,000 paid from the
proceeds at the closing (see Note 9 of Notes to the Consolidated Financial
Statements). On July 1, 1996 the Company entered into a four-year $15 million
revolving bank line of credit agreement (see Note 16 of Notes to the Consoli-
dated Financial Statements). With the proceeds received from the issuance of
preferred stock on July 2, 1996 and $10,500,000 from the revolving line of
credit, the Company paid off notes payable used to finance its growth through
acquisitions, with balances aggregating $12.1 million at June 30, 1996. The
Company believes that cash flows from operations will be sufficient to fund the
Company's interest payments on its debt and capital expenditures, which are the
Company's principal uses of cash other than the acquisitions of portfolios of
subscriber accounts.
Net cash used in operating activities was $2,482,264. A net loss of $4,411,898
which included depreciation and amortization of $2,286,218, was the primary
reason for cash used in operating activities. Other significant changes
included changes in accounts receivable, notes receivable, purchase holdbacks,
accrued expenses and deferred revenues.
-21-
At June 30, 1996, accounts receivable increased by $392,365 from the prior year
ended June 30, 1995. The acquisition of approximately 8,000 subscriber accounts
has caused an increase in monitoring and service revenues billed, resulting in
higher accounts receivable. The provision for doubtful accounts increased to
approximately $327,000 in fiscal 1996 from approximately $87,000 in fiscal 1995,
reflecting an increase in the Company's average subscriber base and the Com-
pany's willingness to work with subscribers experiencing credit difficulties in
order to maintain long-term subscriber relationships. Notes receivable de-
creased by $142,879. Purchase holdbacks decreased by $491,849 and deferred
revenues increased by $302,488, in connection with the acquisition of approx-
imately 8,000 subscriber accounts. Accrued expenses increased by $196,940,
primarily due to the accrual of placement fees in connection with the sale of
preferred stock.
Net cash used investing activities for the fiscal year ended June 30, 1996 was
$5,868,029. The acquisitions of MSG, MAC, SSI and ADI during the months of
February 1996 through June 1996 (See Note 2 of Notes to Consolidated Financial
Statements) and the purchases of monitoring contracts during the year ended
June 30, 1996 accounted for $5,718,491. Other investing activities included
the purchase of property and equipment of $459,898, which was offset by the
proceeds from the sale of equipment of $11,422 and the proceeds from the sale
of monitoring contracts of $298,938.
Net cash provided by financing activities was $10,117,614 for the period ended
June 30, 1996. Net proceeds of $1,007,463 were raised through private place-
ments during the fiscal year ended June 30, 1996. Proceeds of long-term notes
payable of $6,963,891 and proceeds from the exercise of stock options and war-
rants totalling $4,432,743 were used for acquisitions and working capital.
Principal payments on long-term debt of $2,286,483 were made during the fiscal
year ended June 30, 1996.
The Company's wholly-owned subsidiary, Systems, filed a petition for reorgani-
zation under Chapter 11 of the Federal Bankruptcy Act in October 1987. Systems'
Plan of Reorganization became effective in February 1990. The Plan of Reorgani-
zation provides for, among other things, long-term payments totalling approx-
imately $2.8 million to secured and unsecured pre-petition creditors and for
unpaid state and federal taxes. As of June 30, 1996 deferred payment obliga-
tions to such pre-reorganization creditors totalled $374,058, which is payable
in varying installments through the year 2000. In the event that the Company
should default in payment of these deferred obligations, Systems's pre-organiza-
tion creditors could seek appropriate relief in the bankruptcy court, the
result of which could range from dismissal or conversion of the case to a Chap-
ter 7 proceeding requiring liquidation of the Company, or modification of the
Plan of Reorganization. Any such modified plan could require the Company to
pay more to prepetition creditors than the amounts required under the existing
Plan of Reorganization.
The Company has no material commitments for capital expenditures during the
next twelve months and believes that its current cash and working capital posi-
tion and future income from operations will be sufficient to meet its cash and
working capital needs for the twelve months.
-22-
The Company intends to use borrowings under the revolving bank line of credit
(See Note 7 --Notes to Consolidated Financial Statements) together with the
remaining cash flow from operations to continue to acquire monitoring contracts.
Additional funds beyond those currently available may be required to continue
the acquisition program, and there can be no assurance that the Company will
be able to obtain such financing.
Inflation
The Company does not believe that inflation or changing prices had a material
effect on operations in any of the fiscal years ended June 30, 1995, and 1996.
Item 7. Financial Statements
- ------
The response to this Item is submitted as a separate section of this report
commencing on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------ Financial Disclosure
None.
-23-
PART III
Item 9. Directors and Executive Officers of the Registrant
- ------
The current executive officers and directors of the Company are set forth
below:
Name Age Position
---- --- --------
Richard M. Brooks 47 Chief Executive Officer, President, Chief
Financial Officer and Chairman
Ronald A. Feldman 33 Vice President, Chief Operating Officer,
Secretary-Treasurer and Director
Robert M. Rubin 55 Director
Sheldon Lieberbaum 60 Director
Jeffrey S. Budin 32 Director
Stuart Levin 36 Director
Todd E. Herman 42 Director
Directors are elected to serve until the next annual meeting of stockholders
and until their successors have been elected and have qualified. Directors do
not receive remuneration for their services as such, but may be reimbursed for
expenses incurred in connection therewith, such as the cost of travel to Board
meetings. Officers serve at the pleasure of the Board of Directors until their
successors have been elected and have qualified.
Richard M. Brooks has been Chief Executive Officer and Chairman of the Company
since July 1994, a director of the Company since August 1990, and has served as
the President and Chief Financial Officer of the Company since February 1990.
Mr. Brooks was Chief Operating Officer of the Company from February 1990 until
July 1994. From August 1986 to February 1990, Mr. Brooks was general counsel
to Systems. Mr. Brooks served as Regional Counsel Mid-Atlantic Region for the
Interstate Commerce Commission from May 1979 to March 1983 and was a senior
attorney for the United States Treasury Department from March 1974 to April
1979. Mr. Brooks received his Bachelor of Science Degree in Business Admini-
stration in June 1970 from Temple University, and graduated from Temple Univer-
sity School of Law in 1973.
Ronald A. Feldman has been a director and Secretary-Treasurer of the Company
since August 1990 and Chief Operating Officer since July 1994. He has also
served as the Secretary and Treasurer of Systems from June 1990 and Vice Presi-
dent of the Company since April 1992. From August 1986 through September 1989,
he was the supervisor of Systems' manufacturing operations and supervised the
Company's monitoring activities since March 1987. Mr. Feldman attended Temple
University from 1980 to 1982.
-24-
Robert M. Rubin has been a Director of the Company since October 1991. Between
October, 1990 and January 1, 1994, Mr. Rubin served as the Chairman of the Board
and Chief Executive Officer of American United Global, Inc., a publicly-traded
company ("AUGI"); since January 1, 1994, he has only been Chairman of the Board
of AUGI. AUGI, through its subsidiary National Stillman Corporation, is engaged
in the manufacture of O-rings for industrial application and through its sub-
sidiary Western Power & Equipment Corp. ("Western"), is a dealer of Case brand
construction equipment. Mr. Rubin has been Chairman of the Board of Directors
of Western since November 1992. Western became a publicly-traded company in
June 1995. Mr. Rubin was the founder, President, Chief Executive Officer and a
Director of Superior Care, Inc. (SCI) from its inception in 1976 until May 1986.
Mr. Rubin continued as a director of SCI (now known as Olsten Corporation
("Olsten") until the latter part of 1987. Olsten, an American Stock Exchange
listed company, is engaged in providing home care and institutional staffing
and health care management systems. Mr. Rubin is a director, Vice Chairman
and minority stockholder of American Complex Care, Inc. ("ACC"), a public
company currently engaged in providing on-site health care services, including
intra-dermal infusion therapies. ACC's two major operating units filed an
assignment of assets for the benefit of its creditors. ACC cited a lack of
financing, continued cash flow deficits, and pressure from creditors, as the
reasons. Mr. Rubin is also a director, Chairman and minority stockholder of
Universal Self Care, Inc., a public company engaged in the distribution of
products to diabetics, and of Orthopedic Technology, Inc., a public company
engaged in the design and manufacture of custom and off-the-shelf orthotic
products primarily for the sports medicine market. Mr. Rubin is also a direc-
tor of United Vision Group, Inc., a public company engaged in providing
prepaid optical plans and the running of retail optical centers and of Analy-
tical Nursing Management Corp., a home health care deliverer in Baton Rouge,
Louisiana. Since June 1992, Mr. Rubin has been a Director of Diplomat Corpora-
tion, a publicly-traded corporation engaged in the distribution of diapers and
other products for juveniles. Since October 1992, Mr. Rubin has been president
and a director of Trans Cap, Inc, a blind pool company. Mr. Rubin is also
Chairman, Chief Executive Officer and a Director and a principal stockholder of
ERD Waste Corp., a public company specializing in the management and disposal
of municipal solid waste, industrial and commercial nonhazardous solid waste
and hazardous waste. He is also a minority stockholder of STAT Health Care,
Inc., a public company providing physician contract management services to
associations that provide emergency room services to hospitals. Since December
1995, Mr. Rubin has been a director of Help at Home, Inc. ("HAHI"), a public
company which provides housekeeping services to elderly and disabled persons
within their homes.
-25-
Mr. Rubin, together with several other entities and individuals, is a defendant
in an action involving United Dental Program of America, Inc. ("UDP"), a pri-
vately owned company in which Mr. Rubin is a minority stockholder. This action
entitled, Loring v. United Dental Program of America, Inc., et al., was com-
menced in August 1993 by Messrs. Albert Loring and Robert Rosenfeld and their
affiliated companies as plaintiffs, and is pending in the United States District
Court for the Eastern District of New York. The complaint alleges that
Mr. Rubin and the other defendants engaged in the planning or facilitating of a
public offering of shares of UDP and that through a reverse stock split of the
UDP shares plaintiffs' shares improperly devalued, and the UDP issued shares
for inadequate consideration to certain defendants and others. The allegations
are founded in securities and common law fraud, allege violations of the
Racketeer Influenced and Corrupt Organizations Act ("RICO"), and other claims
allegedly arising under Delaware and/or New York law. Plaintiffs' original
complaint was dismissed in toto by order of the Court dated October 29, 1993,
and by order entered September 21, 1994, defendants' motion to dismiss
plaintiffs' amended complaint was granted to the extent that the securities
fraud and RICO conspiracy claims were dismissed as to all defendants, together
with the professional defendant RICO claims and all RICO claims as to certain
defendants, including UDP. However, RICO counts against certain other individual
defendants, including Mr. Rubin, were not dismissed, nor were any of the state
law causes dismissed, so that no defendant has been dismissed from the action
entirely. Reargument seeking dismissal of all claims as to all defendants has
been timely sought. To date, the Court has not ruled on the defendants' motion.
The Company has been advised by Mr. Rubin that in March 1993, Messrs. Loring
and Rosenfeld were indicted by a grand jury convened by the United States
Attorney for the Eastern District of New York on various counts of bank fraud
and mail fraud. The Company has been advised further by Mr. Rubin that on or
about December 1994, Messrs. Loring and Rosenfeld pleaded guilty to one count
of bank fraud and one count of mail fraud, and that the mail fraud count
related to certain of Messrs. Rosenfeld's and Loring's activities while
principal officers and directors of UDP. Mr. Rubin has advised the Company
that he expects to continue to contest vigorously plaintiffs' claims and that
he believes that such claims are totally without merit.
Sheldon Lieberbaum has been a Director of the Company since October 1991.
Mr. Lieberbaum is a co-founder, stockholder and officer of Lew Lieberbaum & Co.,
Inc. ("LLCO"). Mr. Lieberbaum has been in the brokerage business for more than
35 years and serves as a director for the following publicly traded companies:
Unapix Enterprises, a worldwide licensor of feature films and television pro-
grams; Boston Pacific Medical, Inc., which is engaged in the manufacture and
distribution of disposable medical products; All American Semi-Conductor, Inc.,
which is engaged in the manufacture of semi-conductors; and In Home Health,
Inc., a home health care company. Mr. Lieberbaum has developed and participated
in the implementation of corporate finance activities at a variety of New York
and Florida based investment banking firms. He has served as the Underwriter's
Director of Corporate Finance and Syndicate Manager from April 1990 to the
present and served in similar capacities with Global Capital Securities, Inc.
from 1988 to 1990, Schweitzer & Co. from 1986 to 1988 and RLR Securities from
1984 to 1986. In addition, Mr. Lieberbaum was an officer of Lieberbaum &
Company from 1960 to 1971 and was employed by Dreyfus and Company from 1957
to 1960. Since December 1995, Mr. Lieberbaum has been a director of HAHI.
The National Association of Securities Dealers ("NASD") recently alleged that
the Representative and others, including Mr. Lieberbaum, in 1991 engaged in
market manipulation, inaccurately maintained books and records and failed to
adequately supervise the activities of its personnel in connection with the
trading for the Representative's account of warrants which were part of a
public offering of units of convertible preferred stock and warrants of a
company for which the Representative had acted in 1991 as managing underwriter.
In order to resolve this matter expeditiously and without admitting or denying
these allegations, in January 1995 Mr. Lieberbaum and others voluntarily entered
into a Letter of Acceptance, Waiver and Consent with the NASD pursuant to which
Mr. Lieberbaum was censured and fined by the NASD, agreed to pay with the
Representative and others restitution to customers and was suspended from
associating with any NASD member for a one month period.
-26-
Jeffrey S. Budin, has been a Director of the Company since February 1994.
Mr. Budin, a licensed Pennsylvania pharmacist, has been employed in the pharma-
ceutical industry since 1980 in various capacities. His employer since February
1984 has been the Abington Pharmacy Group, Abington, PA. His responsibilities
include store management and the purchasing of prescription drugs and home
health care equipment. He is a member of the Pennsylvania Pharmaceutical
Association and the Montgomery County Pharmaceutical Association. Mr. Budin
received his Bachelor of Science Degree in Pharmacy in May 1980 from the
Philadelphia College of Pharmacy and Science.
Stuart Levin has been a Director of the Company since February 1994. Mr. Levin
has been employed by the Company as its Director of Operations since October
1991 and Director of the Company's institutional division, since April 1994.
Prior to October 1991, Mr. Levin held management positions with Tandy Corpora-
tion, and was the President of W.A.S., Inc., a food distribution company.
Mr. Levin attended Temple University from 1978-1980.
Todd E. Herman has been a Director of the Company since February 1995. Mr.
Herman has been President of USS, or its predecessor, since 1984. Mr. Herman
was also Vice President of Investech Properties, Inc., a private investment and
development firm, from 1984 through 1990. Mr. Herman received his Bachelor of
Science degree in Business Administration from Washington University of
St. Louis, Missouri in 1975 and graduated from Seton Hall School of Law in 1982.
Mr. Herman is a Certified Public Accountant.
The Company maintains an Audit Committee consisting of Messrs. Brooks, Rubin
and Lieberbaum; an Incentive Stock Option Plan Committee consisting of Messrs.
Rubin, Lieberbaum and Brooks; and a Compensation Committee consisting of
Messrs. Rubin, Lieberbaum and Brooks.
-27-
Item 10. Executive Compensation
- -------
Securities
Underlying
Name and Principal Options All Other
Principal Position Year Salary SARS Compensation
- ------------------ ---- ------ ---------- ------------
Richard M. Brooks 1996 $217,980 - -
President and 1995 175,003 - -
Chief Executive and 1994 140,010 - -
Financial Officer
Ronald A. Feldman 1996 $135,654 - -
Chief Operating 1995 106,495 - -
Officer, Vice Presi- 1994 100,022 - -
dent, Secretary and
Treasurer
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options/SARs Options/SARs
Shares at FY-End at FY-End
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized($) Unexercisable Unexercisable
- ---- ------------ ----------- ------------- -------------
Richard Brooks 25,000 $65,625 708,333/0 $4,205,727/0
President, Chief
Executive and
Financial Officer
Ronald A. Feldman 25,000 $65,625 260,067/0 $1,544,148/0
Chief Operating
Officer, Vice
President, Secretary
and Treasurer
-28-
Employment and Consulting Agreements
Mr. Brooks and Mr. Feldman each entered into five-year employment agreements
with the Company, effective as of October 23, 1992, as amended to expire on
June 30, 2000 to act as President, Chief Financial and Chief Operating Officer,
as amended to include Chief Executive Officer; and Vice President, Secretary-
Treasurer, as amended to include Chief Operating Officer, respectively which
provide for initial annual base salaries of $225,000 and $140,000, respectively.
Messrs. Brooks and Feldman also receive life insurance, disability, hospital-
ization, major medical, vacation and other employee benefits, reimbursement of
reasonable business expenses incurred on behalf of the Company, and use of
Company-owned vehicles. The Company maintains and is the beneficiary of a key
person life insurance policy in the amount of $3,000,000 and $1,000,000 on the
life of Mr. Brooks and Mr. Feldman, respectively.
In addition to cash compensation and other benefits, under amendments to their
employment agreements executed in August 1992, Messrs. Brooks and Feldman re-
ceived options to purchase 133,333 and 85,067 shares of Common Stock, respec-
tively, at a price equal to $.375. These options are exercisable until
November 14, 2004. Messrs. Brooks and Feldman also received options to purchase
600,000 and 200,000 shares of Common Stock, respectively, awarded under the
Company's Non-Qualified Stock Option plan. In November 1995 the exercisable
price on Messrs. Brooks's and Feldman's options were reduced to the prevailing
market price of $.25 prior to the one-for-ten reverse stock split (See Note 10
of Notes to Consolidated Financial Statements). During February 1996, Messrs.
Brooks and Feldman both exercised 25,000 options to purchase common stock.
Robert M. Rubin, a director of the Company, has performed consulting services
for the Company in the past. In connection therewith, in January 1992, the
Company granted options to purchase 58,929 shares of the Company's Common Stock
to Mr. Rubin exercisable at a price of $3.50 until January 1997. Mr. Rubin
subsequently transferred these options and disclaims beneficial ownership
thereof. Of such options, options to purchase 6,250 shares of Common Stock
were canceled in August 1992. In February 1993, Mr. Rubin was issued a warrant
to purchase 50,000 shares of Common Stock at $5.00 per share, in consideration
of services to the Company. The exercise price of such warrant was subsequent-
ly reduced to $.008 per share and the warrant was exercised. In September 1994,
Mr. Rubin was granted 150,000 options to purchase Common Stock at the prevail-
ing market price of $.8125, which are exercisable for a period of ten years. In
February 1995, the exercise price of the 150,000 options to purchase common
stock were reduced to the prevailing market price of $.375. Additionally, in
February 1995, Mr. Rubin was granted 150,000 options to purchase common stock
at a price of $.375 per share, which are exercisable for a period of ten years.
In November 1995 the exercise price on Mr. Rubin's options were reduced to the
prevailing market price of $.25 prior to the one-for-ten reverse stock split
(See Note 10 of Notes to Consolidated Financial Statements). On October 1,
1994, Mr. Rubin entered into a consulting agreement with the Company pursuant
to which he is paid an annual consulting fee of $60,000, for a period of two
years. The Agreement was terminated on April 30, 1996. See "Management" and
"Principal Stockholders."
-29-
Incentive Stock Option Plan
In March 1992, the Company's Board of Directors and stockholders adopted and
approved an Incentive Stock Option Plan ("ISO Plan"). The ISO Plan provides
for the grant to key employees of the Company of stock options intended to
qualify as "incentive stock options" under the provisions of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). A total of 400,000
shares of Common Stock have been reserved for issuance under the ISO Plan of
which 30,500 shares were granted in October 1992, 37,000 were granted in
February 1994, 35,000 were granted in April 1994, 13,000 were granted in Decem-
ber 1994, and 62,750 were granted in December 1995. The ISO Plan is admini-
stered by a committee of the Board of Directors which, among other things, has
the sole discretion to select optionees and determine the number of shares
covered by each option, its exercise price and certain of its other terms. The
exercise price of options granted under the ISO Plan may not be less than the
fair market value of the Company's Common Stock on the date of grant, and not
less than 110% of such fair market value in the case of participants owning
more than 10% of the Company's Common Stock. Options expire no later than ten
years after they are granted (5 years after grant in the case of participants
owning more than 10% of the Company's Common Stock). The number of shares for
which the optionee may exercise an option in any calendar year is limited to
option shares with an aggregate fair market value, determined at the time the
option is granted, which does not exceed $100,000. The $100,000 limit for any
calendar year is subject to further reduction by the fair market value of any
stock (determined at the time of option grant) for which the employee was
granted an option under any Company plan during such calendar year. Options
terminate three months after the optionee ceases to be employed by the Company
unless the optionee's employment is terminated by reason of disability, in
which case, the options shall expire following one year after such employment
termination. The committee has the right to accelerate the expiration date in
certain events. Options granted under the ISO Plan are not transferable, except
by will or the law of descent and distribution.
Non-Qualified Stock Options
In August 1990, the Company's Board of Directors approved a Nonqualified Stock
Option Plan (the "NQO Plan") pursuant to which the Company may grant stock
options to directors, officers, key employees and consultants. A total of
372,733 shares of Common Stock are presently outstanding and exercisable from
$2.50 to $35.00, expiring in November 2004 through July 2005. Options shall
terminate six months after the optionee ceases to be employed by the Company or
any subsidiary, regardless of the cause for termination.
In connection with the acquisition of USS, the Company also issued an aggre-
gate of 600,000 options to two former stockholders of USS who became employees
of the Company. Such options were exercisable at $.375 per share until March
2000. In November 1995 the exercise price was reduced to $.25, the prevailing
market price and expire on November 14, 2004. In November 1995, the Board of
Directors and Stockholders authorized and approved a one-for-ten reverse stock
split, which increased the exercise price from $.25 to $2.50.
-30-
The compensation of the Company's executive officers during the fiscal year
ended June 30, 1996 was determined by the Board of Directors at the time of the
Company's public offering in October 1992, as amended. Such determination was
based upon the Board's assessment of each executive's performance to date.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -------
The following table sets forth, as of June 30, 1996, the record and beneficial
ownership of Common Stock of the Company by each officer and director, all
officers and directors as a group, and each person known to the Company to
own beneficially or of record five percent or more of the outstanding shares
of the Company:
Number of Percentage
Shares Owned of Shares
Name and Address* Beneficially (1) Outstanding
- ----------------- ---------------- -----------
Richard M. Brooks (2) 710,315 13.1%
Ronald A. Feldman (3) 262,067 4.8%
Robert M. Rubin (4) 533,082 9.8%
9450 Aegean Drive
Boca Raton, Fl 33496
Sheldon Lieberbaum (5) -0- -
600 Old Country Road
Suite 518
Garden City, NY 11530
Stuart Levin -0- -
Jeffrey Budin -0- -
Todd E. Herman (6) 328,161 6.1%
Officers and directors
as a group (seven persons)
(2)(3)(4)(6) 1,833,625 33.8%
* Unless otherwise specified, the address of each named person is c/o Response
USA, Inc., 11-H Princess Road, Lawrenceville, New Jersey.
(1) Shares of Common Stock which are not outstanding but which a person has the
right to acquire within sixty days pursuant to outstanding options are
deemed outstanding for the purpose of computing such person's ownership of
Common Stock and percentage of outstanding Common Stock owned by such per-
son, but are not deemed to be outstanding for the purpose of computing num-
ber of shares or the percentage of Common Stock owned by any other person.
-31-
(2) Includes 708,333 shares issuable upon exercise of currently exercisable
options. See "Management -- Employment and Consulting Agreements."
(3) Includes 260,067 shares issuable upon exercise of currently exercisable
options. See "Management -- Employment and Consulting Agreements."
(4) Mr. Rubin's wife and children own 5,893 shares of Common Stock, as to which
Mr. Rubin disclaims beneficial ownership. Includes 300,000 shares issuable
upon exercise of currently exercisable options.
(5) Sheldon Lieberbaum is an officer, director and principal stockholder of
LLCO and may be deemed to indirectly own a portion of the underwriter's
warrants and the securities issuable thereunder owned by LLCO.
(6) Of which 300,000 shares are issuable upon exercise of currently exercisable
options.
Item 12. Certain Relationships and Related Transactions
- -------
USS
On March 4, 1994, the Company through its wholly-owned subsidiary, USS, com-
pleted the acquisition of substantially all of the assets of United Video
Associates Inc., a Pennsylvania corporation ("UVA"), and National Security
Finance Limited Partnership II, a limited partnership organized under the laws
of New Jersey ("NSF")(the "Acquisition"). UVA and NSF were engaged in the
installation, servicing and monitoring of commercial and residential electronic
security systems. In consideration of the Acquisition, the Company paid UVA
and NSF an aggregate of $1,747,576. In addition, the Company issued an aggre-
gate of 43,569 shares of its common stock to the shareholders and partners of
USS and NSF, respectively. Under the terms of this Agreement, in March, 1995
and June, 1995 the Company issued an additional 120,000 shares of its common
stock to the stockholders and partners of USS and NSF valued at $477,137. The
Company also entered into five-year employment agreements with two principals
of USS to provide management services to USS.
On November 1, 1994, the Company completed the acquisition of all of the out-
standing capital stock of Universal Security Systems, Inc., a New Jersey Cor-
poration ("USS"), owned by two officers of USS who are principals of UVA and
NSF, and one other stockholder, in exchange for 75,770 shares of the Company's
Common Stock to the former stockholders of USS. USS is engaged in the
installation, servicing and monitoring of electronic security systems. The
Company also entered into an employment agreement with one of the former stock-
holders.
-32-
Other Transactions
- ------------------
On October 1, 1994, Mr. Rubin entered into a consulting agreement with the
Company pursuant to which he is paid an annual consulting fee of $60,000, for a
period of two years. The agreement was terminated on April 30, 1996.
The Company believes that each of the foregoing transactions were on terms at
least as favorable to the Company as those which would have been available from
an unrelated third party in an arm's length transaction.
PART IV
Item 13. Exhibits and Reports on Form 8-K
- -------
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-B).
Exhibit
Numbers Description
- ------- -----------
2(a) - Agreement and Plan of Reorganization dated August 9, 1990, by and
among the Company (Corsica Capital Corp.), Management of Corsica
Capital Corp. and Lifecall Systems, Inc.
2(c) - Plan and Agreement of Merger dated March 18, 1992 by and between
Response USA, Inc. (Delaware) and Lifecall America, Inc.
2(d) - Delaware Certificate of Ownership and Merger Merging Response USA,
Inc., a Nevada Corporation with and into its wholly-owned sub-
sidiary Response USA, Inc., a Delaware corporation
2(e) - Nevada Articles of Merger of Response USA, Inc. (Formerly Lifecall
America, Inc.), a Nevada corporation, into Response USA, Inc., a
Delaware corporation
3(a) - Certificate of Incorporation of the Company
3(b) - Bylaws of the Company
4(a) - Form of Common Stock Certificate
4(b) - Form of Class A Warrant Certificate
4(c) - Form of Class B Warrant Certificate
4(e) - Form of Warrant Agreement
10(a) - Lifecall Systems, Inc. Third Amended Plan of Reorganization with
Order Affirming Third Amended Plan of Reorganization dated
January 9, 1990
10(s) - Employment Agreement dated August 28, 1992, by and between the
Company and Richard R. Brooks, and Addendum thereto dated
October 1, 1992.
10(t) - Employment Agreement dated August 28, 1992, by and between the
Company and Ronald A. Feldman, and Addendum thereto dated
October 1, 1992
10(w) - Incentive Stock Option Plan of the Company adopted by the Company's
Board on March 18, 1992, and approved by the Company's stockholders
on March 1992
10(x) - Restricted Stock Option Plan of the Company adopted August 20,
1990, as amended August 30, 1991, January 2, 1992 and March 18,
1992
-33-
11 - Calculation of Earnings (Loss) Per Share
21 - Subsidiaries of the Company
(b) Reports on Form 8-K - The Registrant filed the following Reports
on Form 8-K during the last quarter of the fiscal year:
Amendment No. 2 to Form 8-K May 14, 1996
Amendment No. 1 to Form 8-K May 29, 1996
Amendment No. 3 to Form 8-K May 30, 1996
Form 8-K June 19, 1996
The Registrant since the last quarter filed Amendment No. 1 to
Form 8-K August 16, 1996
-34-
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
FINANCIAL STATEMENTS
--------------------
JUNE 30, 1996
-------------
PAGE
----
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheet as of June 30, 1996 F-3-4
Statements of operations for the years
ended June 30, 1995 and 1996 F-5
Statements of stockholders' equity for
the years ended June 30, 1995 and 1996 F-6-7
Statement of cash flows for the years
ended June 30, 1995 and 1996 F-8-10
Notes to financial statements F-11-30
F-1
Stockholders and Directors
Response USA, Inc. and Subsidiaries
Lawrenceville, New Jersey
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying consolidated balance sheet of RESPONSE USA,
INC. AND SUBSIDIARIES as of June 30, 1996, and the related consolidated state-
ments of operations, stockholders' equity and cash flows for each of the two
years in the period ended June 30, 1996. These consolidated financial state-
ments are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally auditing standards. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstate-
ment. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Response USA, Inc. and Subsidiaries as of June 30, 1996, and the consolidated
results of their operations and their consolidated cash flows for each of the
two years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
/s/Fishbein & Company, P.C.
-----------------------
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
August 22, 1996
F-2
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
June 30, 1996
------------------------
Actual pro forma
---------- ------------
(See Note 16)
CURRENT ASSETS
Cash $ 1,926,766 $ 3,773,673
Marketable securities 100,000 100,000
Accounts receivable - Current portion
Trade - Net of allowance for doubtful accounts
of $327,072 1,360,321 1,360,321
Net investment in sales-type leases 125,385 125,385
Preferred stock subscription receivable 6,525,000
Current portion of note receivable 101,590 101,590
Inventory 652,551 652,551
Prepaid expenses and other current assets 118,689 118,689
---------- ---------
Total current assets 10,910,302 6,232,209
---------- ---------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $2,838,374 16,950,387 16,950,387
---------- ----------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $1,862,915 1,261,007 1,261,007
---------- ----------
OTHER ASSETS
Accounts receivable - Noncurrent portion
Trade 20,537 20,537
Net investment in sales-type leases 323,817 323,817
Note receivable - Net of current portion 8,884 8,884
Deposits 48,008 48,008
Deferred financing costs - Net of accumulated
amortization of $111,945 - actual and
$9,059 - pro forma 3,411,803 3,277,972
---------- ----------
3,813,049 3,679,218
---------- ----------
$32,934,745 $28,122,821
========== ==========
See notes to consolidated financial statements.
F-3
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, 1996
-------------------------
Actual pro forma
-------- -----------
(See Note 16)
CURRENT LIABILITIES
Current portion of long-term debt
Notes payable $ 194,914 $ 194,914
Capitalized lease obligations 51,064 51,064
Accounts payable - Trade 424,921 424,921
Purchase holdbacks - Current portion 636,493 636,493
Accrued expenses and other current liabilities 2,033,701 1,344,153
Deferred revenue - Current portion 1,568,059 1,568,059
--------- ---------
Total current liabilities 4,909,152 4,219,604
--------- ---------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt
Notes payable 12,374,607 10,801,939
Capitalized lease obligations 31,189 31,189
Purchase holdbacks 10,483 10,483
Deferred revenue 23,044 23,044
Put obligation payable 2,580,338 2,580,338
---------- ----------
15,019,661 13,446,993
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY
Preferred stock - Par value $1,000
Authorized 250,000 shares
Issued and outstanding 7,500 shares 7,500,000 7,500,000
Common stock - Par value $.008
Authorized 12,500,000 shares
Issued and outstanding 3,854,944 shares 30,840 30,840
Additional paid-in capital 19,056,240 19,056,240
Unrealized holding losses on available-for-
sale securities ( 193,343) ( 193,343)
Accumulated deficit ( 13,387,805) ( 15,937,513)
------------ ------------
13,005,932 10,456,224
------------ ------------
$32,934,745 $28,122,821
=========== ===========
See notes to consolidated financial statements.
F-4
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year Ended June 30,
-------------------------
1995 1996
----------- ----------
OPERATING REVENUES
Product sales $ 4,520,062 $ 2,352,449
Service 3,537,522 6,744,975
Finance and rentals 1,274,952 1,770,272
---------- ----------
9,332,536 10,867,696
---------- ----------
COST OF REVENUES
Product sales 2,635,674 1,718,689
Service and rentals 1,125,123 1,779,490
---------- ----------
3,760,797 3,498,179
---------- ----------
GROSS PROFIT 5,571,739 7,369,517
---------- ----------
OPERATING EXPENSES
Selling, general and administrative 6,327,622 6,416,486
Depreciation and amortization 1,302,208 2,200,894
Interest 1,220,618 3,185,603
Litigation settlement 240,000
Recovery of termination benefits cost ( 392,699)
Recovery of restructuring charges ( 52,920)
---------- ----------
8,644,829 11,802,983
---------- ----------
LOSS FROM OPERATIONS ( 3,073,090) ( 4,433,466)
INTEREST INCOME 42,260 21,568
---------- ----------
NET LOSS ($ 3,030,830) ($ 4,411,898)
========== ==========
LOSS PER COMMON SHARE ($ 5.02) ($ 2.87)
========== =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 603,190 1,536,537
========== =========
See notes to consolidated financial statements.
F-5
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
YEARS ENDED JUNE 30, 1995 AND 1996
----------------------------------
Preferred Stock
-----------------------
Number
of Shares Amount
---------- ---------
Balance - July 1, 1994 $
Issuance of warrants
Conversion of convertible subordinated promissory
notes - Net of related costs of $318,848
Acquisitions
Unrealized holding losses on available-
for-sale securities
Net loss
--------- ---------
Balance - June 30, 1995
Exercise of stock options and warrants
Conversion of convertible subordinated promissory
notes - Net of related costs of $383,088
Acquisitions
Issuance of common stock for consulting services
Issuance of common stock as payment of notes payable
Sale of preferred stock 7,500 7,500,000
Unrealized holding losses on available-
for-sale securities
Net loss
--------- ---------
Balance - June 30, 1996 7,500 $7,500,000
========= =========
See notes to consolidated financial statements.
F-6
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
YEARS ENDED JUNE 30, 1995 AND 1996
----------------------------------
Unrealized
Holding
Common Stock Losses on
----------------- Additional Available-
Number Paid-In For-Sale Accumulated
of Shares Amount Capital Securities Deficit Total
--------- ------ ----------- ---------- ----------- -----------
338,000 $ 2,704 $ 7,895,487 $ ($ 5,945,077) $ 1,953,114
2,920 2,920
196,250 1,570 2,117,082 2,118,652
264,270 2,114 1,422,869 1,424,983
( 68,343) ( 68,343)
( 3,030,830) ( 3,030,830)
-------- ------ ---------- -------- ---------- ----------
798,520 6,388 11,438,358 ( 68,343) ( 8,975,907) 2,400,496
1,455,300 11,643 4,421,100 4,432,743
1,116,986 8,936 2,842,976 2,851,912
309,043 2,472 818,086 820,558
2,000 16 8,109 8,125
173,095 1,385 665,736 667,121
( 1,138,125) 6,361,875
( 125,000) ( 125,000)
( 4,411,898) ( 4,411,898)
--------- -------- ---------- --------- ---------- ----------
3,854,944 $ 30,840 $19,056,240 ($ 193,343) ($13,387,805) $13,005,932
========= ======== ========== ========= ========== ==========
See notes to consolidated financial statements.
F-7
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Increase (Decrease) in Cash
Year Ended June 30,
------------------------
1995 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($ 3,030,830) ($ 4,411,898)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization of monitoring contract costs 959,574 1,765,744
Depreciation and amortization of property
and equipment 342,634 435,150
Gain on sale of monitoring contracts ( 91,663)
Loss on sale of property and equipment 13,177 39,851
Amortization of deferred financing costs
and debt discount 87,594 85,324
Interest accrued and added to long-term
notes payable 14,804
Issuance of common stock for interest on
note payable 11,849
Issuance of common stock for consulting fees 8,125
Restructuring charges 140,691
(Increase) decrease in accounts receivable
Trade ( 242,921) ( 423,709)
Net investment in sales-type leases ( 96,354) 31,344
Decrease in income tax refunds receivable 109,000
(Increase) decrease in notes receivable
Related party ( 50,000) 50,000
Other 86,798 92,879
(Increase) decrease in inventory 180,351 ( 171)
(Increase) decrease in prepaid expenses
and other current assets 57,375 ( 13,203)
(Increase) decrease in deposits ( 2,270) 9,014
Decrease in accounts payable - Trade ( 30,033) ( 78,479)
Decrease in termination benefits obligation ( 409,673)
Increase (decrease) in purchase holdbacks 937,603 ( 491,849)
Increase (decrease) in accrued expenses
and other current liabilities ( 96,024) 196,940
Increase in deferred revenue 676,264 302,488
--------- ---------
Net cash used in operating activities ( 352,240) ( 2,482,264)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in cash held in escrow 582,220
Proceeds from sale of monitoring contracts 298,938
Purchase of monitoring contracts ( 6,998,922) ( 5,718,491)
Proceeds from sale of property and equipment 21,537 11,422
Purchase of property and equipment ( 462,210) ( 459,898)
--------- ---------
Net cash used in investing activities ( 6,857,375) ( 5,868,029)
--------- ---------
See notes to consolidated financial statements.
F-8
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Increase (Decrease) in Cash
(Continued)
Year Ended June 30,
--------------------------
1995 1996
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred financing costs incurred ( 163,550) ( 952,537)
Convertible subordinated promissory notes
issued in connection with private placements 912,500 1,960,000
Proceeds of long-term notes payable 7,523,320 6,963,891
Principal payments on long-term debt
Notes payable ( 1,168,081) ( 2,244,495)
Capitalized lease obligations ( 30,772) ( 41,988)
Net proceeds from the exercise of stock
options and warrants 4,432,743
--------- ----------
Net cash provided by financing activities 7,073,417 10,117,614
--------- ----------
NET INCREASE (DECREASE) IN CASH ( 136,198) 1,767,321
CASH - BEGINNING 295,643 159,445
--------- ---------
CASH - ENDING $ 159,445 $1,926,766
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 1,104,653 $ 3,012,698
Cash paid (received) during the year for
income taxes - Net ( 109,000) -
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the years ended June 30, 1995 and 1996, long-term notes payable of
$62,704 and, $63,933, respectively, were incurred for the purchase of proper-
ty and equipment.
During the years ended June 30, 1995 and 1996, capitalized lease obligations
of $59,947 and $43,933, respectively, were incurred for the acquisition of
property and equipment.
During the years ended June 30, 1995 and 1996, convertible subordinated
promissory notes of $2,437,500 and $3,235,000, respectively, were converted
to common stock.
During the years ended June 30, 1995 and 1996, the Company issued 264,270 and
309,043 shares of its common stock, valued at $1,424,983 and $820,558, re-
spectively, in connection with acquisitions (see Note 2). These amounts
include 15,000 shares valued at $70,311 issued as payment of deferred financ-
ing costs and 13,966 shares valued at $67,781 issued as payment of purchase
holdbacks during the year ended June 30, 1996.
During the year ended June 30, 1995, a long-term note payable of $150,000 was
incurred in connection with the purchase of monitoring contracts (see Note 2).
During the year ended June 30, 1996, the Company issued 173,095 shares of its
common stock, valued at $667,121, as payment on notes payable.
See notes to consolidated financial statements.
F-9
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Increase (Decrease) in Cash
(Continued)
During the year ended June 30, 1996, the Company reduced monitoring contract
costs and the corresponding purchase holdbacks in the amount of $838,174.
During the year ended June 30, 1996, the Company increased monitoring contract
costs and the corresponding transition costs liability (included in accrued
expenses and other current liabilities) in the amount of $525,647.
During the year ended June 30, 1996, the Company reduced deferred financing
costs and additional paid-in capital in the amount of $379,961 (see Note 10).
During the year ended June 30, 1996, the Company recorded a preferred stock
subscription receivable of $6,525,000; for preferred stock subscribed with a
par value of $7,500,000, net of the related placement fees of $1,138,125 (of
which $975,000 was paid from the proceeds at closing, and $163,125 was
included in accrued expenses and paid subsequently) recorded as a reduction
of additional paid-in capital (see Note 9).
During the year ended June 30, 1996, the Company recorded a put obligation
payable of $2,580,338 in connection with the line of credit agreement (see
Note 7) with a corresponding charge to deferred financing costs.
See notes to consolidated financial statements.
F-10
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
Response USA, Inc. (Response), its wholly-owned subsidiaries Response Ability
Systems, Inc. (Systems), United Security Systems, Inc. (USS) (formerly United
Video Security, Inc.), and Emergency Response Systems, Inc. (ERS) (the "Com-
pany"). All significant intercompany transactions and balances have been
eliminated.
Nature of Business and Revenue Recognition
------------------------------------------
USS's operations consist principally of the sale, installation, monitoring and
maintenance services for security and fire alarm systems installed in residen-
tial and commercial properties in the Middle Atlantic States. Systems and ERS
sell, monitor and service personal emergency response systems. Revenues from
personal emergency response system sales are recognized upon shipment. Revenues
under contracts for monitoring and service are deferred and recognized ratably
over the contract period. Revenues from the sale of security and fire alarm
systems are recognized when installed.
The Company leases equipment to customers principally under sales-type leases.
The lease payments to be received over the term of the leases are recorded as
receivables at the inception of the lease. Interest income attributable to the
lease contracts is initially recorded as unearned income and subsequently recog-
nized as finance revenue using the interest method over the term of the leases.
The lease contracts are generally for five-year terms and the residual value of
the leased equipment is nominal at the end of the lease period.
The Company also leases certain equipment to customers under month-to-month
operating leases, with revenues recognized as income ratably over the lease
terms.
The Company sells extended warranty and product maintenance contracts to its
customers. Revenues from these contracts are deferred and recorded as income
using the straight-line method over the term of the contracts. The Company
also provides for estimated future warranty costs as necessary.
Use of Estimates
----------------
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-11
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk
----------------------------
The Company places its temporary cash investments with high-credit quality
financial institutions. Such investments are in excess of the FDIC insurance
limit of $100,000, and primarily consist of short-term repurchase agreements
backed by obligations of the U.S. government.
The Company's products are sold directly and through distributors in the United
States to hospitals, home health care agencies and individual consumers. The
Company performs ongoing credit evaluations of its customers and, in the case
of sales-type leases, the leased equipment serves as collateral in the transac-
tions. The Company maintains reserves for potential credit losses.
Marketable Securities
---------------------
The Company's investments in marketable securities have been categorized as
available-for-sale and are stated at fair value. Realized gains and losses,
determined using the specific identification method, are included in operations;
unrealized holding gains and losses are reported as a separate component of
stockholders' equity.
Marketable securities consist of common stock. At June 30, 1996, the cost of
these securities was $293,343, and gross unrealized losses were $193,343.
Allowance for Doubtful Accounts
-------------------------------
An allowance for doubtful accounts is provided by the Company based on histor-
ical collection experience and a review of the current status of existing
receivables.
Inventory
---------
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
Monitoring Contract Costs and Amortization
------------------------------------------
Monitoring contracts acquired are stated at cost. The cost of acquired monitor-
ing contracts includes the cost of accounts purchased and any contractual rights
to related monitoring revenues purchased from alarm system dealers and emergen-
cy response system dealers, and the estimated fair value of the accounts ac-
quired in business acquisitions, including an accrual for estimated acquisition
transition costs. The estimated transition costs include costs associated with
transferring the customers to the Company's central monitoring station, notifi-
cation of change in service provider, and service calls to customer premises.
Costs related to sales, marketing and installation of systems for accounts
internally generated are charged to expense as incurred.
F-12
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Monitoring Contract Costs and Amortization (Continued)
------------------------------------------------------
The cost of acquired monitoring contracts purchased from emergency response
system dealers and alarm system dealers are amortized using the straight-line
method over the seven-year and ten-year estimated lives, respectively, of the
related revenue stream for each pool of acquired accounts. It is the Company's
policy to periodically review actual account attrition and, if necessary, to
adjust downward the remaining estimated lives of acquired account pools to
reflect their anticipated future revenue streams.
Property and Equipment and Depreciation and Amortization
--------------------------------------------------------
Property and equipment are stated at cost. Expenditures for additions, renewals
and betterments are capitalized; expenditures for maintenance and repairs are
charged to expense as incurred. Upon retirement or disposal of assets, the
cost and accumulated depreciation or amortization are eliminated from the
accounts and any resulting gain or loss is credited or charged to operations.
Depreciation and amortization are provided using the straight-line and declin-
ing balance methods over the estimated useful lives of the assets.
Deferred Financing Costs and Amortization
-----------------------------------------
Costs incurred in connection with various financings have been deferred;
amortization is provided using the interest method over the terms of the
financings, and is included in interest expense.
New Accounting Pronouncements
-----------------------------
In March, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) #121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. This statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable. SFAS No. 121 is effective for financial statements for fiscal
years beginning after December 15, 1995. The Company does not anticipate that
the adoption of SFAS No. 121 will have a material effect on the Company's
operating results.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which will be adopted by the Company
in the year ending June 30, 1997, as required by this statement. The Company
has elected to continue to measure such compensation expense using the method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, as permitted by SFAS No. 123. When adopted, SFAS No. 123
will not have any effect on the Company's financial position or results of
operations but will require the Company to provide expanded disclosure regarding
its stock-based employee compensation plans.
F-13
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Also, the tax benefits resulting from the utilization
of net operating loss carryforwards are recorded as ordinary income. A valua-
tion allowance is established for deferred tax assets not expected to be re-
alized.
Principal differences between the Company's financial reporting and tax bases
include accounts receivable reserves, inventory reserves, depreciation and amor-
tization of property and equipment, amortization of capitalized costs, and
deferred revenue.
Loss Per Common Share
---------------------
Loss per common share is based solely on the weighted average number of common
shares outstanding, because the effect of common stock equivalents and other
securities is antidilutive.
F-14
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. ACQUISITIONS
Under the terms of an agreement in connection with an acquisition in March,
1994, during the year ended June 30, 1995, the Company issued an additional
120,000 shares of its common stock valued at $477,137 based on performance.
In November, 1994, the Company acquired all of the outstanding common stock of
Universal Security Systems, Inc. (USSI), a New Jersey corporation, in exchange
for 75,770 shares of the Company's common stock, valued at $576,641, issued to
the former stockholders of USSI. USSI was engaged in the installation, ser-
vicing and monitoring of electronic security systems. The Company also entered
into an employment agreement with one of the former stockholders of USSI (see
Note 14).
The following represents the assets purchased and the liabilities assumed:
Assets
Cash $ 457
Accounts receivable 57,560
Inventory 50,665
Prepaid expenses 8,484
Property and equipment 50,454
Monitoring contracts 995,643
Deposits 3,000
---------
1,166,263
---------
Liabilities
Notes payable - Stockholders 309,902
Accounts payable 150,356
Accrued expenses 84,690
Deferred revenue 44,674
---------
589,622
---------
Total purchase price $ 576,641
=========
Also in November, 1994, the Company acquired substantially all of the assets
(monitoring contracts) of the Medical Alert Systems Monitoring Division of
Emergency Response Systems, Inc. (Division), a California corporation. The
Division was engaged in the installation, servicing and monitoring of personal
emergency response systems. In consideration of this acquisition with a cost
of $1,882,930, the Company paid the Division an aggregate of $1,700,000 con-
sisting of $1,550,000 in cash, a note payable over two years in the amount of
$150,000, issued 10,000 shares of its common stock valued at $100,000 to the
shareholders and principals of the Division, and incurred acquisition costs of
$82,930. As part of this acquisition, the Company also issued 10,000 shares
of restricted common stock as payment of financing costs to the lender that
financed the acquisition.
F-15
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. ACQUISITIONS (Continued)
In February, 1996, the Company acquired all the outstanding common stock of
MSG Security Systems, Inc. (MSG), a Pennsylvania corporation, after giving
effect to MSG's distribution to its stockholder of substantially all of its net
assets other than monitoring and service contracts. MSG was engaged in the
installation, servicing and monitoring of electronic security systems. In con-
sideration of this acquisition with a cost of $429,541, the Company paid
$331,415 in cash, incurred acquisition costs of $37,515, and recorded purchase
holdbacks of $60,611. The following represents the assets acquired and the
liabilities assumed:
Assets
Monitoring contracts $ 404,071
Automotive equipment 4,675
-------
408,746
-------
Liabilities
Accrued expenses 665
Deferred revenue 16,055
-------
16,720
-------
Net assets acquired 392,026
Acquisition costs (assigned to
monitoring contracts) 37,515
-------
Total purchase price $ 429,541
=======
Also in February, 1996, the Company acquired substantially all of the assets
(monitoring contracts) of Monitoring Acquisition Corp. (MAC), a Pennsylvania
corporation. MAC was engaged in the monitoring of electronic security systems.
In consideration of this acquisition with a cost of $2,253,785, the Company
paid $1,604,446 in cash, issued 127,868 shares of its common stock valued at
$639,339, and incurred acquisition costs of $10,000.
In March, 1996, the Company acquired all of the outstanding common stock of
Shelton Security, Inc. (SSI), a New Jersey corporation, after giving effect to
SSI's distribution to its stockholder of substantially all of its net assets
other than monitoring and service contracts. SSI was engaged in the installa-
tion, servicing and monitoring of electronic security systems. In consideration
of the acquisition with a cost of $1,586,698, the Company paid $1,221,617 in
cash, incurred acquisition costs of $86,456, and recorded purchase holdbacks of
$278,625. The following represents the assets acquired and the liabilities
assumed:
F-16
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. ACQUISITIONS (Continued)
Assets
Inventory $ 13,000
Monitoring contracts 1,542,901
---------
1,555,901
---------
Liabilities
Accounts payable 21,704
Accrued expenses 5,702
Deferred revenue 28,253
---------
55,659
---------
Net assets acquired 1,500,242
Acquisition costs (assigned to monitoring
contracts) 86,456
---------
Total purchase price $1,586,698
=========
In June, 1996, the Company acquired substantially all of the assets of Alarm
Data, Inc. (ADI), a Delaware corporation. ADI was engaged in the installation,
servicing and monitoring of electronic security systems. In consideration of
this acquisition with a cost of $426,144, the Company paid $178,092 in cash,
incurred acquisition costs of $24,835, and recorded purchase holdbacks of
$223,217. The following represents the assets acquired:
Assets
Inventory $ 8,500
Monitoring contracts 371,854
Property and equipment 20,955
-------
401,309
Acquisition costs (assigned to
monitoring contracts) 24,835
-------
Total purchase price $ 426,144
=======
USSI, MSG, MAC, SSI and ADI became part of USS upon acquisition.
The following unaudited pro forma combined operating information for the years
ended June 30, 1995 and 1996, gives effect to the acquisitions as if they had
been completed at July 1, 1994.
Year Ended June 30,
-----------------------------
1995 1996
------------ -------------
Operating revenues $11,648,104 $12,660,995
Net loss ( 3,943,779) ( 5,216,898)
Loss per common share ( 5.36) ( 3.15)
Weighted average number of common
shares outstanding 735,299 1,656,406
F-17
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. ACQUISITIONS (Continued)
During the year ended June 30, 1995, the Company purchased additional monitor-
ing contracts for an aggregate of $4,859,516. As consideration, the Company
paid $3,668,944 in cash, recorded purchase holdbacks of $937,603 (which are
payable over periods of up to eighteen months based on performance guarantees
of the seller), and issued 48,500 shares of its common stock valued at $252,969.
During the year ended June 30, 1996, the Company purchased additional monitor-
ing contracts for an aggregate of $3,300,289. As consideration, the Company
paid $2,303,067 in cash, incurred acquisition costs of $366,841, recorded pur-
chase holdbacks of $519,475 (which are payable over periods of up to eighteen
months based on performance guarantees of the seller), and issued 166,175
shares of its common stock valued at $110,908. As part of the acquisitions, the
Company also issued 15,000 shares of restricted common stock valued at $70,311
as payment of financing costs to the lender that financed the acquisition.
3. NET INVESTMENT IN SALES-TYPE LEASES
Information pertaining to the Company's net investment in sales-type leases is
as follows:
Minimum lease payments receivable $ 605,964
Less: Unearned interest - Finance revenue ( 112,762)
Allowance for doubtful accounts ( 44,000)
---------
Net investment in sales-type leases $ 449,202
=========
At June 30, 1996, minimum lease payments are receivable as follows:
Year Ending June 30,
--------------------
1997 $ 188,244
1998 185,218
1999 121,609
2000 78,496
2001 32,397
--------
$ 605,964
========
4. INVENTORY
Raw materials $ 145,098
Finished goods 507,453
--------
$ 652,551
========
F-18
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. PROPERTY AND EQUIPMENT
Estimated
Useful
Lives
---------
Machinery and equipment 5 years $1,853,710
Office furniture and equipment 5 years 226,878
Equipment held for lease 5 years 650,285
Automotive equipment 3 years 297,944
Leasehold improvements 5 years 95,105
---------
3,123,922
Less accumulated depreciation and
amortization (Includes $295,155
for equipment held for lease) 1,862,915
---------
$1,261,007
=========
6. NOTE RECEIVABLE
The note is due in monthly installments of $8,591 including interest at 9%;
final payment is due in July, 1997.
7. LONG-TERM NOTES PAYABLE
Equipment Financing
-------------------
Payable in monthly installments aggregating $5,359 including
interest at rates ranging from 6.95% to 11.8%; final
payments due January, 1997, through December, 1999;
collateralized by related equipment $ 93,880
Reorganization Debt
-------------------
As part of the 1990 plan of reorganization of a 1987
bankruptcy, the U.S. Bankruptcy Court approved a 30.5%
settlement on the total unsecured claims submitted;
payments are due March 1 of each year, as follows:
3.5% ($101,286) - 1997, and 3% ($86,817) each year -
1998 through 2000; interest imputed at 14%; net of
imputed interest of $96,085 265,652
Federal priority tax claims payable in annual
installments of $2,211 through March, 1999, and $1,896
thereafter 12,321
Convertible Subordinated Promissory Notes
-----------------------------------------
5% convertible subordinated promissory notes due November 30,
1996 (see Note 10) 75,000
10% convertible subordinated promissory notes due December 31,
1997 (see Note 10) 50,000
Other
-----
Note payable in declining monthly installments of $23,500
to $8,250 from July, 1996, through January, 1998, including
interest at 23.6%; collateralized by related monitoring
contracts (a) 240,536
F-19
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
7. LONG-TERM NOTES PAYABLE (Continued)
Other (Continued)
-----
Note payable in increasing monthly installments of $11,600
to $13,750 from July, 1996, through September, 1998,
including interest at 24.2%; collateralized by related
monitoring contracts (a) $ 256,035
Notes payable in monthly installments of $431,136 including
interest at rates ranging from 24.1% to 28%; final payments
due June, 1997, through February, 2001; collateralized by
related monitoring contracts (a) 10,689,455
Note payable in monthly installments of $11,500 through
March, 1997, $13,500 from April, 1997, through March, 1998,
$15,500 from April, 1998, through March, 1999, and $17,500
from April, 1999, through October, 2000, including
interest at 25.1%; collateralized by related monitoring
contracts (a) 443,551
Note payable; interest at 21.5% accrued monthly and added to
the principal balance through August, 1997; beginning in
September, 1997, payable in monthly installments of $26,000
including interest at 21.5%; final payment due in January,
2000; collateralized by related monitoring contracts (a) 443,091
----------
12,569,521
Less current portion 194,914
----------
$12,374,607
==========
(a) These notes were paid in full in July, 1996 (see Note 16).
After giving effect to the transactions described in Note 16, principal pay-
ments on long-term notes payable for the next five years are due as follows:
Year ending June 30, 1997 - $194,914, 1998 - $131,995, 1999 - $82,518,
2000 - $10,583,634 and 2001 - $1,896.
Line of Credit Agreement
------------------------
On June 30, 1996, the Company entered into a four-year $15,000,000 revolving
bank line of credit agreement. Loans outstanding bear interest at prime plus
1-3/4%, are collateralized by all assets of the Company, and are subject to
certain restrictive covenants. The agreement also provides for a commitment
fee, payable monthly in arrears, of .5% based on the average daily unused
credit.
In connection with the line of credit agreement, the Company issued warrants
to an affiliate of the bank to purchase 1,032,135 shares of the Company's com-
mon stock at an exercise price of $3.25. The warrants expire June 30, 2006.
Under the terms of the agreement, the Company may be required to purchase the
warrants (put obligation) upon 10 days' notice, at a price equal to the excess
of the market price on the delivery date over the exercise price ($3.25). As of
June 30, 1996, the value of the warrants was estimated at $5.75 per share of
common stock based upon a discounted market value of the average price of the
Company's common stock, resulting in a put obligation payable of $2,580,338,
with a corresponding charge to deferred financing costs.
F-20
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
7. LONG-TERM NOTES PAYABLE (Continued)
Deferred financing costs associated with this agreement will be amortized
using the effective interest method over the four-year term of the agreement.
Also in connection with this agreement, the Company issued warrants to a
consultant to purchase 100,000 shares of the Company's common stock at an exer-
cise price of $4.50 per share; these warrants expire June 30, 2000.
8. CAPITALIZED LEASE OBLIGATIONS
The Company leases office furniture and equipment with a cost of $158,999 and
a net book value of $109,062 at June 30, 1996, under capital leases. The follow-
ing is a schedule by years of future minimum lease payments under these leases
together with the present value of the net minimum lease payments as of
June 30, 1996.
Year Ending June 30,
--------------------
1997 $ 57,818
1998 26,137
1999 7,128
-------
Total minimum lease payments 91,083
Less amount representing interest 8,830
-------
Present value of net minimum lease payments $ 82,253
=======
9. PREFERRED STOCK
In May, 1996, the Company authorized the issuance of 7,500 shares of 1996 -
Series A Convertible Preferred Stock with a par value of $1,000 per share. The
holders of the preferred stock are not entitled to receive dividends and have
no voting rights. The preferred shares are convertible into a number of common
shares determined by using a formula of "the premium plus $1,000, divided by
the conversion price." The premium as defined equates to an annual 10% deemed
dividend, and the conversion price is equal to the lesser of $5.00 or 80% of
the average closing bid price of the Company's common stock for the five days
immediately preceding the date of conversion. Up to 50% of the preferred stock
may be converted beginning 45 days after closing, and the balance may be con-
verted beginning 70 days after closing. After June 1, 1999, the Company may
require conversion. The preferred stock has an aggregate liquidation preference
of $9,375,000 plus the cumulative 10% deemed dividend.
In connection with the sale of the preferred stock on June 30, 1996, the Com-
pany paid placement fees of $1,138,125 (of which $975,000 paid was paid from
the proceeds at closing, and $163,125 was included in accrued expenses and paid
subsequently). The preferred stock subscription receivable of $6,525,000 at
June 30, 1996, was collected on July 2, 1996.
F-21
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
9. PREFERRED STOCK (Continued)
The Company, during the quarter ending September 30, 1996, will record accre-
tion to the preferred stock account of $2,550,000, representing the difference
between the value of common stock into which the preferred stock is convertible
and the issue price of the preferred stock on June 30, 1996, up to eligibility
for conversion of the preferred stock, as described above, with a corresponding
increase in accumulated deficit.
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
The Company has an Incentive Stock Option Plan for key employees under which
options to purchase a maximum of 400,000 shares of the Company's common stock
may be granted, and a Restricted Stock Option Plan which provides for the grant
of stock options to officers, directors, employees, consultants or advisors of
the Company. The price will be determined by a committee of the Board of
Directors at the date of grant (not to be less than the fair market value at
the date of grant). At June 30, 1996, 332,950 shares are available for grant
under the Incentive Stock Option Plan.
In September, 1994, the Board of Directors granted options to executive
officers and a consultant to purchase 550,000 shares of the Company's common
stock at $3.75 per share; the options expire in September, 2004. In November,
1995, the price per share was reduced to $2.50 (the market price as of that
date), and the expiration date was extended to November, 2004.
In December, 1994, the Board of Directors granted options to key employees to
purchase 1,300 shares of the Company's common stock at $5.00 per share; the
options expire in December, 1999. At June 30, 1996, options to purchase 500
shares are still outstanding.
In February, 1995, the Board of Directors granted options to executive officers
and directors to purchase 600,000 shares of the Company's common stock at
$3.75 per share; the options expire in February, 2005. In November, 1995, the
price of 550,000 shares of the Company's common stock was reduced to $2.50 (the
market price as of that date).
Also in February, 1995, the Company reduced the exercise price of options for
1,130,198 shares of common stock (21,840 at $50.00 per share, 555,000 shares at
$17.30 per share, 550,000 shares at $8.125 per share, 1,500 at $52.50 per share,
358 at $35.00 per share and 1,500 at $16.25 per share) to the market price as
of that date ($3.75).
In September, 1995, in connection with a litigation settlement, options were
granted for the purchase of 40,000 shares of the Company's common stock at
$4.45 per share.
In November, 1995, the Board of Directors granted options to key employees to
purchase 89,250 shares of the Company's common stock at $3.875 per share; the
options expire in November 2001.
F-22
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (Continued)
The following is a summary of stock option activity:
Number Option Price
of Shares Per Share (Range)
----------- ----------------
Options outstanding at June 30, 1994 1,021,198 $3.75 - $70.00
Options granted 1,106,300 $3.75
Options cancelled ( 3,200) $2.50 - $52.50
--------- --------------
Options outstanding at June 30, 1995 2,124,298 $3.75 - $70.00
Options granted 129,250 $2.50 - $ 4.45
Options exercised ( 52,500) $2.50 - $3.875
Options cancelled or expired ( 192,865) $5.00 - $70.00
--------- --------------
Options outstanding and exercisable
at June 30, 1996 2,008,183 $2.50 - $70.00
========= ==============
During December, 1993, and January, 1994, the Company completed a private
placement of 109 units. Each unit consisted of a $25,000 5% Convertible
Subordinated Promissory Note due November 30, 1996 (the "5% Notes"), and Class A
and Class B Redeemable Common Stock Purchase Warrants (the "Class A Warrants"
and "Class B Warrants") to purchase 2,000 shares of the Company's common stock.
Through June 30, 1996, $2,650,000 of these notes had been converted into common
stock.
Interest on the 5% Notes is due and payable semi-annually on May 31 and
November 30 of each year. All of the principal amount (but not a portion) of
each of the 5% Notes is convertible into the Company's common stock at $12.50
per share, through November 30, 1996.
The 5% Notes are redeemable at the option of the Company at a price of 120% of
the principal amount at anytime after May 31, 1995. The Company shall pay all
accrued interest at the time of redemption. In the event that the 5% Notes are
redeemed, the noteholders will maintain ownership of their Class A Warrants and
Class B Warrants. The holders shall always retain the right to convert the
Notes into shares of common stock up to the date of redemption.
During January, 1995, through April, 1995, the Company completed a private
placement of 36.5 units. Each unit consisted of a $25,000 12% Convertible
Subordinated Promissory Note due December 31, 1996 (the "12% Notes") and Class C
Redeemable Common Stock Purchase Warrants (the "Class C Warrants") to purchase
10,000 shares of the Company's common stock. After giving effect to commissions
and other costs of the offering and an estimate as to the value of the warrants,
the Company recorded long-term debt of $912,500, debt discount of $2,920, debt
issue costs of $163,550 and additional paid-in capital of $2,920. Through
June 30, 1996, all of these notes had been converted into common stock.
F-23
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (Continued)
During July, 1995, through November, 1995, the Company completed a private
placement of three units. Each unit consisted of a $145,000 13.8% Convertible
Subordinated Promissory Note due June 30, 1997 (the "13.8% Notes"), and Class C
Warrants to purchase 6,667 shares of the Company's common stock. The Company
recorded long-term debt of $435,000, debt discount of $1,600 and additional
paid-in capital of $1,600. Through June 30, 1996, all of these notes had been
converted to common stock.
In November, 1995, the Board of Directors and Stockholders approved a one-for-
ten reverse stock split (the "Reverse Stock Split"). The Reverse Stock Split
became effective on November 20, 1995, and reduced the number of issued and
outstanding shares of common stock from 10,699,222 to 1,070,029; however, the
number of authorized shares of common stock (12,500,000 shares) will remain the
same. The accompanying consolidated financial statements and related notes give
effect to this transaction as of July 1, 1994.
The Reverse Stock Split did not alter the percentage interests of any stock-
holder, except to the extent that the Reverse Stock Split results in a stock-
holder of the Company owning a fractional share. In lieu of issuing fractional
shares, the Company issued an additional full share of common stock.
During January, 1996, and February, 1996, the Company completed a private
placement of 61 units. Each unit consisted of a $25,000 10% Convertible
Subordinated Promissory Note due December 31, 1997 (the "10% Notes"), and
Class C Warrants to purchase 1,000 shares of the Company's common stock. The
Company recorded long-term debt of $1,525,000, debt discount of $2,711 and
additional paid-in capital of $2,711. To the extent that the debt was not
converted, the debt discount is being amortized over the term of the debt using
the effective interest method. Through June 30, 1996, $1,475,000 of these notes
had been converted into common stock.
Interest on the 10% Notes is due and payable quarterly. All of the principal
amount of the 10% Notes is convertible into the Company's common stock at the
lower of (a) 75% of the closing bid price of the common stock on the last
trading day prior to conversion, or (b) $4.50 per share.
Payment of the principal and accrued interest on the 10% Notes is subordinated
to the payment in full of all principal and accrued interest on all indebted-
ness now existing of the Company, which was or will be entered into, on regular
commercial terms, to banks and other institutional lenders ("Senior Indebted-
ness"). The Company may incur further Senior Indebtedness for the sole purpose
of acquiring other personal emergency response systems or security systems
accounts.
On or after the effective date, the principal amount of these 10% Notes may be
prepaid by the Company, in whole or in part without premium or penalty, at any
time upon 10 days prior notice to the holders thereof, during which period the
holders may convert the 10% Notes to common stock. Upon any prepayment of the
entire principal amount of these 10% Notes, all accrued but unpaid interest
shall be paid to the holders.
F-24
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (Continued)
The Warrants are each exercisable for one share of common stock, at any time
until October 22, 1998, for Class A and Class B Warrants, and at any time until
January 15, 2000, for Class C Warrants. The Warrants are redeemable at a price
of $.10 per warrant at the Company's option under certain conditions.
As part of a consulting agreement (see Note 14), the Company issued warrants
to purchase 200,000 shares of the Company's common stock at a price of $5.125;
these warrants expire April 30, 1999. Also, as part of consulting agreements,
the Company issued warrants to purchase 1,285,000 shares of the Company's
common stock at prices ranging from $2.50 to $3.50; these warrants were exer-
cised during the year ended June 30, 1996.
In connection with the issuance of the preferred stock (see Note 9), the
Company granted transferable warrants to purchase 500,000 shares of the Com-
pany's common stock at an exercise price of $6.13 per share and 250,000 shares
of the Company's common stock at an exercise price of $8.00 per share; these
warrants expire June 30, 2001. The Company also issued warrants to a consultant
to purchase 75,000 shares of the Company's common stock at an exercise price of
$4.50; these warrants expire June 30, 2000.
The following is a summary of warrant activity:
Number Exercise Price
of Shares Per Share
--------- -----------------
Warrants outstanding at June 30, 1994 785,595 $3.75 - $ 5.50
Warrants issued in connection with 12%
Notes - Class C 36,500 $ 3.75
Warrants issued to placement agents in
connection with 12% Notes - Class C 20,000 $ 3.75
--------- ---------------
Warrants outstanding at June 30, 1995 842,095 $3.75 - $ 5.50
Warrants issued in connection with
13.8% Notes - Class C 20,000 $ 3.26
Warrants issued in connection with
12% Notes - Class A 92,000 $ 4.50
Warrants issued in connection with
10% Notes - Class C 61,000 $5.625
Warrants issued in connection with
consulting agreements 1,485,000 $2.50 - $5.125
Warrants issued in connection with
preferred stock 825,000 $4.50 - $ 8.00
Warrants issued in connection with
line of credit agreement 1,132,135 $3.25 - $ 4.50
Warrants exercised in connection with
12% Notes - Class C ( 29,300) $ 3.75
Warrants exercised in connection with
10% Notes - Class C ( 28,500) $5.625 - $5.825
Warrants exercised in connection with
consulting agreements (1,285,000) $2.50 - $ 3.50
--------- --------------
Warrants outstanding at June 30, 1996 3,114,430 $2.50 - $ 8.00
========= ==============
F-25
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (Continued)
During the year ended June 30, 1996, the Company issued 309,043 shares of its
common stock, valued at $820,558, in connection with acquisitions (see Note 2).
During the year ended June 30, 1996, the Company issued 32,000 shares of its
common stock, valued at $147,200, as payment of a note payable in connection
with the acquisition of a division of Emergency Response Systems, Inc. (see
Note 2), and issued 141,095 shares of its common stock, valued at $519,920, as
payment of notes payable to stockholders and officers (including interest of
$11,849).
During the year ended June 30, 1996, the Company issued 2,000 shares of its
common stock, valued at $8,125, as payment for consulting services.
11. INCOME TAXES
The differences between the provision for income taxes and income taxes com-
puted using the federal income statutory tax rate are as follows:
Year Ended June 30,
---------------------------
1995 1996
------------ ------------
Amount computed using the statutory rate ($1,030,480) ($1,500,050)
Increase (decrease) in taxes resulting from:
Prior net operating loss carryforwards
Nondeductible expenses 5,720 24,400
State taxes, net of federal taxes ( 189,190) ( 216,900)
Federal tax valuation allowance 1,213,950 1,692,550
---------- ----------
Income taxes (benefit) $ - $ -
========== ==========
F-26
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. INCOME TAXES (Continued)
At June 30, 1996, the cumulative temporary differences resulted in net
deferred tax assets or liabilities consisting primarily of:
Deferred tax assets:
Accounts receivable reserves $ 143,600
Inventory reserves 6,800
Book over tax depreciation and amortization -
Monitoring contracts 544,200
Warranty reserve 36,100
Accrued vacation payroll 37,300
Deferred revenues 13,600
Net operating loss carryforwards 4,778,500
---------
5,560,100
Less valuation allowance 5,393,100
---------
Deferred tax assets, net 167,000
Deferred tax liabilities:
Tax over book depreciation and amortization -
Property and equipment 167,000
---------
Net deferred tax assets (liabilities) $ -
=========
For income tax reporting, the Company has net operating loss carryforwards
available to reduce future federal and state income taxes. If not used, the
carryforwards will expire as follows:
Year Ending June 30, Federal State
-------------------- ------- -----
1997 $ $ 195,000
2000 742,400
2001 3,253,300
2002 3,206,000
2003 254,200 3,491,200
2004 23,100
2006 15,000
2008 136,300
2009 3,605,100 390,100
2010 2,997,000 147,800
2011 3,651,300 160,100
---------- ----------
$10,545,700 $11,722,200
========== ==========
The utilization of the federal net operating loss carryforwards aggregating
$277,300 expiring June 30, 2003, and 2004, are subject to an annual limitation
of $23,110 per year through June, 2004, in accordance with the provisions of
the Internal Revenue Code. This annual limitation may be adjusted due to
ownership changes in future years.
F-27
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. PROFIT SHARING PLAN
Effective June 1, 1995, the Company established a qualified profit sharing
plan under Section 401(k) of the Internal Revenue Code, covering certain of its
salaried employees. The Company contributes 25% of each participant's elective
deferral up to maximum Company contributions of 1.25% of eligible salaries.
Contributions to the plan by the Company for the years ended June 30, 1995 and
1996, were $2,216 and $23,008, respectively.
13. RECOVERY OF RESTRUCTURING CHARGES
In April, 1994, the Company initiated a plan of reorganization and restructur-
ing designed to reduce costs, improve operating efficiency and increase overall
future profitability as the Company refocuses its sales and marketing efforts on
security and fire alarm systems for residential and commercial properties. As a
result, the Company streamlined its organization and closed its manufacturing
and monitoring facilities. During the year ended June 30, 1995, the Company
recorded a recovery of $52,920 of these costs resulting from an overaccrual at
June 30, 1994.
14. COMMITMENTS AND CONTINGENCIES
Employment Agreements and Recovery of Termination Benefits Cost
---------------------------------------------------------------
The Company has employment contracts with certain key personnel for terms
expiring in June 2000. The contracts provide for initial annual base salaries
aggregating $365,000. These base salaries are subject to incremental increases
based upon consolidated pre-tax income as defined. In June, 1994, a key person
resigned; his base salary was $195,000, and, according to the separation
agreement, he will receive annual compensation of $120,000 plus benefits through
October 31, 1997. In connection with this separation agreement, a charge of
$409,673 was recorded as termination benefits for the year ended June 30, 1994,
representing the present value of the obligation based on an interest rate of
8.5%. During the year ended June 30, 1995, the Company renegotiated this agree-
ment, resulting in a recovery of $392,699 of termination benefits cost.
The Company also has employment contracts with certain key personnel of USS
for terms expiring in March, 1999. The contracts provide for initial base
salaries aggregating $240,000 and bonuses based on the fair market value of the
Company's common stock and the number of alarm monitoring subscribers; such
amounts are subject to adjustment under certain conditions. These base salaries
are subject to incremental increases as determined by the Board of Directors.
Consulting Agreement
--------------------
In April, 1996, the Company entered into a five-year consulting agreement
commencing October, 1996, which provides for a minimum annual fee of $42,000.
F-28
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. COMMITMENTS AND CONTINGENCIES (Contuinued)
Monitoring Agreement
--------------------
In April, 1994, the Company entered into a three-year monitoring agreement
which provides for a minimum annual cost of $420,000 plus increases based on
the number of subscribers as defined, for monitoring services previously pro-
vided directly by the Company. Total cost under this agreement was $435,000
and $494,000 for the years ended June 30, 1995 and 1996, respectively.
Lease Commitments
-----------------
The Company leases its facilities and various equipment under operating leases
expiring at various dates through October, 2000. The following is a schedule
of future minimum rental payments required under these leases:
Year Ending June 30,
--------------------
1997 $ 321,416
1998 270,278
1999 227,204
2000 26,891
2001 8,048
---------
$ 853,837
=========
The leases provide that the Company pay as additional rent taxes, insurance
and other operating expenses applicable to the leased premises. Total rent
expense under all operating leases aggregated $258,379 and $369,852 for the
years ended June 30, 1995 and 1996, respectively.
Contingencies
-------------
In the normal course of business, the Company is subject to litigation, none
of which is expected to have a material effect on the consolidated financial
position, results of operations or cash flows of the Company.
As part of certain acquisitions (see Note 2), the Company has guaranteed the
value of its common stock at various prices ranging from $3.75 to $17.34 for
two-year periods expiring at various dates through February, 1997. As of
June 30, 1996, the Company's contingent liabilities under these agreements
aggregated approximately $19,100, which may be settled in cash or by the
issuance of common stock; to the extent that settlement is in common stock, the
holders are entitled to piggy-back registration rights and the Company has
filed a registration statement for 94,402 shares of common stock which are
expected to be sufficient to satisfy the Company's obligation.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash approximates its fair value because of its short
maturity. The carrying amount of marketable securities, none of which are held
for trading purposes, is fair value (see Note 1).
F-29
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amount of the note receivable approximates its fair value because
the interest rate approximates market rates.
It was not deemed practicable to estimate the fair value of the reorganization
debt and the convertible subordinated promissory notes due to the nature of the
financing arrangements.
The carrying amount of equipment financing and capitalized lease obligations
approximates their fair value because the interest rates on these obligations
approximate market rates.
The carrying amount of the long-term debt paid in July, 1996, is $12,072,668
(see Notes 7 and 16); the fair value of this debt is $14,488,545, the amount
paid to settle the debt.
The carrying amount of the put obligation payable approximates its fair value
because it is based upon the value of the Company's common stock (see Note 7).
16. SUBSEQUENT EVENTS AND PRO FORMA BALANCE SHEET
With the proceeds received from the sale of preferred stock (see Note 9) and a
$10,500,000 advance on July 1, 1996, from the line of credit, the Company paid
off notes payable with balances aggregating $12,072,668 at June 30, 1996 (see
Note 7) plus a prepayment penalty. The prepayment penalty of $2,415,877 and
unamortized deferred financing costs of $133,831 associated with the notes paid
will be recorded as an extraordinary item during July, 1996.
The accompanying pro forma balance sheet reflects the following adjustments,
as if these transactions had occurred as of the balance sheet date.
Assets
Net increase in cash $ 1,846,907
Proceeds from preferred stock subscription
receivable ( 6,525,000)
Write-off of deferred financing costs ( 133,831)
Liabilities
Proceeds from line of credit ( 10,500,000)
Principal payments on long-term debt 12,072,668
Payment of related accrued costs 689,548
Stockholders' equity
Extraordinary item on debt extinguishment 2,549,708
----------
$ -
==========
F-30
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of1934, the Registrant has duly caused this Annual Report on
Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly
authorized.
RESPONSE USA, INC.
By:/s/ Richard M. Brooks
---------------------
Richard M. Brooks
President, Chief Executive,
and Financial Officer
and a Director
Dated: October 11, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons, which include the Chief
Executive Officer, the Chief Financial Officer and a majority of the Board of
Directors, on behalf of the Registrant and in the capacities and on the dates
indicated:
Name Title Date
- ---- ----- ----
/s/ Richard M. Brooks President Chief Executive October 11, 1996
- --------------------- and Financial Officer, and
Richard M. Brooks a Director (Principal
Executive and Financial Officer)
/s/ Ronald A. Feldman Chief Operating Officer, October 11, 1996
- --------------------- Vice President, Secretary,
Ronald A. Feldman Treasurer and a Director
/s/ Stuart Levin Director October 11, 1996
- ----------------
Stuart Levin
/s/ Todd Herman Director October 11, 1996
- ---------------
Todd Herman
___________________ Director October 11, 1996
Robert M. Rubin
______________________ Director October 11, 1996
Sheldon Lieberbaum
/s/ Jeffrey Budin Director October 11, 1996
- -----------------
Jeffrey Budin
-34-
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<FISCAL-YEAR-END> JUN-30-1996
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