<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
RESPONSE USA, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7382 22-3088639
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
RESPONSE USA, INC.
11-H PRINCESS ROAD
LAWRENCEVILLE, NEW JERSEY 08648
(609) 896-4500
(Address and telephone number of principal executive offices)
------------------------------
RESPONSE USA, INC.
11-H PRINCESS ROAD
LAWRENCEVILLE, NEW JERSEY 08648
(609) 896-4500
(Address of principal place of business or intended principal place of business)
------------------------------
RICHARD M. BROOKS, CHIEF EXECUTIVE OFFICER
RESPONSE USA, INC.
11-H PRINCESS ROAD
LAWRENCEVILLE, NEW JERSEY 08648
(609) 896-4500
(Name, address and telephone number of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
KENNETH R. KOCH, ESQUIRE ROBERT H. COHEN, ESQUIRE
Squadron, Ellenoff, Plesent & Sheinfeld, LLP Morrison Cohen Singer & Weinstein, LLP
551 Fifth Avenue 750 Lexington Avenue
New York, New York 10176 New York, New York 10022
(212) 661-6500 (212) 735-8680
(212) 697-6686 (fax) (212) 735-8708 (fax)
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.008 per share........... 2,760,000 $10.97 $30,277,200 $9,174.91
Representative's Warrants (3)..................... 240,000 $12.07 $2,896,800 $877.82
Common Stock, par value $.008 per share........... 240,000(4)(5) (6) (6) (6)
Total........................................... -- -- $33,174,000 $10,052.73
</TABLE>
(1) Includes 360,000 shares of Common Stock, par value $.008 per share, which
the Underwriters have the option to acquire solely to cover over-allotments,
if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act based on the average of the bid and
asked price of the Common Stock on the Nasdaq SmallCap Market on October 6,
1997.
(3) Issued to the Representative of the Underwriters.
(4) Issuable upon exercise of the Representative's Warrants.
(5) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares as may become issuable as a result of the
anti-dilution adjustment in accordance with the terms of the
Representative's Warrants.
(6) Pursuant to Rule 457(g), no additional registration fee is required for
these shares.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 10, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
2,400,000 SHARES
RESPONSE USA, INC.
COMMON STOCK
Response USA, Inc., a Delaware corporation (the "Company"), hereby offers
2,400,000 shares of common stock, par value $0.008 per share (the "Common
Stock") (after giving effect to the anticipated one-for-three reverse stock
split). The Company has applied for listing of the Common Stock on the Nasdaq
National Market under the symbol "RSPN." The Common Stock is currently being
traded on the Nasdaq SmallCap Market under the symbol "RUOK." On October 6,
1997, the closing bid price of the Common Stock as reported in the Nasdaq
SmallCap Market was $10.875 per share (after giving effect to the anticipated
one-for-three reverse stock split). See "Price Range of Common Stock."
SEE "RISK FACTORS" LOCATED ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)(3)
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total.................................................... $ $ $
</TABLE>
(1) Does not include additional consideration to Hampshire Securities
Corporation, the representative (the "Representative") of the several
underwriters named herein (the "Underwriters"), consisting of (i) a
non-accountable expense allowance, and (ii) warrants to purchase up to an
aggregate of 240,000 shares of Common Stock (the "Representative's
Warrants"). The Company has agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of this offering payable by the Company estimated
at $ , including non-accountable expense allowance described in note
(1) above ( $ in the event of the exercise in full of the
Underwriters' over-allotment option).
(3) The Company has granted the Underwriters a 45-day option to purchase up to
an additional 360,000 shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
the Underwriters exercise this option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $
, and $ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by
them, and subject to their right to reject orders in whole or in part, and to
certain other matters. It is expected that delivery of the certificates
representing shares of Common Stock will be made against payment therefor at the
offices of Hampshire Securities Corporation, on or about , 1997.
--------------------------
HAMPSHIRE SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING SYNDICATE COVERING TRANSACTIONS, PENALTY BIDS AND SHORT SALES. FOR A
DESCRIPTION OF THESE ACTIVITIES; SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET-MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ SMALLCAP MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M.
SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. UNLESS
OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) GIVES EFFECT TO THE
ANTICIPATED ONE-FOR-THREE REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK
WHICH IS EXPECTED TO BE EFFECTIVE IN NOVEMBER 1997, (II) ASSUMES A PUBLIC
OFFERING PRICE OF $10.875 PER SHARE, (III) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION AND (IV) ASSUMES THE REDEMPTION OF THE
COMPANY'S SERIES A CONVERTIBLE PREFERRED STOCK (THE "PREFERRED STOCK") AND
COMPLIANCE WITH ALL OTHER PROVISIONS OF THE SETTLEMENT AGREEMENT BETWEEN THE
COMPANY AND THE HOLDERS OF THE PREFERRED STOCK. SEE "DESCRIPTION OF SECURITIES
- -- SERIES A CONVERTIBLE PREFERRED STOCK." EACH PROSPECTIVE INVESTOR IS URGED TO
READ THIS PROSPECTUS IN ITS ENTIRETY. AS USED IN THIS PROSPECTUS, THE TERM
"COMPANY" MEANS, UNLESS THE CONTEXT REQUIRES OTHERWISE, THE COMPANY AND ITS
WHOLLY-OWNED SUBSIDIARIES, UNITED SECURITY SYSTEMS, INC. ("USS"), EMERGENCY
RESPONSE SYSTEMS, INC. ("ERS") RESPONSE ABILITY SYSTEMS, INC. ("SYSTEMS") AND,
HEALTHLINK, LTD. ("HEALTHLINK"), AN ENTITY IN WHICH THE COMPANY HAS A 50% EQUITY
INTEREST. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS."
THE COMPANY
The Company is a fully-integrated security systems provider engaged in the
monitoring, sale, installation and maintenance of residential and commercial
security systems and personal emergency response systems ("PERS"). The Company
is a regional provider of security alarm monitoring services for residential and
small business subscribers operating in the states of New York, New Jersey,
Pennsylvania, Delaware and Connecticut. The Company is also a nationwide
provider of PERS products which enable individual users, such as elderly or
disabled persons, to transmit a distress signal using a portable transmitter.
The Company currently has an aggregate of over 48,000 alarm and PERS subscribers
for which it provides monitoring services. As a result of the Company's
acquisitions of subscriber account portfolios, the Company's monthly recurring
revenue ("MRR") has grown by 60%, to approximately $800,000 for the month ended
June 30, 1997, from approximately $500,000 for the month ended June 30, 1995.
According to a May 1997 report published by Security Distributing and Marketing
("SDM"), an organization which publishes industry reports, as of December 31,
1996, the Company is the 31st largest electronic security company in the United
States, based on total revenues, and the 25th largest electronic security
company, based on recurring annual revenues.
The Company's electronic security systems business utilizes electronic
systems installed in businesses and residences to provide (i) detection of
events such as intrusion or fire, (ii) surveillance and (iii) control of access
to property. The detection devices are monitored by a third-party monitoring
station located in Euclid, Ohio (the "Monitoring Station"). The Monitoring
Station personnel verify the nature of the emergency and contact the appropriate
emergency authorities in the user's area. 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.
The Company's PERS is an electronic device which is designed to monitor,
identify and electronically report emergencies requiring medical, fire or police
assistance, to help elderly, disabled and other individuals. When activated by
the pressing of a button, or automatically, in the case of certain environmental
temperature fluctuations, 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 the Monitoring Station which provides continuous monitoring
services. In addition, this signal establishes two-way voice communication
3
<PAGE>
between the user and the Monitoring Station personnel directly through the PERS
unit, thereby avoiding any need for the user to access a telephone.
The electronic security services industry is highly fragmented and the
Company's strategy is to grow by acquisition, as well as by offering new
products and services. According to an industry report published in 1996, there
are approximately 12,000 separate security services companies nationally, and
according to the May 1997 SDM Report, the electronic security industry generates
an aggregate of approximately $13 billion in revenues annually. The Company
believes that there is an industry-wide trend towards consolidation due, in
part, to the relatively high fixed costs of maintaining a centralized monitoring
station and the relatively low incremental cost of servicing additional
subscribers. The Company completed the acquisition of an aggregate of 38
subscriber account portfolios (a total of approximately 25,000 subscriber
accounts) during the three fiscal years ended June 30, 1997.
The Company has recently entered into an agreement with Triple A Security
Systems, Inc. ("Triple A"), pursuant to which the Company would acquire
substantially all of the assets of Triple A upon the consummation of this
offering. Triple A is engaged in the monitoring, sale and installation of
residential and commercial security systems, principally in northeastern
Pennsylvania. Triple A currently services approximately 14,000 subscriber
accounts which are monitored by its central monitoring station. In addition, the
Company has entered into an agreement, pursuant to which, if consummated, the
Company would acquire approximately 2,000 additional subscriber accounts. See
"Business --Pending Acquisitions."
In March 1997, the Company acquired a 50% interest in HealthLink. HealthLink
markets a low-cost PERS product containing basic one-way transmission features
(the "HealthLink System"). The HealthLink System is distributed nationally
through retail stores, including Target Stores ("Target") (808 stores), Long's
Drugs, a west-coast regional chain (305 stores), Fred Myer, a northwest regional
chain (104 stores), Fry's, a southwest regional chain (51 stores) and Bergen
Brunswick's west-coast Good Neighbor Pharmacies (429 stores), accounting for
distribution through a total of approximately 1,700 stores as of the date of
this Prospectus. The Company is negotiating with several other chain stores to
further increase distribution. The Company provides monitoring and related
services to HealthLink System customers, is responsible for billing and
collecting from such customers and receives a portion of the recurring revenue
as a fee for providing these services.
In November 1996, the Company entered into a two-year agreement granting it
the exclusive worldwide distribution rights within the health care industry to
WanderWatch,-TM- a monitoring system designed to assist in the care of patients
with Alzheimer's disease, autism, head injury, dementia or other diseases or
injuries which may involve memory loss. WanderWatch-TM- is similar to PERS,
except that the transmitter is designed to be continuously activated and
transmits a signal to the base unit. If the base unit does not receive the
requisite number of transmissions, it indicates that the patient may have
wandered outside the "safety range," and triggers an alarm in the home base
unit. If the alarm is not disabled, a signal is automatically transmitted to the
Monitoring Station, whose personnel will then place calls based upon a set
protocol established by the caregivers. The license agreement for
WanderWatch-TM- provides for automatic one-year renewals and the Company's
exclusive rights to the license are subject to forfeiture under certain
circumstances. WanderWatch-TM- is currently being test-marketed by the Company
and the Company does not anticipate commencing distribution of the product until
fiscal 1999.
The Company is a Delaware corporation, organized in March 1992. The
Company's principal executive offices are located at 11-H Princess Road,
Lawrenceville, New Jersey 08648, and its telephone number is 609-896-4500.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company........................... 2,400,000 shares
Common Stock outstanding prior to
this offering..................... 2,198,863 shares(1)
Common Stock outstanding after this
offering.......................... 4,598,863 shares(1)(2)
Use of Proceeds..................... To consummate the acquisition of Triple A and to
reduce certain indebtedness and other obligations of
the Company. See "Use of Proceeds."
Risk Factors........................ The purchase of the shares of Common Stock is
speculative and involves substantial risk.
Prospective investors should carefully review and
consider the information set forth under "Risk
Factors."
Nasdaq SmallCap Market Symbol....... RUOK
Proposed Nasdaq National Market
Symbol............................ RSPN
</TABLE>
- ------------------------
(1) Does not include up to (i) 679,653 shares of Common Stock issuable upon
exercise of outstanding options granted to officers, directors, employees
and consultants of the Company, at exercise prices ranging from $.03 to
$13.35 per share, including 422,800 shares of Common Stock issuable upon
exercise of outstanding options granted to certain officers and directors at
an exercise price of $0.03 per share, 200,000 shares of Common Stock
issuable upon exercise of outstanding options granted to two officers of
USS, one of whom is a director of the Company at an exercise price of $4.50
per share and 56,853 shares of Common Stock issuable upon exercise of
outstanding options granted to employees and consultants at exercise prices
ranging from $.30 to $13.35 per share, (ii) 1,561,510 shares of Common Stock
issuable upon exercise of outstanding warrants at exercise prices ranging
from $6.00 to $24.00 per share, including 114,833 shares of Common Stock
issuable upon exercise of outstanding warrants granted to the holders of the
Company's Preferred Stock at an exercise price of $6.00 per share (the
"Preferred Warrants"), 411,127 shares of Common Stock issuable upon exercise
of the Company's publicly-traded Class A Warrants at an exercise price of
$7.50 per share (the "Class A Warrants"), 493,983 shares of Common Stock
issuable upon exercise of the Company's publicly-traded Class B Warrants at
an exercise price of $9.75 per share (the "Class B Warrants"), 16,567 shares
of Common Stock issuable upon exercise of the Company's Class C Warrants at
an exercise price of $10.00 per share (the "Class C Warrants"), 150,000
shares issuable upon exercise of a warrant granted to BKR, Inc. in
connection with the Company's investment in HealthLink at an exercise price
of $9.00 per share and 375,000 shares of Common Stock issuable upon exercise
of outstanding warrants granted to consultants and placement agents at
exercise prices ranging from $9.00 to $24.00 per share, (iii) 102,320 shares
of Common Stock issuable upon conversion of the Company's Series B Preferred
Stock (the "Series B Preferred Stock"), (iv) 240,000 shares of Common Stock
issuable upon exercise of the Representative's Warrants to be issued to the
Representative on the closing of this offering, and (v) 500,000 shares of
Common Stock issuable upon exercise of options which may be granted pursuant
to the Company's 1997 Stock Option Plan (the "1997 Plan") to be adopted by
the stockholders of the Company at the next annual meeting, which is
expected to take place in November 1997. See "Management" and "Description
of Securities."
(2) Does not include shares of Common Stock to be issued upon consummation of
two pending acquisitions, based upon the market price of the Common Stock at
the time of the consummation. Assuming the current market price of $10.875
per share, an aggregate of 169,783 shares of Common Stock would be issued
upon consummation of such acquisitions. See "Business--Pending
Acquisitions."
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA INFORMATION
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------------------------- AS ADJUSTED(3)
1995 1996 1997 1997
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Product Sales.................................. $ 4,520,062 $ 2,352,449 $ 2,938,618 $ 4,726,515
Monitoring and Service......................... 4,812,474 8,515,247 9,784,285 13,129,927
------------- ------------- -------------- --------------
Total Revenues............................... 9,332,536 10,867,696 12,722,903 17,856,442
------------- ------------- -------------- --------------
Cost of Revenues:
Product Sales(1)............................... 2,635,674 1,718,689 1,970,158 3,364,629
Monitoring and Service(2)...................... 1,125,123 1,779,490 2,127,257 3,085,976
------------- ------------- -------------- --------------
Total Cost of Revenues....................... 3,760,797 3,498,179 4,097,415 6,450,605
------------- ------------- -------------- --------------
Gross profit..................................... 5,571,739 7,369,517 8,625,488 11,405,837
------------- ------------- -------------- --------------
Operating Expenses:
Selling, General and Administrative............ 6,327,622 6,416,486 9,126,641 11,171,071
Compensation--Options/Employment Contracts..... -- -- 3,689,700 3,689,700
Depreciation and Amortization.................. 1,302,208 2,200,894 2,976,433 4,349,946
Interest....................................... 1,220,618 3,185,603 1,349,480 1,049,667
Litigation Settlement.......................... 240,000 -- -- --
Recovery of Termination Benefits Cost.......... (392,699) -- -- --
Recovery of Restructuring Charges.............. (52,920) -- -- --
------------- ------------- -------------- --------------
Total Operating Expenses..................... 8,644,829 11,802,983 17,142,254 20,260,384
------------- ------------- -------------- --------------
Loss from Operations........................... (3,073,090) (4,433,466) (8,516,766) (8,854,547)
Other Income (Expense):
Interest Income................................ 42,260 21,568 12,176 25,931
Joint Venture Loss............................. -- -- (123,325) (123,325)
------------- ------------- -------------- --------------
Loss Before Extraordinary Item..................... (3,030,830) (4,411,898) (8,627,915) (8,951,941)
Extraordinary Item Loss on Debt Extinguishment... -- -- 2,549,708 2,549,708
------------- ------------- -------------- --------------
Net Loss........................................... (3,030,830) (4,411,898) (11,177,623) (11,501,649)
Dividends and Accretion on Preferred Stock......... -- -- (6,876,521) --
------------- ------------- -------------- --------------
Net Loss Applicable to Common Shareholders......... $ (3,030,830) $ (4,411,898) $ (18,054,144) $ (11,501,649)
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Loss per Common Share:
Loss Before Extraordinary Item................. $ (15.07) $ (8.61) $ (5.80) $ (2.21)
Extraordinary Item............................. -- -- (1.71) (0.63)
------------- ------------- -------------- --------------
Net Loss....................................... $ (15.07) $ (8.61) $ (7.51) $ (2.84)
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Net Loss Applicable to Common Shareholders..... $ (15.07) $ (8.61) $ (12.14) $ (2.84)
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Weighted Average Number of Common Shares
Outstanding.................................... 201,064 512,179 1,487,574 4,049,183
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------
HISTORICAL PRO FORMA
---------------------------------- AS ADJUSTED(3)
1995 1996 1997 1997
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
CERTAIN SUBSCRIBER DATA:
MRR(4)..................................................... $ 500,000 $ 720,600 $ 800,000 $ 1,067,000
Number of Retail Subscribers............................... 28,628 34,173 37,770 47,770
Number of Wholesale Subscribers............................ 9,440 11,132 9,639 13,639
Total Number of Subscribers................................ 38,068 45,305 47,409 61,409
MRR per Retail Subscriber(5)............................... 16.93 20.25 20.27 21.34
MRR per Wholesale Subscriber(5)............................ $ 1.63 $ 2.22 $ 3.50 $ 3.47
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
---------------------------------------------
PRO FORMA
HISTORICAL AS ADJUSTED(3)
------------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working Capital (Deficit)........................................ $ (1,023,805)
Total Assets..................................................... 31,239,808
Long-Term Debt, Net of Current Portion(6)........................ 12,520,722
Preferred Stock.................................................. 7,757,783
Total Stockholders' Equity....................................... $ 11,769,502
</TABLE>
- ------------------------
(1) Includes cost of goods sold and installation expenses.
(2) Includes monitoring costs and time and material expenses.
(3) Pro forma to reflect (i) the acquisition of Triple A as if it had occurred
on July 1, 1996, including the elimination of amortization of monitoring
contracts in the amount of $55,434 purchased from Triple A; amortization of
the net increase of purchased monitoring contracts of $965,033; $128,574 in
the elimination of interest expense on debt not acquired; $298,913 in the
reduction of interest expense related to the net decrease in the Credit
Line; and 161,609 shares of Common Stock to be issued to Triple A in
connection with the acquisition (assuming a $10.875 per share offering
price) (ii) the sale by the Company of 2,400,000 shares of Common Stock
offered hereby and the application of the net proceeds therefrom and (iii)
the redemption of the Preferred Stock. The pro forma financial information
is unaudited and may not be indicative of the results that actually would
have occurred if the acquisition had occurred on July 1, 1996. See "Use of
Proceeds," "Capitalization" and "Description of Securities."
(4) MRR is monthly recurring revenue which the Company is entitled to receive
under contracts in effect at the end of the period. MRR is a term commonly
used in the industry as a measure of 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. The Company does
not have sufficient information as to the attrition of acquired subscriber
accounts to predict the amount of MRR that will be realized in future
periods or the impact of the attrition of acquired subscriber accounts on
the Company's overall rate of attrition. A retail subscriber is a subscriber
who contracts directly with the Company for monitoring services. A wholesale
subscriber is a subscriber who contracts through a third party for
monitoring services provided by the Company. See "Risk Factors--Attrition of
Subscriber Accounts."
(5) MRR at the end of the period divided by the number of retail or wholesale
(as the case may be) subscribers at the end of the period.
(6) Includes $12,235,000 of borrowings under the Credit Line (as defined
herein). As of September 15, 1997, actual borrowings under the Credit Line
were $12,385,000.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK BEING OFFERED HEREBY IS HIGHLY
SPECULATIVE, INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS
WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS, PRIOR
TO MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, TOGETHER WITH OTHER
MATTERS REFERRED TO HEREIN, INCLUDING THE FINANCIAL STATEMENTS AND NOTES
THERETO, THE FOLLOWING RISK FACTORS. IT MUST BE RECOGNIZED THAT OTHER UNFORSEEN
RISKS MIGHT ARISE IN THE FUTURE AND AFFECT THE COMPANY TO A GREATER EXTENT THAN
COULD EVER BE ANTICIPATED.
THIS PROSPECTUS CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS PROSPECTUS AND
INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE
COMPANY, WITH RESPECT TO (I) THE COMPANY'S ACQUISITION AND FINANCING PLANS, (II)
TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS,
(III) THE IMPACT OF COMPETITION AND (IV) THE EXPANSION OF CERTAIN OPERATIONS.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE ACCOMPANYING INFORMATION
CONTAINED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, THE INFORMATION
UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" IDENTIFIES IMPORTANT FACTORS
THAT COULD CAUSE SUCH DIFFERENCES.
HISTORY OF SIGNIFICANT LOSSES; WORKING CAPITAL DEFICIT; UNCERTAIN FUTURE
PROFITABILITY;
ASSETS ENCUMBERED; HIGHLY-LEVERAGED STRUCTURE
The Company has incurred net losses of $3,030,830, $4,411,898 and
$18,054,144 (inclusive of dividends and accretion on preferred stock of
$6,876,521 for the fiscal year ended June 30, 1997) for the three fiscal years
ended June 30, 1995, 1996 and 1997, respectively and an accumulated deficit of
$31,441,944. It is anticipated that such losses will continue for the
foreseeable future. The Company had a net working capital deficit of $1,023,805
as at June 30, 1997. In addition, the Company's future plans are subject to
known and unknown risks and uncertainties that may cause the Company to continue
to incur substantial losses from operations. There can be no assurance that the
Company's operations will ever become profitable or that, if it is successful in
doing so, it will be able to maintain profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
On June 30, 1996, the Company completed a restructuring of its long-term
debt and obtained a $15,000,000 credit line (the "Credit Line") from Mellon
Bank, N.A. (the "Bank"). As of September 15, 1997, $2,615,000 was available for
borrowing under the Credit Line. The Company intends to use a portion of the net
proceeds of this offering to pay down a portion of the outstanding indebtedness
under the Credit Line and intends to subsequently borrow approximately
$8,475,000 to redeem the Preferred Stock, assuming the redemption occurs on
November 30, 1997. See "Use of Proceeds" and "Description of Securities--Series
A Convertible Preferred Stock." At June 30, 1997, after giving pro forma effect
to the receipt and application of the net proceeds from this offering and the
redemption of the Preferred Stock, the Company's pro forma consolidated
long-term indebtedness would have been approximately $8,968,504. As a result of
such borrowings, the Company's capital structure is highly leveraged. The
Company's indebtedness requires that a significant amount of its cash flow from
operations be applied to the payment of interest, and there can be no assurance
that the Company's operations will generate sufficient cash flow to service this
indebtedness. Borrowings under the Credit Line are at variable rates of
interest, which subjects the Company to fluctuations in interest rates.
The Credit Line is secured by all of the assets of the Company, and includes
financial and other covenants that restrict the operational and financial
flexibility of the Company, including restrictions on indebtedness, liens,
acquisitions and other significant corporate events. Failure to comply with
certain covenants would, among other things, permit the Bank to accelerate the
maturity of the obligations
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thereunder and could result in cross-defaults permitting the acceleration of
debt under other Company agreements and the foreclosure on all of the assets of
the Company. In addition, the Company is required to obtain the consent of the
Bank under the Credit Line and to maintain certain financial ratios in order to
undertake significant acquisitions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company's highly-leveraged capital structure could impair its ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions, or other purposes, to compete effectively or to
operate successfully in the future. As of March 31, 1997 and June 30, 1997, the
Company was not in compliance with certain financial covenants under the Credit
Line. The Company subsequently entered into amendments to the Credit Line which
amended the covenants for the third and fourth quarters of the fiscal year ended
June 30, 1997 such that the Company was then in compliance with the Credit Line.
While the Company believes that it will be able to maintain compliance with the
financial covenants under the Credit Line, there can be no assurance that the
Company will maintain compliance with such financial covenants, or that the
Company will be able to obtain necessary consents, waivers or amendments to the
Credit Line in the future.
RISK RELATED TO GROWTH THROUGH ACQUISITIONS
Since fiscal year end 1994, substantially all of the Company's growth has
been through acquisitions. One of the Company's primary strategies is to
continue to increase its revenues and the markets it serves through the
acquisition of other companies in the electronic security services industry and
portfolios of alarm monitoring accounts. During the fiscal years ended June 30,
1995, 1996 and 1997, the Company consummated eight acquisitions (an aggregate of
10,700 subscriber accounts), 16 acquisitions (an aggregate of 9,200 subscriber
accounts) and 14 acquisitions (an aggregate of 5,300 subscriber accounts),
respectively. In the event that the Company targets larger acquisitions, such as
the acquisition of Triple A, such acquisitions can be expected to involve
significant expenditures of capital and time, whether or not consummated. In
addition, the acquisition of electronic security service companies may become
more expensive in the future, to the extent that demand and competition
increases. There can be no assurance that the Company will be able to identify
acquisition candidates, successfully consummate such acquisitions, acquire or
profitably manage such acquisition candidates or successfully integrate such
businesses into its operations without substantial costs, delays or other
problems. In addition, the Company is unable to predict the size or frequency of
any future acquisitions, and there can be no assurance that any businesses
acquired will be profitable at the time of their acquisition or will achieve
sales and profitability that justify the investment therein or that the Company
will be able to realize expected operating and economic efficiencies following
such acquisitions. Acquisitions may involve a number of special risks, including
(i) adverse effects on the Company's reported operating results, (ii) diversion
of management's attention, (iii) increased burdens on the Company's management
resources and financial controls, (iv) dependence on retention and hiring of key
personnel, (v) risks associated with unanticipated problems or legal liabilities
and (vi) amortization of acquired intangible assets, some or all of which could
have a material adverse effect on the Company's operations and financial
performance. Furthermore, significant acquisitions, such as the acquisition of
Triple A, require consent of the Bank under the Credit Line and there can be no
assurance that the Bank will consent to such acquisitions. Failure to receive
any such consent of the Bank could have a material adverse effect on the
Company's operations and financial performance.
The Company has entered into an agreement to acquire a company engaged in
the patrol service business. The Company has no experience in the patrol service
business and such industry may involve risks and uncertainties which are unknown
to the Company and which could have a material adverse effect on the Company's
financial condition and results of operations. In addition, the patrol service
business has a significantly lower profit margin than the other services
provided by the Company, which could also have a material adverse effect on the
Company's results of operations and financial performance. See
"Business--Pending Acquisitions."
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Since the Company's primary consideration in making an acquisition is the
amount of MRR associated with the seller's subscriber accounts, the price paid
by the Company is customarily directly tied to such MRR. No audited historical
financial information was available for any of the Company's acquisitions made
since 1994, except Triple A, if consummated. Therefore, the actual MRR acquired
may be less than the Company anticipated. Thus, the Company must rely on
management's knowledge of the industry, due diligence procedures, and
representations and warranties of the sellers. In the event the Company's
assessment of the MRR of an acquired company is higher than actual MRR for an
acquired company, the Company's financial condition and results of operations
could be materially adversely affected.
A difference between the accounting treatment of the purchase of subscriber
accounts and the accounting treatment of the generation of subscriber accounts
through direct sales by the Company's sales force has a significant impact on
the Company's results of operations. The costs of monitoring contracts (acquired
either through the Company's dealer program or through the acquisition of
subscriber account portfolios) are capitalized and amortized over estimated
lives ranging from five to ten years on a straight-line basis for alarm and PERS
accounts. Included in capitalized costs are acquisition transition costs that
reflect the Company's estimate of costs associated with incorporating the
acquired subscriber accounts into its operations. In contrast, all of the
Company's costs related to the marketing, sales and installation of new alarm
monitoring systems generated by its sales force are expenses in the period in
which such activities occur. The Company's marketing, sales and installation
expenses for new systems generally exceed installation revenues. Such accounting
treatment could adversely affect the Company's financial condition and results
of operations. See "Business."
POTENTIAL NEED FOR ADDITIONAL FINANCING
Based on the Company's operating plan, the Company believes that the net
proceeds of this offering, together with cash on hand and available debt
financing under the Credit Line, will be sufficient to satisfy its current
capital requirements for at least 12 months following this offering. However, in
the event that the Company were to make significant acquisitions for cash
consideration, the Company may require additional capital before such time.
Sources of funds may include the issuance of Common Stock or preferred stock
sold in a public offering or in private placements, debt securities or bank
financing. There can be no assurance that the Company would be able to obtain
capital on a timely basis, on favorable terms, or at all. If the Company is
unable to obtain such financing, or generate funds from operation sufficient to
meet it needs, the Company may be unable to implement its current plans for
expansion and development. See "Use of Proceeds."
ATTRITION OF SUBSCRIBER ACCOUNTS
The Company is heavily dependent on its recurring monitoring and service
revenues. Given the relatively fixed nature of monitoring and service expenses,
increases and decreases in monitoring and service revenues have a significant
impact on the Company's financial performance. Substantially all of the
Company's monitoring and service revenues are derived from recurring charges to
subscribers for the provision of various services. Although no single subscriber
represents more than one-half of one percent of the Company's recurring revenue
base, the Company is vulnerable to subscribers canceling their contracts. In
recent years, lost recurring revenues from such cancellations have exceeded the
new recurring revenues added by the Company's internal sales efforts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
At June 30, 1997, the cost of subscriber accounts and intangible assets, net
of previously accumulated amortization, was $18,433,133, which constituted 59.0%
of the book value of the Company's total assets. The Company's acquired
subscriber accounts are amortized on a straight-line basis over the estimated
life of the related revenues. The Company's assumed attrition rate for all of
its subscriber accounts, expressed
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as total accounts lost per year, net of new accounts from subscribers who move
into premises previously occupied by Company subscribers and accounts for which
the Company is reimbursed by virtue of a guarantee by the seller of the account,
is approximately 10%. It is the Company's policy to review periodically actual
account attrition and, when necessary, adjust the remaining estimated lives of
the Company's acquired accounts to reflect assumed future attrition (see Note 1
of Notes to Consolidated Financial Statements of the Company). There could be a
material adverse effect on the Company's results of operations and financial
condition if actual account attrition significantly exceeds assumed attrition
and the Company has to make further adjustments with respect to the amortization
of acquired subscriber accounts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Subscriber Attrition."
COMPETITION
The electronic security services industry is highly competitive and
fragmented. The Company competes with national and regional companies, as well
as smaller local companies, in all of its operations. Furthermore, new
competitors continue to enter the industry and the Company may encounter
additional competition from such future industry entrants. Subject to regulatory
compliance, certain companies engaged in the telephone and cable business are
competing in the electronic security services industry and other such companies
may, in the future, enter the industry. Certain of the Company's current
competitors have, and new competitors may have, substantially greater financial
resources than the Company. There can be no assurance that the Company will be
able to compete successfully in the electronic security services industry. The
Company's principal competitors with respect to its PERS 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.
There can be no assurance that the Company will be able to compete successfully
in the PERS industry. See "Business--Competition."
DEPENDENCE ON THE MONITORING STATION
The Company is dependent on an independent third-party monitoring station to
monitor substantially all of its subscriber accounts. The Company's agreement
with the Monitoring Station expires in April 2000 and is terminable sooner under
certain circumstances. Although the Company believes that alternative monitoring
stations are available on commercially reasonable terms, any termination or
temporary interruption of services by the Monitoring Station for any reason
including a catastrophic event such as tornado, hurricane, earthquake, fire or
other disaster which rendered the Monitoring Station temporarily or permanently
inoperable could adversely affect the Company's financial condition and results
of operations.
DEPENDENCE ON SUPPLIERS AND MANUFACTURERS
The Company does not manufacture any of the equipment or components that it
designs and installs. Although the Company believes that a variety of
alternative sources of supply are available on commercially reasonable terms,
the Company has no guaranteed supply arrangements with its suppliers and
purchases components pursuant to purchase orders placed from time to time in the
ordinary course of business. There can be no assurance that shortages of
components will not occur in the future. Failure of sources of supply and the
inability of the Company to develop alternative sources of supply, if required
in the future, could have a material adverse effect on the Company's operations.
See "Business--Suppliers, Manufacturing and Assembly."
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PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
The nature of the security services provided by the Company potentially
exposes it to greater risk of liability claims for employee acts or omissions or
system failure than may be inherent in many other service businesses. Although
(i) substantially all of the Company's customers have subscriber agreements
which contain provisions for limited liability and predetermined liquidated
damages and (ii) the Company carries insurance which provides coverage against
certain of such liabilities, there can be no assurance that such existing
arrangements will prevent the Company from being adversely affected as a result
of damages arising from the acts of its employees, defective equipment, the acts
or omissions of the Monitoring Station or because some jurisdictions prohibit or
restrict limitations on liabilities and liquidated damages. In addition, certain
of the Company's insurance policies and the laws of some states may limit or
prohibit insurance coverage for punitive damages and for certain other kinds of
damages arising from employee misconduct. In addition, in some states, the
contractual limitation on liability and indemnification provisions may be
ineffective in cases of gross negligence or intentional misconduct and in
certain other situations. See "Business--Risk Management."
The sale and service of the Company's products entails the risk of product
liability claims. In addition, many of the companies with which the Company does
or may do business may require financial assurances of product reliability. The
Company has product liability insurance, but may be required to pay higher
premiums associated with new product development. Product liability insurance is
expensive and there can be no assurance that additional insurance will be
available on acceptable terms, if at all, or that it will provide adequate
coverage against potential liabilities. The inability to obtain additional
insurance at an acceptable cost or to otherwise protect against potential
product liability could prevent or inhibit commercialization of the Company's
products. A successful claim brought against the Company in excess of its
insurance coverage could have a material adverse effect on the Company.
POSSIBLE ADVERSE EFFECT OF "FALSE ALARMS" ORDINANCES AND GOVERNMENT REGULATIONS
The Company believes that approximately 97% of alarm activations that result
in the dispatch of police or fire department personnel are not emergencies, and
thus are "false alarms." Significant concern has arisen in certain
municipalities about this high incidence of false alarms. This concern could
cause a decrease in the likelihood or timeliness of police response to alarm
activations and thereby decrease the propensity of consumers to purchase or
maintain alarm monitoring services.
A number of local governmental authorities have considered or adopted
various measures aimed at reducing the number of false alarms. Such measures
include (i) subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms, (ii) licensing individual alarm systems and the
revocation of such licenses following a specified number of false alarms, (iii)
imposing fines on alarm subscribers for false alarms, (iv) imposing limitations
on the number of times the police will respond to alarms at a particular
location after a specified number of false alarms and (v) requiring further
verification of an alarm signal before the police will respond. Enactment of
such measures could adversely affect the Company's future business and
operations. See "Business--Government Regulation."
The Company's operations are also subject to a variety of federal, state,
county and municipal laws, regulations and licensing requirements. Many of the
states in which the Company operates, as well as certain local authorities,
require the Company to obtain licenses or permits to conduct a security alarm
services business. Certain governmental entities also require persons engaged in
the security alarm services business to be licensed and to meet certain
standards in the selection and training of employees and in the conduct of
business. The loss of such licenses, or the imposition of conditions on the
granting or retention of such licenses, could have a material adverse effect on
the Company.
The Company's advertising and sales practices are regulated by both the
Federal Trade Commission (the "FTC") and state consumer protection laws. Such
regulations include restrictions on the manner in which the Company promotes the
sale of its products and the obligation of the Company to provide
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<PAGE>
purchasers of its products with certain rights. While the Company believes that
it has complied with these regulations in all material respects, there can be no
assurance that none of these regulations were violated in connection with the
solicitation of the Company's existing subscriber accounts, particularly with
respect to accounts acquired from third parties, or that no such violations will
occur in the future. See "Business-- Governmental Regulation."
GEOGRAPHIC CONCENTRATION
The Company's existing alarm subscriber base is geographically concentrated
in New York, New Jersey, Connecticut, Delaware and Pennsylvania. Accordingly,
the performance of the Company may be adversely affected by regional or local
economic conditions. The Company may from time to time make acquisitions in
regions outside of its current operating area. The acquisition of companies in
other regions, or in metropolitan areas in which the Company does not currently
have subscribers, requires an investment by the Company. In order for the
Company to expand successfully into a new area, the Company must acquire
companies with a sufficient number and density of subscriber accounts in such
area to support the investment. There can be no assurance that the Company will
find such opportunities or that an expansion into new geographic areas will
generate operating profits.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continuing
contributions of its senior management and other key employees, including
Richard M. Brooks, the Company's Chief Executive Officer, President, Chief
Financial Officer and Chairman of the Board, and Ronald A. Feldman, the
Company's Chief Operating Officer, Vice President, Secretary and Treasurer. It
is an event of default under the Credit Line if Messrs. Brooks and Feldman or
Todd Herman, President of USS, are not employed in certain management positions.
The Company has key-man life insurance policies on the lives of Messrs. Brooks
and Feldman in the amount of $3,000,000 and $1,000,000, respectively. See
"Management."
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
Upon the consummation of this offering, the Company's directors and
executive officers will beneficially own approximately 11.9% of the outstanding
shares of Common Stock and, accordingly, will have substantial influence over
the outcome of any matter submitted to a vote of stockholders, including the
election of directors and the approval of significant corporate transactions
(such as acquisitions of the Company or its assets). Such influence could delay
or prevent a change of control of the Company. See "Principal Stockholders" and
"Description of Securities."
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market has from time to time experienced extreme price and volume
fluctuations that have been unrelated to the operating performance of particular
companies. The market price of the Common Stock may be significantly affected by
quarterly variations in the Company's operating results, changes in financial
estimates by securities analysts or failure by the Company to meet such
estimates, litigation involving the Company, general trends in the security
alarm industry, actions by governmental agencies, national economic and stock
market conditions, industry reports and other factors, many of which are beyond
the control of the Company. See "Price Range of Common Stock."
SUBSTANTIAL DILUTION
Investors purchasing shares in this offering will incur immediate and
substantial dilution of approximately $4.15 (38%) per share between the adjusted
net tangible book value per share of Common Stock after this offering and the
assumed public offering price of $10.875 per share.
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NO DIVIDENDS
The Company has never paid any cash or other dividends on its Common Stock.
Payment of dividends on the Common Stock is within the discretion of the Board
of Directors and will depend upon the Company's earnings, its capital
requirements and financial condition, and other relevant factors. For the
foreseeable future, the Board intends to retain future earnings, if any, to
finance its business operations and does not anticipate paying any cash
dividends with respect to the Common Stock. Pursuant to the terms of the Credit
Line, the Company may not declare any dividends while any outstanding balance
exists under the Credit Line. See "Management's Discussion and Analysis and
Results of Operations--Liquidity and Capital Resources" and "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE; EFFECT OF PREVIOUSLY ISSUED OPTIONS;
REGISTRATION RIGHTS
Upon the consummation of this offering, the Company will have outstanding
4,598,863 shares of Common Stock, of which the 2,400,000 shares offered hereby
will be freely tradeable without restriction or further registration under the
Securities Act. Approximately an additional 2,091,600 shares of Common Stock are
also freely tradeable. The remaining approximately 107,263 shares of Common
Stock are "restricted securities" (as that term is defined in Rule 144 under the
Securities Act) and in the future may only be sold pursuant to a registration
statement under the Securities Act, in compliance with the exemption provisions
of Rule 144 or pursuant to another exemption under the Securities Act. The
holders of 107,263 shares of Common Stock have demand and "piggyback"
registration rights. In general, under Rule 144, as currently in effect, a
person (including a person who may be deemed an "affiliate" of the Company as
that term is defined under the Securities Act) who has beneficially owned such
shares for at least one year would be entitled to sell within any three-month
period a number of shares beneficially owned for at least one year that do not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are further subject to
certain restrictions relating to the manner of sale, notice and the availability
of current public information about the Company. After two years have elapsed
from the date of the issuance of restricted securities by the Company or their
acquisition from an affiliate, such shares may be sold without limitation by
persons who have not been affiliates of the Company for at least three months.
Commencing approximately 12 months following the date of this Prospectus,
substantially all of such securities would become eligible for sale in the
public market pursuant to Rule 144. The beneficial owners of 602,480 shares of
Common Stock (including shares of Common Stock issuable upon exercise of
outstanding options) have agreed not to sell such shares for a period of 12
months after this offering without the consent of the Representative. The sale,
or availability for sale, of substantial amounts of Common Stock in the public
market subsequent to this offering pursuant to Rule 144 or otherwise could
materially adversely affect the market price of the Common Stock and could
impair the Company's ability to raise additional capital through the sale of its
equity securities or debt financing.
The Company has reserved from the authorized, but unissued, Common Stock,
1,690,376 shares of Common Stock issuable upon exercise of outstanding options
at exercise prices ranging from $0.03 to $10.00 per share, and 411,127, 493,983,
16,567 and 114,833 shares of Common Stock, respectively, for issuance upon
exercise of the Company's publicly-traded Class A Warrants, at an exercise price
of $7.50 per share, publicly-traded Class B Warrants, at an exercise price of
$9.75 per share, the Class C Warrants, at an exercise price of $10.00 per share,
and the Preferred Warrants, at an exercise price of $6.00 per share. The
existence of such outstanding options and warrants and any outstanding options
issued under the Plans may prove to be a hindrance to future financings, since
the holders of such warrants and options may be expected to exercise them at a
time when the Company would otherwise be able to obtain additional equity
capital on terms more favorable to the Company. See "Description of Securities."
The holders of the Representative's Warrants will have certain demand and
"piggyback" registration rights with respect to the shares of Common Stock
underlying such warrants, commencing one year after
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<PAGE>
the effective date of this offering. If the Representative should exercise
registration rights to effect the distribution of the securities underlying the
Representatives' Warrants, it will be unable to make an active market in the
Company's securities prior to and during such distribution. If it ceases making
a market in the Common Stock, the market and market prices for the Common Stock
may be materially adversely affected, and holders thereof may be unable to sell
or otherwise dispose of the Common Stock. In addition, the holders of the
Preferred Warrants have demand and "piggyback" registration rights. No
prediction can be made as to the effect, if any, that sales of such securities,
or the availability of such securities for sale, will have on the market prices
prevailing from time to time for the Common Stock. However, even the possibility
that a substantial number of the Company's securities may, in the near future,
be sold in the public market may adversely affect prevailing market prices for
the Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities. See "Shares Eligible For Future Sale,"
"Description of Securities" and "Underwriting."
DELAWARE ANTI-TAKEOVER STATUTE; LIMITATION OF LIABILITY OF DIRECTORS AND
OFFICERS; POSSIBLE ADVERSE EFFECTS ASSOCIATED WITH THE ISSUANCE OF "BLANK
CHECK" PREFERRED STOCK
The Company is a Delaware corporation and is subject to the prohibitions
imposed by Section 203 of the Delaware General Corporate Law ("DGCL"), which is
generally viewed as an anti-takeover statute. In general, this statute will
prohibit the Company from entering into certain business combinations without
the approval of its Board of Directors and, as accordingly, could prohibit or
delay mergers or other attempted takeovers or changes in control with respect to
the Company. Such provisions may discourage attempts to acquire the Company. A
change of control of the Company would also cause a default under the Credit
Line which could accelerate the maturity of the obligations thereunder.
The Company's Certificate of Incorporation includes provisions to eliminate,
to the full extent permitted by the DGCL as in effect from time to time, the
personal liability of directors of the Company for monetary damages arising from
a breach of their fiduciary duties as directors. The Certificate of
Incorporation also includes provisions to the effect that (subject to certain
exceptions) the Company shall, to the maximum extent permitted from time to time
under the law of the State of Delaware, indemnify, and upon request shall
advance expenses to, any director or officer to the extent that such
indemnification and advancement of expenses is permitted under such law, as it
may from time to time be in effect. In addition, the Company's Bylaws (the
"Bylaws") require the Company to indemnify, to the full extent permitted by law,
any director, officer, employee or agent of the Company for acts which such
person reasonably believes are not in violation of the Company's corporate
purposes as set forth in the Certificate of Incorporation. As a result of such
provisions in the Certificate of Incorporation and the Bylaws, stockholders may
be unable to recover damages against the directors and officers of the Company
for actions taken by them which constitute negligence, gross negligence or a
violation of their fiduciary duties, which may reduce the likelihood of
stockholders instituting derivative litigation against directors and officers
and may discourage or deter stockholders from suing directors, officers,
employees and agents of the Company for breaches of their duty of care, even
though such action, if successful, might otherwise benefit the Company and its
stockholders.
In addition, the Company's Certificate of Incorporation authorizes the
Company's Board of Directors to issue up to 250,000 shares (of which 239,430.42
remain available) of "blank check" preferred stock, from time to time, in one or
more series, solely on the authorization of its Board of Directors. The Board of
Directors will thus be authorized, without further approval of the stockholders,
to fix the dividend rights and terms, conversion rights, voting rights,
redemption rights and terms, liquidation preferences, and any other rights,
preferences, privileges and restrictions applicable to each new series of
preferred stock. The issuance of such stock could, among other results,
adversely affect the voting power of the holders of Common Stock and, under
certain circumstances, make it more difficult for a third party to gain control
of the Company, discourage bids for the Common Stock at a premium, or otherwise
adversely affect the market price of the Common Stock. See "Description of
Securities--Preferred Stock."
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CERTAIN NON-CASH CHARGES
The Company may incur certain non-cash charges (i) of up to $900,000 for the
fiscal year ended June 30, 1998, as deferred compensation expense relating to
certain performance options granted to two officers of USS, based upon
fluctuations in the market price of the Common Stock, and (ii) for the fiscal
year ended June 30, 1998 in connection with the issuance of a certain
performance warrant issued to BKR, Inc. in connection with the Company's
investment in HealthLink, based upon the value of such warrant. Such charges
could have a material adverse effect on the Company's results of operations. See
"Management," "Business--HealthLink" and Notes 3 and 14 of Notes to Consolidated
Financial Statements of the Company.
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USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,400,000 shares of Common Stock being offered by the Company are estimated to
be approximately $ , $( if the Underwriters' over-allotment is
exercised in full), after deducting the underwriting discounts and estimated
offering expenses payable by the Company, assuming a public offering price of
$ per share.
Of such net proceeds, it is anticipated that approximately $10,000,000 will
be used to consummate the acquisition of substantially all of the assets of
Triple A, which acquisition is expected to be consummated upon the consummation
of this offering. Triple A is a provider of residential and commercial security
systems, principally in northeastern Pennsylvania. See "Business--Pending
Acquisitions."
The Company intends to use the remainder of such net proceeds to reduce
amounts outstanding under the Credit Line and intends to subsequently borrow
approximately $8,475,000 under the Credit Line to redeem the Preferred Stock,
assuming the redemption occurs on November 30, 1997. See "Description of
Securities--Series A Preferred Stock." Funds from the Credit Line were utilized
to repay prior existing indebtedness to the lender which had financed the
acquisition of certain subscriber account portfolios, inventory and working
capital purposes. Pending application of the net proceeds, the Company intends
to invest the net proceeds in short-term investment grade, interest-bearing
securities. Amounts outstanding under the Credit Line bear interest at the
Bank's prime rate plus 1 3/4% per annum and are due on June 30, 2000. The
Company may borrow up to $15,000,000 under the Credit Line and, as of September
15, 1997, $12,385,000 was outstanding under the Credit Line. The Company expects
that additional proceeds from any exercise of the Underwriters' over-allotment
option will be used similarly or to supplement working capital.
Based on the Company's operating plan, the Company believes that the net
proceeds of this offering, together with cash on hand and available debt
financing under the Credit Line, will be sufficient to satisfy its current
working capital requirements for at least 12 months following this offering.
Such belief is based upon certain assumptions (including assumptions as to the
Company's contemplated operations and business plan and economic and industry
conditions) and there can be no assurance that such resources will be sufficient
for such purpose. Furthermore, in the event that the Company were to make
significant acquisitions for cash consideration, the Company may require
additional capital. In addition, contingencies may arise which may require the
Company to obtain additional capital. There can be no assurance that the Company
will be able to obtain such capital on favorable terms or at all. See
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business."
17
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq SmallCap Market under the trading symbol "RUOK." The Company has applied
for listing of the Common Stock, upon completion of this offering, on the Nasdaq
National Market under the symbol "RSPN". The following table sets forth, for the
quarters indicated, the high and low bid and asked prices for the Company's
Common Stock in the over-the-counter market (as adjusted to reflect the
anticipated one-for-three reverse stock split). Such prices reflect interdealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
BID ASK
------------------ ------------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
------- ------- ------- -------
FISCAL YEAR ENDING
JUNE 30, 1998:
First Quarter
(through September
15, 1997).......... $12 $ 6 3/4 $12 3/4 $ 7 1/8
FISCAL YEAR ENDED
JUNE 30, 1997:
First Quarter....... $26 5/8 $ 9 3/8 $27 3/8 $ 9 3/4
Second Quarter...... 15 3/8 7 1/8 16 1/8 7 7/8
Third Quarter....... 16 1/8 8 1/16 16 7/8 8 5/8
Fourth Quarter...... 9 4 5/16 9 3/8 4 11/16
FISCAL YEAR ENDED
JUNE 30, 1996:
First Quarter....... $21 9/16 $11 1/4 $23 7/16 $13 1/8
Second Quarter...... 18 12 3/4 18 3/4 13 7/8
Third Quarter....... 18 3/8 14 1/4 18 3/4 15
Fourth Quarter...... 25 1/2 15 3/8 26 1/4 15 3/4
</TABLE>
On October 6, 1997, the closing bid price of the Company's Common Stock as
reported on the Nasdaq SmallCap Market was $10.875 per share (as adjusted to
reflect the anticipated one-for-three reverse stock split). As of October 6,
there were 220 stockholders of record of the Common Stock.
DIVIDEND POLICY
The Company has not paid dividends on the Common Stock since inception and
does not intend to pay any dividends to its stockholders in the foreseeable
future. The Company currently intends to retain earnings, if any, for the
development and expansion of its business. The declaration of dividends in the
future will be at the discretion of the Board of Directors and will depend upon
the earnings, capital requirements and financial position of the Company,
general economic conditions and other pertinent factors. The Company is
prohibited from declaring dividends while any outstanding balance exists under
the Credit Line.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1997, and as adjusted to reflect (i) the sale of the 2,400,000 shares of Common
Stock of the Company offered hereby (after giving effect to the anticipated
one-for-three reverse stock split) at an assumed offering price of $10.875 per
share, (ii) the application of the estimated net proceeds therefrom, (iii) the
redemption of the Preferred Stock, (iv) the issuance of the Series B Preferred
Stock and (v) the issuance of 169,783 shares in connection with two pending
acquisitions. This table below should be read in conjunction with the financial
statements and related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-------------------------------
PRO FORMA
AS
ACTUAL(1) ADJUSTED(2)(3)
------------- ----------------
<S> <C> <C>
Short-Term Debt, Including Capital Lease Obligations:........................... $ 157,782
Long-Term Debt, Net of Current Portion:......................................... 12,520,722
Stockholders' Equity:
Preferred stock--Par value $1,000
Authorized 250,000 shares
Issued and outstanding 6,890 shares....................................... 7,757,783
Common stock--Par value $.008
Authorized 12,500,000 shares
Issued and outstanding 1,769,736 shares--June 30, 1997.................... 14,158
Additional Paid-in Capital...................................................... 35,439,510
Deficit......................................................................... (31,441,949)
Total Stockholders' Equity...................................................... 24,448,006
-------------
Total Capitalization........................................................ $ 24,448,006
-------------
-------------
</TABLE>
- ------------------------
(1) Reflects the anticipated one-for-three reverse stock split as if it had
occurred at June 30, 1997. See Note 16 of Notes to Consolidated Financial
Statements of the Company.
(2) Pro forma to reflect (i) the 2,400,000 shares of Common Stock offered hereby
and the application of the net proceeds thereof, (ii) the conversion of
1,000 shares of Preferred Stock and the redemption of the remaining 5,890
shares of Preferred Stock, (iii) the issuance of the Series B Preferred
Stock in September 1997 and (iv) the acquisition of Triple A as if it had
occurred prior to June 30, 1997, including the issuance of 161,609 shares of
Common Stock to be issued upon the consummation of the acquisition (based
upon a market price of $10.875 per share at the time of the consummation of
the acquisition). See "Description of Securities" and Note 16 of Notes to
Consolidated Financial Statements of the Company.
(3) Does not include up to (i) 240,000 shares of Common Stock issuable upon
exercise of the Representative's Warrants to be issued to the Representative
on the closing of this offering, (ii) 2,334,150 shares of Common Stock
issuable upon the exercise of outstanding options and warrants at exercise
prices ranging from $0.03 to $24.00 per share and upon conversion of
convertible securities or (iii) 169,783 shares of Common Stock to be issued
upon consummation of two pending acquisitions (based upon a market price of
$10.875 per share at the time of the consummation of the acquisition). See
"Business--Pending Acquisitions."
19
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table presents, for the periods and dates indicated, selected
historical and pro forma as adjusted financial data and other data of the
Company. The historical statement of operations data and the balance sheet data
of the Company for and at the year ended June 30, 1997 are derived from the
Company's financial statements, which have been audited by Deloitte & Touche
LLP, independent certified public accountants, and which appear elsewhere in
this Prospectus. The historical statement of operations data and the balance
sheet data of the Company for and at the years ended June 30, 1995 and 1996 are
derived from the Company's financial statements, which have been audited by
Fishbein and Company, PC, independent certified public accountants, and which
appear elsewhere in this Prospectus. The unaudited pro forma as adjusted
statement of operations and the balance sheet data of the Company give effect to
(i) the consummation of this offering and the application of the net proceeds
therefrom, as set forth in "Use of Proceeds," (ii) the acquisition of Triple A
and (iii) the effects of certain pro forma adjustments to the historical
financial statements described below, as if such events occurred prior to June
30, 1997. This information should be read in conjunction with the Company's
financial statements and the related notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Capitalization,"
included elsewhere in this Prospectus. The pro forma as adjusted information is
not necessarily indicative of what the actual results would have been had the
transactions occurred prior to June 30, 1997, nor does it purport to indicate
the results of future operations. The pro forma as adjusted information reflects
the acquisition of Triple A and does not reflect any other acquisitions of the
Company occurring after June 30, 1997, which acquisitions were not deemed to be
material acquisitions by the Company.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL AS ADJUSTED(3)
---------------------------------------- ----------------
1995 1996 1997 1997
----------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Product Sales.................................... $ 4,520,062 $ 2,352,449 $ 2,938,618 $ 4,726,515
Monitoring and Service........................... 4,812,474 8,515,247 9,784,285 13,129,927
----------- ------------ ------------- ----------------
Total Revenues............................... 9,332,536 10,867,696 12,722,903 17,856,442
----------- ------------ ------------- ----------------
Cost of Revenues:
Product Sales(1)................................. 2,635,674 1,718,689 1,970,158 3,364,629
Monitoring and Service(2)........................ 1,125,123 1,779,490 2,127,257 3,085,976
----------- ------------ ------------- ----------------
Total Cost of Revenues....................... 3,760,797 3,498,179 4,097,415 6,450,605
----------- ------------ ------------- ----------------
Gross profit................................... 5,571,739 7,369,517 8,625,488 11,405,837
----------- ------------ ------------- ----------------
Operating Expenses:
Selling, General and Administrative.................. 6,327,622 6,416,486 9,126,641 11,171,071
Compensation--Options/Employment Contracts........... -- -- 3,689,700 3,689,700
Depreciation and Amortization........................ 1,302,208 2,200,894 2,976,433 4,349,946
Interest............................................. 1,220,618 3,185,603 1,349,480 1,049,667
Litigation Settlement................................ 240,000 -- -- --
Recovery of Termination Benefits Cost................ (392,699) -- -- --
Recovery of Restructuring Charges.................... (52,920) -- -- --
----------- ------------ ------------- ----------------
Total Operating Expenses............................. 8,644,829 11,802,983 17,142,254 20,260,384
----------- ------------ ------------- ----------------
Loss from Operations................................. (3,073,090) (4,433,466) (8,516,766) (8,854,547)
Other Income (Expense):
Interest Income.................................. 42,260 21,568 12,176 25,931
Joint Venture Loss................................... -- -- (123,325) (123,325)
----------- ------------ ------------- ----------------
Loss Before Extraordinary Item....................... (3,030,830) (4,411,898) (8,627,915) (8,951,941)
----------- ------------ ------------- ----------------
----------- ------------ ------------- ----------------
Extraordinary Item Loss on Debt Extinguishment....... -- -- 2,549,708 2,549,708
Net Loss............................................. (3,030,830) (4,411,898) (11,177,623) (11,501,649)
Dividends and Accretion on Preferred Stock........... -- -- (6,876,521) --
----------- ------------ ------------- ----------------
Net Loss Applicable to Common Shareholders........... $(3,030,830) $ (4,411,898) $ (18,054,144) $ (11,501,649)
----------- ------------ ------------- ----------------
----------- ------------ ------------- ----------------
Loss per Common Share:
Loss Before Extraordinary Item................... (15.07) (8.61) (5.80) (2.24)
Extraordinary Item............................... -- -- (1.71) (0.63)
----------- ------------ ------------- ----------------
Net Loss......................................... $ (15.07) $ (8.61) $ (7.51) $ (2.86)
----------- ------------ ------------- ----------------
----------- ------------ ------------- ----------------
Net Loss Applicable to Common Shareholders....... $ (15.07) $ (8.61) $ (12.14) $ (2.87)
----------- ------------ ------------- ----------------
----------- ------------ ------------- ----------------
Weighted Average Number of Common Shares
Outstanding........................................ 201,064 512,179 1,487,574 4,049,183
----------- ------------ ------------- ----------------
----------- ------------ ------------- ----------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
PRO FORMA
HISTORICAL AS ADJUSTED(3)
---------------------------------- ----------------
1995 1996 1997 1997
---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
CERTAIN SUBSCRIBER DATA:
MRR(4)................................................... $ 500,000 $ 720,600 $ 800,000 $ 1,067,000
Number of Retail Subscribers(5).......................... 28,628 34,173 37,770 47,770
Number of Wholesale Subscribers(5)....................... 9,440 11,132 9,639 13,639
Total Number of Subscribers.............................. 38,068 45,305 47,409 61,409
MRR per Retail Subscriber(5)............................. 16.93 20.25 20.27 21.34
MRR per Wholesale Subscriber(5).......................... $ 1.63 $ 2.22 $ 3.50 $ 3.47
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
-----------------------------------------------
PRO FORMA
HISTORICAL AS ADJUSTED(3)
------------- ----------------
--------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working Capital (Deficit)..................................... $ (1,023,805)
Total Assets.................................................. 31,239,808
Long-Term Debt, Net of Current Portion (6).................... 12,520,722
Preferred Stock............................................... 7,757,783
Total Stockholders' Equity.................................... $ 11,769,502
</TABLE>
- ------------------------
(1) Includes cost of goods sold and installation expenses.
(2) Includes monitoring costs and time and material expenses.
(3) Pro forma to reflect (i) the acquisition of Triple A as if it had occurred
on July 1, 1996, including the elimination of amortization of monitoring
contracts in the amount of $55,434 purchased from Triple A; amortization of
the net increase of purchased monitoring contracts of $965,033; $128,574 in
the elimination of interest expense on debt not acquired; $298,913 in the
reduction of interest expense related to the net decrease in the Credit
Line; and 161,609 shares of Common Stock to be issued to Triple A in
connection with the acquisition (assuming a $10.875 per share offering
price), (ii) the sale by the Company of 2,400,000 shares of Common Stock
offered hereby and the application of the net proceeds therefrom and (iii)
the redemption of the Preferred Stock. The pro forma financial information
is unaudited and may not be indicative of the results that actually would
have occurred if the acquisition had occurred on July 1, 1996. See "Use of
Proceeds," "Capitalization" and "Description of Securities."
(4) MRR is monthly recurring revenue which the Company is entitled to receive
under contracts in effect at the end of the period. MRR is a term commonly
used in the industry as a measure of 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. The Company does
not have sufficient information as to the attrition of acquired subscriber
accounts to predict the amount of MRR that will be realized in future
periods or the impact of the attrition of acquired subscriber accounts on
the Company's overall rate of attrition. A retail subscriber is a subscriber
who contracts directly with the Company for monitoring services. A wholesale
subscriber is a subscriber who contracts through a third party for
monitoring services provided by the Company. See "Risk Factors -- Attrition
of Subscriber Accounts."
(5) MRR at the end of the period divided by the number of retail or wholesale
(as the case may be) subscribers at the end of the period.
(6) Includes $12,235,000 of borrowings under the Credit Line. As of September
15, 1997, actual borrowings under the Credit Line were $12,385,000.
21
<PAGE>
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 of the Company and related notes thereto.
GENERAL
Since fiscal year-end 1994, substantially all of the Company's growth has
been through the acquisition of smaller alarm companies.
During the fiscal year ended June 30, 1995 ("Fiscal 1995"), the Company
consummated eight acquisitions, purchasing approximately 10,700 subscriber
accounts for an aggregate consideration of $5,218,944 in cash and 48,090 shares
of Common Stock.
During the fiscal year ended June 30, 1996 ("Fiscal 1996"), the Company
consummated 16 acquisitions, purchasing approximately 9,200 subscriber accounts
for an aggregate consideration of $5,638,637 in cash and 98,014 shares of Common
Stock. As part of the acquisitions, the Company also issued 5,000 shares of
Common Stock valued at $70,311 as payment of financing costs to the lender that
financed the acquisitions.
During the fiscal year ended June 30, 1997 ("Fiscal 1997"), the Company
consummated 14 acquisitions, purchasing approximately 5,300 subscriber accounts
for an aggregate consideration of $3,424,712 in cash and 8,334 shares of Common
Stock. 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. The Company
anticipates continuing its acquisition program which may subject the Company to
certain risks and uncertainties. In addition, the Company's financial
information for Fiscal 1997 reflects the Company's investment in a joint venture
with BKR, Inc. to form HealthLink in March 1997 (see Note 3 of Notes to
Consolidated Financial Statements of the Company). See "Risk Factors--Risk
Related to Growth Through Acquisitions."
In July 1996, the Company completed a restructuring of its long-term debt.
The Company obtained the $15,000,000 Credit Line from the Bank and issued
$7,500,000 of its Preferred Stock to institutional and individual domestic and
foreign investors. The proceeds were used to reduce the Company's long-term
indebtedness and resulted in a substantial decrease in the Company's interest
expense (see Notes 7 and 9 of Notes to Consolidated Financial Statements of the
Company).
A majority of the Company's revenues are derived from monthly 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 significantly
higher gross margins than do the other services provided by the Company.
The Company has significantly expanded its operations during the two years
ended June 30, 1997. Its alarm subscriber base has grown to over 25,000
customers and the Company's total account base is in excess of an aggregate of
48,000 alarm and PERS subscribers as of the date of this Prospectus.
22
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the components of the Company's revenues and
cost of revenues for the fiscal years ended June 30, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------
1995 1996 1997
----------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Product sales.............................. $ 4,520,062 48.4% $ 2,352,449 21.6% $ 2,938,618 23.1%
Monitoring and Service..................... 4,812,474 51.6% 8,515,247 78.4% 9,784,285 76.9%
------------ --------- ------------- --------- ------------- ---------
9,332,536 100.0% 10,867,696 100.0% 12,722,903 100.0%
------------ --------- ------------- --------- ------------- ---------
Cost of Revenues*:
Product sales.............................. 2,635,674 28.2% 1,718,689 15.8% 1,970,158 15.5%
Monitoring and Service..................... 1,125,123 12.1% 1,779,490 16.4% 2,127,257 16.7%
------------ --------- ------------- --------- ------------- ---------
Total Cost of Revenues..................... 3,760,797 40.3% 3,498,179 32.2% 4,097,415 32.2%
------------ --------- ------------- --------- ------------- ---------
Gross Profit............................... $ 5,571,739 59.7% $ 7,369,517 67.8% $ 8,625,488 67.8%
------------ --------- ------------- --------- ------------- ---------
------------ --------- ------------- --------- ------------- ---------
</TABLE>
- ------------------------
* As a percentage of total revenues
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996:
Operating revenues increased by $1,855,207, or 17.1%, for Fiscal 1997, as
compared to Fiscal 1996. Product sales increased by $586,169, or 24.9%, for
Fiscal 1997, as compared to Fiscal 1996. The increase in product sales was due
primarily to the sale of PERS to home health care agencies, private label
wholesalers and sales of electronic security systems to commercial customers.
The significant growth in monitoring and service revenues of $1,269,038, or
14.9%, for Fiscal 1997, as compared to Fiscal 1996, was due to the acquisition
of monitoring contracts and the success of the Company's extended warranty
program.
Gross Profit for Fiscal 1997 was $8,625,488, which represents an increase of
$1,255,971, or 17.0%, over the $7,369,517 of gross profit recognized in Fiscal
1996. The increase was due primarily to an increase in monitoring and service
revenues, and the success of the extended warranty program, which was concurrent
with the increase in the Company's subscriber base. The Gross Profit Margin
("GPM"), as a percentage of sales, was 67.8% for both Fiscal 1996 and Fiscal
1997. The GPM on product sales rose from 26.9% for Fiscal 1996 to 33.0% for
Fiscal 1997. The increase was due to increased revenues derived from the
installation of electronic security systems to commercial customers as opposed
to residential customers and the utilization of in-house labor in lieu of
subcontractors for the installation of electronic security systems. The GPM on
monitoring and service revenues decreased slightly to 78.3% for Fiscal 1997 from
79.1% for Fiscal 1996.
Selling, general and administrative expenses (excluding charges incurred for
legal fees in connection with the preferred stock litigation of $475,000, the
non-cash charge of $689,000 for consulting fees and the non-cash loss recognized
on available-for-sale securities of $218,000) grew to $7,744,641 for Fiscal
1997, which represents an increase of $1,328,155, or 20.7%, over selling,
general and administrative expenses for Fiscal 1996. Selling, general and
administrative expenses (excluding such charges and losses in the aggregate
amount of $1,382,000), as a percentage of total operating revenues, increased
slightly from 59.0% for Fiscal 1996 to 60.9% for Fiscal 1997. The increase in
selling, general and administrative expenses was due primarily to increases in
corporate overhead expenses incurred to assimilate newly acquired customers into
the Company's customer base and to support the larger subscriber base.
23
<PAGE>
On December 16, 1996, the Company granted to employees non-qualified stock
options at $.30 per share, expiring November 27, 2001, and, on June 27, 1997,
reduced the exercise price of options granted to certain officers and directors
of the Company from $4.50 to $.03 and, as a result thereof, the Company recorded
compensation expense of $2,032,200 for Fiscal 1997. In addition, the Company
recorded deferred compensation expense of $1,657,500 for Fiscal 1997, in
connection with two employment contracts with officers of USS. See Note 14 of
Notes to Consolidated Financial Statements of the Company.
Amortization and depreciation expenses increased by $775,539, from
$2,200,894 to $2,976,433 for Fiscal 1996 and Fiscal 1997, respectively. This
increase in amortization and depreciation expense is the result of the Company's
purchase of monitoring contracts totaling $4,168,525 and property and equipment
totaling $636,659 (including equipment held for lease of $150,000) during Fiscal
1997.
Interest expense decreased by $1,836,123, or 57.6%, for Fiscal 1997, as
compared to Fiscal 1996. In July 1996, the Company completed a restructuring of
its long-term debt. The Company obtained the $15,000,000 Credit Line from the
Bank and issued $7,500,000 of its Preferred Stock to institutional and
individual domestic and foreign investors. The proceeds of the financing were
utilized to reduce the Company's long-term indebtedness. The restructuring
resulted in an extraordinary charge of $2,549,708 for early extinguishment of
debt in Fiscal 1997.
Equity in loss of joint venture consists of the Company's share ($123,325)
of HealthLink's losses for Fiscal 1997.
The net loss applicable to common shareholders (net loss adjusted for
dividends and accretion on Preferred Stock) for Fiscal 1997 was $18,054,144, or
$(12.14) per share, based on 1,487,574 shares outstanding. The net loss for
Fiscal 1997, excluding the following nonrecurring charges: (i) loss on early
debt extinguishment of $2,549,708; (ii) compensation expense recognized from the
grant of stock options and from employment contracts of $3,689,700; (iii) legal
fees incurred in connection with the preferred stock litigation of $475,000;
(iv) the non-cash charge of $689,000 for consulting fees; and (v) loss realized
on available-for-sale securities of $218,000, was $3,556,215, or $(2.39) per
share, based on 1,487,574 shares outstanding, as compared to a net loss of
$4,411,898, or $(8.61) per share, based on 512,179 shares outstanding for Fiscal
1996. The net losses for Fiscal 1996 and Fiscal 1997 are attributable to
depreciation, amortization and interest expense totaling $5,386,497 and
$4,325,913, respectively. Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), excluding nonrecurring charges and the loss on the
HealthLink joint venture, was approximately $950,000 for Fiscal 1996, as
compared to approximately $880,000 for Fiscal 1997. The decrease was due
primarily to the write-down of inventory used to service outdated electronic
security systems acquired from other alarm dealers, and an increase in the
Company's provision for doubtful accounts, along with direct write-offs to bad
debt expense totaling approximately $830,000.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995:
The Company significantly expanded its operations for Fiscal 1996. Its alarm
subscriber base grew to over 21,000 customers, an increase of approximately
62.0% over the number of subscribers as of Fiscal 1995. The substantial increase
in operating revenues and monitoring service revenues resulted primarily from
acquisitions totaling over 9,200 monitoring accounts from other dealers and
companies, and the sale of the Company's PERS products to hospitals and home
health care agencies. The Company's account base totaled in excess of 45,000
monitoring subscribers as of June 30, 1996.
Operating revenues increased by $1,535,160, or 16.4%, for Fiscal 1996 as
compared to Fiscal 1995. Product sales decreased by $2,167,613, or 48.0%, for
Fiscal 1996 as compared to Fiscal 1995. The decline in product sales was due to
the Company's strategy of expanding primarily through the acquisition of
monitoring contracts, as opposed to direct sales of security systems. Sales of
electronic security systems decreased by approximately $2,500,000 for Fiscal
1996 as compared to Fiscal 1995. Revenues from the sale of PERS products
increased by approximately $300,000 for Fiscal 1996 as compared to Fiscal 1995.
The
24
<PAGE>
significant growth in monitoring and service revenues of $3,702,773, or 76.9%,
for Fiscal 1996, as compared to Fiscal 1995, was due to the acquisition of
monitoring contracts and the success of the Company's extended warranty program
and the acquisition of the Medical Alert Systems Monitoring Division of ERS in
November 1994.
Gross Profit for Fiscal 1996 was $7,369,517, which represents an increase of
$1,797,778, or 32.3%, over the $5,571,739 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 related to
the increase in the Company's subscriber base by approximately 9,200
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 monitoring and service revenues as a percentage of
total revenues from 51.6% in Fiscal 1995 to 78.4% in Fiscal 1996. The cost of
product sales rose from 58.3% for Fiscal 1995 to 73.1% for Fiscal 1996. An
increase in competition, including the advertisement of free security systems,
resulted in a lower average selling price for the Company's security systems,
causing a decline in the Gross Profit Margin in Fiscal 1996.
Selling, general and administrative expenses rose to $6,416,486 in Fiscal
1996, which represents an increase of $88,864, or 1.4%, over selling, general
and administrative expenses for Fiscal 1995. Selling, general and administrative
expenses, as a percentage of total operating revenues, declined from 67.8% for
Fiscal 1995 to 59.0% for Fiscal 1996. Sales and marketing expenses declined from
$2,000,000 for Fiscal 1995 to $700,000 for Fiscal 1996, a decrease of
$1,300,000, or 65.0%. 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 $4,327,622 in Fiscal 1995 to
$5,716,486 in Fiscal 1996, representing an increase of $1,388,864, or 32.1%. The
increase in general and administrative expenses was caused by increases in
corporate overhead expenses incurred to support a larger subscriber base.
Amortization and depreciation expenses increased by $898,686, or 69.0% from
$1,302,208 for Fiscal 1995 to $2,200,894 for Fiscal 1996. This increase in
amortization expense is the result of the Company's purchase of monitoring
contracts totaling $7,996,459.
Interest expense increased by $1,964,985, to $3,185,603 for Fiscal 1996,
from $1,220,618 for Fiscal 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. In July
1996, the Company obtained the $15,000,000 Credit Line from the Bank, of which
$10,500,000 was used to repay existing notes payable collateralized by
monitoring contracts.
In June 1994, an employee resigned and, pursuant to the severance agreement,
he was to receive annual compensation of $120,000 plus benefits through October
31, 1997. In connection with this severance agreement, a charge of $409,673 was
recorded as termination benefits for the fiscal year ended June 30, 1994,
representing the present value of the obligation based on an interest rate of
8.5%. During Fiscal 1995, the Company renegotiated this agreement, resulting in
a recovery of $392,699 of termination benefits cost.
In April 1994, the Company initiated a plan of restructuring designed to
reduce costs, improve operational efficiencies and increase overall future
profitability as the Company refocused 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 Fiscal 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 Fiscal 1996 was $4,411,898, or $(8.61) per share, based on
512,179 shares outstanding, as compared to a net loss for Fiscal 1995 of
$3,030,830, or $(15.07) per share, based on 201,064 shares outstanding. The net
loss for the period is attributable primarily to $5,384,497 in amortization and
interest
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expense related to the Company's acquisition of subscribers from other dealers
and increased selling, general and administrative expenses incurred in
connection with the expansion of the Company's subscriber monitoring account
base. EBITDA improved by approximately $1,500,000, to approximately $950,000 for
Fiscal 1996, as compared to a loss before interest, taxes, depreciation and
amortization of approximately $550,000 for Fiscal 1995.
ACCOUNTING DIFFERENCES FOR ACCOUNT PURCHASES AND NEW INSTALLATIONS
A difference 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. The costs of monitoring contracts (acquired
either through the Company's dealer program or through acquisition of subscriber
account portfolios) are capitalized and amortized over estimated lives ranging
from five to 10 years for alarm and PERS accounts. Included in capitalized costs
are certain acquisition 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 preacquisition
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 expenses 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. The
Company experiences attrition of subscriber accounts as a result of several
factors, including relocation of subscribers, adverse financial and economic
conditions and competition from other alarm service companies. In addition, the
Company may lose certain subscriber accounts, particularly subscriber accounts
acquired as part of an acquisition, if the Company does not service those
subscriber accounts successfully or does not assimilate such accounts into the
Company's operations. Gross subscriber attrition is defined by the Company for a
particular period as a quotient, the numerator of which is equal to the number
of subscribers who disconnect during such period, and the denominator of which
is the average of the number of subscribers at each month end during such
period. Net MRR attrition is defined by the Company for a particular period as a
quotient, the number of which is an amount equal to gross MRR lost as the result
of canceled subscriber accounts during such period, net of MRR during such
period (i) generated by increases in rates to existing subscribers, (ii)
resulting from the reconnection of premises previously occupied by subscribers
of the Company or of prior subscribers of the Company, (iii) resulting from
conversions and (iv) associated with canceled accounts with respect to which the
Company obtained an account guarantee, and the denominator of which is the
average month-end MRR in effect during such period. Although the Company
believes that its formulas of gross subscriber attrition and net MRR attrition
are similar to those used by other security alarm companies, there can be no
assurance that gross subscriber attrition and net MRR attrition, as presented by
the Company, are comparable to other similarly titled measures of other alarm
monitoring companies. During Fiscal 1997, the Company experienced gross
attrition of approximately 10.6% and net MRR attrition of approximately 10.4%.
LIQUIDITY AND CAPITAL RESOURCES
In July 1996, the Company completed a restructuring of its long-term debt.
The Company obtained the $15,000,000 Credit Line from the Bank and issued
$7,500,000 of Preferred Stock to institutional and individual domestic and
foreign investors. The proceeds of the financing were utilized to repay the
Company's long-term indebtedness and resulted in a substantial decrease in the
Company's borrowing costs. As of September 15, 1997, the Company has $2,615,000
available under the Credit Line. Amounts
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outstanding under the Credit Line bear interest at the Bank's prime rate, plus
1 3/4%. As of March 31, 1997 and June 30, 1997, the Company was not in
compliance with certain financial covenants under the Credit Line. The Company
subsequently entered into amendments to the Credit Line which amended the
covenants for the third and fourth quarters of the fiscal year ended June 30,
1997 such that the Company was then in compliance with the Credit Line. While
the Company believes that it will be able to maintain compliance with the
financial covenants under the Credit Line, there can be no assurance that the
Company will maintain compliance with such financial covenants, or that the
Company will be able to obtain necessary consents, waivers or amendments to the
Credit Line in the future. The restructuring resulted in an extraordinary charge
of $2,549,708 for early extinguishment of debt in Fiscal 1997. The Company's
working capital decreased by $6,991,428, from $5,967,623 to a working capital
deficiency of $1,023,805 at June 30, 1997, as compared to June 30, 1996. On June
30, 1996, the Company recorded a preferred stock subscription receivable for
$6,525,000, from 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.
With the proceeds received from the issuance of Preferred Stock on July 2, 1996
and $10,500,000 from the Credit Line, the Company paid off notes payable used to
finance its growth through acquisitions, with balances aggregating $12,235,000.
The Company believes its 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 $3,538,693 for Fiscal 1997, as
compared to $1,990,415 for Fiscal 1996 and $1,289,843 for Fiscal 1995. A net
loss of $11,177,623 (which included non-cash charges for depreciation and
amortization of $2,976,433, compensation expense in connection with the issuance
of stock options and employment contracts of $3,689,700 and an extraordinary
charge for the early extinguishment of debt of $2,549,708) was the primary
reason for cash used in operating activities. Other significant changes included
changes in inventory, accounts payable and accrued expenses, deferred revenues,
and loss on available-for-sale securities. The increase in inventory of $146,263
was attributable to an anticipated increase in future orders for PERS by both
private label wholesalers and home health care agencies. Accounts payable and
accrued expenses decreased by $582,205, primarily due to costs related to both
the Credit Line (see Note 7 of Notes to Consolidated Financial Statements of the
Company) and the issuance of Preferred Stock (see Note 9 of Notes to
Consolidated Financial Statements of the Company) having been accrued at June
30, 1996 and remitted in July 1997. Deferred revenue increased by $390,395 as a
result of the acquisition of subscriber accounts from other alarm dealers and
the continued success of the Company's extended warranty program. During Fiscal
1997, management concluded that a decline in the fair value of its available-for
sale securities was not temporary and therefore recorded a loss on such
securities of $218,000.
Net cash used in investing activities for Fiscal 1997 was $4,472,965, as
compared to $6,359,878 for Fiscal 1996 and $5,919,772 for Fiscal 1995. The
purchase of monitoring contracts during Fiscal 1997 accounted for $3,863,360 of
the cash used in investing activities. Other investing activities included costs
incurred in connection with the joint venture of $12,810, and the purchase of
property and equipment of $636,659 (including equipment used for rentals in the
amount of $150,000), which was offset by the proceeds from the sale of equipment
of $39,864.
Net cash provided by financing activities was $6,783,443 for Fiscal 1997, as
compared to $10,117,614 for Fiscal 1996 and $7,073,417 for Fiscal 1995. Net
proceeds of $6,487,551 were received from the issuance of Preferred Stock in
July 1996. Proceeds from the exercise of stock options and warrants totaled
$447,745. Net proceeds received from the Credit Line (see Note 7 of Notes to
Consolidated Financial Statements of the Company), along with the proceeds from
the Preferred Stock issuance totaling $21,700,000, were used to pay off notes
payable totaling $12,235,000 and for the purchase of monitoring contracts.
Principal payments on long-term debt, excluding notes payable paid off with the
Credit Line and Preferred Stock proceeds, totaling approximately $3,100,000,
were made during Fiscal 1997.
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Systems filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code in October 1987. Systems' Plan of Reorganization became
effective in February 1990 and provided for, among other things, long-term
payments to creditors totaling approximately $2,800,000. As of June 30, 1997,
deferred payment obligations to such pre-reorganization creditors totaled
$273,560, which is payable in varying installments through the year 2000.
The Company has no material commitments for capital expenditures during the
next 12 months and believes that its current cash and working capital position
and future cash flow from operations will be sufficient to meet its working
capital needs for 12 months. The Company intends to use borrowings under the
Credit Line to acquire monitoring contracts. Additional funds beyond those
currently available will 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 has a material effect on its
operations.
CERTAIN NON-CASH CHARGES
The Company may incur certain non-cash charges (i) of up to $900,000 for the
fiscal year ended June 30, 1998, as deferred compensation expense relating to
certain performance options granted to two officers of USS, based upon
fluctuations in the market price of the Common Stock, and (ii) for the fiscal
year ended June 30, 1998 in connection with the issuance of a certain
performance warrant issued to BKR, Inc. in connection with the Company's
investment in HealthLink, based upon the value of such warrant. See
"Management," "Business--HealthLink" and Notes 3 and 14 of Notes to Consolidated
Financial Statements of the Company. Such charges could have a material adverse
effect on the Company's results of operations.
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BUSINESS
GENERAL
The Company is a fully-integrated security systems provider engaged in the
monitoring, sale, installation and maintenance of residential and commercial
security systems and PERS. The Company is a regional provider of security alarm
monitoring services for residential and small business subscribers operating in
the states of New York, New Jersey, Pennsylvania, Delaware and Connecticut. The
Company is also a nationwide provider of PERS products which enable individual
users, such as elderly or disabled persons, to transmit a distress signal using
a portable transmitter. The Company currently has an aggregate of over 48,000
alarm and PERS subscribers for which it provides monitoring services. As a
result of the Company's acquisitions of subscriber account portfolios, the
Company's MRR has grown by 60%, to approximately $800,000 for the month ended
June 30, 1997, from approximately $500,000 for the month ended June 30, 1995.
According to a May 1997 report published by SDM, an organization which publishes
industry reports, as of December 31, 1996, the Company is the 31st largest
electronic security company in the United States, based on total revenues, and
the 25th largest electronic security company, based on recurring annual
revenues.
The Company's electronic security systems business utilizes electronic
systems installed in businesses and residences to provide (i) detection of
events such as intrusion or fire, (ii) surveillance and (iii) control of access
to property. The detection devices are monitored by the Monitoring Station. The
Monitoring Station personnel verify the nature of the emergency and contact the
appropriate emergency authorities in the user's area. 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.
The Company's PERS is an electronic device which is designed to monitor,
identify and electronically report emergencies requiring medical, fire or police
assistance, to help elderly, disabled and other individuals. When activated by
the pressing of a button, or automatically, in the case of certain environmental
temperature fluctuations, 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 the Monitoring Station which provides continuous monitoring
services. In addition, this signal establishes two-way voice communication
between the user and the Monitoring Station personnel directly through the PERS
unit, thereby avoiding any need for the user to access a telephone.
The electronic security services industry is highly fragmented and the
Company's strategy is to grow by acquisition, as well as by offering new
products and services. According to an industry report published in 1996, there
are approximately 12,000 separate security services companies nationally and,
according to the May 1997 SDM report, the electronic security industry generates
an aggregate of approximately $13 billion in revenues annually. The Company
believes that there is an industry-wide trend towards consolidation due, in
part, to the relatively high fixed costs of maintaining a centralized monitoring
station and the relatively low incremental cost of servicing additional
subscribers. The Company completed the acquisition of an aggregate of 38
subscriber account portfolios (a total of approximately 25,000 subscriber
accounts) during the three fiscal years ended June 30, 1997.
The Company has recently entered into an agreement with Triple A, pursuant
to which the Company would acquire substantially all of the assets of Triple A
upon the consummation of this offering. Triple A is engaged in the installation,
monitoring and servicing of residential and commercial alarm systems,
principally in northeastern Pennsylvania. Triple A currently services
approximately 14,000 subscriber accounts which are monitored by its central
monitoring station. In addition, the Company has entered into an agreement,
pursuant to which, if consummated, the Company would acquire approximately 2,000
additional subscribers. See "Business--Pending Acquisitions."
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In March 1997, the Company acquired a 50% interest in HealthLink. HealthLink
markets a low-cost PERS product containing basic one-way transmission features.
The HealthLink System is distributed nationally through retail stores, including
Target (808 stores), Long's Drugs, a west-coast regional chain (305 stores),
Fred Myer, a northwest regional chain (104 stores), Fry's, a southwest regional
chain (51 stores) and Bergen Brunswick's west-coast Good Neighbor Pharmacies
(429 stores), accounting for distribution through a total of approximately 1,700
stores as of the date of this Prospectus. The Company is negotiating with
several other chain stores to further increase distribution. The Company
provides monitoring and related services to HealthLink System customers, is
responsible for billing and collecting from such customers and receives a
portion of the recurring revenue as a fee for providing these services.
In November 1996, the Company entered into a two-year agreement granting it
the exclusive worldwide distribution rights within the health care industry to
WanderWatch,-TM- a monitoring system designed to assist in the care of patients
with Alzheimer's disease, autism, head injury, dementia or other diseases or
injuries which may involve memory loss. WanderWatch-TM- is similar to PERS,
except that the transmitter is designed to be continuously activated and
transmits a signal to the base unit. If the base unit does not receive the
requisite number of transmissions, it indicates that the patient may have
wandered outside the "safety range," and triggers an alarm in the home base
unit. If the alarm is not disabled, a signal is automatically transmitted to the
Monitoring Station, whose personnel will then place calls based upon a set
protocol established by the caregivers. The license agreement for
WanderWatch-TM- provides for automatic one-year renewals and the Company's
exclusive rights to the license are subject to forfeiture under certain
circumstances. WanderWatch-TM- is currently being test-marketed by the Company
and the Company does not anticipate commencing distribution of the product until
fiscal 1999.
The Company's revenues consist primarily of recurring payments under written
contracts for the monitoring and servicing of security systems and PERS
products. The Company currently monitors approximately 48,000 subscribers. For
the fiscal year ended June 30, 1997, monitoring and service revenues represented
76.9% of total 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. During the fiscal year ended June 30, 1997, the
Company's MRR grew by 60.0%, to approximately $800,000 from approximately
$500,000 for the fiscal year ended June 30, 1995. Total revenues have increased
during such period from $9,332,536 to $12,722,903, or 36.3%.
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 the Company provides and highly labor intensive manned guarding
and patrol services, which the Company does not currently provide, but will
provide upon the consummation of the acquisition of The Jupiter Group, Inc.
d/b/a Triple A Patrol ("Jupiter"). 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 (i) detection of
events such as intrusion or fire, (ii) surveillance, (iii) control of access and
(iv) 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. See "Business -- Pending Acquisitions."
The Company believes that the electronic security services industry is
characterized by the following attributes:
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- HIGH DEGREE OF FRAGMENTATION. The electronic security services industry is
comprised of a large number of local and regional companies and several
integrated national companies. The Company believes that, based on
industry studies, there are approximately 12,000 separate security
services companies nationally generating an aggregate of approximately $13
billion in revenues annually. A survey published by SDM magazine in May
1996 reported that, in 1995, based upon information provided by the
respondents, the 100 largest companies in the industry accounted for
approximately 23% of total industry revenues.
- TREND TOWARD CONSOLIDATION. The Company believes that because the central
station monitoring sector of the electronic industry has relatively high
fixed costs but relatively low incremental costs associated with servicing
additional subscribers, the industry offers significant opportunities for
consolidation. In addition, the Company believes that the fragmented
nature of the industry can be attributed to the low capital requirements
associated with performing basic installation and maintenance of
electronic security systems. However, the business of a full service,
integrated electronic security services company which provides central
station monitoring services is capital intensive, and the Company believes
that the high fixed costs of establishing both central monitoring stations
and full service operations contribute to the small number of national
competitors.
- CONTINUED PRODUCT DIVERSIFICATION AND INTEGRATION OF SERVICES. A recent
trend in the commercial electronic security services industry has been
increased integration of different types of products into single systems
provided by single vendors. The Company believes that this trend has
resulted from commercial needs for enhanced security services on a more
cost-effective basis. Whereas basic alarm systems were once adequate for
many businesses, it appears that many companies now require access control
and closed circuit television systems integrated into a single system to
provide for their overall security needs. A security system which provides
burglar and fire alarm monitoring along with closed circuit television and
access control, all integrated into one central system, not only provides
enhanced security services, but also is more cost-effective than four
separate systems installed by four separate vendors. The Company is
positioning itself to take advantage of this trend by expanding the
breadth of its electronic security service offerings.
- ADVANCES IN DIGITAL COMMUNICATIONS TECHNOLOGY. Prior to the development of
digital communications technology, alarm monitoring required a dedicated
telephone line, which made long-distance monitoring uneconomic.
Consequently, in order to achieve a national or regional presence, alarm
monitoring companies were required to maintain a large number of
geographically dispersed monitoring stations. The development of digital
communications technology eliminated the need for dedicated telephone
lines, reducing the cost of monitoring services to the subscriber and
permitting the monitoring of subscriber accounts over a wide geographic
area from a central monitoring station. The elimination of local
monitoring stations has decreased the cost of providing alarm monitoring
services and has substantially increased the economies of scale for larger
alarm service companies. In addition, the concurrent development of
microprocessor-based control panels has substantially reduced the cost of
the equipment available to subscribers in the residential and commercial
markets and has substantially reduced service costs because many
diagnostic and maintenance functions can be performed from a company's
office without having to send a technician to the customer's premises.
The Company believes that several factors contribute to a favorable market
for electronic security services generally in the United States:
- HIGH LEVEL OF CONCERN ABOUT CRIME. As violent crime and the reporting of
crime by the news media has increased, the perception by Americans that
crime is a significant problem has also grown. Concurrently, demand for
security systems has grown with greater awareness of risk management
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within the business community. In addition to the protection that
electronic detection and surveillance systems provide, the Company
believes that such systems also have a deterrent effect against crime.
- INSURANCE REQUIREMENTS AND PREMIUM DISCOUNTS. The increase in demand for
security systems may also be attributable, in part, to the requirement of
insurance companies that businesses install an electronic security system
as a condition of insurance coverage. The purchase of an electronic alarm
system often entitles the subscriber to obtain premium discounts as well.
In addition, in order to comply with many municipal fire codes, the
installation of an electronic fire system is required in many localities.
ELECTRONIC SECURITY SERVICES
MONITORED ELECTRONIC SECURITY SYSTEMS
The Company's electronically-monitored security systems involve the use on a
customer's premises of devices designed to detect or react to various
occurrences or conditions, 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
the Monitoring Station where alarm and supervisory signals are received and
recorded. Systems may also incorporate an emergency "panic button," which when
pushed causes the control 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 the Monitoring Station. Depending upon
the type of service for which the subscriber has contracted, Monitoring Station
personnel respond to alarms by relaying appropriate information to the local
fire or police departments, notifying the customer or taking other appropriate
action. As of June 30, 1997, the Company has approximately 25,000 alarm
subscribers for which it provides monitoring services. Of such alarm
subscribers, approximately 80% are residential and 20% are commercial.
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, residential customers are usually able to obtain more
favorable insurance rates if an electronically monitored security system is
installed in their home. Approximately 80% of the Company's 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 SYSTEMS. The Company 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. The
Company also markets standard security packages for specific types of commercial
customers. Certain commercial customers require more complex electronic security
systems. To meet this demand, the Company also sells integrated electronic
security systems that combine a variety of electronic security services and
products. These systems are integrated by the Company to provide a single
computer-controlled security system.
PRODUCTS
The Company 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
the Company the purchase price. When the system is leased, only an
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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 customers who purchase standard security
systems, which includes a fixed number of detection devices. Frequently,
customers add detection devices at an additional charge to expand the coverage
of the system. 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, the Company maintains a trained installation, service and
maintenance staff. These employees are trained by the Company to install and
service the various types of commercial and residential security systems which
the Company sells. The Company does not manufacture any of the components used
in its electronic security service business.
Installations of new alarm systems are performed promptly after the
completion of the sale of the account. After completing an installation, the
technician instructs the subscriber on the use of the system and furnishes a
written manual and, in many instances, an instruction video. Additional
follow-up instruction is provided by sales consultants in the branch offices on
an as-needed basis.
The increasing density of the Company's subscriber base as a result of the
Company's continuing strategy to "infill" its existing branch service areas with
new subscribers permits more efficient scheduling and routing of field service
technicians and results in economies of scale at the branch level. The increased
efficiency in scheduling and routing also allows the Company to provide faster
field service response and support, which leads to a higher level of subscriber
satisfaction.
The Company offers an extended one-year service protection plan which
provides that, for an additional fee, the Company will cover the normal costs of
repair and maintenance of its systems during normal business hours after the
expiration of the initial warranty period.
CONTRACTS
The Company's alarm monitoring subscriber contracts generally have initial
terms ranging from four 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 applicable 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 between $25 to $50 per month.
In the normal course of its business, the Company experiences customer
cancellations of monitoring and related services as a result of subscribers
relocating, 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
against account cancellations for a period following the acquisition.
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ELECTRONIC SECURITY SERVICES BUSINESS STRATEGY
THE ACQUISITION PROGRAM
The Company grows primarily by acquiring subscriber accounts 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 three years in completing 38
acquisitions. In addition, the Company has entered into agreements, pursuant to
which, if consummated, the Company would acquire an additional 16,000 subscriber
accounts.
During the fiscal year ended June 30, 1995, the Company consummated eight
acquisitions, purchasing approximately 10,700 subscriber accounts for an
aggregate consideration of $5,218,944 in cash and 48,090 shares of Common Stock.
During the fiscal year ended June 30, 1996, the Company consummated 16
acquisitions, purchasing approximately 9,200 subscriber accounts for an
aggregate consideration of $5,638,637 in cash and 98,014 shares of Common Stock.
As part of the acquisitions, the Company also issued 5,000 shares of restricted
Common Stock as payment of financing costs to the lender that financed the
acquisitions.
During the fiscal year ended June 30, 1997, the Company consummated 14
acquisitions, purchasing approximately 5,300 subscriber accounts for an
aggregate consideration of $3,424,712 in cash and 8,334 shares of Common Stock.
The Company anticipates continuing its acquisition program. 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. The Company is unable to predict the timing,
size or frequency of any acquisitions in the future. See "Risk Factors -- Risk
Related to Growth Through Acquisitions."
Since the Company's primary consideration in making an acquisition is the
amount of MRR that will be derived from such new subscribers, the price paid by
the Company is customarily based upon such MRR. 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, typically 9-18 months. The Company usually holds back from the
seller 10%-20% 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
primarily on management's knowledge of the industry, its due diligence
procedures, its experience integrating accounts into the Company's operations,
its assumptions 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: (i) the identification and negotiation stage; (ii) the due
diligence stage; and (iii) 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.
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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.
PENDING ACQUISITIONS
On July 31, 1997, the Company entered into an agreement with 4R Security,
Inc. ("4R Security") to acquire approximately 2,000 alarm monitoring subscriber
accounts and certain assets of 4R Security for a purchase price of approximately
$1,600,000, substantially all of which is payable in cash and a portion of which
is payable in stock, subject to certain adjustments and holdbacks. Since 4R
Security has filed for protection under the United States Bankruptcy Code, the
acquisition is conditioned upon the approval by the United States Bankruptcy
Court for the Eastern District of New York. Pursuant to the agreement, 4R
Security has agreed not to solicit or otherwise communicate with any customer
whose account was purchased by the Company for the purpose of inducing such
customer to discontinue its relationship with the Company. If the acquisition is
consummated, the Company will assume the balance of 4R Security's lease for its
premises in Patchogue, New York.
On September 30, 1997, the Company entered into an asset purchase agreement
with Triple A, pursuant to which the Company agreed to acquire substantially all
of the assets of Triple A for aggregate consideration of approximately
$12,500,000, including $10,000,000 payable in cash, approximately $1,750,000
payable in Common Stock of the Company, based on the lesser of market (as
defined) at closing or the price per share of Common Stock with respect to this
offering, and $750,000 in the assumption of liabilities of Triple A. The
purchase price is subject to adjustment at the closing under certain
circumstances. The closing of the acquisition is conditioned on the closing of
this offering, and the Company intends to utilize a portion of the proceeds from
this offering to consummate the acquisition. Triple A is engaged in the
installation, monitoring and servicing of residential and commercial alarm
systems, principally in northeastern Pennsylvania. Triple A currently services
approximately 14,000 subscriber accounts which are monitored by Triple A's
central monitoring station. As part of the acquisition, the Company has agreed
to enter into an employment agreement with Robert L. May, President and sole
stockholder of Triple A, on terms to be agreed upon by the parties.
The holder of all of the common stock of Triple A is the owner of 80% of the
common stock of Jupiter. In connection with the Triple A acquisition, on
September 30, 1997, the Company entered into an agreement to acquire all of the
outstanding stock of Jupiter, a patrol service company. Jupiter's patrol
services are principally supplied in areas in which the Company believes that
Triple A is a substantial provider of security systems services. The patrol
service supplements the Company's alarm monitoring service by providing routine
patrol of a subscriber's premises and neighborhood, response to alarm system
activations and "special watch" services, such as picking up mail and newspaper
and increased surveillance when the customer is on vacation.
Jupiter also offers "dedicated" patrol service to homeowners' associations
in selected markets, for which Jupiter provides a marked car for patrol
exclusively in such association's neighborhood. The Company believes that
offering such services will enable it to increase sales of the Company's alarm
monitoring services within such neighborhoods. The acquisition involves a line
of business in which the
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Company has no previous experience and may involve risks and uncertainties which
are unknown to the Company. See "Risk Factors--Risk Related to Growth Through
Acquisitions."
DEALER PROGRAM
The Company recently commenced a dealer program (the "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 the
Company's alarm monitoring agreements, and install the Company's yard signs and
window decals. In addition, the Company evaluates the credit history of the
prospective new subscriber prior to purchase from the dealer. The Company is
currently purchasing approximately 75 accounts per month through its Dealer
Program and anticipates an expansion of this program during its next fiscal
year.
PATIENT MONITORING SERVICES
PERS INDUSTRY
The personal emergency response industry generally consists of companies
that provide technological support services to 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 products. 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.
PERS PRODUCTS AND MONITORING SERVICES
PRODUCTS. The Company's PERS is designed to monitor, identify and
electronically report emergencies requiring medical, fire and police assistance.
The PERS unit consists of two basic components: (i) 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 (ii) 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 the Monitoring
Station in the event of fire, and a medical/police hand-held transmitter that
transmits a medical or police distress signal to the Monitoring Station. Both
the pendant and medical/police hand-held transmitter send a medical distress
signal to the 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
environmental control which detects temperature fluctuations, a cancel function
to avoid false alarms, an alternative power source, which allows the system to
remain functional in the event of a generalized power failure, and a special
transmitter designed for use by handicapped persons. 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
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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 products 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 150 feet), which
in turn translates the radio signal and automatically dials the Monitoring
Station using a toll-free telephone number. Once telephone contact is made with
the Monitoring 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 unit, 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, 1997, the Company has
approximately 23,000 PERS 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 products cannot be
programmed to permit the customer to utilize a competitor's monitoring service.
The Company provides all of its PERS users with a 24-hours-per-day, 365
days-per-year monitoring service. The monthly charge for monitoring services
paid by the subscriber is approximately $28. 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 per 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 contracted Euclid,
Ohio facility.
SALES AND MARKETING
The Company sells its PERS products in the United States directly to
consumers through referrals by affiliated hospitals and through franchisees and
private label re-sellers (principally home alarm companies). In Canada, the
Company's PERS products are marketed exclusively by a Canadian distributor.
Until 1991, substantially all PERS products were sold through franchisees,
although the sale of new franchises was discontinued in 1987. Currently, the
Company's direct sales are generated principally by the Company's home health
care division, which commenced operations in March 1991. The following is a
summary of the Company's current and proposed 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 August 31, 1997,
approximately 80 franchisees had paid their franchise renewal fee for the 1998
fiscal 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 products 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 advertising and promotional materials, accessories and supplies to
its franchisees pursuant to a published price list.
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HOME HEALTH CARE DIVISION. In March 1991, the Company established a home
health care division to market PERS products to hospitals and home health care
agencies. Hospitals and home health care agencies may either purchase or
lease/purchase PERS products 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 home health care 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. The Company has
entered into agreements with the Philadelphia Corporation on Aging and the
municipality of Los Angeles, Department of Aging, pursuant to which the Company
provides PERS and monitoring services to clients of such entities.
PRIVATE LABEL PROGRAMS. The Company also supplies PERS products for vendors
under product names owned by the vendors. Currently, sales under these programs
are limited. Currently, all of the Company's private label vendors provide 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 products consist
of electronic components which are obtained from several suppliers. The
sub-contractor also purchases molded plastic, printed circuit boards and
miscellaneous hardware from several sources. The Company believes that the
required electronic components are not unique to a particular vendor and that
other sources could be obtained, although some delay in production might result
if it were necessary to find new sources for electronic components.
HEALTHLINK
HealthLink is a 50% joint venture between the Company and BKR, Inc.
HealthLink was formed in March 1997 to distribute the HealthLink System through
retail pharmacies. In connection with its investment in HealthLink, the Company
issued 364,722 shares of Common Stock to BKR, Inc. and issued a
performance-based warrant, expiring March 3, 2002, to BKR, Inc., entitling it to
purchase up to 10,000 shares of Common Stock for each 10,000 PERS products sold
by HealthLink at an exercise price of $9.00 per share up to a maximum of 150,000
shares of Common Stock. HealthLink's distribution has grown from 58 stores in
the fourth quarter of 1996 to approximately 1,700 stores as of the date of this
Prospectus. To date, HealthLink has sold and shipped approximately 3,300 systems
to such stores. HealthLink is currently available in Target (808 stores)
nationwide, Long's Drugs (305 stores), Fry's (51 stores), Fred Myer (104 stores)
and in 429 Bergen Brunswick's west-coast Good Neighbor Pharmacies.
The HealthLink System is designed as a low-cost PERS for use by senior
citizens. The HealthLink System has a suggested retail price of $129.95 in most
stores, and provides monitoring revenue to HealthLink of approximately $23 per
month. The HealthLink System is manufactured by a third-party foreign
manufacturer. The Company provides monitoring and related services to HealthLink
System customers, is responsible for billing and collecting from such customers
and receives a portion of the recurring revenue as a fee for providing these
services.
WANDERWATCH-TM-
On November 22, 1996, the Company entered into a two-year agreement granting
the Company the exclusive worldwide distribution rights within the health care
industry to WanderWatch-TM-, a wandering compliance monitoring system designed
for use in home health care and assisted living facility environments. The
WanderWatch-TM- system is designed to provide around-the-clock monitoring of
patients that suffer from Alzheimer's disease, autism, dementia, head injury or
other diseases or injuries which may
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involve memory loss. The WanderWatch-TM- system consists of a wireless ankle
transmitter that sends a radio frequency transmission to a base unit, usually
located centrally in a home. If the base unit does not receive a requisite
number of transmissions within a 60-second interval, it indicates that the
patient may have wandered outside of the "safety range" and triggers a loud
beeping alarm in the base unit. If the alarm is not disabled within 60 seconds,
a signal is automatically transmitted to the Monitoring Station. The license
agreement for WanderWatch-TM- provides for automatic one-year renewals, provided
that neither party has notified the other that it has failed to comply with the
terms of the agreement within 60 days prior to the expiration of any such
renewal term. In addition, the Company's exclusive rights to the license are
subject to forfeiture in the event that the Company fails to achieve certain
targeted annual sales increases of WanderWatch-TM- and fails to use reasonable
efforts to fully and effectively promote the sale of WanderWatch-TM-. In such
event, the Company's license of WanderWatch-TM- would become non-exclusive. The
agreement also contains certain non-competition provisions which restrict the
right of both parties to produce products which could be considered directly
competitive with WanderWatch-TM-. The agreement provides for an initial license
fee payable by the Company, a per-unit purchase price payable by the Company and
a per-unit percentage of the monthly recurring revenue received from
WanderWatch-TM-, subject to a certain maximum fee for recurring revenues.
Approximately 2,800,000 patients are afflicted with Alzheimer's disease and
are being cared for in their homes. Alzheimer's disease is a progressive,
degenerative disease of the brain, and the most common form of dementia. There
are approximately four million people afflicted with Alzheimer's disease in the
United States. Approximately one in ten persons over the age of 65, and nearly
half of the people over the age of 85, have Alzheimer's disease. Over 70% of
Alzheimer's patients live at home. An Alzheimer's patient will live an average
of eight years and as many as 20 years or more from the onset of symptoms. The
WanderWatch-TM- system will be offered to the caregivers (I.E., family members
and professional caregivers) on a monthly rental basis. Additionally,
WanderWatch-TM- will be offered through the Company's existing distribution
network of home health care companies, hospitals, visiting nurse associations
and various governmental agencies. WanderWatch-TM- is currently being
test-marketed by the Company, and the Company does not anticipate commencing
distribution of the product until fiscal 1999.
MONITORING STATION
In April 1994, the Company entered into an agreement with Emergency Response
Center, Inc. ("ERC"), owner of the Monitoring Station, expiring in April 2000.
The agreement automatically renews for successive one-year terms unless either
party gives the other written notice of termination not later than six months
prior to the end of the then current term of the agreement. Pursuant to the
agreement, in consideration for providing monitoring services and electronic
data base storage for the Company, ERC receives monitoring service fees based
upon the number of subscribers it services and certain other start-up and
maintenance costs. Upon consummation of the Triple A acquisition, the Company
will own Triple A's monitoring station, located in Wilkes-Barre, Pennsylvania,
which will continue to provide monitoring services to Triple A customers.
GOVERNMENTAL REGULATION
The Company's operations are subject to a variety of federal, state, county
and municipal laws, regulations and licensing requirements. Many of the states
in which the Company operates, as well as certain local authorities, require the
Company to obtain licenses or permits to conduct a security alarm services
business. Certain governmental entities also require persons engaged in the
security alarm services business to be licensed and to meet certain standards in
the selection and training of employees and in the conduct of business. The
Company believes that it holds the required licenses and is in substantial
compliance with all licensing and regulatory requirements in each jurisdiction
in which it operates.
The security alarm industry is also subject to the oversight and
requirements of various insurance, approval, listing and standards
organizations. Adherence to the standards and requirements of such
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organizations may be mandatory or voluntary depending upon the type of customer
served, the nature of security service provided and the requirements of the
local governmental jurisdiction. The Company has not had any material
difficulties in complying with such standards and requirements in the past.
The Company's electronic security business relies on the use of telephone
lines and radio frequencies to transmit signals and to communicate with field
personnel. The cost of such lines and the type of equipment which may be
utilized in telephone line transmissions are regulated by both the federal and
state governments. The operation and utilization of radio frequencies are
regulated by the Federal Communications Commission and state public utilities
commissions. The Company's PERS products are regulated by the Federal Food and
Drug Administration.
The Company's advertising and sales practices are regulated by both the FTC
and state consumer protection laws. Such regulations include restrictions on the
manner in which the Company promotes the sale of its products and the obligation
of the Company to provide purchasers of its products with certain rescission
rights. While the Company believes that it has complied with these regulations
in all material respects, there can be no assurance that none of these
regulations were violated in connection with the solicitation of the Company's
existing subscriber accounts, particularly with respect to accounts acquired
from third parties, or that no such violations will occur in the future.
The Company believes that approximately 97% of alarm activations that result
in the dispatch of police or fire department personnel are not emergencies, and
thus are "false alarms." Significant concern has arisen in certain
municipalities about this high incidence of false alarms. This concern could
cause a decrease in the likelihood or timeliness of police response to alarm
activations and thereby decrease the propensity of consumers to purchase or
maintain alarm monitoring services.
A number of local governmental authorities have considered or adopted
various measures aimed at reducing the number of false alarms. Such measures
include (i) subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms, (ii) licensing individual alarm systems and the
revocation of such licenses following a specified number of false alarms, (iii)
imposing fines on alarm subscribers for false alarms, (iv) imposing limitations
on the number of times the police will respond to alarms at a particular
location after a specified number of false alarms and (v) requiring further
verification of an alarm signal before the police will respond. Enactment of
such measures could adversely affect the Company's future business and
operations.
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 and by the FTC. 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.
RISK MANAGEMENT
The nature of the services provided by the Company potentially exposes it to
greater risks of liability for employee acts or omissions, or system failures,
than may be inherent in many other service businesses. To reduce those risks,
substantially all of the Company's customers have subscriber agreements which
contain provisions for limited liability and predetermined liquidated damages to
customers and indemnification by customers against third-party claims; however,
some jurisdictions prohibit or restrict limitations on liability and liquidated
damages. The Company carries insurance of various types, including general
liability and errors and omissions insurance to insure it from liability arising
from acts or omissions of its employees. The Company's general and umbrella
liability insurance policies combined provide up to
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$10,000,000 of coverage, depending on the nature of claims. Certain of the
Company's insurance policies and the laws of some states may limit or prohibit
insurance coverage for punitive or certain other kinds of damages arising from
employee misconduct. In addition, in some states the contractual limitation of
liability and indemnification provisions may be ineffective in cases of gross
negligence or intentional misconduct and in certain other situations.
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 with a
deductible of $50,000 per occurrence payable by the Company. 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.
INTELLECTUAL PROPERTY
The Company owns a federal trademark registration for the trade name
"Response Ability" and holds a license for the names "WanderWatch" and
"HealthLink." The Company believes that its rights in these trademarks are of
unlimited duration and adequately protected by registration or applications to
register. In addition, the Company relies on trade secret and other laws to
protect its proprietary rights in its security systems and programs. No
assurance can be given that the Company will be able to successfully enforce or
protect its rights to its trademarks or proprietary information in the event
that any of them is subject to third-party infringement or misappropriation. The
Company's central monitoring operations utilize proprietary software which the
Company has licensed from a third party.
SUPPLIERS, MANUFACTURING AND ASSEMBLY
The Company currently has multiple sources of supply for the components used
in the electronic security and PERS products that it designs and installs. The
Company does not manufacture any of the products that it designs and installs,
or any of the components thereof. The Company's products are assembled from such
components by third-party contract assemblers. The Company believes that a
variety of alternative sources of supply are available on reasonable terms.
However, the Company has no guaranteed supply arrangements with its suppliers
and purchases components pursuant to purchase orders placed from time to time in
the ordinary course of business. There can be no assurance that shortages of
components will not occur in the future. Failure of sources of supply and the
inability of the Company to develop alternative sources of supply if required in
the future could have a material adverse effect on the Company's operations.
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.
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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, a division of Tyco, International, Borg-Warner Security Corporation
(under the Wells Fargo and Pony Express brand names), a division of Honeywell,
Inc., Brinks Home Security, a division of The Pittston Company, SecurityLink by
Ameritech and Protection One, Inc.
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 units
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.
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 products. 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 products. The
Company believes that it competes favorably as to all of these factors.
EMPLOYEES
At October 1, 1997, the Company employed 137 full-time employees. Of this
number, 14 are engaged in sales, 8 in quality control, 44 in field service and
installation, 27 in customer service, 16 in acquisition assimilation and 28 in
administration. None of the Company's employees are represented by a labor
union, and the Company considers its employee relations to be satisfactory.
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) 1,100 square feet in Wilmington, Delaware, for use
as a sales and installation facility, at an annual rental of $14,400, which
lease expires in February 1998, after which the Company has a one-year renewal
option on the same terms and conditions; (ii) 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; (iii) 5,000 square feet for its
inventory, storage and testing facility in Florida, which is adjacent to the
Company's third-party assembler, at an annual rental of $19,200, which lease
expires in March 1999; and (iv) 2,900 square feet in Allentown, Pennsylvania,
for use as a sales and installation facility, at an annual rental of $24,000,
which lease expires in November 1998, after which the Company has two, one-year
renewal options on the same terms and conditions.
The Company believes that its current facilities are adequate for its needs.
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LEGAL PROCEEDINGS
The Company experiences routine litigation in the normal course of its
business. 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.
In February 1996, the Company consented to the issuance of an Order
Instituting Proceedings pursuant to the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and Findings and Order of
the Securities and Exchange Commission (the "Finding"), without admitting or
denying allegations of facts contained therein. In July 1993, the Company sold
20,000 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 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 certain consent decrees and regulations involving its continuing
relationship with franchisees.
43
<PAGE>
MANAGEMENT
The current executive officers and directors of the Company are set forth
below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Richard M. Brooks(1)................ 48 Chief Executive Officer, President, Chief Financial Officer and
Chairman of the Board
Ronald A. Feldman................... 34 Vice President, Chief Operating Officer, Secretary-Treasurer and
Director
Todd E. Herman...................... 43 Director, President of USS
Robert M. Rubin(1).................. 57 Director
Stuart Levin........................ 37 Director
Bruce H. Luehrs(1)(2)............... 44 Director
Stuart R. Chalfin(1)(2)............. 56 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Stock Option Committee
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. Under the Credit Line, the Bank is entitled to cause the Company to
nominate one person to the Company's Board of Directors. Bruce H. Luehrs is
currently the Bank's nominee. 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
Administration in June 1970 from Temple University, and graduated from Temple
University 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
President 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.
TODD E. HERMAN has been a Director of the Company since February 1995 and
President of USS 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.
ROBERT M. RUBIN has been a Director of the Company since October 1991. Mr.
Rubin has served as Chairman of Connectsoft Communications Corporation, a
developmental stage company, since June 1997. Mr. Rubin has also served as
Chairman of the Board of Directors of American United Global, Inc.
44
<PAGE>
("AUGI") since May 1991, and was its Chief Executive Officer from May 1991 to
January 1994. Since January 1996, Mr. Rubin has also served as President and
Chief Executive Officer of AUGI. 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 late 1987. Olsten, a New York
Stock Exchange listed company, is engaged in providing home care and
institutional staffing services and health care management services. Mr. Rubin
is Chairman of the Board and a minority stockholder of ERD Waste Technology,
Inc. ("ERD"), a diversified waste management public company specializing in the
management and disposal of municipal solid waste, industrial and commercial
non-hazardous waste and hazardous waste. In September 1997, ERD filed for
protection under Chapter 11 of the United States Bankruptcy Code. Mr. Rubin is a
former director and Vice Chairman, and currently a minority stockholder, of
American Complex Care, Incorporated ("ACCI"), a public company formerly engaged
in providing on-site health care services, including intra-dermal infusion
therapies. In April 1995, ACCI's operating subsidiaries made an assignment of
their assets for the benefit of creditors without resort to bankruptcy
proceedings. Mr. Rubin is also the Chairman of the Board of Western Power &
Equipment Corp. ("Western") and Chairman of the Board of IDF International, Inc.
("IDF"), both public companies. Western, a 56.6%-owned subsidiary of AUGI, is
engaged in the distribution of construction equipment, principally manufactured
by Case Corporation. IDF, a 58%-owned subsidiary of AUGI, is engaged in
providing construction consulting services to businesses and municipalities and
site acquisition, architectural and engineering services for the cellular
communications industry. Mr. Rubin is also a director and a minority stockholder
of Diplomat Corporation, a public company engaged in the manufacture and
distribution of baby products.
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 home health care division, since
April 1994. Prior to October 1991, Mr. Levin held management positions with
Tandy Corporation, and was the President of W.A.S., Inc., a food distribution
company. Mr. Levin attended Temple University from 1978 to 1980.
BRUCE H. LUEHRS has been a Director of the Company since September 1997.
Mr. Luehrs has an extensive background in venture capital, mergers and
acquisitions and commercial and investment banking. In September 1996, Mr.
Luehrs formed Penn Valley Capital ("PVC"), which provides advisory services to
companies in transition due to periods of rapid growth or financial difficulty.
From July 1995 to September 1996, Mr. Luehrs was a principal with Columbia
Capital Corporation, a merchant bank focusing on the telecommunications
industry. From June 1992 to July 1995, Mr. Luehrs served as Executive Vice
President and Chief Financial Officer of Seaview Thermal Systems, a
technology-driven environmental services company. From February 1990 through
March 1992, Mr. Luehrs was a principal of PNC Equity Management, an equity fund
affiliated with PNC Corporation. Mr. Luehrs received his undergraduate degree in
economics from Duke University and his Masters in Management from Northwestern
University.
STUART R. CHALFIN has been a Director of the Company since September 1997.
Since 1975, Mr. Chalfin has been a principal of Fishbein & Company, P.C.,
independent public accountants, where he specializes in advising closely held
businesses and professionals. Mr. Chalfin is affiliated with the Committee on
Relations with Colleges and Universities and the Linda Creed Foundation and is a
member of the American Institute of Certified Public Accountants.
EMPLOYMENT AND CONSULTING AGREEMENTS
Mr. Brooks and Mr. Feldman each have employment agreements, expiring June
30, 2000, to act in the capacities listed above for the Company. Such agreements
provide for initial annual base salaries of $225,000 and $150,000, respectively.
The Credit Line provides that the salaries and bonuses received by Messrs.
Brooks and Feldman in any fiscal year shall not exceed $225,000 and $150,000,
respectively. Under
45
<PAGE>
their employment agreements, Messrs. Brooks and Feldman also receive life
insurance, disability, hospitalization, major medical, vacation and other
employee benefits, reimbursement of reasonable business expenses incurred on
behalf of the Company, a non-accountable expense allowance of up to $1,000 per
month, in the case of Mr. Brooks, and $500 per month, in the case of Mr.
Feldman, and use of Company-owned vehicles. The employment agreements are
terminable only upon certain circumstances, such as for cause, disability and
death, and if terminated for any other reason, such employees shall be entitled
to receive the present value of all compensation and benefits through June 30,
2000. The Company maintains and is the beneficiary of key person life insurance
policies in the amount of $3,000,000 and $1,000,000 on the lives of Messrs.
Brooks and Feldman, respectively.
In addition to cash compensation and other benefits, in connection with
amendments to their employment agreements executed in August 1992, Messrs.
Brooks and Feldman received options to purchase 44,445 and 28,356 shares of
Common Stock, respectively, at a price equal to $11.25. These options are
exercisable until November 14, 2004. Messrs. Brooks and Feldman also received
options to purchase 200,000 and 66,667 shares of Common Stock, respectively,
awarded under the Company's Non-Qualified Stock Option Plan. In November 1995,
the exercise price on Messrs. Brooks' and Feldman's options were reduced to the
prevailing market price of $7.50 and subsequently reduced to $4.50 on June 15,
1997 and to $0.03 on June 27, 1997. During February 1996, Messrs. Brooks and
Feldman both exercised options to purchase 8,334 shares of Common Stock.
Mr. Herman and John Colehower have employment agreements with USS, expiring
March 4, 1999, to act as President and Treasurer of USS and Vice President of
USS, respectively. Such agreements provide for an initial base salary of
$120,000, and may be increased at the discretion of the Board of Directors of
the Company, as well as certain additional payments and benefits based upon
increases in the Company's subscriber accounts. As a result of such additional
payments made to Messrs. Herman and Colehower, the Company recorded deferred
compensation expenses of $1,657,500. Under their employment agreements, Messrs.
Herman and Colehower also receive life insurance, disability, hospitalization,
major medical, vacation and other employee benefits. The employment agreements
are terminable only upon certain circumstances, such as for cause, disability
and death or, for any other reason, upon 90 days' written notice.
In addition to cash compensation and other benefits, Messrs. Herman and
Colehower received options to purchase 100,000 shares each of Common Stock at an
exercise price of $4.50. These options were subject to a vesting schedule, which
schedule has been accelerated such that all of such options are fully vested.
Robert M. Rubin, a Director of the Company, has performed consulting
services for the Company in the past. In February 1993, Mr. Rubin was issued a
warrant to purchase 1,667 shares of Common Stock at $15.00 per share, in
consideration of services to the Company. The exercise price of such warrant was
subsequently reduced to $.024 per share and the warrant was exercised. In
September 1994, Mr. Rubin was granted options to purchase 1,667 shares of Common
Stock at the prevailing market price of $2.4375, which options were exercised.
In February 1995, Mr. Rubin was granted options to purchase 50,000 shares of
Common Stock at a price of $11.25 per share, which options are exercisable for a
period of ten years. In November 1995, Mr. Rubin was granted options to purchase
50,000 shares of Common Stock at the prevailing market price of $7.50 and in
November 1995, the exercise price of Mr. Rubin's options granted in February
1995 were reduced to the prevailing market price of $7.50. (See Note 10 of Notes
to Consolidated Financial Statements of the Company). On June 27, 1997, the
exercise price of all of Mr. Rubin's options was reduced to $0.03. On October 1,
1994, Mr. Rubin entered into a consulting agreement with the Company pursuant to
which he was paid an annual consulting fee of $60,000 for a period of two years.
The agreement was terminated on April 30, 1996, at which time Mr. Rubin
converted outstanding loans in the amount of $200,000 into 84,208 shares of
Common Stock and converted subordinated debentures in the amount of $101,329
into 67,553 shares of Common Stock. See "Management" and "Principal
Stockholders."
46
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
services in all capacities paid by the Company to its Chief Executive Officer
and each executive officer whose annual compensation exceeded $100,000 (the
"Named Executive Officers") during fiscal 1995, 1996 or 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------------------------------
--------------------------------------------------- SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING LONG-TERM
NAME AND PRINCIPAL BONUS COMPENSATION STOCK OPTIONS/ INCENTIVE PLAN
POSITION YEAR SALARY ($) ($) ($)(1) AWARD(S) SARS (#) PAYOUTS
- ------------------ --------- ----------- ------------- ----------------------- ------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard M. Brooks, 1997 $ 220,673 -- -- -- 236,111(2) --
President, Chief 1996 $ 217,980 -- -- -- -- --
Executive 1995 $ 175,003 -- -- -- -- --
Officer and
Chief Financial
Officer
Ronald A. Feldman, 1997 $ 137,307 -- -- -- 86,689(2) --
Chief Operating 1996 $ 135,654 -- -- -- -- --
Officer, 1995 $ 106,495 -- -- -- -- --
Vice President,
Secretary
and Treasurer
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL COMPENSATION
POSITION ($)
- ------------------ ---------------------
<S> <C>
Richard M. Brooks, --
President, Chief --
Executive --
Officer and
Chief Financial
Officer
Ronald A. Feldman, --
Chief Operating --
Officer, --
Vice President,
Secretary
and Treasurer
</TABLE>
- ------------------------
(1) Excludes perquisites and other personal benefits, securities and properties
otherwise categorized as salary or bonuses which in the aggregate, for each
of the Named Executive Officers did not exceed the lesser of either $50,000
or 10% of the total annual salary reported for such person.
(2) Such options were originally granted in prior periods; however, on June 15,
1997, the Company reduced the exercise price of such options from $7.50 per
share to $4.50 per share. On June 27, 1997, the Company further reduced the
exercise price of such options from $4.50 per share to $0.03 per share. See
"Management -- Reduction of Exercise Price of Certain Stock Options."
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 13,334 shares of
Common Stock have been reserved for issuance under the ISO Plan, all of which
shares have been granted as of the date of this Prospectus. The ISO Plan is
administered 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 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
Common Stock. Options expire no later than 10 years after they are granted (five
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
47
<PAGE>
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 OPTION PLAN
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 3,453
shares of Common Stock were reserved for issuance under the NQO Plan, all of
which shares have been granted as of the date of this Prospectus. Options shall
terminate six months after the optionee ceases to be employed by the Company or
any subsidiary, regardless of the cause for termination.
REDUCTION OF EXERCISE PRICE OF CERTAIN STOCK OPTIONS
On June 15, 1997, the Company reduced the exercise price of options to
purchase 622,800 shares of Common Stock granted to officers, directors and a key
employee of the Company, from $7.50 to $4.50, or the prevailing market price. On
June 27, 1997, the Company further reduced the exercise price of options to
purchase 422,800 shares of Common Stock granted to certain officers and
directors of the Company, from $4.50 to $0.03, which resulted in a compensation
expense of $1,889,916.
1997 STOCK OPTION PLAN
In October 1997, the Board of Directors of the Company adopted the 1997
Plan. The 1997 Plan is subject to approval by the Company's stockholders at the
next annual meeting of stockholders, which is expected to take place in November
1997.
The 1997 Plan provides for the grant of options to purchase up to, but not
in excess of, 500,000 shares of Common Stock to key employees, including but not
limited to officers, directors, agents, consultants and independent contractors
of the Company or any parent or subsidiary of the Company (excluding members of
the Administrator (as defined in the 1997 Plan)). Options may be either
"incentive stock options" within the meaning of Section 422 of the Code, or
non-qualified options. Incentive stock options may be granted only to employees
of the Company or a subsidiary of the Company, while non-qualified options may
be issued to non-employee directors, as well as to employees of the Company or
its subsidiary.
The 1997 Plan is administered by a committee selected by the Board of
Directors (the "Administrator"), which determines, among other things, those
individuals who receive options, the time period during which the options may be
exercised, the number of shares of Common Stock issuable upon the exercise of
each option and the option exercise price. Pursuant to the 1997 Plan, the
Administrator determines, among other things, those individuals who receive
options, the time period during which the grants will be made, the number of
shares of Common Stock to be granted and the price (if any) to be paid by such
key employees therefor.
The exercise price per share of Common Stock subject to an incentive option
may not be less than the fair market value per share of Common Stock on the date
the option is granted. The per share exercise price of the Common Stock subject
to a non-qualified option may be established by the Administrator. If the
aggregate fair market value (determined as of the date the option is granted) of
Common Stock for which any person may be granted incentive stock options which
first become exercisable in any calendar year exceeds $100,000, such stock
option shall be treated, to the extent of such excess, as an option which does
not qualify as an incentive stock option. No person who owns, directly or
indirectly, at the time of the granting of an incentive stock option to such
person, 10% or more of the total combined voting power of all classes of stock
of the Company (a "10% Shareholder") shall be eligible to receive any incentive
stock options under the 1997 Plan unless the exercise price is at least 110% of
the fair market value of the shares of Common Stock subject to the option,
determined on the date of grant. Non-qualified options are not subject to such
limitation.
48
<PAGE>
No stock option may be transferred by an optionee other than by will or the
laws of descent and
distribution, and, during the lifetime of an optionee, the option will be
exercisable only by the optionee. In the event of termination of employment
other than by death, retirement, permanent and total disability, unless extended
by the Administrator on or before such employee's date of termination of
employment, the optionee will have no more than three months after such
termination during which the optionee shall be entitled to exercise all or any
part of such employee's option, unless otherwise determined by the
Administrator. Upon termination of employment of an optionee by reason of death,
retirement, permanent or total disability, such optionee's options remain
exercisable for one year thereafter to the extent such options were exercisable
on the date of such termination.
Options under the 1997 Plan must be issued within 10 years from the
effective date of the Plan. The effective date of the 1997 Plan is September
1997. Incentive stock options granted under the 1997 Plan cannot be exercised
more than 10 years from the date of grant. Incentive stock options issued to a
10% Shareholder are limited to five-year terms. All options granted under the
1997 Plan provide for the payment of the exercise price in cash or check or by
delivery to the Company of shares of Common Stock already owned by the optionee
having a fair market value equal to the exercise price of the options being
exercised, or by a combination of such methods, or by such other methods
approved by the Administrator pursuant to the 1997 Plan. Therefore, an optionee
may be able to tender shares of Common Stock to purchase additional shares of
Common Stock and may theoretically exercise all of such optionee's stock options
with no additional investment other than the purchase of the original shares.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the 1997 Plan.
To date, no options have been granted under the 1997 Plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted to or
held by the Named Executive Officers during the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- ------------------------------------------- ------------------- --------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Richard M. Brooks.......................... 236,111(1) 42.1% $ .03 11/14/04
Ronald A. Feldman.......................... 86,689(1) 15.4% $ .03 11/14/04
</TABLE>
- ------------------------
(1) Such options were originally granted in prior periods; however, on June 15,
1997, the Company reduced the exercise price of such options from $7.50 per
share to $4.50 per share. On June 27, 1997, the Company further reduced the
exercise price of such options from $4.50 per share to $0.03 per share. See
"Management -- Reduction of Exercise Price of Certain Stock Options."
49
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth certain information regarding stock options
exercised by the Named Executive Officers during the fiscal year ended June 30,
1997, as well as the number of exercisable and unexercisable in-the-money stock
options and their values at fiscal year end. An option is in-the-money if the
fair market value for the underlying securities exceeds the exercise price of
the option.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXERCISED OPTIONS THE-MONEY OPTIONS
AT FY-END AT FY-END
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ----------------------------------------------- ----------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Richard M. Brooks
President, Chief Executive Officer
and Chief Financial Officer.................... 0 0 236,111/0 $ 1,586,666/0
Ronald A. Feldman
Chief Operating Officer,
Vice President, Secretary
and Treasurer.................................. 0 0 86,689/0 $ 582,550/0
</TABLE>
- ------------------------
(1) The value of unexercised options is determined by multiplying the number of
options held by the difference between the closing price of the Common Stock
of $6 3/4 at June 30, 1997 (as adjusted to reflect the anticipated
one-for-three reverse stock split), as reported by the Nasdaq SmallCap
Market, and the exercise price of the options.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of the date of this
Prospectus, based upon 2,198,863 shares of Common Stock outstanding and as
adjusted to reflect the sale of 2,400,000 shares of Common Stock (after giving
effect to the anticipated one-for-three reverse stock split) by the Company in
this offering regarding the beneficial ownership of the Company's Common Stock
by (i) all persons known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each director and executive officer of the Company
and (iii) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING STOCK
OWNED(3)
----------------------------------
<S> <C> <C> <C>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL
OF BENEFICIAL OWNER(2) OWNERSHIP(1) BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------------- ------------------------ ----------------- ---------------
Richard M. Brooks(4).................................... 236,772 9.7% 4.9%
Ronald A. Feldman (5)................................... 87,356 3.8% 1.9%
Robert M. Rubin (6)..................................... 177,694 7.7% 3.8%
Stuart Levin (7)........................................ 4,834 * *
Todd E. Herman (8)...................................... 100,658 4.4% 2.1%
BKR, Inc................................................ 126,667 5.8% 2.8%
Kenneth Stickney........................................ 198,055 9.0% 4.3%
Bruce H. Luehrs......................................... 334 * *
Stuart R. Chalfin....................................... -0- * *
Executive Officers and Directors as a group (seven
persons) (9).......................................... 607,648 22.3% 11.9%
</TABLE>
- ------------------------
* Less than one percent.
(1) For purposes of the above table, a person or group of persons is deemed to
have "beneficial ownership" of any shares that such person or group has the
right to acquire within 60 days after such date; and for purposes of
computing the percentage of outstanding shares held by each person or group
on a given date, such shares are deemed to be outstanding, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
Beneficial ownership is determined in accordance with Rule 13d-3 under the
Exchange Act, and is generally determined by voting power and/or investment
power with respect to securities. Except as indicated by footnote, and
subject to community property laws where applicable, the Company believes
that the persons named in the table above have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned
by them.
(2) The address for the referenced individuals who beneficially owns 5% or more
of the outstanding Common Stock of the Company is c/o Response USA, Inc.,
11-H Princess Road, Lawrenceville, New Jersey, except for Robert M. Rubin,
whose address is 9450 Aegean Drive, Boca Raton, Florida 33496, BKR, Inc.,
whose address is 7944 East Beck Lane, Suite 210, Scottsdale, Arizona 85260,
and Kenneth Stickney, whose address is 7944 East Beck Lane, Suite 210,
Scottsdale, Arizona 85260.
(3) Individual percentages have been rounded to the nearest 0.1%.
(4) Includes 236,111 shares issuable upon exercise of currently exercisable
options. See "Management -- Employment and Consulting Agreements."
(5) Includes 86,689 shares issuable upon exercise of currently exercisable
options. See "Management -- Employment and Consulting Agreements."
(6) Mr. Rubin's wife and children own 1,840 shares of Common Stock, as to which
Mr. Rubin disclaims beneficial ownership. Includes 100,000 shares issuable
upon exercise of currently exercisable options. See "Management--Employment
and Consulting Agreements."
(7) Includes 4,834 shares issuable upon exercise of currently exercisable
options.
(8) Includes 100,000 shares issuable upon exercise of currently exercisable
options. See "Management-- Employment and Consulting Agreements."
(9) Includes 527,634 shares issuable upon exercise of currently exercisable
options referred to in notes 4, 5, 6, 7 and 8 above.
51
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as described under "Management" and "Executive Compensation," the
Company has not engaged in any transactions with individuals who, at the time of
such transaction, were officers, directors, principal stockholders or affiliates
thereof during the three fiscal years ended June 30, 1997.
DESCRIPTION OF SECURITIES
The following summary description of the Company's capital stock and
selected provisions of its Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by reference to the Company's Certificate of
Incorporation and Bylaws, copies of which have been filed with the Securities
and Exchange Commission (the "Commission") as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue up to 12,500,000 shares of Common Stock,
par value $.008 per share, of which 2,198,863 shares are outstanding as of the
date hereof. Holders of Common Stock are entitled to one vote for each share
held of record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of preferred stock which may from time to time be outstanding, if any,
holders of Common Stock are entitled to receive ratably, dividends when, as, and
if declared by the Board of Directors out of funds legally available therefor
and, upon the liquidation, dissolution or winding up of the Company, are
entitled to share ratably in all assets remaining after payment of liabilities
and payment of accrued dividends and liquidation preferences on the preferred
stock, if any. Holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any other securities. The outstanding
Common Stock is validly authorized and issued, fully paid and nonassessable. The
stockholders of the Company will vote on a proposed amendment to the Company's
Certificate of Incorporation to increase the authorized number of Common Stock
to 37,500,000 at their annual meeting, which is expected to take place in
November 1997.
PREFERRED STOCK
The Company is authorized to issue up to 239,430.42 shares of preferred
stock, par value $1,000 per share. The preferred stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by stockholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion rights, redemption
rights and sinking fund provisions. The issuance of any such preferred stock
could adversely affect the rights of the holders of Common Stock and, therefore,
reduce the value of the Common Stock. The ability of the Board of Directors to
issue preferred stock could discourage, delay or prevent a takeover of the
Company. See "Risk Factors -- Delaware Anti-Takeover Statute; Limitation of
Liability of Directors and Officers; Possible Adverse Effects Associated with
the Issuance of 'Blank Check' Preferred Stock."
SERIES A CONVERTIBLE PREFERRED STOCK
In May 1996, the Company authorized the issuance of 7,500 shares (of which
5,890 shares remain outstanding as of the date hereof) 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 Stock is convertible into a number of shares of Common
Stock 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 $15.00 or 80% of
the average closing bid price of Common Stock for the five days immediately
preceding the date of conversion. Up to 50% of the Preferred Stock was
convertible commencing 45 days after issuance, and the balance was
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convertible commencing 70 days after issuance. After June 1, 1999, the Company
may require conversion. The Preferred Stock has an aggregate liquidation
preference of $7,362,500 plus the cumulative 10% deemed dividend.
In January and February 1996, certain holders of the Preferred Stock
commenced litigation against the Company, challenging, among other things, the
Company's decision to suspend conversion rights and seeking, among other things,
specific performance under the Certificate of Designations to convert their
Preferred Stock to Common Stock of the Company.
Prior to June 30, 1997, the Company reached an agreement (the "Settlement
Agreement") with the holders (the "Holders") of the Preferred Stock (other than
Halifax Fund, LP ("Halifax")), pursuant to which the Holders agreed to refrain
from all conversions of the Preferred Stock for specified periods, and the
Company agreed to issue to the Holders of the Preferred Warrants as described
below and to amend (subject to stockholder approval, which is expected to take
place in November 1997) the terms of the Preferred Stock by the filing of an
Amended and Restated Certificate of Designation (the "Amendment").
Pursuant to the terms of the Settlement Agreement, on June 26, 1997, each
Holder received 5,000 Preferred Warrants for each 100 shares of Preferred Stock
held as of June 26, 1997, an aggregate of 114,833 Preferred Warrants. The
Preferred Warrants, which are not redeemable by the Company, are exercisable at
a price per share of $6.00 and entitle the holder thereof to purchase one share
of Common Stock per Preferred Warrant. Of such Preferred Warrants, 50% are
exercisable after June 30, 1998 and the remaining 50% of the Preferred Warrants
are exercisable after June 30, 1999. The Preferred Warrants expire after June
30, 2006.
In consideration of the issuance of the Preferred Warrants, and subject to
the terms and conditions set forth in the Settlement Agreement, each Holder
agreed (a) to give its proxy and its consent in favor of the Amendment and (b)
to refrain from any and all conversions of such Holder's Preferred Stock,
pursuant to the terms of the original Certificate of Designation, until the
earlier of November 30, 1997 or upon the occurrence of defaults on certain dates
("Trigger Dates"). If the Company fails to comply with the Trigger Dates, the
Holder's right to convert its Preferred Stock shall be activated if and only if
a majority of the Holders as of such Trigger Date have collectively provided
appropriate written notice exercising such right. The Trigger Dates are
comprised of the following: (i) the filing with the Commission of a Proxy
Statement on or before July 10, 1997 (which filing was completed); (ii) the
mailing of a definitive proxy statement to the Company's stockholders for the
Stockholders' Meeting on or before August 4, 1997 (subject to extension in the
event the Commission conducts a review of this Proxy Statement); (iii) the
filing by the Company of a registration statement on Form S-3 or other
appropriate form, with respect to the registration for resale of the shares
issuable upon exercise of the Preferred Warrants and other shares of Common
Stock issuable to the Holders, on or before August 21, 1997; (iv) the filing by
the Company of the Amendment and an amendment to the Company's Certificate of
Incorporation to increase the Company's authorized Common Stock to at least
37,500,000 shares, on or before September 18, 1997 (subject to extension in the
event the Commission conducts a review of this Proxy Statement); (v) the filing
by the Company of a registration statement with the Commission for the primary
issuance by the Company of securities to generate approximately $8,750,000 of
net proceeds for use by the Company to redeem all of the Preferred Stock (the
"Preferred Registration Statement"), on or before October 1, 1997 (subject to
the expiration of a 10-day cure period; and (vi) upon such applicable date as
the Company abandons or withdraws the Preferred Registration Statement prior to
the Preferred Registration Statement being declared effective for use by the
Company on or before November 30, 1997. To date, the Company has complied with
all Trigger Dates.
The Amendment gives the Company the right to redeem the Preferred Stock
("Redemption") for payment of the following to the Holders: (i) cash in an
amount equal to One Thousand Three Hundred Fifty Dollars ($1,350) per share of
Preferred Stock (the "Redemption Price"); and (ii) interest at a rate of
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<PAGE>
twelve percent (12%) per annum on the Redemption Price from May 12, 1997 until
consummation of the Redemption.
The Amendment provides that the suspension of conversion rights would no
longer be effective and the right to convert the Preferred Stock shall be
effective commencing on and after November 30, 1997, in accordance with the
terms set forth in the Amended and Restated Certificate of Designations. In
addition, pursuant to the Settlement Agreement, effective as of June 18, 1997,
each Holder agreed to refrain from conversions of the Preferred Stock until the
earlier of November 30, 1997 or certain other specified dates.
On June 30, 1997, the Company agreed to convert 1,000 shares of Preferred
Stock owned by Halifax and issued to Halifax 300,000 shares of the Company's
Common Stock and concluded the Settlement Agreement with the Holders. The
Company assisted in locating EC Capital, Inc., a market maker in the Company's
securities as a purchaser for the Common Stock received by Halifax upon
conversion of its Preferred Stock. Halifax's Common Stock was purchased for an
aggregate price of $1,500,000, comprised of $1,350 per share for each share of
Preferred Stock, plus $150,000 for reimbursement of attorneys' fees. The Company
issued to Halifax 5,000 Class C Warrants for each 100 shares of Preferred Stock
held by Halifax. In the event that the Company settles with any other Holder of
Preferred Stock on terms which Halifax in its sole discretion believes are
better than those received by Halifax in the settlement, Halifax has the right
to elect the alternative settlement. Upon the consummation of this offering, the
Company intends to utilize funds available under the Credit Line to redeem the
Preferred Stock which, based upon an assumed redemption date of November 30,
1997, would have an aggregate redemption price of approximately $8,475,000.
SERIES B PREFERRED STOCK
In September 1997, the Company authorized the issuance of 3,069.58 shares
(all of which shares remain outstanding as of the date hereof) of 1997 Series B
Preferred Stock with a par value of $.01 per share. The holders of the Series B
Preferred Stock are not entitled to receive dividends and have no voting rights.
Each share of the Series B Preferred Stock is convertible at any time into 100
shares of Common Stock, subject to adjustment under certain circumstances.
CLASS A WARRANTS
The Company currently has outstanding publicly-traded Class A Warrants to
purchase up to 411,127 shares of Common Stock at an exercise price of $7.50 per
share at any time until October 22, 1998. Each holder thereof is entitled to
purchase one share of Common Stock for each nine Class A Warrants and payment of
$7.50. The Class A Warrants contain anti-dilution provisions providing for
adjustment of the exercise price and the number of shares of Common Stock
underlying the Class A Warrants upon the occurrence of certain events. The Class
A Warrants are redeemable by the Company, upon proper notice, at a redemption
price of $.30 per share, until October 1998, after a period of at least ten
consecutive business days on which the closing high bid price for the Common
Stock as reported on the Nasdaq SmallCap Market, or, the closing sales price, if
the Common Stock is listed on an exchange or reporting system that provides last
sales prices, equals or exceeds 120% of the then current exercise price of the
Class A Warrants.
CLASS B WARRANTS
The Company currently has outstanding publicly-traded Class B Warrants to
purchase up to 493,983 shares of Common Stock at an exercise price of $9.75 per
share at any time until October 22, 1998. Each holder thereof is entitled to
purchase one share of Common Stock for each nine Class B Warrants and payment of
$9.00. The Class B Warrants contain anti-dilution provisions providing for
adjustment of the exercise price and the number of shares of Common Stock
underlying the Class B Warrants upon the
54
<PAGE>
occurrence of certain events. The Class B Warrants are redeemable by the Company
upon the same terms as the Class A Warrants.
CLASS C WARRANTS
The Company currently has outstanding Class C Warrants to purchase up to
16,567 shares of Common Stock at an exercise price of $10.00 per share at any
time until January 15, 2000. The Class C Warrants contain anti-dilution
provisions providing for adjustment of the exercise price and the number of
shares of Common Stock underlying the Class C Warrants upon the occurrence of
certain events. The Class C Warrants were issued in connection with a private
financing by the Company.
PREFERRED WARRANTS
The Company currently has outstanding Preferred Warrants to purchase up to
114,833 shares of Common Stock at an exercise price of $6.00 per share at any
time until June 25, 2007. The Company issued such Preferred Warrants in
connection with the settlement with the Holders. The Preferred Warrants contain
anti-dilution provisions providing for adjustment of the exercise price and the
number of shares of Common Stock underlying the Preferred Warrants upon the
occurrence of certain events. The Preferred Warrants also entitle the holders to
certain "piggyback" registration rights with respect to the shares issuable upon
exercise thereof at any time that the Company files a registration statement
other than one relating solely to the sale of securities to participants in a
Company employee benefit plan, one not including substantially the same
information as would be required to be included in a registration statement
covering the sale of such Common Stock, or one only registering Common Stock
issuable upon conversion of convertible debt securities which are also being
registered.
REPRESENTATIVE'S WARRANTS
In connection with this offering, the Company has agreed to issue to the
Representative the Representative's Warrants. The Representative's Warrants will
be exercisable, at a price equal to 110% of the public offering price, for a
period of four years commencing one year after the closing of this offering. The
Representative and their designees are entitled to certain registration rights
under the Securities Act relating to the shares of Common Stock received upon
the exercise of the Representative's Warrants. The Representative's Warrants may
not be sold or transferred during the first year after issuance, except to
persons who are officers of the Representative or by operation of law. The
exercise price and the number of shares of Common Stock that may be purchased
are subject to adjustment pursuant to anti-dilution provisions of the
Representative's Warrants.
TRANSFER AGENT
American Registrar and Transfer Co., Salt Lake City, Utah, is the Transfer
Agent for the Company's Common Stock and registrar for the Company's
publicly-traded warrants.
DIRECTORS' LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation includes provisions which
eliminate the personal liability of directors for monetary damages resulting
from breaches of their fiduciary duty (except for liability for breaches of the
duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, violations under Section
174 of the DGCL or for any transaction from which the director derived an
improper personal benefit). The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
Section 145 of the DGCL permits indemnification by a corporation of certain
officers, directors, employees and agents.
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The Company's Bylaws provide that the Company will indemnify each of its
directors and officers with respect to all liability and loss suffered and
expenses incurred by such person in any action, suit or proceeding in which such
person was or is made or threatened to be made a party or is otherwise involved
by reason of the fact that such person is or was a director or officer of the
Company. The Company is also obligated to pay the expenses of the directors and
officers incurred in defending such proceedings, subject to reimbursement if it
is subsequently determined that such person is not entitled to indemnification.
The Company maintains a policy of insurance under which the directors and
officers of the Company will be insured, subject to the limits of the policy,
against certain losses arising from claims made against such directors and
officers by reason of any acts or omissions covered under such policy in their
respective capacities as directors or officers, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to Section 203 of the DGCL ("Section 203"), which,
subject to certain exceptions and limitations, prohibits a Delaware corporation
from engaging in any "business combination" with any "interested stockholder"
for a period of three years following the date that such stockholder became an
interested stockholder, unless: (i) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (for the purposes of determining the number of shares outstanding
under the DGCL, those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer are excluded from the
calculation); or (iii) on or subsequent to such date, the business combination
is approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
For purposes of Section 203, a "business combination" includes (i) any
merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested stockholder; (iii)
subject to certain exceptions, any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the receipt
by the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have outstanding
4,598,863 shares of Common Stock, of which the 2,400,000 shares offered hereby
will be freely tradeable without restriction or further registration under the
Securities Act. Approximately an additional 2,091,600 shares of Common Stock are
also freely tradeable. The remaining approximately 107,263 shares of Common
Stock are "restricted securities" (as that term is defined in Rule 144 under the
Securities Act) and in the future may only be sold pursuant to a registration
statement under the Securities Act, in compliance with the exemption provisions
of Rule 144 or pursuant to another exemption under the Securities Act.
Commencing approximately 12 months following the date of this Prospectus,
substantially all of these restricted securities would become eligible for sale
in the public market pursuant to Rule 144. The beneficial owners of 602,480
shares of Common Stock (including shares of Common Stock issuable upon exercise
of outstanding options) have agreed not to sell such shares for a period of 12
months after this offering without the consent of the Representative.
In general, under Rule 144, as currently in effect, a person (including a
person who may be deemed an "affiliate" of the Company as that term is defined
under the Securities Act) who has beneficially owned such shares for at least
one year would be entitled to sell within any three-month period a number of
shares beneficially owned for at least one year that do not exceed the greater
of (i) 1% of the then outstanding shares of Common Stock or (ii) the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are further subject to certain
restrictions relating to the manner of sale, notice and the availability of
current public information about the Company. After two years have elapsed from
the date of the issuance of restricted securities by the Company or their
acquisition from an affiliate, such shares may be sold without limitation by
persons who have not been affiliates of the Company for at least three months.
The sale, or availability for sale, of substantial amounts of Common Stock
in the public market subsequent to this offering pursuant to Rule 144 or
otherwise could materially adversely affect the market price of the Common Stock
and could impair the Company's ability to raise additional capital through the
sale of its equity securities or debt financing.
The holders of the Representative's Warrants will have certain demand and
"piggyback" registration rights with respect to the shares of Common Stock
underlying such warrants, commencing one year after the effective date of this
offering. In addition, the holder of 107,263 shares of Common Stock issued upon
exercise of a warrant and the holders of the Preferred Warrants have demand and
"piggyback" registration rights. See "Underwriting."
If the Representative should exercise registration rights to effect the
distribution of the securities underlying the Representatives' Warrants, it will
be unable to make an active market in the Company's securities prior to and
during such distribution. If it ceases making a market in the Common Stock, the
market and market prices for the Common Stock may be materially adversely
affected, and holders thereof may be unable to sell or otherwise dispose of the
Common Stock. See "Description of Securities" and "Underwriting."
No prediction can be made as to the effect, if any, that sales of such
securities, or the availability of such securities for sale, will have on the
market prices prevailing from time to time for the Common Stock. However, even
the possibility that a substantial number of the Company's securities may, in
the near future, be sold in the public market may adversely affect prevailing
market prices for the Common Stock and could impair the Company's ability to
raise capital through the sale of its equity securities. See "Shares Eligible
For Future Sale" and "Underwriting."
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell an aggregate of 2,400,000 shares of Common Stock
to the Underwriters named below, for whom Hampshire Securities Corporation is
acting as the Representative, and the Underwriters have severally agreed to
purchase the number of shares of Common Stock set forth opposite their
respective names in the table below at the offering price, less underwriting
discounts set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Hampshire Securities Corporation...............................................................
-----------------
Total...................................................................................... 2,400,000
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase the shares of Common Stock is subject to certain conditions. The
Underwriters are committed to purchase all of the shares of the Common Stock
(other than those covered by the over-allotment option described below), if any
are purchased.
The Underwriters propose to offer the Common Stock to the public initially
at the public offering price set forth on the cover page of this Prospectus, and
to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, discount
not in excess of $ per share; and the Underwriters may allow, and such
dealers reallow, a concession of not more than $ per share to certain
other dealers. After this offering, the public offering price, the concession to
selected dealers and the reallowance to other dealers may be changed by the
Representative.
The Company has agreed to pay the Representative a non-accountable expense
allowance equal to 3% of the gross proceeds received by the Company from the
sale of the 2,400,000 shares of Common Stock offered hereby, of which $50,000
has already been paid. The Company has also agreed to pay certain of the
Underwriters' expenses in connection with this offering, including expenses in
connection with qualifying the shares offered hereby for sale under the laws of
such states as the Underwriters may designate and the placement of tombstone
advertisements. The Company has also granted to the Representative and its
designees, for nominal consideration, warrants to purchase from the Company up
to 240,000 shares of Common Stock at an exercise price per share equal to 110%
of the public offering price per share. The Representative's Warrants may not be
sold, transferred, assigned, pledged or hypothecated for 12 months from the date
of this Prospectus, except to members of the selling group. The Representative's
Warrants contain anti-dilution provisions upon the occurrence of certain events,
including stock dividends, stock splits and recapitalizations, and grant
registration rights to the holders thereof at the expense of the Company, at the
request of the holders of a majority thereof (on no more than one occasion)
during the four-year period beginning on the first anniversary of the date of
this Prospectus and "piggyback" registration rights (on no more than one
occasion). The Company has also granted to the Representative a right of first
refusal to act as the Company's investment banker with respect to future
financings or any merger, acquisition or disposition of assets of the Company
for a period of two years from the date of this Prospectus. In addition, the
Company and any stockholders of the Company owning in excess of 5% of the
Company's Common Stock have granted the Representative the right to sell, for a
period of 18 months from the date of this Prospectus, any securities sold by the
Company or such stockholders. See "Description of Securities -- Representative's
Warrants."
The Company has also granted to the Underwriters, exercisable for 45 days
from the date of this Prospectus, an option to purchase up to 360,000 additional
shares of Common Stock at the public offering price less the underwriting
discount. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase additional shares of
Common Stock proportionate to such Underwriter's initial commitment as indicated
in the preceding table. The Underwriters shall exercise
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such right of purchase only for the purpose of covering over-allotments, if any,
made in connection with the sale of the shares of Common Stock.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company, its directors and officers, and certain stockholders of the
Company, beneficially owning an aggregate of 602,480 shares of Common Stock
prior to the offering (including shares of Common Stock issuable upon exercise
of outstanding options), have agreed with the Underwriters not to publicly sell
or otherwise dispose of any of their shares of Common Stock or securities
exercisable for or convertible into shares of Common Stock for a period of 12
months after the date of the Prospectus without the prior written consent of the
Representative.
In connection with this offering, certain Underwriters may engage in passive
market-making transactions in the Common Stock on the Nasdaq SmallCap Market
immediately prior to the commencement of sales in this offering, in accordance
with Rule 103 under Regulation M. Passive market-making consists of displaying
bids on the Nasdaq SmallCap Market limited by the bid prices of independent
market makers for a security and making purchases of a security which are
limited by such prices and effected in response to order flow. Net purchases by
a passive market maker on each day are limited to a specified percentage of the
passive market maker's average daily trading volume in the Common Stock during a
specified prior period and must be discontinued when such limit is reached.
Passive market-making may stabilize the market price of the Common Stock at a
level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
During and after the Offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the Offering for their
account may be reclaimed by the syndicate if such shares are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock
which may be higher than the price that might otherwise prevail in the open
market. Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued at any time.
OBSERVER TO THE BOARD
In connection with this offering, the Company has agreed that, until the
third anniversary of the date of this Prospectus, the Representative may appoint
an observer to attend all meetings of the Company's Board of Directors. The
observer will be entitled to reimbursement of reasonable and accountable out-of-
pocket expenses for attendance at those meetings. In addition, the observer will
be entitled to indemnification to the same extent as the Company's directors.
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LEGAL MATTERS
The validity of the shares offered hereby and certain other legal matters
will be passed upon for the Company by Squadron, Ellenoff, Plesent & Sheinfeld,
LLP, New York, New York. Certain legal matters in connection with the offering
will be passed upon for the Underwriters by Morrison Cohen Singer & Weinstein,
LLP, New York, New York.
EXPERTS
The financial statements of the Company included in this Prospectus as of
and for the year ended June 30, 1997 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of the Company included in this Prospectus as of
and for the years ended June 30, 1996 and 1995 have been audited by Fishbein &
Company, PC, independent auditors, as stated in their report appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Triple A included in this Prospectus as of and
for the years ended December 31, 1996 and 1995 have been audited by Terry H.
Jones, CPA, independent auditor, as stated in his report appearing herein, and
are included in reliance upon the report of such person given upon his authority
as an expert in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files periodic reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, NW, Washington, DC 20549, and at the Commission's Regional Offices at 7
World Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Electronic filings made via EDGAR
are publicly available through the Commission's Web site at http://www.sec.gov.
Copies of such material can be obtained from the Public Reference Section of the
Commission, Room 1024, 450 Fifth Street, NW Washington, DC 20549 at prescribed
rates. In addition, reports and other information concerning the Company may be
inspected at the offices of the NASD, 1735 K Street, NW, Washington, DC 20006.
The Company has filed with the Commission a Registration Statement on Form
SB-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act, with respect to the Common
Stock offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement which may be examined without charge
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, NW, Washington, DC 20549. Copies thereof may be obtained from
the Commission upon payment of the prescribed fees. Statements contained in this
Prospectus as to the contents of any contract or document referred to herein are
not necessarily complete, and in each instance reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement or
such other document, each such statement being qualified in all respects by such
reference.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
RESPONSE USA, INC. AND SUBSIDIARIES
Independent Auditors' Report for the Fiscal Year Ended June 30, 1997....................................... F-2
Independent Auditors' Report for the Fiscal Years Ended June 30, 1995 and June 30, 1996.................... F-3
Consolidated Balance Sheets at June 30, 1996 and June 30, 1997............................................. F-4
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 1995, June 30, 1996 and June 30,
1997..................................................................................................... F-6
Consolidated Statement of Stockholders' Equity for the Fiscal Years Ended June 30, 1995, June 30, 1996 and
June 30, 1997............................................................................................ F-7
Consolidated Statement of Cash Flows for the Fiscal Years Ended June 30, 1995, June 30, 1996 and June 30,
1997..................................................................................................... F-8
Notes to Consolidated Financial Statements................................................................. F-12
TRIPLE A SECURITY SYSTEMS, INC.
Independent Auditors' Report............................................................................... F-32
Balance Sheets at December 31, 1996 and December 31, 1995.................................................. F-33
Statements of Income and Retained Earning for the Years Ended December 31, 1996 and December 31, 1995...... F-34
Statements of Cash Flows for the Years Ended December 31, 1996 and December 31, 1995....................... F-35
Notes to Financial Statements.............................................................................. F-36
RESPONSE USA, INC. AND SUBSIDIARIES
Unaudited Pro Forma Financial Statements................................................................... F-44
Unaudited Pro Forma Condensed Consolidated Balance Sheet at June 30, 1997.................................. F-45
Unaudited Condensed Consolidated Statement of Operations for the Fiscal Year Ended June 30, 1997........... F-46
Notes to Unaudited Pro Forma Financial Statements.......................................................... F-47
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of Response USA, Inc.:
We have audited the accompanying consolidated balance sheet of Response USA,
Inc. as of June 30, 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement presents fairly, in all material
respects, the financial position of the Company as of June 30, 1997 and the
results of its operations and cash flows for the year then ended, in conformity
with generally accepted accounting principles.
Philadelphia, Pennsylvania
November , 1997
The accompanying financial statements reflect a one-for-three reverse split
of Common Stock, which is to be effected prior to the effective date of this
Registration Statement, which is expected to be on or about November ,
1997. The above report is in the form which will be signed by Deloitte & Touche
LLP upon consummation of such reverse split, which is described in Note 16 of
Notes to Consolidated Financial Statements of the Company and, assuming that
from October 8, 1997 to the date of such reverse split, no other events shall
have occurred that would affect the accompanying financial statements and notes
thereto:
Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 8, 1997
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholders and Directors
Response USA, Inc. and Subsidiaries
Lawrenceville, New Jersey
We have audited the consolidated balance sheet of RESPONSE USA, INC. AND
SUBSIDIARIES as of June 30, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended June 30, 1996. These consolidated financial statements 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 accepted 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
misstatement. 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 provides 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.
As discussed in Note 9, the Company has retroactively reclassified an amount
from the preferred stock account into additional paid-in capital. In addition,
the financial statements give effect to the one-for-three reverse stock split
described in Note 16.
The accompanying financial statements reflect a one-for-three reverse split
of Common Stock, which is to be effected prior to the effective date of this
Registration Statement, which is expected to be on or about November , 1997.
The above report is in the form which will be signed by Fishbein & Company, P.C.
upon consummation of such reverse split, which is described in Note 16 of Notes
to Consolidated Financial Statements of the Company and, assuming that from
October 8, 1997 to the date of such reverse split, no other events shall have
occurred that would affect the accompanying financial statements and notes
thereto:
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
August 22, 1996 (November , 1997
as to the last paragraph hereof)
F-3
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................. $ 1,926,766 $ 698,551
Marketable securities............................................................ 100,000 75,000
Accounts receivable--Current portion
Trade--Net of allowance for doubtful accounts of $327,072 and $437,208,
respectively................................................................. 1,461,911 1,443,203
Net investment in sales-type leases............................................ 125,385 89,124
Preferred Stock subscription receivable.......................................... 6,525,000
Inventory........................................................................ 652,551 798,814
Prepaid expenses and other current assets........................................ 118,689 271,087
------------- -------------
Total current assets......................................................... 10,910,302 3,375,779
------------- -------------
MONITORING CONTRACT COSTS--Net of accumulated amortization of $2,838,374 and
$5,217,345, respectively......................................................... 16,950,387 18,433,133
------------- -------------
PROPERTY AND EQUIPMENT--Net of accumulated depreciation and amortization of
$1,862,915 and $2,363,067, respectively.......................................... 1,261,007 1,512,077
------------- -------------
OTHER ASSETS
Accounts receivable--Noncurrent portion
Trade.......................................................................... 29,421 49,046
Net investment in sales-type leases............................................ 323,817 179,752
Deposits......................................................................... 48,008 45,310
Investment in joint venture...................................................... 3,139,484
Deferred compensation expense.................................................... 892,500
Deferred financing costs--Net of accumulated amortization of $111,945 and
$254,154, respectively......................................................... 3,411,803 3,612,727
------------- -------------
3,813,049 7,918,819
------------- -------------
$ 32,934,745 $ 31,239,808
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------
<S> <C> <C>
1996 1997
-------------- --------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt
Notes payable................................................................. $ 194,914 $ 100,329
Capitalized lease obligations................................................. 51,064 57,453
Accounts payable--Trade......................................................... 424,921 556,205
Purchase holdbacks.............................................................. 646,976 415,765
Accrued expenses and other current liabilities.................................. 2,033,701 1,288,332
Deferred revenue................................................................ 1,591,103 1,981,500
-------------- --------------
Total current liabilities................................................... 4,942,679 4,399,584
-------------- --------------
LONG-TERM LIABILITIES--Net of current portion
Long-term debt
Notes payable................................................................. 12,374,607 12,435,287
Capitalized lease obligations................................................. 31,189 85,435
Put obligation payable.......................................................... 2,580,338
Deferred compensation expense................................................... 2,550,000
-------------- --------------
14,986,134 15,070,722
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY
Preferred Stock--Par value $1,000
Authorized 250,000 shares
Issued and outstanding 7,500 shares--June 30, 1996
Issued and outstanding 6,890 shares--June 30, 1997.......................... 1,605,000 7,757,783
Common Stock--Par value $.008
Authorized 12,500,000 shares
Issued and outstanding 1,284,982 shares--June 30, 1996
Issued and outstanding 1,769,736 shares--June 30, 1997...................... 10,280 14,158
Additional paid-in capital...................................................... 24,971,800 35,439,510
Unrealized holding losses on available-for-sale securities...................... (193,343)
Accumulated deficit............................................................. (13,387,805) (31,441,949)
-------------- --------------
13,005,932 11,769,502
-------------- --------------
$ 32,934,745 $ 31,239,808
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
OPERATING REVENUES
Product sales..................................................... $ 4,520,062 $ 2,352,449 $ 2,938,618
Monitoring and service............................................ 4,812,474 8,515,247 9,784,285
------------- ------------- --------------
9,332,536 10,867,696 12,722,903
------------- ------------- --------------
COST OF REVENUES
Product sales..................................................... 2,635,674 1,718,689 1,970,158
Monitoring and service............................................ 1,125,123 1,779,490 2,127,257
------------- ------------- --------------
3,760,797 3,498,179 4,097,415
------------- ------------- --------------
GROSS PROFIT........................................................ 5,571,739 7,369,517 8,625,488
------------- ------------- --------------
OPERATING EXPENSES
Selling, general and administrative............................... 6,327,622 6,416,486 9,126,641
Compensation--Options/Employment contracts........................ 3,689,700
Litigation settlement............................................. 240,000
Recovery of termination benefits cost............................. (392,699)
Recovery of restructuring charges................................. (52,920)
Depreciation and amortization..................................... 1,302,208 2,200,894 2,976,433
Interest.......................................................... 1,220,618 3,185,603 1,349,480
------------- ------------- --------------
8,644,829 11,802,983 17,142,254
------------- ------------- --------------
LOSS FROM OPERATIONS................................................ (3,073,090) (4,433,466) (8,516,766)
------------- ------------- --------------
OTHER INCOME/(EXPENSE)
Interest income................................................... 42,260 21,568 12,176
Joint venture loss................................................ (123,325)
------------- ------------- --------------
42,260 21,568 (111,149)
------------- ------------- --------------
LOSS BEFORE EXTRAORDINARY ITEM...................................... (3,030,830) (4,411,898) (8,627,915)
EXTRAORDINARY ITEM
Loss on debt extinguishment....................................... 2,549,708
------------- ------------- --------------
NET LOSS............................................................ (3,030,830) (4,411,898) (11,177,623)
Dividends and accretion on preferred stock.......................... (6,876,521)
------------- ------------- --------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS.......................... $ (3,030,830) $ (4,411,898) $ (18,054,144)
------------- ------------- --------------
------------- ------------- --------------
Loss per common share
Loss before extraordinary item.................................... $ (15.07) $ (8.61) $ (5.80)
Extraordinary item................................................ (1.71)
------------- ------------- --------------
Net loss.......................................................... $ (15.07) $ (8.61) $ (7.51)
------------- ------------- --------------
------------- ------------- --------------
Net loss applicable to common shareholders........................ $ (15.07) $ (8.61) $ (12.14)
------------- ------------- --------------
------------- ------------- --------------
Weighted average number of shares outstanding....................... 201,064 512,179 1,487,574
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30,1995, 1996 AND 1997
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
PREFERRED STOCK COMMON STOCK LOSSES ON
---------------------- ------------------------ ADDITIONAL AVAILABLE-
NUMBER NUMBER PAID-IN FOR-SALE ACCUMULATED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL SECURITIES DEFICIT TOTAL
----------- --------- ----------- ----------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--June 30, 1994....... 112,666 $ 901 $7,897,290 $ -- $(5,945,077) $1,953,114
Issuance of warrants......... 2,920 2,920
Conversion of convertible
subordinated promissory
notes--net of related costs
of $318,848................ 65,416 524 2,118,128 2,118,652
Acquisitions................. 88,090 705 1,424,278 1,424,983
Unrealized holding losses on
available-for-sale
securities................. (68,343) (68,343)
Net loss..................... (3,030,830) (3,030,830)
----- --------- ----------- ----------- ---------- ----------- ------------ ----------
Balance--June 30, 1995....... 266,172 2,130 11,442,616 (68,343) (8,975,907) 2,400,496
Exercise of stock options and
warrants................... 485,100 3,880 4,428,863 4,432,743
Conversion of convertible
subordinated promissory
notes--Net of related costs
of $383,088................ 372,329 2,979 2,848,933 2,851,912
Acquisitions................. 103,015 824 819,734 820,558
Issuance of common stock for
consulting services........ 667 5 8,120 8,125
Issuance of common stock as
payment of notes payable... 57,699 462 666,659 667,121
Sale of preferred stock...... 7,500 $1,605,000 4,756,875 6,361,875
Unrealized holding losses on
available-for-sale
securities................. (125,000) (125,000)
Net loss..................... (4,411,898) (4,411,898)
----- --------- ----------- ----------- ---------- ----------- ------------ ----------
Balance--June 30, 1996....... 7,500 1,605,000 1,284,982 10,280 24,971,800 (193,343) (13,387,805) 13,005,932
Accretion on preferred
stock...................... 5,895,000 (5,895,000) 0
Discount on and deemed
dividends on preferred
stock...................... 876,521 (876,521) 0
Exercise of stock options and
warrants................... 55,650 445 407,508 407,953
Issuance of warrants to
consultants in connection
with the exercise of
warrants................... 689,000 689,000
Repricing of stock purchase
warrants................... 2,848,765 2,848,765
Conversion of convertible
subordinated promissory
notes--Net of related costs
of $5,068.................. 3,704 30 44,902 44,932
Acquisitions................. 13,900 111 74,889 75,000
Issuance of stock options.... 2,032,200 2,032,200
Investment in joint
venture.................... 364,721 2,918 3,297,082 3,300,000
Conversion of preferred
stock...................... (610) (618,738) 63,446 508 618,230 0
Issuance of warrants to
preferred shareholders..... 105,000 (105,000) 0
Issuance of warrants in
connection with the
obtaining preferred
stock...................... 350,000 350,000
Cancellation of common stock
held in escrow............. (16,667) (134) 134 0
Unrealized holding losses on
available-for-sale
securities................. 193,343 193,343
Net loss..................... (11,177,623) (11,177,623)
----- --------- ----------- ----------- ---------- ----------- ------------ ----------
Balance--June 30, 1997....... 6,890 $7,757,783 1,769,736 $ 14,158 $35,439,510 $ 0 ($31,441,949) $11,769,502
----- --------- ----------- ----------- ---------- ----------- ------------ ----------
----- --------- ----------- ----------- ---------- ----------- ------------ ----------
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss.......................................................... $ (3,030,830) ($ 4,411,898) ($ 11,177,623)
Adjustments to reconcile net loss to net cash used in operating
activities
Amortization of monitoring contract costs....................... 959,574 1,765,744 2,378,969
Depreciation and amortization of property and equipment......... 342,634 435,150 547,464
Gain on sale of monitoring contracts............................ (91,663)
Loss on sale of property and equipment.......................... 13,177 39,851 15,389
Loss on available-for-sale securities........................... 218,343
Amortization of deferred financing costs and debt discount...... 87,594 85,324 389,674
Amortization of goodwill (see Note 3)........................... 50,000
Interest accrued and added to long-term notes payable........... 14,804
Restructuring charges........................................... 140,691
Loss on joint venture........................................... 123,325
Issuance of common stock for interest on note payable........... 11,849
Issuance of common stock for consulting fees.................... 8,125
Issuance of warrants for consulting fees........................ 689,000
Compensation expense in connection with the issuance of stock
options and employment agreements............................. 3,689,700
(Increase) decrease in accounts receivable
Trade......................................................... (156,123) (330,830) (29,004)
Net investment in sales-type leases........................... (96,354) 31,344 53,843
Decrease in income tax refunds receivable....................... 109,000
(Increase) decrease in notes receivable--Related party.......... (50,000) 50,000
(Increase) decrease in inventory................................ 180,351 (171) (146,263)
(Increase) decrease in prepaid expenses and other current
assets........................................................ 57,375 (13,203) (152,397)
(Increase) decrease in deposits................................. (2,270) 9,014 2,697
Increase (decrease) in accounts payable--Trade.................. (30,033) (78,479) 130,672
Decrease in termination benefits obligation..................... (409,673)
Increase (decrease) in accrued expenses and other current
liabilities................................................... (96,024) 196,940 (712,877)
Increase in deferred revenues................................... 676,264 302,488 390,395
------------- ------------- --------------
Net cash used in operating activities......................... (1,289,843) (1,990,415) (3,538,693)
------------- ------------- --------------
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in joint venture....................................... (12,810)
Decrease in cash held in escrow................................... 582,220
Proceeds from the sale of monitoring contracts.................... 298,938
Purchase of monitoring contracts (net of purchase holdbacks)...... (6,061,319) (6,210,340) (3,863,360)
Proceeds from the sale of property and equipment.................. 21,537 11,422 39,864
Purchase of property and equipment................................ (462,210) (459,898) (636,659)
------------- ------------- --------------
Net cash used in investing activities......................... (5,919,772) (6,359,878) (4,472,965)
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of preferred stock..................... 7,500,000
Costs incurred in connection with the preferred stock issuance.... (1,012,449)
Costs incurred in connection with common stock issuances.......... (34,220)
Deferred financing costs incurred................................. (163,550) (952,537) 22,761
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 15,235,000
Principal payments on long-term debt
Notes payable................................................... (1,168,081) (2,244,495) (15,292,934)
Capitalized lease obligations................................... (30,772) (41,988) (82,460)
Net proceeds from the exercise of stock options and warrants...... 4,432,743 447,745
------------- ------------- --------------
Net cash provided by financing activities..................... 7,073,417 10,117,614 6,783,443
------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH..................................... (136,198) 1,767,321 (1,228,215)
CASH--BEGINNING..................................................... 295,643 159,445 1,926,766
------------- ------------- --------------
CASH--ENDING........................................................ $ 159,445 $ 1,926,766 $ 698,551
------------- ------------- --------------
------------- ------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest............................ $ 1,104,653 $ 3,012,698 $ 1,280,340
Cash paid (received) during the year for income taxes-- Net....... (109,000) -- --
</TABLE>
See notes to consolidated financial statements
F-9
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
During the years ended June 30, 1995, 1996 and 1997, convertible
subordinated promissory notes of $2,437,500, $3,235,000 and $50,000,
respectively, were converted into common stock. The Company reduced deferred
financing costs and additional paid-in capital in the amount of $318,848,
$383,088 and $5,068 for the years ended June 30, 1995, 1996 and 1997
respectively.
During the years ended June 30, 1995, 1996 and 1997, long-term notes payable
of $62,704, $63,933 and $74,028, respectively, were incurred for the purchase of
property and equipment.
During the years ended June 30, 1995, 1996 and 1997, capitalized lease
obligations of $59,947, $43,933 and $143,100, respectively, were incurred for
the acquisition of property and equipment.
During the years ended June 30, 1996 and 1997, the Company reduced
monitoring contract costs and the corresponding purchase holdbacks in the amount
of $838,174 and $306,808, respectively. The Company issued 4,656 shares of its
common stock, valued at $67,781, as payment for purchase holdbacks during the
year ended June 30, 1996.
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 years ended June 30, 1995, 1996 and 1997, the Company issued
88,090, 103,015 and 13,900 shares of its common stock, valued at $1,424,983,
$820,558 and $75,000, respectively, in connection with acquisitions (see Note
2). The amount includes 5,000 shares of common stock valued at $70,311 issued as
payment of deferred financing costs during the year ended June 30, 1996.
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). The Company issued warrants in
connection with the sale of preferred stock valued at $3,200,000 and recorded a
discount on the preferred stock of $5,895,000.
During the year ended June 30, 1997, the Company recorded accretion to
preferred stock in the amount of $5,895,000 with a corresponding charge to
accumulated deficit. The accretion represents the intrinsic value of the
beneficial conversion feature contained within the preferred stock (see Note 9).
During the year ended June 30, 1997, the Company recorded $350,000 as
additional paid-in capital, related to the issuance of warrants to a consultant
in connection with the sale of preferred stock.
During the year ended June 30, 1997, the Company recorded a deemed dividend
in the amount of $704,271 in connection with the preferred stock issuance, with
a corresponding charge to accumulated deficit (see Note 9). As a result, the
Company recorded a discount on preferred stock in the amount of $172,250.
During the year ended June 30, 1997, $610,000 of preferred stock and $8,738
in deemed dividends were converted into 63,446 shares of common stock.
During the year ended June 30, 1997, the Company recorded additional paid-in
capital of $105,000, with a corresponding charge to accumulated deficit, to
reflect the fair value of the additional warrants issued to the preferred
shareholders.
During the year ended June 30, 1997, the Company issued 364,721 shares of
common stock, valued at $3.3 million in connection with a joint venture (see
Note 3).
F-10
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
(CONTINUED)
During the year ended June 30, 1997, in connection with the repricing of
stock purchase warrants, the Company recorded deferred financing costs and
additional paid-in capital of $2,848,765.
During the year ended June 30, 1997, the Company reduced amounts
receivable-trade and accounts receivable-net investment in sales-type leases in
the amount of $28,088 and $126,482, respectively, and recorded monitoring
contract costs of $154,570, in connection with the purchase of monitoring
accounts.
During the year ended June 30, 1997, the Company recorded consulting fees in
the amount of $689,000 in connection with the exercise of warrants.
During the year ended June 30, 1996, the Company issued 57,699 shares of
common stock, valued at $667,121, as payment on notes payable.
During the year ended June 30, 1996, the Company issued 667 shares of common
stock, valued at $8,125 as payment for consulting services.
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).
F-11
<PAGE>
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. (USA), its wholly-owned subsidiaries Response Ability
Systems, Inc. (RAS), United Security Systems, Inc. (USS), and Emergency Response
Systems, Inc. (ERS) (together, the "Company"). All significant intercompany
transactions and balances have been eliminated.
NATURE OF BUSINESS AND REVENUE RECOGNITION
The Company is a fully-integrated security systems provider engaged in the
monitoring, sale, installation and maintenance of residential and commercial
security systems and Personal Emergency Response Systems (PERS). The Company is
a regional provider of security alarm monitoring services for residential and
small business subscribers operating in the states of New York, New Jersey,
Pennsylvania, Delaware and Connecticut. The Company is also a nationwide
provider of PERS products which enable individual users, such as elderly or
disabled persons, to transmit a distress signal using a portable transmitter.
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 recognized 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.
CONCENTRATION OF CREDIT RISK
The Company's products are sold directly and through distributors in the
United States to hospitals, home healthcare 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
transactions. The Company maintains reserves for potential credit losses.
F-12
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 an investment in the common stock of one
company. During 1997, management concluded that a decline in the fair value of
this common stock was not temporary and recorded a writedown of $218,343 which
is included in selling, general and administrative expenses.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is provided by the Company based on
historical 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 costs of acquired
monitoring contracts includes the costs of accounts purchased and any
contractual rights to related monitoring revenues purchased from alarm system
dealers and emergency response system dealers, and the estimated fair value of
the accounts acquired 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, notification 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.
The Company records purchase holdbacks, in connection with its acquisitions
of monitoring contracts, as a liability for delinquent accounts and for future
cancellations within an agreed upon time period. Monitoring contract costs and
the corresponding purchase holdback liabilities are reduced for delinquent
accounts and cancellations as specified in each agreement.
The costs of acquired monitoring contracts purchased from emergency response
system dealers and alarm system dealers are amortized using the straight-line
method over estimated lives ranging from five to ten years. 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
method over the estimated useful lives of the assets.
F-13
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS AND AMORTIZATION
Costs incurred in connection with various financing have been deferred;
amortization is provided using the straight-line method over the terms of the
financing, and is included in interest expense.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long lived assets and intangbles for impairment whenever
events or changes in circumstances indicate that the carrying value of the asset
may not be recoverable. The Company determines the value of subscriber accounts
based on the cash flows from the monthly recurring revenue (MRR) stream using
the most recent historical attrition rate and the aggregate MRR.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for transactions in which goods or services are
received in return for the issuance of equity instruments based on the fair
value of the equity instruments or the goods or services received, whichever is
more reliably measured.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1996, the Financial Accounting Standards Board issued SFAS No.
125, ACCOUNTING FOR THE TRANSFERS AND SERVICING OF FINANCIAL ASSETS, which the
Company has adopted for its fiscal year ended June 30, 1997. SFAS No. 125 does
not have any effect on the Company's financial position or results of operations
for its year ended June 30, 1997, and does not anticipate any material impact on
the financial statements of the registrant.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, STANDARDS FOR COMPUTING AND PRESENTING EARNINGS PER SHARE (EPS), which will
be adopted by the Company in the year ended June 30, 1998, as required by this
statement. When adopted, SFAS No. 128 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 EPS computations.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME.
This statement, which establishes standards for reporting and disclosure of
comprehensive income, is effective for interim and annual periods beginning
after December 15, 1997, although earlier adoption is permitted.
Reclassification of financial information for earlier periods presented for
comparative purposes is required under SFAS No. 130. As this statement only
requires additional disclosures in the Company's financial statements, its
adoption will not have any impact on the Company's financial position or results
of operations. The Company expects to adopt SFAS No. 130 effective July 1, 1998.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. This statement, which establishes standards
for the reporting of information about operating segments and requires the
reporting of selected information about operating segments in financial
statements, is effective for fiscal years beginning after December 15, 1997,
although earlier application is permitted. reclassification of segment
information for earlier periods presented for comparative purposes is required
under SFAS No. 131. As this statement only requires additional disclosures in
the Company's financial statements, its adoption will not have any impact on the
company's financial position or results of operations. The Company expects to
adopt SFAS No. 131 effective July 1, 1998.
F-14
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 valuation allowance is established for deferred tax assets not expected to be
realized.
Principal differences between the Company's financial reporting and tax
bases include accounts receivable reserves, inventory reserves, depreciation and
amortization of property and equipment, amortization of capitalized costs, and
deferred revenue.
LOSS PER COMMON SHARE
Loss per common share is computed based on the weighted average number of
common shares outstanding during each period after deducting dividends and
accretion on preferred stock. The effect of common stock equivalents on loss per
share is not applicable for loss periods.
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
40,000 shares of 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 25,257 shares of the Company's common stock, valued at $576,641,
issued to the former stockholders of USSI. USSI was engaged in the installation,
servicing 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:
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
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
F-15
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
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 consisting of $1,550,000 in cash, issued a note payable
over two years in the amount of $150,000 and issued 3,333 shares of 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 3,333 shares of restricted common stock as payment of financing
costs to the lender that financed the acquisition.
During the year ended June 30, 1995, the Company purchased additional
monitoring 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 16,167 shares of common stock valued at
$252,969.
During the year ended June 30, 1996, the Company purchased monitoring
contracts for an aggregate of $7,996,459. As consideration, the Company paid
$5,638,637 in cash, incurred acquisition costs of $525,647, recorded purchase
holdbacks of $1,081,928 (which are payable over periods of up to 18 months based
on performance guarantees of the seller), and issued 98,015 shares of common
stock valued at $750,247. As part of the acquisitions, the Company also issued
5,000 shares of restricted common stock valued at $70,311 as payment of
financing costs to the lender that financed the acquisitions.
On March 27,1997, the Company completed the acquisition of all the
outstanding common stock of Reliable-Hawk, Inc. (RHI), a New Jersey corporation,
after giving effect to RHI's distribution to its stockholders of all of its net
assets other than monitoring and service contracts. RHI is engaged in the
installation, servicing and monitoring of electronic security systems. In
consideration of the acquisition with a cost of $1,743,181, the Company paid
$1,469,503 in cash, incurred acquisition costs of $35,400, recorded purchase
holdbacks of $163,278 and issued 8,333 shares of its common stock valued at
$75,000. The following represents total assets acquired and the liabilities
assumed:
<TABLE>
<S> <C>
ASSETS
Monitoring Contracts.......................................... $1,707,781
Acquisition costs (assigned to monitoring contracts).......... 35,400
---------
Total Purchase Price............................................ $1,743,181
---------
---------
</TABLE>
During the year ended June 30, 1997, the Company purchased additional
monitoring contracts for an aggregate of $2,425,344. As consideration, the
Company paid $1,955,209 in cash, reduced amounts receivable by $154,570,
incurred acquisition costs of $69,541 and recorded purchase holdbacks of
$246,024 (which are payable over periods of up to twenty-one months based on
performance guarantees of the seller).
3. INVESTMENT IN JOINT VENTURE
On March 4, 1997, the Company entered into a purchase agreement with BKR,
Inc. BKR, a Nevada corporation and HealthLink, Ltd. (HL), a Nevada limited
liability company. The parties agreed to the purchase by the Company of a 50%
interest in the assets of BKR, the contribution of BKR's remaining 50% interest
in the assets to HL, and the contribution of the Company's 50% interest in BKR's
assets to HL. HL is engaged in the sale and monitoring of PERS to the general
public primarily through national
F-16
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT IN JOINT VENTURE (CONTINUED)
retail and pharmacy chains. In consideration of the HL joint venture, the
Company issued 364,721 shares of its common stock, valued at $3.3 million, to
BKR for their 50% interest in HL.
At the date of the Company's investment in HL, the investment in HL exceeded
the Company's share of the underlying net assets by $1,500,000. The excess is
being amortized by the straight line method over 10 years.
The Company's investment in HL at June 30, 1997 is summarized as follows:
<TABLE>
<S> <C>
Initial Investment.............................................. $3,312,809
Cumulative equity in net losses of HL........................... (123,325)
Cumulative authorization of Goodwill............................ (50,000)
---------
Total........................................................... $3,139,484
---------
---------
</TABLE>
The Company accounts for its investment in HL under the equity method.
BKR, as part of the purchase agreement, is entitled to exercise warrants to
purchase shares of the Company's common stock subject to the following
provisions: (i) for each 10,000 PERS placed on-line by HL, 10,000 shares of
common stock may be purchased at an exercise price of $9.00 per share, and (ii)
in no event shall such warrant be exercisable for more than 150,000 shares of
common stock. This warrant may be exercised in whole or in part at any time, or
from time to time, commencing on March 4, 1997 and expiring on March 3, 2002.
The following summary of financial data has been derived from the unaudited
Financial Statements of HL for the four months ended June 30, 1997:
<TABLE>
<S> <C>
Operating Revenues............................................. $ 305,750
Cost of Revenues............................................... 192,059
----------
Gross Profit................................................... 113,691
Selling, general and administrative expense.................... 355,962
Interest expense............................................... 4,380
----------
Net Loss....................................................... $ (246,651)
----------
----------
Current Assets................................................. $ 117,870
Working capital (deficiency)................................... (117,391)
Total Assets................................................... 3,568,176
Current Liabilities............................................ 235,621
Stockholders' equity........................................... $3,332,915
</TABLE>
4. NET INVESTMENT IN SALES-TYPE LEASES
Information pertaining to the Company's net investment in sales-type leases
is as follows:
<TABLE>
<S> <C>
Minimum lease payments receivable................................. $ 363,052
Less: Unearned Interest--Finance revenue.......................... (65,976)
Allowance for doubtful accounts................................... (28,200)
---------
Net Investment in sales-type leases............................... $ 268,876
---------
---------
</TABLE>
At June 30, 1997, minimum lease payments are receivable as follows:
F-17
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NET INVESTMENT IN SALES-TYPE LEASES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- ----------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 127,683
1999.............................................................................. 93,413
2000.............................................................................. 76,776
2001.............................................................................. 55,083
2002.............................................................................. 10,097
----------
$ 363,052
----------
----------
</TABLE>
5. INVENTORY
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Parts Inventory....................................................... 145,098 $ 613,646
Finished Goods........................................................ 507,453 185,168
---------- ----------
652,551 $ 798,814
---------- ----------
---------- ----------
</TABLE>
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES 1996 1997
----------- ---------- ------------
<S> <C> <C> <C>
Office furniture and equipment........................ 5 years 2,080,588 2,513,120
Equipment held for lease.............................. 5 years 650,285 800,555
Automotive equipment.................................. 3 years 297,944 343,576
Leasehold improvements................................ 5 years 95,105 217,893
----------- ---------- ------------
3,123,922 3,875,144
Less accumulated depreciation and amortization........ 1,862,915 2,363,067
---------- ------------
1,261,007 $ 1,512,077
---------- ------------
---------- ------------
</TABLE>
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.
F-18
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM NOTES PAYABLE
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
LINE OF CREDIT AGREEMENT
Note payable with interest only due through June 30, 2000 at Prime Plus 1-3/4%
on the outstanding loan balance; a commitment fee of .5% is payable on the
average daily unused credit; collateralized by all assets of the Company....... -- $ 12,235,000
EQUIPMENT FINANCING
Payable in monthly installments aggregating $4,557, bearing interest at rates
ranging from 3.90% to 11.83%; final payments due April, 1997 through March,
2000; collateralized by related equipment...................................... 93,880 88,950
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% ($86,817) each
year--1998 through 2000; interest imputed at 14%; net of imputed interest of
$58,894........................................................................ 265,652 201,557
Federal priority tax claims payable in annual installments of $2,211 through
March 1999 and $1,896 thereafter............................................... 12,321 10,109
CONVERTIBLE SUBORDINATED PROMISSORY NOTES
5% convertible subordinated promissory notes due November 30, 1996............. 75,000 --
10% convertible subordinated promissory notes due December 31, 1997............ 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................................................... 240,536 --
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................................................... 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................................. 10,689,455 --
</TABLE>
F-19
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
1996 1997
------------- -------------
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................................. 443,551 --
<S> <C> <C>
------------- -------------
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................... 443,091 --
------------- -------------
12,569,521 12,535,616
Less Current Portion........................................................... 194,914 100,329
------------- -------------
12,374,607 $ 12,435,287
------------- -------------
------------- -------------
</TABLE>
Principal payments on long-term notes payable for the next five years are
due as follows: Years ending June 30, 1998--$100,329; 1999--$103,146;
2000--$12,228,020; 2001--$1,896; 2002 -$1,896.
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 Company was not in compliance with certain
covenants as of June 30, 1997 (see Note 16, Subsequent Events). The agreement
also provides for a commitment fee payable monthly in arrears, of .5% based on
the average daily unused credit. As of June 30, 1997, the Company has available
on its revolving credit facility the amount of $2,765,000. The Company is
prohibited from declaring dividends while any outstanding balance exists under
the line of credit.
In connection with obtaining the line of credit, the Company issued a stock
purchase warrant (the Warrant) to an affiliate of the bank which provided the
line of credit. The terms of this Warrant, which were subsequently modified (see
below), included the following: (i) number of shares, 344,045; (ii) exercise
price, $9.75 per share; (iii) put obligation feature, which the Holder of the
warrant can require, during the period between July 1, 2000 and June 30, 2001
upon 10 days notice, the Company to purchase the Warrant for the difference
between the market price of the Company's common stock and the exercise price
times 344,045 shares.
The Company recorded deferred financing costs of approximately $6,800,000
related to this warrant (based on an independent valuation) and a related put
obligation payable amount. The deferred financing costs were originally to be
amortized over the life of the related line of credit (four years) using the
straight-line method. The put obligation and the deferred financing costs were
adjusted quarterly based upon the value (market price less exercise price of the
obligation).
F-20
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM NOTES PAYABLE (CONTINUED)
On June 24, 1997, the Company, in return for the holder of the Warrant
forgiving the put obligation feature, reduced the exercise price of the Warrant
to $1.50. This resulted in the Company recording deferred financing costs for
the market value of the revised Warrant ($2,800,000 based on an independent
valuation), crediting additional paid-in capital for the same amount. The
remaining deferred financing costs will be amortized using the straight-line
method over the remaining life of the line of credit.
On August 13, 1997 the Holder exercised the Warrant and received 107,263
shares of common stock and blank check preferred stock convertible into 102,319
shares of common stock.
No cash was paid by the Warrant holder.
Also in connection with this agreement, the Company issued warrants to a
consultant to purchase 33,334 shares of the Company's common stock at an
exercise price of $13.50 per share; these warrants expire June 30, 2000. The
value of these warrants ($350,000) is being amortized over four years.
With the proceeds received from the issuance of preferred stock (see Note 9)
and a $10,500,000 advance on July 1, 1996, from a line of credit, the Company
paid off notes payable with balances aggregating $12,072,668 at June 30, 1996
plus a prepayment penalty. The prepayment penalty of $2,415,877 and unamortized
deferred financing costs of $133, 831 associated with the notes paid have been
recorded as an extraordinary item during the year ended June 30, 1997.
8. CAPITALIZED LEASE OBLIGATIONS
The Company leases office furniture and equipment with a cost of $245,808
and a net book value of $188,462 at June 30, 1997, under capital leases. The
following 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, 1997.
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- ----------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 70,069
1999.............................................................................. 51,061
2000.............................................................................. 43,933
2001.............................................................................. --
2002.............................................................................. --
----------
Total minimum lease payments...................................................... 165,063
Less amount representing interest................................................. 22,175
----------
Present value of net minimum lease payments....................................... $ 142,888
----------
----------
</TABLE>
F-21
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 preferred shares are convertible into a number of common shares determined
based on the premium plus $1,000, divided by the conversion price. The premium
equates to an annual ten percent "deemed" dividend and the conversion price is
equal to the lesser of $15.00 or 80% of the average closing bid price of the
Company's common stock for the five days immediately preceding the date of
conversion. The holders of Preferred Stock are not entitled to receive dividends
and have no voting rights.
Up to fifty percent of the preferred stock may be converted by the holder
beginning 45 days after closing and the balance may be converted beginning 70
days after closing. Since the convertible preferred stock contained a beneficial
conversion feature at the date of issue, the company allocated a portion of the
proceeds equal to the value of that feature ($5,895,000) to additional paid-in
capital. This amount was amortized over the 70 day minimum period the preferred
shareholders were required to hold the shares before conversion was allowed.
Preferred shares were then accreted to their face value by recording $5,895,000
charge to accumulated deficit.
Due to an unexpectedly large volume of conversion requests, after 610 shares
of the preferred stock were converted to common shares, the company suspended
conversion of its Series A Convertible Preferred Stock due to the negative
impact of the conversions on the common stock price.
Subsequent to the suspension of the conversion of the preferred stock, three
groups of preferred shareholders (Halifax Fund, L.P., Lake Management L.D.C. and
KA Investments, L.D.C.) commenced legal action to force the company to resume
conversion of the preferred stock. In order to settle the matters of litigation,
the Company reached two separate agreements with the complainants.
During June, 1997, all preferred shareholders, other than Halifax Fund, L.P.
received 5,000 warrants to purchase common stock of the Company for $6.00 per
share for each 100 shares of preferred stock held. Fifty percent of said
warrants are exercisable after one year from issuance and the remaining fifty
percent are exercisable after two years from issuance. In return for the filing
by the Company of a registration statement with the SEC for the primary issuance
by the Company of securities to generate approximately $8,750,000 of net
proceeds for use by the Company to redeem all of the Preferred Stock (the
"Registration Statement"), on or before October 11, 1997, the preferred
shareholders agreed to refrain from all conversions of the preferred shares
until November 30, 1997. The value of these warrants, $90,000, was recorded as a
dividend to the preferred shareholders.
On June 30, 1997 the company reached an agreement with Halifax Fund, L.P.
where the company agreed to convert the 1,000 shares of preferred stock owned by
this group into 300,000 shares of the company's common stock and assisted in
locating a purchaser for the 300,000 shares from the preferred shareholders for
a total of $1,500,000. The company also issued to these former preferred
shareholders 5,000 warrants to purchase common stock of the company for $6.00
per share for each 100 shares of preferred stock held. Fifty percent of said
warrants are exercisable after one year from issuance and the remaining fifty
percent are exercisable after two years from issuance. The Company also agreed
to reimburse these preferred shareholders $150,000 for legal fees. In the event
that the Company settles with any other preferred shareholders on terms which
these shareholders, in their sole discretion, believe are better than those they
have received, these shareholders have the right to elect the alternative
settlement.
During 1997, the Company reclassified $5,895,000 which had been previously
reported in the 1996 financial statements as Preferred Stock to Additional Paid
in Capital. This was a result of March, 1997
F-22
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PREFERRED STOCK (CONTINUED)
comments by the Staff of the Securities and Exchange Commission regarding the
treatment of beneficial conversion features of preferred stock.
During 1997, deemed convertible preferred stock dividends totaling $704,271
were recorded relating to the preferred shares.
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
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
3,334 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, 1997, all of these notes had been converted into common stock.
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 2,222 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, 1997, 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 Reserve 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
stockholder, except to the extent that the Reverse Stock Split results in a
stockholder of the Company owning a fractional share. In lieu of issuing
fractional shares, the Company issued an additional full share of common stock.
The Company has an Incentive Stock Option Plan which provides for the grant
of stock options to key employees of the Company to purchase a maximum of 13,334
shares of Common Stock, all of which have been granted. In addition, the Company
has a Restricted Stock Option Plan which provides for the grant of stock options
to officers, directors, employees, consultants or advisors of the Company to
purchase a maximum of 3,453 shares of Common Stock, all of which have been
granted. The Company has issued Incentive Stock Options to employees in excess
of the plan and will convert the 9,017 ISO's to Non-Qualified Stock Options
during Fiscal 1998.
On December 16, 1996, the Company granted 18,783 Non-Qualified Stock Options
(NQO) outside of the Restricted Stock Option Plan at $.30 per share, expiring
November 27, 2001 to employees. As a result, the Company recorded compensation
expense and increased additional paid-in capital in the amount of $142,284. In
addition, the Company granted 18,334 NQO's and 1,334 Incentive Stock Options to
employees at $7.875, the prevailing market price, expiring November 27, 2001. As
of June 30, 1997, 14,150 NQO's at $.30 and 834 NQO's at $11.625 were exercised.
The Company recorded common stock of $359 and additional paid-in capital of
$13,261.
F-23
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)
On June 15, 1997, the Company reduced the exercise price of options for
622,800 shares of common stock, granted to officers, directors and a key
employee of the Company, from $7.50 to $4.50, the market price. On June 27,
1997, the Company further reduced the exercise price of options for 422,800
shares of common stock, granted to officers and a director of the Company, from
$4.50 to $.03, which resulted in a compensation expense of $1,889,916.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
---------- ---------------- -------------
<S> <C> <C> <C>
Options outstanding at June 30, 1994............................... 331,100 $ 11.25-210.00 $ 51.24
Options granted.................................................. 387,667 $ 11.25-24.375 $ 17.49
Options canceled or expired...................................... (10,668) $ 48.75-157.50 $ 128.61
Options outstanding at June 30, 1995............................... 708,099 $ 11.25-210.00 $ 14.94
Options granted.................................................. 43,083 $ 7.50-13.35 $ 12.159
Options exercised................................................ (17,500) $ 7.50-11.625 $ 7.695
Options canceled or expired...................................... (64,288) $ 15.00-210.00 $ 22.008
---------- ---------------- -------------
Options outstanding at June 30, 1996............................... 669,394 $ 7.50-105.00 $ 7.911
Options granted.................................................. 28,450 $ 0.03-7.875 $ 2.874
Options exercised................................................ (14,983) $ 0.30-11.625 $ 0.93
Options canceled or expired...................................... (3,208) $ 11.625-105.00 $ 17.688
---------- ---------------- -------------
Options outstanding at June 30, 1997............................... 679,653 $ 0.03-13.35 $ 2.061
---------- ---------------- -------------
---------- ---------------- -------------
Options exercisable at June 30, 1997............................... 679,653 $ 0.03-13.35 $ 2.061
---------- ---------------- -------------
---------- ---------------- -------------
</TABLE>
The Company accounts for the Plans in accordance with Accounting Principles
Board Opinion No. 25, under which no compensation cost has been recognized for
stock option awards. Had compensation cost for the Plans been determined
consistent with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock--Based Compensation" (SFAS #123), the Company's pro forma net loss and
loss per share for June 30, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
REPORTED PRO-FORMA
------------- -------------
<S> <C> <C>
1997 Net Loss.................................................. $ 11,177,623 $ 11,368,594
1997 Net Loss applicable to Common Shareholders................ 18,054,144 18,245,115
1997 Net Loss per Common Share................................. 12.14 12.27
1996 Net Loss.................................................. $ 4,411,898 $ 8,558,764
1996 Net Loss per Share........................................ $ 8.61 $ 16.71
</TABLE>
The weighted average fair value of the stock options during the fiscal years
ended June 30, 1996 and 1997 ranged from $3.51 to $11.43.
The fair value of options granted under the Plans during fiscals 1996 and
1997 were estimated on the date of grant using the Black--Scholes option pricing
model with the following weighted average assumptions used:
(i) no dividend yield
F-24
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)
(ii) expected volatility of 81% and 75% for 1996 and 1997, respectively
(iii) risk free interest rate of between 5.81% and 6.25%
(iv) expected lives ranging from 2 to 10 years
During the year ended June 30, 1996, the Company issued 103,015 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 10,667 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 47,032 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 667 shares of its
common stock, valued at $8,125, as payment for consulting services.
The Company, in December, 1996, canceled 16,667 shares of its common stock
held in escrow, in connection with an acquisition.
In March, 1997, the Company issued 8,333 shares of its common stock in
connection with a purchase of monitoring contracts and 5,567 shares of its
common stock pursuant to a guarantee of stock valuation in connection with an
acquisition (see Note 2). As a result, the Company recorded common stock of $334
and additional paid-in capital of $74,934.
On March 4, 1997, the Company issued 364,721 shares of its common stock,
valued at $3.3 million in connection with a Joint Venture (see Note 3), pursuant
to a guarantee of stock valuation.
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 334 shares of the Company's common stock. Through June
30, 1997, all of these notes had been converted to common stock.
The Company, as part of a consulting agreement, issued warrants to purchase
66,667 shares of the Company's common stock at a price of $15.375; these
warrants expire April 30, 1999. Also, as part of consulting agreements, the
Company issued warrants to purchase 428,334 shares of the Company's common stock
at prices ranging from $7.50 to $10.50; these warrants were exercised 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 166,667 shares of the
Company's common stock at an exercise price of $18.39 per share and 83,334
shares of the Company's common stock at an exercise price of $24.00 per share;
these warrants expire June 30, 2001. The Company also issued warrants to a
consultant to purchase 25,000 shares of the Company's common stock at an
exercise price of $13.50; these warrants expire June 30, 2000.
During the months July, 1996, through September, 1996, 40,667 shares of the
Company's common stock were issued as a result of the exercise of Class A and
Class C Warrants. The Company recorded common stock of $976 and additional
paid-in capital of $466,684.
F-25
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)
The following is a summary of warrant activity:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- ------------------
<S> <C> <C>
Warrants outstanding at June 30, 1994............................................ 744,398 $7.50-13.50
Warrants issued in connection with 12% Notes-Class C........................... 12,167 $11.25
Warrants issued to placement agents in connection with 13.8% Notes-Class C..... 6,667 $11.25
Warrants outstanding at June 30, 1995............................................ 963,232 $7.50-13.50
Warrants issued in connection with 13.8% Notes-Class C......................... 6,667 $9.78
Warrants issued in connection with 12 % Notes--Class A......................... 10,223 $7.50
Warrants issued in connection with 10% Notes--Class C.......................... 20,333 $16.875
Warrants issued in connection with consulting agreements....................... 495,000 $7.50-15.375
Warrants issued in connection with preferred stock............................. 91,667 $13.50-24.00
Warrants issued in connection with line of credit agreement.................... 377,378 $4.50-13.50
Warrants exercised in connection with 12% Notes--Class C....................... (9,767) $11.25
Warrants exercised in connection with 10% Notes--Class C....................... (9,500) $16.875
Warrants exercised in connection with consulting agreements.................... (428,333) $7.50-10.50
---------- ------------------
Warrants outstanding at June 30, 1996............................................ 1,316,900 $4.50-24.00
Warrants issued in connection with preferred stock litigation.................. 114,833 $6.00
Warrants exercised in connection with 12% Notes- Class A....................... (10,223) $7.50
Warrants exercised in connection with 10% Notes- Class C....................... (10,000) $16.875
---------- ------------------
Warrants outstanding at June 30, 1997.......................................... 1,411,510 $4.50-24.00
---------- ------------------
---------- ------------------
</TABLE>
11. INCOME TAXES
The differences between the provision for income taxes and income taxes
computed using the federal income statutory tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
Amount computed using the statutory rate............................................ ($ 1,500,050) ($ 3,800,392)
Increase (decrease) in taxes resulting from: Prior net operating loss carryforwards
Nondeductible expenses............................................................ 24,400 12,626
State taxes, net of federal taxes................................................... (216,900) 0
Other
Federal tax valuation allowance..................................................... 1,692,550 3,787,766
------------- -------------
Income taxes (benefit).............................................................. $ 0 $ 0
------------- -------------
------------- -------------
</TABLE>
F-26
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
At June 30, 1997, the cumulative temporary differences resulted in net
deferred tax assets or liabilities consisting primarily of:
<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable reserves.................................... $ 186,163
Inventory reserves.............................................. 8,366
Property........................................................ 1,069,849
Warranty reserve................................................ 55,792
Accrued vacation accrual........................................ 45,564
Uncollected Interest Revenue.................................... 100,453
Deferred Expenses............................................... 973,600
Other........................................................... 49,330
Net operating loss carryforwards................................ 6,752,044
---------
9,241,161
Less valuation allowance........................................ 9,241,161
---------
$ 0
---------
---------
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, FEDERAL STATE
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
2000........................................................... -- $ 1,191,025
2001........................................................... -- 3,253,300
2002........................................................... -- 3,206,000
2003........................................................... $ 254,200 3,491,200
2004........................................................... 23,100 2,433,632
2005...........................................................
2006........................................................... 15,000
2007...........................................................
2008........................................................... 136,300
2009........................................................... 3,605,100 390,100
2010........................................................... 2,997,000 147,800
2011........................................................... 3,504,400 160,100
2012........................................................... 6,897,226 260,490
------------- -------------
$ 17,296,026 $ 14,669,947
------------- -------------
------------- -------------
</TABLE>
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
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 50% of each participant's elective
deferral up to maximum Company contributions of 2.50% of eligible salaries.
Contributions to the plan by the Company for the years ended June 30, 1995, 1996
and 1997, were $2,216, $23,008 and $36,981, respectively.
13. RECOVERY OF RESTRUCTURING CHARGES
In April, 1994, the Company initiated a plan of reorganization and
restructuring 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
The Company has employment contracts with certain key personnel for terms
expiring in June 2000. The contracts provide for initial annual base salaries
aggregating $375,000.
The Company has employment contracts with certain key personnel of USS for
terms expiring March, 1999. The contracts provide for initial base salaries
aggregating $240,000 which are subject to incremental increases as determined by
the Board of Directors on all payments provided the following conditions are
realized: (i) if the Company increases its net alarm system subscriber accounts
by at least 10,000 accounts before March 1999, the Company shall pay each
employee $1.0 million dollars less the gross proceeds received from the sale or
exercise of their options; (ii) if the Company increases its net alarm system
subscriber accounts by at least 15,000 accounts before March, 1999, the Company
shall pay each employee $1.5 million less the gross proceeds received from the
sale or exercise of their options; and (iii) any increases in net alarm systems
between 10,000 and 15,000 account shall entitle certain employees to a pro rated
amount between $1.0 million and $1.5 million as determined in provisions (i) and
(ii) above. As a result, the Company recorded compensation expense and a
deferred liability at June 30, 1997 relating to such contracts.
CONSULTING AGREEMENT
In April, 1996, the Company entered into a two-year consulting agreement
which provides for a minimum annual fee of $42,000. In March, the consulting
agreement was terminated. As a result of the termination of the agreement, the
Company recorded a charge of $63,000 to consulting fees for the fiscal year
ended June 30, 1997.
MONITORING AGREEMENT
In April, 1994, the Company entered into a three-year monitoring agreement,
which has been extended through April, 2000, providing for a minimum annual cost
of $420,000 plus increases based on the number of subscribers as defined, for
monitoring services previously provided directly by the Company.
F-28
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total cost under this agreement was $435,000, $494,000 and $703,470 for the
years ended June 30, 1995, 1996 and 1997, respectively.
LEASE COMMITMENTS
The Company leases its facilities and various equipment under operating
leases expiring at various dates through December 2000. The following is a
schedule of future minimum rental payments required under these leases:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- --------------------------------------------------------------
<S> <C>
1998.......................................................... $ 321,074
1999.......................................................... 256,564
2000.......................................................... 40,038
2001.......................................................... 12,944
2002.......................................................... --
----------
$ 630,620
----------
----------
</TABLE>
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, $369,852 and $344,117
for the years ended June 30, 1995, 1996 and 1997, 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 and a joint venture, the Company has
guaranteed the value of its common stock at various prices ranging from $9.03 to
$15.00 for periods expiring at various dates through March 2000. As of June 30,
1997, the Company's contingent liabilities under these agreements aggregated
approximately $20,000, 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 31,467 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.)
The carrying amount of the line of credit approximates its fair value
because the interest rates on this obligation approximate market rates.
It was not deemed practicable to estimate the fair value of the
reorganization debt due to the nature of the financing arrangements.
The carrying amount of equipment financing and capitalized lease obligations
approximates its fair value because the interest rates on these obligations
approximate market rates.
F-29
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS
On September 30, 1997, the Company, entered into an agreement with Triple A
Security Systems, Inc. ("Triple A"), a Pennsylvania corporation, and Robert L.
May, an individual to acquire substantially all of the assets of Triple A
Security Systems, Inc. Triple A which is engaged in the installation, servicing
and monitoring of electronic security systems.
In consideration of the acquisition of approximately 14,000 subscriber
accounts, the Company will pay Triple A an aggregate of approximately
$12,500,000, consisting of $10,000,000 in cash and $1,750,000 million in shares
of its common stock; additionally the Company will assume certain liabilities
totaling $750,000. Summarized financial data of Triple A for the years ending
December 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revenues.............................................................................. $ 5,138,532 $ 5,206,608
Cost of Revenues...................................................................... 2,319,741 2,652,662
------------ ------------
Gross Profit.......................................................................... 2,818,791 2,553,946
Operating Expenses.................................................................... 2,528,204 2,315,544
Interest Expense (net)................................................................ 101,959 113,362
------------ ------------
Net Income............................................................................ $ 188,628 $ 125,040
------------ ------------
------------ ------------
</TABLE>
In October 1997, the Company entered into an agreement to acquire all of the
outstanding stock of Jupiter, a patrol service company. Jupiter's patrol
services are principally supplied in areas in which the Company believes that
Triple A is a substantial provider of security systems services. The patrol
service supplements the Company's alarm monitoring service by providing routine
patrol of a subscriber's premises and neighborhood, response to alarm system
activations and "special watch" services, such as picking up mail and newspapers
and increased surveillance when the customer is on vacation.
On July 31, 1997, the Company entered into an Agreement with 4R Security
("4R Security") to acquire approximately 2,000 alarm monitoring subscriber
accounts and certain assets of 4R Security for a purchase price of approximately
$1,600,000, substantially all of which is payable in cash and a portion of which
is payable in stock, subject to certain adjustments and holdbacks. Since 4R has
filed for protection under the United States Bankruptcy Code, the acquisition is
conditioned upon the approval by the United States Bankruptcy Court for the
Eastern District of New York. Pursuant to the agreement, 4R Security has agreed
not to solicit or otherwise communicate with any customer whose account was
purchased by the Company for the purpose of inducing such customer to
discontinue its relationship with the Company. If the acquisition is
consummated, the Company will assume the balance of 4R Security's lease for its
premises in Patchogue, New York.
On June 18, 1997, and October 1, 1997, Mellon amended certain financial
covenants in the Loan and Security Agreement dated June 30, 1996, as follows:
(i) ratio of cash flow to interest expense; (ii) ratio of senior funded debt to
cash flow; (iii) net income (loss); and (iv) capital expenditures. The Company
believes it can maintain compliance with the terms of the amended covenants.
In October, 1997, the Company filed Form SB-2, Registration Statement under
the Securities Act of 1933, offering 2,400,000 shares of Common Stock, par value
$.008 per share. The Company has granted the Underwriters a 45-day option to
purchase up to an additional 360,000 shares of Common Stock solely to
F-30
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (CONTINUED)
cover over-allotments, if any. In connection with the offering, the Underwriters
will receive warrants to purchase up to an aggregate of 240,000 shares of Common
Stock from the Company.
The net proceeds from the sale of Stock will be used for the acquisition of
Triple A, to redeem the preferred stock and the remainder to pay down amounts
outstanding under the credit line.
The Company anticipates declaring a one-for-three reverse stock split prior
to the effective date of the Form SB-2 Registration Statement.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
Triple A Security Systems, Inc.:
We have audited the accompanying balance sheets of Triple A Security
Systems, Inc. as of December 31, 1996 and 1995, and the related statements of
income and retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Triple A Security Systems,
Inc. as of December 31, 1996 and 1995 and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Terry H. Jones, CPA
March 27, 1997
F-32
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................................. $ 126,941 $ 235,963
Marketable securities................................................................ 110,176 108,583
Accounts receivable, net of allowance for doubtful accounts of $50,000 in 1996 and
$29,000 in 1995.................................................................... 551,432 343,589
Employee advance..................................................................... 6,871 5,658
Inventory and work-in-progress....................................................... 483,875 384,553
Prepaid expenses..................................................................... 14,981 8,693
Deposits............................................................................. 7,950 7,370
Due from stockholder................................................................. 9,857 14,068
Due from affiliate................................................................... 84,169 103,135
Other current assets................................................................. 5,951 --
------------ ------------
Total Current Assets............................................................. 1,402,203 1,211,612
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment, net of accumulated depreciation.............................. 1,185,326 821,916
Property and equipment held for lease, net of accumulated depreciation............... 611,251 542,624
------------ ------------
1,796,577 1,364,540
------------ ------------
INTANGIBLE ASSETS, net............................................................... 210,980 281,304
------------ ------------
$ 3,409,760 $ 2,857,456
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Demand notes payable................................................................. $ 65,000 $ --
Current portion of long-term......................................................... 344,224 259,582
Accounts payable..................................................................... 583,504 188,031
Deferred revenue..................................................................... 683,338 702,992
Accrued expenses..................................................................... 118,912 209,319
Payroll taxes withheld and accrued................................................... 10,635 16,741
Sales and use tax payable............................................................ 2,555 2,881
------------ ------------
Total Current Liabilities........................................................ 1,808,168 1,379,546
LONG-TERM DEBT, net of current portion............................................... 1,215,348 1,121,678
------------ ------------
Total Liabilities................................................................ 3,023,516 2,501,224
------------ ------------
COMMITMENT AND CONTINGENCY
STOCKHOLDER'S EQUITY:
Common stock, $100 par, 5,000 shares authorized, 1,250 issued and outstanding........ 125,000 125,000
Additional paid-in capital........................................................... 215,814 215,814
Net unrealized loss on marketable securities......................................... (4,286) (5,696)
Retained earnings.................................................................... 49,716 21,114
------------ ------------
Total Stockholder's Equity....................................................... 386,244 356,232
------------ ------------
$ 3,409,760 $ 2,857,456
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
REVENUES........................................................................... $ 5,041,574 $ 5,158,440
COST OF REVENUES (SCHEDULE 1)...................................................... 2,319,741 2,652,662
------------ ------------
Gross Profit................................................................... 2,721,833 2,505,778
------------ ------------
OPERATING EXPENSES:
Selling expenses (schedule......................................................... 644,213 761,250
General and administrative expenses (schedule 3) 1,312,056 1,106,715
------------ ------------
Total Operating Expenses....................................................... 1,956,269 1,867,965
------------ ------------
Income Before Depreciation and Amortization........................................ 765,564 637,813
------------ ------------
DEPRECIATION AND AMORTIZATION:
Depreciation of property and equipment............................................. 380,375 325,230
Amortization of intangibles........................................................ 70,323 77,204
------------ ------------
Total Depreciation and Amortization............................................ 450,698 402,434
------------ ------------
Income From Operations............................................................. 314,866 235,379
------------ ------------
OTHER INCOME (EXPENSE):
Finance and service charge income.................................................. 65,930 31,134
Miscellaneous income............................................................... 31,028 17,034
Interest income.................................................................... 14,303 22,310
Gain on sale of assets............................................................. 4,890 207
Dividend income.................................................................... 3,957 4,335
Interest expense................................................................... (120,219) (140,007)
Loss on abandonment................................................................ (55,783) --
Conversion costs................................................................... (41,214) (45,352)
Relocation expense................................................................. (29,130) --
------------ ------------
Other Expense, Net............................................................. (126,238) (110,339)
------------ ------------
NET INCOME......................................................................... 188,628 125,040
RETAINED EARNINGS:
Beginning of year.................................................................. 21,114 39,724
Distributions...................................................................... (160,026) (143,650)
------------ ------------
End of year........................................................................ $ 49,716 $ 21,114
------------ ------------
------------ ------------
</TABLE>
F-34
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................. $ 188,628 $ 125,040
Adjustments to reconcile net income to net cash provided by operating activities:......
Depreciation........................................................................... 380,375 325,230
Amortization of intangible assets...................................................... 70,323 77,204
Other amortization..................................................................... (182) (231)
Gain on sale of assets................................................................. (4,890) (207)
Loss on abandonment.................................................................... 55,783 --
Changes in assets and liabilities:
(Increase) decrease in assets:.......................................................
Accounts receivable.................................................................. (207,843) 100,408
Employee advances.................................................................... (1,213) 12,566
Inventory and work-in-progress....................................................... (99,322) 100,591
Prepaid expenses..................................................................... (14,551) 52,563
Deposits............................................................................. (580.) 1,347.
Due from affiliate................................................................... 27,246 17,701
Other current assets................................................................. (5,951) --
Increase (decrease) in liabilities:
Accounts payable..................................................................... 395,473 (108,596)
Deferred revenue..................................................................... (19,654) (47,954)
Accrued expenses..................................................................... (90,407) 88,898
Payroll taxes withheld and accrued................................................... (6,106) 2,043
Sales and use tax payable............................................................ (326) (793)
----------- -----------
Net Cash Provided by Operating Activities.............................................. 666,803 745,810
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities.................................................... -- (3,200)
Proceeds from sale of equipment...................................................... 4,890 2,900
Capital expenditures................................................................. (652,452) (354,199)
Advances to stockholder.............................................................. (52,216) (19,657)
----------- -----------
Net Cash Used in Investing Activities.................................................. (699,778) (374,156)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on demand notes........................................................... 65,000 --
Proceeds from long-term debt......................................................... 292,650 105,274
Payments on long-term debt........................................................... (330,097) (233,846)
Distributions to stockholder......................................................... (103,600) (70,900)
----------- -----------
Net Cash used in Financing Activities.................................................. (76,047) (199,472)
----------- -----------
NET INCREASE (DECREASE) IN CASH........................................................ (109,022) 172,182
CASH - BEGINNING....................................................................... 235,963 63,781
----------- -----------
CASH - ENDING.......................................................................... $ 126,941 $ 235,963
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest................................................. $ 118.567 $ 140.764
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Fair value of property and equipment acquired and liabilities assumed.................. $ 215,750 $ 31,941
Payment on stockholder loan through non-cash distributions............................. 56,426 72,750
----------- -----------
----------- -----------
Payment on stockholder loan from personal assumption of note payable-- unsecured....... $ -- $ 148,254
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
NATURE OF OPERATIONS
Triple A Security Systems, Inc. (the company) is engaged in the sale, lease,
installation, service and monitoring of security systems to commercial and
residential customers. The company grants credit to customers throughout
Northeastern Pennsylvania. Consequently, the company's ability to collect the
amounts due from customers is affected economic fluctuations within the
geographic area.
REVENUE RECOGNITIONS
Rental, monitoring and service fees related to operating leases, monitoring
and service contracts are recorded as income when earned. All contracts contain
an initial noncancellable three or five year term with subsequent annual
renewals cancellable within sixty days of the anniversary date. Advance billings
are reflected as deferred revenue in the accompanying balance sheet.
Installation fees are recognized when the leased equipment is installed.
At December 31, 1996, the retail monthly recurring revenues were
approximately $245,576 and the wholesale monthly recurring revenues were
approximately $13,567.
INVENTORY AND WORK-IN-PROGRESS
Inventory consisting of equipment held for sale or lease and related repair
parts is valued at the lower of cost or market determined on a first-in,
first-out basis. Work-in-progress inventory is valued at cost.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed
primarily using the straight-line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Monitoring equipment.................................................................. 10-12
Other equipment....................................................................... 3-12
Office furniture and fixtures......................................................... 5-12
Vehicles.............................................................................. 5
Leasehold improvements................................................................ 7-40
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred. Cost of replacement and renewals are capitalized.
Upon sale or other disposition, the asset account and related deprecation
account are relieved, and any gain or loss is included in operations.
MARKETABLE SECURITIES
Effective January 1, 1995, the company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The company's investment securities are classified
as available-for-sale. Accordingly, unrealized gains and losses are excluded
from earnings and reported as a separate component of stockholders' equity.
Realized gains or losses are computed based on specific identification of the
securities sold.
F-36
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
SFAS No. 115 superseded SFAS No. 12, "Accounting for Certain Marketable
Securities," under which investment securities were generally carried at the
lower of aggregate market or amortized cost and unrealized gains were not
recognized. The effect of the initial adoption of SFAS No. 115 was not material.
INTANGIBLE ASSETS
Costs incurred in connection with the organization of the company and
purchases of contracts from predecessor entities are being amortized using the
straight-line method over the following lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Monitoring contracts................................................................... 7-8
Goodwill............................................................................... 5
Noncompete agreements.................................................................. 3-11
Loan origination fees.................................................................. 5-11
Deferred acquisition costs............................................................. 5
</TABLE>
INCOME TAXES
The company has elected to be taxed as an "S" Corporation as provided in the
Federal and State Income Tax Codes. All income and losses are passed through to
the stockholder and are taxed at the individual level. As such, no provision for
federal or state income taxes is included in the financial statements.
RECLASSIFICATIONS
Certain accounts for the year ended December 31, 1995 have been reclassified
for comparative purposes to conform with the year ended December 31, 1996.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
F-37
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 2: MARKETABLE SECURITIES
The following tables reflect the amortized cost and estimated fair values of
marketable debt and equity securities held at December 31, 1996 and 1995. All
investments held by the company are classified as available-for-sale.
<TABLE>
<CAPTION>
1996
-----------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Equity securities............................................... $ 7,805 $ 1,525 $ 16 $ 9,314
U.S. government obligations..................................... 12,292 2,873 -- 15,165
Mortgage-backed securities...................................... 40,664 -- 2,927 37,737
Mutual funds.................................................... 53,700 -- 5,740 47,960
---------- ----------- ----------- ----------
$ 114,461 $ 4,398 $ 8,683 $ 110,176
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
1995
-----------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Equity securities............................................... $ 7,805 $ 588 $ 279 $ 8,114
U.S. government obligations..................................... 12,086 2,644 -- 14,730
Mortgage-backed securities...................................... 40,688 -- 3,266 37,422
Mutual funds.................................................... 53,700 -- 5,383 48,317
---------- ----------- ----------- ----------
$ 114,279 $ 3,232 $ 8,928 $ 108,583
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
U.S. government obligations mature in 2024 and mortgage-backed securities
mature in 2023. The change in net unrealized holding losses on marketable debt
and equity securities in the amount of $1,359 and $11,632 has been charged to
stockholder's equity for the years ended December 31, 1996 and 1995,
respectively.
F-38
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 3: INVENTORY AND WORK-IN-PROGRESS
Inventory and work-in-progress consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials......................................................... $ 347,679 $ 264,942
Work-in-progress...................................................... 136,196 119,611
---------- ----------
$ 483,875 $ 384,553
---------- ----------
---------- ----------
</TABLE>
NOTE 4: RELATED PARTY TRANSACTIONS
The balance due from stockholder is an unsecured loan requiring interest
only at 5.65%. The balance at December 31, 1996 and 1995 due from affiliate of
$84,169 and $103,135 represents money advanced to a company which is
substantially owned by the stockholder of Triple A Security Systems, Inc.
Interest has been accrued on the 1996 and 1995 average balance at prime plus 1%.
Interest accrued for the years ended December 31, 1996 and 1995 was $8,280 and
$9,341, respectively.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Monitoring equipment.......................................... $ 686,851 $ 686,851
Other equipment............................................... 1,266,810 1,378,284
Office furniture & fixtures................................... 267,595 402,975
Vehicles...................................................... 470,447 355,615
Leasehold improvements........................................ 328,746 123,781
------------- -------------
3,020,449 2,947,506
Less accumulated depreciation (1,835,123) (2,125,590)
------------- -------------
$ 1,185,326 $ 821,916
------------- -------------
------------- -------------
</TABLE>
NOTE 6: OPERATING LEASES
LESSOR TRANSACTIONS
The company is the lessor of security monitoring equipment under operating
leases expiring in various years through 2001.
Property on or held for lease consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Monitoring equipment.............................................. $ 1,480,778 $ 1,303,611
Less accumulated depreciation..................................... (869,527) (760,987)
------------ ------------
$ 611,251 $ 542,624
------------ ------------
------------ ------------
</TABLE>
F-39
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 6: OPERATING LEASES (CONTINUED)
LESSEE TRANSACTIONS
The company is currently leasing its facilities under several one year or
month-to-month renewable operating lease agreements. Annual rentals were $47,715
and $43,478, in 1996 and 1995, respectively.
RELATED PARTY TRANSACTIONS
The company leases two of its facilities from the stockholder on a triple
net basis. One agreement is a noncancellable lease requiring payments that
increase annually at predetermined amounts through June, 2000. Thereafter,
payments are adjusted annually in accordance with the Consumer Price Index. The
other is a month-to-month lease at $1,070 per month. Rent expense for the year
ended December 31, 1996 was $69,533.
At December 31, 1996, minimum future lease payments under the noncancellable
lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING LEASE
DECEMBER 31 OBLIGATION
- ---------------------------------------------------------------- ------------
<S> <C>
1997............................................................ $ 97,067
1998............................................................ 109,867
1999............................................................ 122,667
2000............................................................ 128,000
2001............................................................ 128,000
Thereafter...................................................... 1,845,000
------------
$ 2,430,601
------------
------------
</TABLE>
NOTE 7: INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization consist of the following
at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Monitoring contracts.................................................. $ 82,051 $ 112,507
Goodwill.............................................................. 605 1,815
Noncompete agreements................................................. 114,824 132,642
Loan origination fees................................................. 4,147 6,280
Deferred acquisition costs............................................ 9,353 28,060
---------- ----------
$ 210,980 $ 281,304
---------- ----------
---------- ----------
</TABLE>
NOTE 8: DEMAND NOTES PAYABLE
The company has available $130,000 under a line of credit agreement with
Summit Bank, expiring June 30, 1997. The terms are interest payable monthly at
prime plus 1% on the outstanding balance, with principal and interest due in
full at the expiration of the term. This note is cross-collateralized with the
company's other notes with Summit Bank. At December 31, 1996, the company had
$55,000 outstanding on this line of credit.
The company has available $150,000 under a revolving line of credit
agreement with Summit Bank, expiring April, 1997. The terms are interest payable
monthly at prime plus .25% on the outstanding balance, with principal and
interest due in full at the expiration of the term. This note is cross-
F-40
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 8: DEMAND NOTES PAYABLE (CONTINUED)
collateralized and cross-defaulted with the company's other notes with Summit
Bank. At December 31, 1996, the company had $10,000 outstanding on this line of
credit.
NOTE 9: LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Summit Bank:
Term loan payable in monthly installments of $15,946, including
interest at 8.13%, maturing October, 2000. Pledged as collateral
is accounts receivable. The loan is personally guaranteed by the
stockholder. The loan has cross-default provisions with the
other Summit Bank notes......................................... $ 642,544 $ 774,783
Term loan payable in monthly installments of $1,200, including
interest at 8.13%, maturing October, 2000. Pledged as collateral
is accounts receivable. The loan is personally guaranteed by the
stockholder. The loan has cross-default provisions with the
other Summit Bank notes......................................... 48,355 58,306
Revolving line of credit, payable monthly, at 1.67% of the
outstanding principal balance plus interest at prime plus 1%,
with a floor of 6% and a ceiling of 10%, maturing October, 1999.
Maximum borrowing under this agreement is $500,000. Pledged as
collateral are accounts receivable, inventory, machinery,
equipment, furniture and fixtures. The loan is personally
guaranteed by the stockholder. The note is cross-collateralized
and has cross-default provisions with the other summit Bank
notes........................................................... 234,731 176,321
Term note payable in monthly installments of $1,670, including
interest at 8.5%, maturing September, 1997. Pledged as
collateral are accounts receivable, inventory, machinery,
equipment, furniture and fixtures. The loan is personally
guaranteed by the stockholder. The note is cross-collateralized
and has cross-default provisions with the other Summit Bank
notes........................................................... 16,428 34,204
Term note payable in monthly installments of $2,556, including
interest at 8.35%, maturing October, 2001. Pledged as collateral
are accounts receivable, inventory, machinery, equipment,
furniture and fixtures. The loan is personally guaranteed by the
stockholder. The note is cross-collateralized and has
cross-default provisions with the other Summit Bank notes....... 121,180 --
Former owner--Acquired Company:
Promissory note payable in monthly installments of $3,744,
including interest at 8% maturing October, 2003. Pledged as
collateral are assets acquired in acquisition as well as the
personal guarantee of the stockholder and the common stock of
Triple A Security Systems, Inc.................................. 233,757 258,886
</TABLE>
F-41
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 9: LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
Fidelity Bank:
<S> <C> <C>
Two notes payable in monthly installments of $706, including
interest at prime plus .5%, maturing in April, 1997 and January,
1998. Pledged as collateral are vehicles with a book value of
$11,292......................................................... 7,340 14,781
Note payable in monthly installments of $1,707, including interest
at prime plus .75%, maturing April, 1997. Pledged as collateral
are vehicles with a book value of $20,660....................... 6,237 25,176
First Heritage Bank:
Note payable in monthly installments of $266, including interest
at prime plus .5%, maturing December, 1998. Pledged as
collateral is a vehicle with a book value of $3,917............. 5,827 8,390
Note payable in monthly installments of $798, including interest
at prime plus .5%, maturing January, 1999. Pledged as collateral
are vehicles with book value of $19,690......................... 18,173 25,734
Note payable in monthly installments of $6,252, including interest
at 8.75%, maturing June, 2000. Interest of $1,640 way payable
monthly through December, 1996. Pledged as collateral are
vehicles with a book value of $193,934.......................... 225,000
Lake Ariel Bank:
Installment note payable matured November, 1996................... 4,679
------------ ------------
1,559,572 1,381,260
Less current portion.......................................... 344,224 259,582
------------ ------------
$ 1,215,348 $ 1,121,678
------------ ------------
------------ ------------
</TABLE>
F-42
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 9: LONG-TERM DEBT (CONTINUED)
The aggregate principal payments required on the long-term debt obligations
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1997............................................................................ $ 344,224
1998............................................................................ 332,404
1999............................................................................ 465,758
2000............................................................................ 282,587
2001............................................................................ 61,433
Thereafter...................................................................... 73,166
------------
$ 1,559,572
------------
------------
</TABLE>
NOTE 10: COMMITMENT AND CONTINGENCY
COMMITMENT--SUMMIT BANK LOAN COVENANTS
Under the terms of the company's loan agreements with Summit Bank there are
various covenants including minimum debt coverage ratio requirements, maximum
officer salary, limitations on distributions to the stockholder, and limitations
on acquisitions of other companies. The company must also maintain a primary
depository relationship with Summit Bank. The company was in compliance with all
covenants at December 31, 1996 and 1995.
CONTINGENCY
A customer, to which the company provides installation, repair and alarm
monitoring service, incurred a loss of approximately $817,008, due to a burglary
at its warehouse in October, 1993. Counsel for the company's customer has
advised the company that it has considered the possibility of seeking
contribution or indemnity from the company to the extent of its loss.
Counsel for the company has advised that there is no litigation with regard
to this matter at the time of the release of these financial statements. The
company believes that any potential claim would be without merit and will defend
its position vigorously. The company maintains $10 million of commercial general
liability/errors and omissions insurance.
NOTE 11: PROFIT SHARING PLAN
The company maintains a voluntary 401K profit-sharing plan that covers
substantially all of the employees. Contributions to the plan are at the
discretion of the Board of Directors. For the years ended December 31, 1996 and
1995, contributions of $8,792 and $5,772 have been made to the plan.
NOTE 12: SUBSEQUENT EVENT
The company borrowed $50,000 from Summit Bank in February, 1997. The note
requires monthly payments of $1,019, including interest at 8.22% through
February, 2002. The note is cross-collateralized and has cross-default
provisions with the other Summit Bank notes.
F-43
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma combined statement of operations for the
year ended June 30, 1997, gives effect to the following: (i) the sale of
2,400,000 shares of common stock through a secondary offering and the use of the
net proceeds therefrom to redeem preferred stock, (ii) a one-for-three reverse
stock split, and (iii) the Company's acquisition of Triple A Security Systems,
Inc. (Triple A) as if such events had been completed at July 1, 1996 for
purposes of the pro forma statement of operations and as of June 30, 1997 for
purposes of the pro forma balance sheet. The historical information pertaining
to Triple A is for the 12 months ended June 30, 1997. The pro forma information
is based on the historical financial statements of the Company and Triple A,
giving effect to the transactions under the purchase method of accounting and
the assumptions and adjustments described in the accompanying notes to the
unaudited pro forma financial statement. In the preparation of the pro forma
combined balance sheet, the columns pertaining to Triple A contain information
as to the assets and the liabilities acquired as of its date of acquisition.
This pro forma statement of operations may not be indicative of the results
that actually would have occurred if the acquisition had occurred on July 1,
1996.
F-44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Use of Proceeds................................. 17
Price Range of Common Stock..................... 18
Dividend Policy................................. 18
Capitalization.................................. 19
Selected Financial Information.................. 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 22
Business........................................ 29
Management...................................... 44
Principal Stockholders.......................... 51
Certain Relationships and Related
Transactions.................................. 52
Description of Securities....................... 52
Shares Eligible for Future Sale................. 57
Underwriting.................................... 58
Legal Matters................................... 60
Experts......................................... 60
Available Information........................... 60
Index to Financial Statements................... F-1
</TABLE>
2,400,000 SHARES
RESPONSE USA, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
HAMPSHIRE SECURITIES CORPORATION
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. The Company's Certificate of Incorporation includes the
following language:
"No director of the Corporation shall be liable to the Corporation or
any of its stockholders for monetary damages for breach of fiduciary
duty as a director; PROVIDED that this provision does not eliminate the
liability of the director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of Title 8 of the
Delaware Code, or (iv) for any transaction from which the director
derived an improper personal benefit."
Article Ninth of the Certificate of Incorporation of the Company permits
indemnification of directors of the Corporation. Such Article provides as
follows:
"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director
derived an improper personal benefit. Any repeal or modification of this
paragraph shall not adversely affect any right or protection of a director
of the Corporation existing hereunder with respect to any act or omission
occurring prior to such repeal or modification.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the liability of a
director, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the amended
Delaware General Corporation Law. Any repeal or modification of this
paragraph shall not adversely affect any right or protection of a director
of the Corporation existing hereunder with respect to any act or omission
occurring prior to such repeal or modification."
Additionally, the Company's Bylaws provide that the Company will indemnify
each of its directors and officers with respect to all liability and loss
suffered and expenses incurred by such person in any action, suit or proceeding
in which such person was or is made or threatened to be made a party or is
otherwise involved by reason of the fact that such person is or was a director
or officer of the Company. The Company is also obligated to pay the expenses of
the directors and officers incurred in defending such proceedings, subject to
reimbursement if it is subsequently determined that such person is not entitled
to indemnification.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby (items
marked with an asterisk (*) represent estimated expenses):
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 10,053
Legal Fees and Expenses........................................... *
Blue Sky Fees (including counsel fees)............................ *
NASD Filing Fees.................................................. 3,818
NASDAQ SmallCap Fee............................................... *
Accounting Fees and Expenses...................................... *
Transfer Agent and Registrar Fees................................. *
Printing and Engraving Expenses................................... *
Underwriting Expense Allowance.................................... *
Miscellaneous..................................................... *
---------
Total............................................................. $ *
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is information regarding the number
of shares of Common Stock sold or issued by the Company, since October 1994, the
consideration received by the Company for such shares, and information relating
to the section of the Securities Act, or rule of the Commission under which
exemption from registration was claimed. None of these securities was registered
under the Securities Act. Except as set forth below no sales and/or issuance of
securities involved the use of an underwriter and no commissions were paid in
connection with the sale of any securities.
In March 1997, the Company issued 8,334 shares of Common Stock to
Reliable-Hawk, Inc. in connection with a purchase of monitoring contracts and
5,567 shares of Common Stock pursuant to a guarantee of stock valuation in
connection with an acquisition.
In March 1997, the Company issued 364,722 shares of Common Stock to BKR,
Inc. in connection with a joint venture (see Note 3 of Notes to Consolidated
Financial Statements of the Company).
In December 1996 the Company issued 4,656 shares of Common Stock to the
owner of an acquired company as payment for purchase holdbacks.
During Fiscal 1996 and Fiscal 1997, the Company issued 103,015 shares of
Common Stock in connection with certain acquisitions (see Note 2 of Notes to
Consolidated Financial Statements of the Company). Such amount includes 5,000
shares of Common Stock issued as payment of deferred financing costs during
Fiscal 1996.
During Fiscal 1996, the Company issued 667 shares of Common Stock as payment
for consulting services.
During Fiscal 1996, the Company issued 10,667 shares of Common Stock as
payment of a note payable in connection with the acquisition of a division of
ERS and issued 47,032 shares of Common Stock as payment of notes payable to
stockholders and officers.
From June 30, 1996 to July 2, 1996, the Company issued 7,500 shares of
Preferred Stock to accredited investors and received aggregate gross proceeds of
$7,500,000. The Company paid the placement agent, Zannett Securities Corp., fees
of $975,000.
In July 1996, in connection with obtaining the Credit Line, the Company
issued a warrant to an affiliate of the Bank to purchase 344,045 shares of
Common Stock at an exercise price of $4.50 per share.
II-2
<PAGE>
On June 30, 1996, the Company, as part of a consulting agreement, issued
warrants to purchase 66,667 shares of Common Stock at an exercise price of
$15.375.
On June 30, 1996, in connection with the issuance of the Preferred Stock,
the Company issued warrants to accredited investors to purchase 166,667 shares
of Common Stock at an exercise price of $18.39 per share and 83,334 shares of
Common Stock at an exercise price of $24.00 per share. On June 30, 1996, the
Company also issued warrants to a consultant to purchase 25,000 shares of Common
Stock at an exercise price of $13.50.
During January and February 1996, the Company completed a private placement
of 61 units to accredited investors. Each unit consisted of a $25,000 10%
Convertible Subordinated Promissory Note due December 31, 1997 and Class C
Warrants to purchase 334 shares of Common Stock. The Company sold such
securities through Lew Lieberbaum & Co., Inc., for which the Company paid fees
of $219,745.
In November 1995, as part of consulting agreements, the Company issued
warrants to purchase 428,334 shares of Common Stock at exercise prices ranging
from $7.50 to $10.50.
During July through November 1995, the Company completed a private placement
of three units to accredited investors. Each unit consisted of a $145,000 13.8%
Convertible Subordinated Promissory Note due June 30, 1997 and Class C Warrants
to purchase 2,223 shares of Common Stock.
During January through April 1995, the Company completed a private placement
of 36.5 units to accredited investors. Each unit consisted of a $25,000 12%
Convertible Subordinated Promissory Note due December 31, 1996 and Class C
Warrants to purchase 334 shares of Common Stock. The Company sold such
securities through Lew Lieberbaum & Co., Inc., for which the Company paid fees
of $121,825.
The Company has issued shares under its NQO Plan and ISO Plan and
non-qualified options outside of such plans during the last three fiscal years
to employees, officers, directors and consultants.
If the acquisition of Triple A is consummated, the Company will issue shares
of Common Stock valued at $1.75 million, based upon the lesser of the market (as
defined) at closing or the price of the Common Stock pursuant to this offering.
Each of the foregoing transactions was exempt from registration under the
Securities Act by virtue of the provisions of Sections 3(a)(9), 3(b) or 4(2) of
the Securities Act. None of such transactions involved any general solicitation.
Each purchaser of the securities described above has represented that he
understands that the securities acquired may not be sold or otherwise
transferred absent registration under the Securities Act or the availability of
an exemption from the registration requirements of the Securities Act, and each
certificate evidencing the securities owned by each purchaser bears or will bear
upon issuance a legend to that effect.
ITEM 27. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement
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.(1)
2(b) Plan and Agreement of Merger dated March 18, 1992 by and between Response USA, Inc. (Delaware) and
Lifecall America, Inc.(1)
2(c) Delaware Certificate of Ownership and Merger Merging Response USA, Inc., a Nevada Corporation with
and into its wholly-owned subsidiary Response USA, Inc., a Delaware corporation(1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2(d) Nevada Articles of Merger of Response USA, Inc. (formerly Lifecall America, Inc.), a Nevada
corporation, into Response USA, Inc., a Delaware corporation(1)
3(a) Certificate of Incorporation of the Company(3)
3(b) Bylaws of the Company(1)
4(a) Form of Common Stock Certificate(1)
4(b) Form of Warrant Agreement(1)
4(c) Form of Class A Warrant Certificate(1)
4(d) Form of Class B Warrant Certificate(1)
4(e) Form of Class C Warrant Certificate(1)
4(f) Form of Preferred Warrant Certificate(2)
4(g) Form of Representative's Warrants
4(h) 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(1)
4(i) Restricted Stock Option Plan of the Company adopted by the Company's Board on August 20, 1990, as
amended August 30, 1991, January 2, 1992 and March 18, 1992(1)
4(j) 1997 Stock Option Plan of the Company adopted by the Company's Board in September 1997
5 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP(3)
10(a) Lifecall Systems, Inc. Third Amended Plan of Reorganization with Order Affirming Third Amended Plan
of Reorganization dated January 9, 1990(1)
10(b) Employment Agreement dated August 28, 1992, by and between the Company and Richard R. Brooks, and
Addendum thereto dated October 1, 1992, as amended(2)
10(c) Employment Agreement dated August 28, 1992, by and between the Company and Ronald A. Feldman, and
Addendum thereto dated October 1, 1992, as amended(2)
10(d) Employment Agreement dated March 4, 1994, by and among the Company, USS and Todd Herman(2)
10(e) Employment Agreement dated March 4, 1994, by and among the Company, USS and John Colehower(2)
10(f) Agreement dated as of November 22, 1996 between Sloan Electronics, Incorporated and the Company(2)
10(g) Asset Purchase Agreement dated October 1, 1997 between the Company and Triple A Security Systems,
Inc.(2)
10(h) Loan and Security Agreement dated as of June 30, 1996 between Mellon Bank, N.A. and the Company(2)
10(i) Purchase Agreement dated as of March 4, 1997, among BKR, Inc., the Company and HealthLink, Ltd.(2)
10(j) Operating Agreement of HealthLink, Ltd. dated as of March 4, 1997(2)
10(k) Agreement dated as of June 18, 1997, by and among the Company and the holders of the Preferred Stock
who are signatories thereto(3)
11 Statement re: computation of earnings (loss) per share
21 Subsidiaries of the registrant(2)
23(a) Consent of Deloitte & Touche LLP
23(b) Consent of Fishbein & Company, PC
23(c) Consent of Terry H. Jones, CPA
23(d) Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the Opinion filed as Exhibit 5)
24 Power of Attorney (included on page II-6)
27 Financial Data Schedule
</TABLE>
II-4
<PAGE>
- ------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (registration number 33-47589).
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1997.
(3) To be filed by amendment.
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement;
(iii) to include any additional or changed material information on
the plan of distribution;
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be treated as a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The Registrant hereby undertakes that it will:
(1) for determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective; and
(2) for the purpose of determining any liability under the Securities
Act, treat each post-effective amendment that contains a form of prospectus
as a new registration statement relating to the securities offered therein,
and the offering of such securities at that time as the initial bona fide
offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of
Lawrenceville, New Jersey, on October 9, 1997.
<TABLE>
<S> <C> <C>
RESPONSE USA, INC.
By: /s/ RICHARD M. BROOKS
-----------------------------------------
Richard M. Brooks
CHIEF EXECUTIVE OFFICER, PRESIDENT, CHIEF
FINANCIAL OFFICER AND CHAIRMAN OF THE
BOARD
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard Brooks and Ronald A. Feldman, or either
one of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place, and stead,
in any and all capacities, to sign (i) any and all pre- or post-effective
amendments to this Registration Statement, and to file the same with all
exhibits thereto, and other documents in connection therewith, and (ii) any
registration statements, and any and all amendments thereto, relating to the
offering covered hereby filed pursuant to Rule 462(b) under the Securities Act,
with the Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
Chief Executive Officer,
President, Chief Financial
/s/ RICHARD M. BROOKS Officer and Chairman of the
------------------------------------------- Board (Principal Executive October 9, 1997
Richard M. Brooks Officer) (Principal Accounting
and Financial Officer)
/s/ RONALD A. FELDMAN Vice President, Chief Operating
------------------------------------------- Officer, Secretary, Treasurer October 9, 1997
Ronald A. Feldman and Director
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ ROBERT M. RUBIN
------------------------------------------- Director October 9, 1997
Robert M. Rubin
/s/ STUART LEVIN
------------------------------------------- Director October 9, 1997
Stuart Levin
------------------------------------------- Director October , 1997
Todd E. Herman
/s/ BRUCE LUEHRS
------------------------------------------- Director October 9, 1997
Bruce Luehrs
/s/ STUART R. CHALFIN
------------------------------------------- Director October 9, 1997
Stuart R. Chalfin
</TABLE>
II-7
<PAGE>
Exhibit 1.1
2,400,000 SHARES OF COMMON STOCK
RESPONSE USA, INC.
UNDERWRITING AGREEMENT
__________ ___, 1997
Hampshire Securities Corporation
640 Fifth Avenue
New York, New York 10019
Gentlemen:
The undersigned, Response USA, Inc., a Delaware corporation (the
"Company"), hereby confirms its agreement with Hampshire Securities Corporation,
as representative (the "Representative") of the several underwriters identified
in Schedule I hereto (the "Underwriters") as follows:
1. INTRODUCTION. The Company proposes to issue and sell to the
Underwriters an aggregate amount of 2,400,000 shares of common stock, par value
$.008 per share (the "Common Stock"), of the Company. Such shares of Common
Stock are hereinafter referred to as the "Stock." In addition, solely for the
purpose of covering over-allotments, the Company proposes to grant to the
Underwriters an option (the "Over-allotment Option") to purchase from it, in the
aggregate, up to an additional 360,000 shares (the "Additional Stock") of Common
Stock. The Common Stock is more fully described in the prospectus referred to
below.
2. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to, and agrees with, the
Underwriters that:
1
<PAGE>
(1) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, and may have filed one or more
amendments thereto, on Form SB-2 (Registration File No. 333-_______),
including in such registration statement and each such amendment a related
preliminary prospectus, for the registration of the Stock, the Additional
Stock, the common stock purchase warrants referred to in Section 5(a)(17)
(the "Representative's Warrants") and the shares of Common Stock underlying
the Representative's Warrants (the "Warrant Stock") under the Securities
Act of 1933, as amended (the "Act"). As used in this Agreement, the term
"Registration Statement" shall refer to such registration statement, as
amended, on file with the Commission at the time such registration
statement becomes effective under the Act (including the prospectus,
financial statements, exhibits, and all other documents filed as a part
thereof, provided, however, that such registration statement, at the time
it becomes effective, may omit such information as is permitted to be
omitted from such registration statement when it becomes effective under
the Act pursuant to Rule 430A of the General Rules and Regulations of the
Commission under the Act (the "Regulations"), which information (the "Rule
430A Information") shall be deemed to be included in such registration
statement when a final prospectus is filed with the Commission in
accordance with Rules 430A and 424(b)(1) or (4) of the Regulations); the
term "Preliminary Prospectus" shall refer to each prospectus included in
the Registration Statement, or any amendments thereto, before the
Registration Statement becomes effective under the Act, the form of
prospectus omitting Rule 430A Information included in the Registration
Statement when the Registration Statement becomes effective under the Act,
if applicable (the "Rule 430A Prospectus"), and any prospectus filed by the
Company with the Representative's consent pursuant to Rule 424(a) of the
Regulations; and the term "Prospectus" shall refer to the final prospectus
in the form first filed pursuant to Rule 424(b)(1) or (4) of the
Regulations or, if no such filing is required, the form of final prospectus
included in the Registration Statement.
2
<PAGE>
(2) When the Registration Statement becomes effective under the Act,
and at all times subsequent thereto up to and including the Closing Date
(as defined in Section 3) and each Additional Closing Date (as defined in
Section 3), and during such longer period as the Prospectus may be required
to be delivered in connection with sales by the Underwriters or a dealer,
and during such longer period until any post-effective amendment thereto
shall become effective under the Act, the Registration Statement (and any
post-effective amendment thereto) and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment or supplement to the Registration Statement or the Prospectus),
respectively, will contain all statements which are required to be stated
therein in accordance with the Act and the Regulations, will comply with
the Act and the Regulations, and will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and no
event will have occurred which should have been set forth in an amendment
or supplement to the Registration Statement or the Prospectus which has not
then been set forth in such an amendment or supplement; if a Rule 430A
Prospectus is included in the Registration Statement at the time it becomes
effective under the Act, the Prospectus filed pursuant to Rules 430A and
424(b)(1) or (4) of the Regulations will contain all Rule 430A Information
and all statements which are required to be stated therein in accordance
with the Act or the Regulations, will comply with the Act and the
Regulations, and will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; and each
Preliminary Prospectus, as of the date filed with the Commission, contained
all statements required to be stated therein in accordance with the Act and
the Regulations, complied with the Act and the Regulations, and did not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; except that no representation or
warranty is made in this Section 2(a)(2) with respect to
3
<PAGE>
statements or omissions made in reliance upon, and in conformity with,
written information furnished to the Company as stated in Section 8(b) with
respect to any Underwriter by or on behalf of such Underwriter through the
Representative expressly for inclusion in the Registration Statement, any
Preliminary Prospectus, or the Prospectus, or any amendment or supplement
thereto.
(3) The Company has filed with the Commission on a timely basis all
filings required of a company whose securities have been registered under
the Exchange Act. All information contained in such filings (such filings,
together with any filings made subsequent to the date hereof (the "Exchange
Act Filings")) is and will be true, accurate and complete in all material
respects and all of the Exchange Act Filings filed prior to the date of
this Agreement have been previously delivered to the Placement Agent. The
Company covenants to maintain the registration of its Common Stock under
the Exchange Act and to make all filings thereunder on a timely basis. For
the purpose of this paragraph, filings pursuant to Rule 12b-25 of the
Exchange Act shall be deemed timely.
(4) Neither the Commission nor the "blue sky" or securities authority
of any jurisdiction has issued an order (a "Stop Order") suspending the
effectiveness of, or preventing or suspending the use of, the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, refusing to permit the effectiveness of the
Registration Statement, or suspending the registration or qualification of
the Stock, the Additional Stock, the Representative's Warrants or the
Warrant Stock, nor has any of such authorities instituted or threatened to
institute any proceedings with respect to a Stop Order.
(5) Any contract, agreement, instrument, lease, or license required
to be described in the Registration Statement or the Prospectus has been
properly described therein. Any contract, agreement, instrument, lease, or
license required to be filed as an exhibit to the Registration Statement
has been filed with the Commission as an exhibit to the Registration
Statement.
4
<PAGE>
(6) The Company has no subsidiary or subsidiaries (as defined in the
Regulations) other than as disclosed in the Registration Statement. The
Company is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware, with full power and
authority, and all necessary consents, authorizations, approvals, orders,
licenses, certificates, and permits of and from, and declarations and
filings with, all federal, state, local, and other governmental authorities
and all courts and other tribunals, to own, lease, license, and use its
properties and assets and to conduct its business in the manner described
in the Prospectus. The Company is duly qualified to do business as a
foreign corporation and is in good standing as such in every jurisdiction
in which its ownership, leasing, licensing, or use of property and assets
or the conduct of its business makes such qualification necessary, except
where the failure to be so qualified does not amount to a material
liability or disability to the Company.
(7) The Company has authorized capital stock as disclosed in the
Registration Statement, of which the Prospectus is a part. Except as
disclosed in the Prospectus, each outstanding share of Common Stock is
validly authorized and issued, fully paid, and nonassessable, without any
personal liability attaching to the ownership thereof, has not been issued
and is not owned or held in violation of any preemptive rights of
stockholders. There is no commitment, plan, or arrangement to issue, and
no outstanding option, warrant, or other right calling for the issuance of,
any share of capital stock of the Company or any security or other
instrument which by its terms is convertible into, or exercisable or
exchangeable for, capital stock of the Company, except as may be properly
described in the Prospectus. There is outstanding no security or other
instrument which by its terms is convertible into, or exercisable or
exchangeable for, capital stock of the Company, except as may be properly
be described in the Prospectus. The certificates evidencing the Common
Stock are in proper form.
(8) The consolidated financial statements of the Company included in
the Registration Statement and the Prospectus fairly present, with respect
to the
5
<PAGE>
Company, the financial position, the results of operations, the cash flows,
and the other information purported to be shown therein at the respective
dates and for the respective periods to which they apply. Such financial
statements have been prepared in accordance with generally accepted
accounting principles (except to the extent that certain footnote
disclosures regarding any stub period may have been omitted in accordance
with the applicable rules of the Commission under the Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
consistently applied throughout the periods involved, are correct and
complete in all material respects, and are in accordance with the books and
records of the Company. Deloitte & Touche, LLP, the accountants whose
report on the audited financial statements is filed with the Commission as
a part of the Registration Statement, are, and during the periods covered
by their report(s) included in the Registration Statement and the
Prospectus were, independent certified public accountants with respect to
the Company within the meaning of the Act and the Regulations. No other
financial statements are required by Form SB-2 or otherwise to be included
in the Registration Statement or the Prospectus. There has at no time been
a material adverse change in the financial condition, results of
operations, business, properties, assets, liabilities, or future prospects
of the Company from the latest information set forth in the Registration
Statement or the Prospectus, except as may be properly described in the
Prospectus.
(9) There is no litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation pending, threatened, or,
to the best knowledge of the Company, in prospect (or any basis therefor)
with respect to the Company or any of its operations, businesses,
properties, or assets, except as may be properly described in the
Prospectus or such as individually or in the aggregate do not now have, and
will not in the future have, a material adverse effect upon the operations,
business, properties, or assets of the Company. The Company is not in
violation of, or in default with respect to, any law, rule, regulation,
order, judgment, or decree, except as may be properly described in the
Prospectus or such as in the
6
<PAGE>
aggregate do not now have, and will not in the future have, a material
adverse effect upon the operations, business, properties, or assets of the
Company; nor is the Company currently required to take any action in order
to avoid any such violation or default.
(10) The Company has good title to all properties and assets which the
Prospectus indicates are owned by it, free and clear of all liens, security
interests, pledges, charges, encumbrances, and mortgages, except such as to
not materially and adversely affect the value of such property and do not
interfere with the use made or proposed to made of such property (or except
as may be properly described in the Prospectus). No real property leased,
licensed, or used by the Company lies in an area which is, or to the
knowledge of the Company will be, subject to zoning, use, or building code
restrictions which would prohibit, and no state of facts relating to the
actions or inactions of another person or entity or his or its ownership,
leasing, licensing, or use of any real or personal property exists or will
exist which would prevent, the continued effective leasing, licensing, or
use of such real property in the business of the Company as presently
conducted or as the Prospectus indicates it contemplates conducting, with
such exceptions as are not material and do not interfere with the use made
or proposed to be made of such property and buildings by the Company (or
except as may be properly described in the Prospectus).
(11) Neither the Company nor, to the knowledge of the Company, any
other party, is now, or is expected by the Company to be, in violation or
breach of, or in default with respect to, any material provision of any
contract, agreement, instrument, lease, license, arrangement, or
understanding which is material to the Company, and each such contract,
agreement, instrument, lease, license, arrangement, and understanding is in
full force and effect and is the legal, valid, and binding obligation of
the parties thereto and is enforceable as to them in accordance with its
terms. The Company enjoys peaceful and undisturbed possession under all
leases and licenses under which it is operating. Except as described in
the Prospectus, the Company is not a party to, or bound by, any contract,
agreement,
7
<PAGE>
instrument, lease, license, arrangement, or understanding, or subject to
any charter or other restriction, which has had, or may in the future have,
a material adverse effect on the financial condition, results of
operations, business, properties, assets, liabilities, or future prospects
of the Company. The Company is not in violation or breach of, or in
default with respect to, any term of its certificate of incorporation, as
amended, (or other charter document) or by-laws, as amended.
(12) All United States and foreign patents, patent applications,
trademarks, trademark applications, trade names, service marks, copyrights,
franchises, and other intangible properties and assets (all of the
foregoing being herein called "Intangibles") that the Company owns or has
pending, or under which it is licensed, are in good standing and
uncontested, except as may be properly described in the Prospectus. There
is no right under any Intangible necessary to the business of the Company
as presently conducted or as the Prospectus indicates it contemplates
conducting, except as may be so designated in the Prospectus. The Company
has not infringed, is not infringing, or has not received notice of (or
knows of any basis for) a third party claim of infringement with respect to
asserted Intangibles of others, except as may be properly described in the
Prospectus. To the knowledge of the Company, there is no infringement by
others of Intangibles of the Company. To the knowledge of the Company,
there is no Intangible of others which has had, or may in the future have a
material adverse effect on the financial condition, results of operations,
business, properties, assets, liabilities or future prospects of the
Company, except as may be properly described in the Prospectus.
(13) Neither the Company nor any director, officer, agent, employee,
or other person associated with, or acting on behalf of, the Company has,
directly or indirectly: used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses relating to
political activity; made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political
parties or campaigns from corporate funds; violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or made any bribe,
rebate,
8
<PAGE>
payoff, influence payment, kickback, or other unlawful payment. The
Company's internal accounting controls and procedures are sufficient to
cause the Company to comply in all respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(14) The Company has all requisite power and authority to execute,
deliver, and perform this Agreement and the Representative's Warrants. All
necessary corporate proceedings of the Company have been duly taken to
authorize the execution, delivery, and performance by the Company of this
Agreement and the Representative's Warrants. This Agreement has been duly
authorized, executed, and delivered by the Company, is the legal, valid,
and binding obligation of the Company, and is enforceable as to the Company
in accordance with its terms. The Representative's Warrants have been duly
authorized by the Company and, when executed and delivered by the Company,
will be legal, valid, and binding obligations of the Company, each
enforceable as to the Company in accordance with its terms. No consent,
authorization, approval, order, license, certificate, or permit of or from,
or declaration or filing with, any federal, state, local, or other
governmental authority or any court or other tribunal is required by the
Company for the execution, delivery, or performance by the Company of this
Agreement or the Representative's Warrants (except filings under the Act
which have been or will be made before the Closing Date and filings and
consents consisting only of filings and consents under "blue sky" or
securities laws which have been obtained at or prior to the date of this
Agreement). No consent of any party to any contract, agreement,
instrument, lease, license, arrangement, or understanding to which the
Company is a party, or to which any of their respective properties or
assets are subject, is required for the execution, delivery, or performance
of this Agreement and the Representative's Warrants; and the execution,
delivery, and performance of this Agreement and the Representative's
Warrants will not violate, result in a breach of, conflict with, result in
the creation or imposition of any lien, charge, or encumbrance upon any
properties or assets of the Company pursuant to the terms of, or (with or
without the giving of notice or the passage of time or both) entitle any
party to terminate or call a default under, any
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such contract, agreement, instrument, lease, license, arrangement, or
understanding, or violate, result in a breach of, or conflict with any term
of the certificate of incorporation, as amended (or other charter document)
or by-laws, as amended, of the Company, or violate, result in a breach of,
or conflict with any law, rule, regulation, order, judgment, or decree
binding on the Company or to which any of its respective operations,
businesses, properties, or assets are subject.
(15) The Stock and the Additional Stock are validly authorized and,
when issued and delivered in accordance with this Agreement, will be
validly issued, fully paid, and nonassessable, without any personal
liability attaching to the ownership thereof, and will not be issued in
violation of any preemptive or similar rights of stockholders, and the
Underwriters will receive good title to the Stock and the Additional Stock,
free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements, and voting trusts. The Common
Stock, the Stock, and the Additional Stock conform to all statements
relating thereto contained in the Registration Statement or the Prospectus.
(16) The Warrant Stock is validly authorized and has been duly and
validly reserved for issuance and, when issued and delivered upon exercise
of the Representative's Warrants in accordance with the terms thereof, will
be validly issued, fully paid, and nonassessable, without any personal
liability attaching to the ownership thereof, and will not be issued in
violation of any preemptive rights of stockholders; and the holders of the
Representative's Warrants will receive good title to the securities
purchased by them upon the exercise of the Representative's Warrants, free
and clear of all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements, and voting trusts. The Representative's Warrants
and the Warrant Stock conform to all statements relating thereto contained
in the Registration Statement or the Prospectus.
(17) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as may
otherwise be properly described in the Prospectus, the Company has not (i)
issued any securities
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or incurred any liability or obligation, primary or contingent, for
borrowed money, (ii) entered into any transaction not in the ordinary
course of business, (iii) declared or paid any dividend on its capital
stock, or (iv) experienced any adverse changes or any development which may
materially adversely effect the condition (financial or otherwise), net
assets or stockholders' equity, results of operations, business, key
personnel, assets, or properties of the Company.
(18) Neither the Company nor any of its officers, directors, or
affiliates (as defined in the Regulations), has taken or will take,
directly or indirectly, prior to the termination of the offering
contemplated by this Agreement, any action designed to stabilize or
manipulate the price of any security of the Company, or which has caused or
resulted in, or which might in the future reasonably be expected to cause
or result in, stabilization or manipulation of the price of any security of
the Company, to facilitate the sale or resale of any of the Stock or the
Additional Stock.
(19) The Company has obtained from each of its directors, officers,
and securityholders, a written agreement, in form and substance
satisfactory to counsel for the Underwriters, that, for a period of 12
months from the date on which the Registration Statement shall become
effective under the Act, he, she, or it will not, without the
Representative's prior written consent, publicly offer, sell, contract to
sell, grant any option for the sale of, or otherwise dispose of, directly
or indirectly, any shares of Common Stock or any security or other
instrument which by its terms is convertible into, or exercisable or
exchangeable for, shares of Common Stock or other securities of the
Company, including, without limitation, any shares of Common Stock issuable
pursuant to the terms of any employee stock options; provided, however,
that such persons may offer, sell, contract to sell, grant an option for
the sale of, or otherwise dispose of all or any part of his, her, or its
shares of Common Stock or other such security or instrument of the Company
during such period only if such transaction is private in nature and the
transferee of such shares of Common Stock or other securities or
instruments agrees, prior to such transaction, to be bound by all of the
provisions of such agreement.
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<PAGE>
(20) The Company is not, and does not intend to conduct its business
in a manner in which it would become, an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940, as amended (the
"Investment Company Act").
(21) Except for the securities that are being registered pursuant to
the Registration Statement, no person or entity has the right to require
registration of shares of Common Stock or other securities of the Company
because of the filing or effectiveness of the Registration Statement.
(22) Except as may be set forth in the Prospectus, the Company has not
incurred any liability for a fee, commission, or other compensation on
account of the employment of a broker or finder in connection with the
transactions contemplated by this Agreement.
(23) Neither the Company, nor any of its affiliates, is presently
doing business with the government of Cuba or with any person or affiliate
located in Cuba. If, at any time after the date on which the Registration
Statement is declared effective under the Act or with the Florida
Department of Banking and Finance (the "Florida Department"), whichever is
later, and prior to the end of the period referred to in the first clause
of Section 2(a)(2), the Company commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba, the
Company will so inform the Florida Department within 90 days after such
commencement of business in Cuba, and, during the period referred to in
Section 2(a)(2), will inform the Florida Department within 90 days after
any change occurs with respect to previously reported information.
(24) No officer, director, or stockholder of the Company has any
affiliation or association with the National Association of Securities
Dealers, Inc. (the "NASD") or any member thereof.
(25) Except as disclosed in the Prospectus, the Company has filed all
necessary federal, state, local, and foreign income and franchise tax
returns and other reports required to be filed and has paid all taxes shown
as due thereon; and there is
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<PAGE>
no tax deficiency which has been, or, to the knowledge of the Company,
might be, asserted against the Company.
(26) To the best knowledge of the Company, none of the activities or
businesses of the Company is in violation of, or will cause the Company to
violate, any law, rule, regulation, or order of the United States, any
state, county, or locality, or of any agency or body of the United States
or of any state, county, or locality, the violation of which would have a
material adverse effect upon the condition (financial or otherwise),
business, property, prospective results of operations, or net worth of the
Company.
(27) The Common Stock has been designated for quotation on the NASD
National Market System (the "NNM").
3. PURCHASE, SALE, AND DELIVERY OF THE STOCK AND THE ADDITIONAL STOCK.
On the basis of the representations, warranties, covenants, and agreements
of the Company herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to issue and sell to the Underwriters, and the
Underwriters, severally and not jointly, agree to purchase from the Company, the
numbers of shares of Stock set forth opposite the respective names of the
Underwriters in Schedule I hereto.
The purchase price per share of the Stock to be paid by the Underwriters
shall be $__________. The initial public offering price per share of the Stock
shall be $_______.
Payment for the Stock by the Underwriters shall be made by certified or
official bank check in New York Clearing House funds payable to the order of the
Company at the offices of Hampshire Securities Corporation, 640 Fifth Avenue,
New York, New York 10019, or at such other place in the New York City
metropolitan area as the Representative shall determine and advise the Company
by at least two full days' notice in writing, upon delivery of the Stock to the
Representative for the respective accounts of the Underwriters. Such delivery
and payment shall be made by 12:00 p.m., New York City local time, on the third
business day following the time of the initial public offering, as defined in
Section 11(a) (unless such time and date is postponed in accordance with the
provisions of Section 9(c)), or at such other time as shall be agreed upon
between the Representative and the
13
<PAGE>
Company. The time and date of such delivery and payment are hereinafter
referred to as the "Closing Date."
Certificates for the Stock shall be registered in such name or names and in
such authorized denominations as the Representative may request in writing at
least two full business days prior to the Closing Date. The Company shall
permit the Representative to examine and package such certificates for delivery
at least one full business day prior to the Closing Date.
In addition, the Company hereby grants to the Representative, the
Over-allotment Option to purchase all or a portion of the Additional Stock as
may be necessary to cover over-allotments, at the same purchase price per share
to be paid by the several Underwriters to the Company for the Stock as provided
for in this Section 3. The Over-allotment Option may be exercised only to cover
over-allotments in the sale of shares by the Underwriters. The Over-allotment
Option may be exercised by the Representative on the basis of the
representations, warranties, covenants, and agreements of the Company herein
contained, but subject to the terms and conditions herein set forth, at any time
and from time to time on or before the forty-fifth (45th) day following the date
on which the Registration Statement becomes effective under the Act, by written
notice by the Representative to the Company. Such notice shall set forth the
aggregate number of shares of Additional Stock as to which the Over-allotment
Option is being exercised (which shall be allocated as to the Company and the
Representative deem appropriate) and the time and date, as determined by the
Representative, when such shares of Additional Stock are to be delivered (such
time and date are hereinafter referred to as an "Additional Closing Date");
provided, however, that no Additional Closing Date shall be earlier than the
Closing Date nor earlier than the second business day after the date on which
the notice of the exercise of the Over-allotment Option shall have been given
nor later than the eighth business day after the date on which such notice shall
have been given.
In the event the Company declares or pays a dividend or a distribution on
the Common Stock, whether in the form of cash, shares of Common Stock, or other
consideration, prior to the Additional Closing Date, such dividend or
distribution shall also be paid on the Additional Stock on the later of the
Additional Closing Date and the date on which such dividend or distribution is
payable.
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<PAGE>
Payment for the shares of Additional Stock by the Representative shall be
made by certified or official bank check in New York Clearing House funds
payable to the order of the Company at the offices of Hampshire Securities
Corporation, 640 Fifth Avenue, New York, New York 10019, or at such other place
in the New York City metropolitan area as the Representative shall determine and
advise the Company by at least two full days' notice in writing, upon delivery
of the shares of Additional Stock to the Representative for the account of the
Representative.
Certificates for the shares of Additional Stock shall be registered in such
name or names and in such authorized denominations as the Representative may
request in writing at least two full business days prior to the Additional
Closing Date with respect thereto. The Company shall permit the Representative
to examine and package such certificates for delivery at least one full business
day prior to the Additional Closing Date with respect thereto.
It is understood that the Representative, individually and not as
Representative of the several Underwriters, may (but shall not be obligated to)
make any and all the payments required pursuant to this Section 3 on behalf of
any Underwriters whose check or checks shall not have been received by the
Representative at the time of delivery of the Stock to be purchased by such
Underwriter or Underwriters. Any such payment by the Representative shall not
relieve any such Underwriter or Underwriters of any of its or their obligations
hereunder.
4. OFFERING. The Underwriters are to make a public offering of the Stock
as soon, on or after the date on which the Registration Statement becomes
effective under the Act, as the Representative deem it advisable so to do. The
Stock is to be initially offered to the public at the initial public offering
price as provided for in Section 3 (such price being hereinafter referred to as
the "public offering price"). After the initial public offering, the
Representative may from time to time increase or decrease the public offering
price, in the Representative's sole discretion, by reason of changes in general
market conditions or otherwise.
5. COVENANTS.
(a) The Company covenants that it will:
(1) Use its best efforts to cause the Registration Statement to
become effective under the Act as promptly as possible and notify the
Representative immediately, and confirm such notice in writing, (i)
when the Registration Statement
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<PAGE>
and any post-effective amendment thereto become effective under the
Act, (ii) of the receipt of any comments from the Commission or the
"blue sky" or securities authority of any jurisdiction regarding the
Registration Statement, any post-effective amendment thereto, the
Prospectus, or any amendment or supplement thereto, (iii) of the
filing with the Commission of any supplement to the Prospectus, and
(iv) of the receipt of any notification with respect to a Stop Order
or the initiation or threatening of any proceeding with respect to a
Stop Order. The Company will use its best efforts to prevent the
issuance of any Stop Order and, if any Stop Order is issued, to obtain
the lifting thereof as promptly as possible. If the Registration
Statement has become or becomes effective under the Act with a form of
prospectus omitting Rule 430A Information, or filing of the Prospectus
with the Commission is otherwise required under Rule 424(b), the
Company will file with the Commission the Prospectus, properly
completed, pursuant to Rule 424(b) within the time period prescribed
and will provide evidence satisfactory to the Representative of such
timely filing.
(2) During the time when a prospectus relating to the Stock or
the Additional Stock is required to be delivered hereunder or under
the Act or the Regulations, comply with all requirements imposed upon
it by the Act, as now existing and as hereafter amended, and by the
Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of, or dealings in, the Stock and the
Additional Stock in accordance with the provisions hereof and the
Prospectus. If, at any time when a prospectus relating to the Stock
or the Additional Stock is required to be delivered hereunder or under
the Act or the Regulations, any event shall have occurred as a result
of which, in the reasonable opinion of counsel for the Company or
counsel for the Underwriters, the Registration Statement or the
Prospectus as then amended or supplemented contains any untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, or if, in the opinion of either of such
counsel, it is necessary at any time to amend or supplement the
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<PAGE>
Registration Statement or the Prospectus to comply with the Act or the
Regulations, the Company will immediately notify the Representative
and promptly prepare and file with the Commission an appropriate
amendment or supplement (in form and substance satisfactory to the
Representative) which will correct such statement or omission or which
will effect such compliance and will use its best efforts to have any
such amendment declared effective under the Act as soon as possible.
(3) Deliver without charge to each of the Underwriters such
number of copies of each Preliminary Prospectus as Underwriters may
reasonably request and, as soon as the Registration Statement, or any
amendment thereto, becomes effective under the Act or a supplement is
filed with the Commission, deliver without charge to the
Representative two signed copies of the Registration Statement,
including exhibits, or such amendment thereto, as the case may be, and
two copies of any supplement thereto, and deliver without charge to
each of the Underwriters such number of copies of the Prospectus, the
Registration Statement, and amendments and supplements thereto, if
any, without exhibits, as the Representative may request for the
purposes contemplated by the Act.
(4) Endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement
becomes effective under the Act, to qualify the Stock and the
Additional Stock for offering and sale under the "blue sky" or
securities laws of such jurisdictions as the Representative may
designate; provided, however, that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Company
would be subject to service of general process or to taxation as a
foreign corporation doing business in such jurisdiction to which it is
not then subject. In each jurisdiction where such qualification shall
be effected, the Company will, unless the Representative agree in
writing that such action is not at the time necessary or advisable,
file and make such statements or reports at such times as are or may
be required by the laws of such jurisdiction.
(5) Make generally available (within the meaning of Section
11(a) of the Act and the Regulations) to its securityholders as soon
as practicable, but not later
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<PAGE>
than 45 days after the end of the fiscal quarter in which the first
anniversary date of the Registration Statement occurs, an earnings
statement (which need not be certified by independent certified public
accountants unless required by the Act or the Regulations, but which
shall satisfy the provisions of Section 11(a) of the Act and the
Regulations) covering a period of at least 12 months beginning after
the effective date of the Registration Statement.
(6) For a period of 18 months after the date on which the
Registration Statement shall become effective under the Act, not,
without the Representative's prior written consent, offer, issue,
sell, contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or
other securities of the Company (or any security or other instrument
which by its terms is convertible into, or exercisable or exchangeable
for, shares of Common Stock), except as provided in Section 3 and
except for (i) the issuance of shares of Common Stock issuable upon
the exercise of stock options to purchase up to a aggregate of
_________ shares of Common Stock which may be granted pursuant to the
Company's 1997 Stock Option Plan (the "Plan"), as properly described
in the Prospectus, (ii) the issuance of 240,000 shares of Warrant
Stock issuable upon exercise of the Representative's Warrants and
(iii) the issuance of Common Stock upon the exercise of currently
outstanding warrants to purchase ______ shares of Common Stock.
(7) For a period of five years after the effective date of the
Registration Statement, furnish the Representative without charge the
following:
(i) within 90 days after the end of each fiscal year, three
copies of financial statements certified by independent certified
public accountants, including a balance sheet, statement of
income, and statement of changes in cash flows of the Company,
with supporting schedules, prepared in accordance with generally
accepted accounting principles, as at the end of such fiscal year
and for the 12 months then ended, which may be on a consolidated
basis;
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<PAGE>
(ii) as soon as practicable after they have been sent to
stockholders of the Company or filed with, or furnished to, the
Commission or the NASD, three copies of each annual and interim
financial, proxy statements and other reports or communications
sent by the Company to its stockholders or filed with, or
furnished to, the Commission or the NASD;
(iii) as soon as practicable, two copies of every press
release and every material news item and article in respect of
the Company or its affairs which was released by the Company; and
(iv) such additional documents and information with respect
to the Company and its affairs as the Representative may from
time to time reasonably request; provided, however, that such
additional documents and information shall be received by the
Representative on a confidential basis, unless otherwise
disclosed to the public, and shall not be used in violation of
the Federal Securities laws and the Regulations.
(8) Apply the net proceeds received by it from the offering
contemplated by this Agreement in the manner set forth under the
heading "Use of Proceeds" in the Prospectus.
(9) Furnish to the Representative as early as practicable prior
to the Closing Date and any Additional Closing Date, as the case may
be, but no less than two full business days prior thereto, a copy of
the latest available unaudited interim consolidated financial
statements of the Company which have been read by the Company's
independent certified public accountants, as stated in their letters
to be furnished pursuant to Section 7(f).
(10) File no amendment or supplement to the Registration
Statement or Prospectus at any time, whether before or after the date
on which the Registration Statement becomes effective under the Act,
unless such filing shall comply with the Act and the Regulations and
unless the Representative shall previously have been advised of such
filing and furnished with a copy thereof, and the Representative and
counsel for the Underwriters shall have approved such filing in
writing. Until the
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<PAGE>
later of (i) the completion by the Underwriters of the distribution of
the Stock (but in no event more than nine months after the date on
which the Registration Statement shall have become effective under the
Act) and (ii) 25 days after the date on which the Registration
Statement becomes effective under the Act, the Company will prepare
and file with the Commission, promptly upon the Representative's
request, any amendments or supplements to the Registration Statement
or the Prospectus which, in the Representative's sole opinion, may be
necessary or advisable in connection with the distribution of the
Stock.
(11) File timely with the Commission an appropriate form to
register the Common Stock pursuant to Section 12(g) of the Exchange
Act and comply with all registration, filing, and reporting
requirements of the Exchange Act, which may from time to time be
applicable to the Company.
(12) Comply with all provisions of all undertakings contained in
the Registration Statement.
(13) Prior to the Closing Date or any Additional Closing Date, as
the case may be, issue no press release or other communication,
directly or indirectly, and hold no press conference with respect to
the Company, the financial condition, results of operations, business,
properties, assets, liabilities of any of them, or this offering,
without the Representative's prior written consent.
(14) File timely and accurate reports on Form SR with the
Commission in accordance with Rule 463 of the Regulations or any
successor provision.
(15) If the principal stockholders, officers, or directors of the
Company are required by the "blue sky" or securities authority of any
jurisdiction selected by the Representative pursuant to Section
5(a)(4) to escrow or agree to restrict the sale of any security of the
Company owned by them for the Company to qualify or register the Stock
or the Additional Stock for sale under the "blue sky" or securities
laws of any such jurisdiction, cause each such person to escrow or
restrict the sale of such security on the terms and conditions and in
the form specified by the securities administrator of such
jurisdiction.
20
<PAGE>
(16) Make all filings required to maintain the inclusion of the
Common Stock on the NNM for a least five years from the date of this
Agreement.
(17) On the Closing Date, sell to the Representative,
individually and not as Representative of the Underwriters, at the
price of $.001 per warrant, Representative's Warrants to purchase an
aggregate of 10% of the Stock, exclusive of the exercise of any
portion of the Over-allotment Option, which shall be substantially in
the form set forth as an exhibit to the Registration Statement. Each
Representative's Warrant shall entitle the holder thereof to purchase
one share of Common Stock of the Company at a price equal to 1.1 times
the public offering price per share of Common Stock.
(18) Until expiration of the Representative's Warrant, keep
reserved sufficient shares of Common Stock for issuance upon exercise
of the Representative's Warrants.
(19) Deliver to the Representative, without charge, no later than
six months after the last Additional Closing Date or the expiration of
the period during which the Representative may exercise the
Over-allotment Option, five (5) sets of bound volumes of the complete
Registration Statement and all related materials to the individuals
designated by the Representative or counsel to the Underwriters.
(20) For a period of three years after the effective date of the
Registration Statement, provide, at its sole expense, to the
Representative copies of the Company's daily transfer sheets, if so
requested by the Representative.
(21) Maintain key-person life insurance from such life insurance
Company as reasonably acceptable to the Representative, payable to the
Company on the life of Mr. Richard M. Brooks, the Company's Chief
Executive Officer, President, Chief Financial Officer and Chairman of
the Board, and Mr. Ronald A. Feldman, the Company's Chief Operating
Officer, Vice President, Secretary and Treasurer, in the amount of at
least $3,000,000 and $1,000,000, respectively, for the period of time
equal to the longer of (i) three years from the date on which the
Registration
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<PAGE>
Statement becomes effective under the Act and (ii) the terms of the
employment agreement between the Company and such officer.
(22) Use its best efforts, for a period of five years following
the date on which the Registration Statement becomes effective under
the Act, to cause two persons to be elected to the Company's Board of
Directors who are deemed by the Representative, in the
Representative's reasonable judgment, to be independent of the
Company's management.
(23) Until the expiration of three years from the date on which
the Registration Statement becomes effective under the Act, not effect
a change in the independent certified public accountants for the
Company unless either the Company has received the prior written
consent of the Representative or such substitute independent certified
public accountant is one of (i) Arthur Andersen & Co., (ii) Ernst &
Young, (iii) Price Waterhouse, LLP, (iv) Coopers & Lybrand or (v) KPMG
Peat Marwick.
(24) For a period of three years from the date on which the
Registration Statement becomes effective under the Act, the
Representative shall have the right to appoint a designee as an
observer of the Company's Board of Directors. Such observer will have
the right to attend all meetings of the Board of Directors. Such
observer shall be entitled to receive reimbursement for all
out-of-pocket expenses incurred in attending such meetings, including,
but not limited to, food, lodging, transportation, and any fees paid
to directors for attending meetings. The Representative shall be
given notice of such meetings at the same time and in the same manner
as directors of the Company are informed. The Representative and such
observer shall be indemnified to the same extent as the other
directors. The Company will use its best efforts to purchase
directors and officers insurance in an amount of not less than
$2,000,000, with a deductible of not more than $50,000, provided,
however, that the Company shall not be required to pay more than
$50,000 per year in order to maintain such insurance, and if insurance
in such amount is not available at such cost, the Company shall
purchase that amount of such insurance
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<PAGE>
which is available at a cost of $50,000 per year. The Company will
use its best efforts to extend the coverage of such insurance to the
observer.
(25) For a period of three years from date on which the
Registration Statement becomes effective under the Act, the Company,
at its expense, shall cause its regularly engaged independent
certified public accountants to review (but not audit) the Company's
financial statements for each of the first three fiscal quarters prior
to the announcement of quarterly financial information, the filing of
the Company's Quarterly Report on Form 10-QSB, and the mailing of
quarterly financial information to stockholders.
(26) Have in effect on the Closing Date the Plan, which will
provide for the issuance of options to purchase no more than
[__________] shares of Common Stock of which no more than 10% of the
amount of shares of Common Stock shall be outstanding pre-offering.
The Plan shall authorize the grant of options to purchase not more
than [_______] shares of Common Stock at less than the fair market
value on the date of grant. The Company will not grant, for a period
of three years following the date on which the Registration Statement
becomes effective under the Act, any non-qualified options unless the
exercise price thereof on the date of grant is at least equal to the
fair market value of the Common Stock on such date. No option granted
under such plan shall be exercisable during the first year following
grant, and each option shall vest thereafter at the rate of 25% per
year.
(27) For a period of eighteen (18) months after the effective
date of the Registration Statement, the Company shall grant the
Representative a preferential right to sell in accordance with such
stockholders' instructions, within seven (7) business days, for the
account of any of the Company's stockholders owning at least five
percent (5%) of the Company's Common Stock, any securities sold
pursuant to Rule 144 promulgated under the Act.
(28) During the four-year period commencing one year from the
effective date of the Registration Statement, the Company will agree
to use its best efforts to register the Representative's Warrants and
the Warrant Stock when and if requested
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<PAGE>
by the Representative. These best efforts shall include the
preparation and filing of one demand registration statement with
respect to the Warrant Stock during such four-year period and
maintaining the effectiveness thereof, for nine (9) months or such
shorter period as may be required for the sale of the Warrant Stock in
the open market, at the Company's sole expense (other than underwriter
or selling broker costs), including blue sky fees and expenses. The
Company agrees that for the period starting at the beginning of the
second year and concluding at the end of the seventh year after the
effective date of the Registration Statement, the Company will notify
all holders of the Representative's Warrants and Warrant Stock of the
Company's intention to do another public offering of the Company's
securities (whether by the Company or by any security holder of the
Company) and, if requested by the holders of the Representative's
Warrants, include any Representative's Warrants and Warrant Stock in
such offering at the Company's sole cost and expense and maintain the
effectiveness thereof for at least twelve (12) months ("Piggyback
Registration Rights").
(29) For the two-year period commencing on the effective date of
the Registration Statement, the Company and all of its stockholders
owning at least five percent (5%) of the shares of the Company's
Common Stock either currently or immediately preceding the date of the
offering, shall grant the Representative the right of first refusal
(on terms at least as favorable as can be obtained from other sources)
to act as lead manager, placement agent, or investment banker with
respect to any proposed underwritten public distribution or private
placement of the Company's securities or any merger, acquisition, or
disposition of assets of the Company, if the Company uses a lead
manager, placement agent or investment banker or person performing
such functions for a fee. The Representative will advise the Company
promptly (but in no event later than seven (7) days following the
submission to the Representative in writing of any such proposed
transaction(s)) of its election to exercise said right. If any such
proposal is not accepted by the Representative, but later modified,
the Company will resubmit such proposal to the
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Representative. Should the Representative elect, at any time, not to
exercise said right, this will not affect preferential rights for
future finances.
6. PAYMENT OF EXPENSES. The Company hereby agrees to pay all expenses
(other than fees of counsel for the Underwriters, except as provided in Section
6(c)) in connection with (a) the preparation, printing, filing, distribution,
and mailing of the Registration Statement and the Prospectus and the printing,
filing, distribution, and mailing of this Agreement, and other underwriting and
related agreements and related documents, including the cost of all copies
thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments or supplements thereto supplied to the Underwriters in quantities as
hereinabove stated, (b) the issuance, sale, transfer, and delivery (as
applicable) of the Stock and the Additional Stock, including any transfer or
other taxes payable thereon, (c) the qualification of the Stock and the
Additional Stock under state or foreign "blue sky" or securities laws, including
the costs of printing and mailing the preliminary and final "Blue Sky Survey"
and the fees for the Underwriters' counsel (in the amount of $35,000 ($50,000 if
NNM listing is not obtained)) and the disbursements in connection therewith, (d)
the filing fees payable to the Commission, the NASD, and the jurisdictions in
which such qualification is sought, (e) any fees relating to the listing of the
Common Stock on the NNM, (f) the cost of printing certificates representing the
shares of Common Stock, (g) the fees of the transfer agent for the Common Stock,
(h) the cost of publication of "tombstone" advertisements with respect to the
offering, which expense shall not be in excess of $50,000 without the Company's
consent, (i) due diligence expenses and shall pay the Representative $50,000 in
connection therewith and (j) a non-accountable expense allowance equal to three
percent of the gross proceeds of the sale of the Stock and, to the extent
Additional Stock is sold, on the gross proceeds of the sale of the Additional
Stock (less amounts, if any, previously paid to the Representative in respect of
such non-accountable expense allowance) to the Representative on the Closing
Date.
7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several
Underwriters to purchase and pay for the Stock and the Additional Stock, as
provided herein, shall be subject, in their discretion, to the continuing
accuracy of the representations and warranties of the Company contained herein
and in each certificate and document contemplated under this Agreement to be
delivered to the Representative, as of the date hereof and as of the Closing
Date (or any Additional
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Closing Date, as the case may be), to the performance by the Company of its
obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective under the
Act not later than 6:00 p.m., New York City time, on the date of this Agreement
or such later date and time as shall be consented to in writing by the
Representative; on or prior to the Closing Date, or any Additional Closing Date,
as the case may be, no Stop Order shall have been issued and no proceeding shall
have been initiated or threatened with respect to a Stop Order; and any request
by the Commission for additional information shall have been complied with by
the Company to the reasonable satisfaction of counsel for the Underwriters. If
required, the Prospectus shall have been filed with the Commission in the manner
and within the time period required by Rule 424(b) under the Regulations.
(b)(1) At the Closing Date and any Additional Closing Date, as the
case may be, the Representative shall have received the favorable opinion of
Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, counsel for the Company, dated
the date of delivery, addressed to the Underwriters, and in form and scope
satisfactory to counsel for the Underwriters, with reproduced copies or signed
counterparts thereof for each of the Underwriters, to the effect that:
(i) The Company is a corporation duly organized, validly existing,
and in good standing under the laws of the jurisdiction of its
incorporation, with full power and authority, and all necessary consents,
authorizations, approvals, orders, licenses, certificates, and permits of
and from, and declarations and filings with, all federal, state, local, and
other governmental authorities and all courts and other tribunals, to own,
lease, license, and use its properties and assets and to conduct its
business in the manner described in the Prospectus. The Company is duly
qualified to do business as a foreign corporation and is in good standing
as such in every jurisdiction in which its ownership, leasing, licensing,
or use of property and assets or the conduct of its business makes such
qualification necessary, except where the failure to be so qualified does
not amount to a material liability or disability to the Company;
(ii) the authorized capital stock of the Company is as reflected in
the Registration Statement, of which the Prospectus is a part. Except as
disclosed in the Prospectus, each
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outstanding share of Common Stock is validly authorized and issued, fully
paid, and nonassessable, without any personal liability attaching to the
ownership thereof, has not been issued and is not owned or held in
violation of any preemptive rights of stockholders. To the knowledge of
such counsel, there is no commitment, plan, or arrangement to issue, and no
outstanding option, warrant, or other right calling for the issuance of,
any share of capital stock of the Company or any security or other
instrument which by its terms is convertible into, or exercisable or
exchangeable for, capital stock of the Company, except as may be properly
described in the Prospectus. There is outstanding no security or other
instrument which by its terms is convertible into, or exercisable or
exchangeable for, capital stock of the Company. The certificates
evidencing the Common Stock are in proper form;
(iii) to the knowledge of such counsel, there is no litigation,
arbitration, claim, governmental or other proceeding (formal or informal),
or investigation pending, threatened, or in prospect (or any basis
therefor) with respect to the Company or any of their respective
operations, businesses, properties, or assets, except as may be properly
described in the Prospectus or such as individually or in the aggregate do
not now have, and will not in the future have, a material adverse effect
upon the operations, business, properties, or assets of the Company. To
the knowledge of such counsel, the Company is not in violation of, or in
default with respect to, any law, rule, regulation, order, judgment, or
decree, except as may be properly described in the Prospectus or such as in
the aggregate do not now have and will not in the future have a material
adverse effect upon the operations, business, properties, or assets of the
Company; nor is the Company required to take any action in order to avoid
any such violation or default;
(iv) to the knowledge of such counsel, neither the Company nor any
other party is now, or is expected by the Company to be in violation or
breach of, or in default with respect to, any material provision of any
contract, agreement, instrument, lease, license, arrangement, or
understanding which is material to the Company, and, to the knowledge of
such counsel, each such contract, agreement, instrument, lease, license,
arrangement, or understanding is in full force and effect and is the valid,
legal, and binding obligation of the parties thereto and is enforceable in
accordance with its terms;
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(v) The Company is not in violation or breach of, or in default with
respect to, any term of its certificate of incorporation (or other charter
document) or by-laws, as those documents have been amended or restated;
(vi) the Company has all requisite power and authority to execute,
deliver, and perform this Agreement and the Representative's Warrants. All
necessary corporate proceedings of the Company have been taken to authorize
the execution, delivery, and performance by the Company of this Agreement
and the Representative's Warrant. This Agreement has been duly authorized,
executed, and delivered by the Company, is the legal, valid, and binding
obligation of the Company, and, subject to applicable bankruptcy,
insolvency, and other laws affecting the enforceability of creditors'
rights generally, is enforceable as to the Company in accordance with its
terms. The Representative's Warrants have been duly authorized by the
Company and, when executed and delivered by the Company, will be legal,
valid, and binding obligations of the Company, each enforceable as to the
Company in accordance with its terms. No consent, authorization, approval,
order, license, certificate, or permit of or from, or declaration or filing
with, any federal, state, local, or other governmental authority or any
court or other tribunal is required by the Company for the execution,
delivery, or performance by the Company of this Agreement or the
Representative's Warrants (except filings under the Act which have been
made or will be made before the Closing Date or Additional Closing Date, as
the case may be, and filings and consents consisting only of filings and
consents under "blue sky" or securities laws). No consent of any party to
any contract, agreement, instrument, lease, license, arrangement, or
understanding known to such counsel to which the Company is a party, or to
which any of its properties or assets are subject, is required for the
execution, delivery, or performance of this Agreement and the
Representative's Warrants; and the execution, delivery, and performance of
this Agreement and the Representative's Warrants will not violate, result
in a breach of, conflict with, result in the creation or imposition of any
lien, charge, or encumbrance upon any properties or assets of the Company
pursuant to the terms of, or (with or without the giving of notice or the
passage of time or both) entitle any party to terminate or call a default
under, any such contract, agreement, instrument, lease, license,
arrangement,
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or understanding known to such counsel, violate or result in a breach of,
or conflict with any term of the certificate of incorporation (or other
charter document) or by-laws of the Company, or violate, result in a breach
of, or conflict with any law, rule, regulation, order, judgment, or decree
binding on the Company or to which any of its operations, businesses,
properties, or assets are subject;
(vii) each share of Stock to be delivered on the Closing Date is
validly authorized and, when issued and delivered in accordance with the
terms hereof, will be validly issued, fully paid, and nonassessable,
without any personal liability attaching to the ownership thereof, and is
not issued in violation of any preemptive rights of stockholders, and the
Underwriters have received good title to the shares of Stock purchased by
them, from the Company, free and clear of all liens, security interests,
pledges, charges, encumbrances, stockholders' agreements, and voting
trusts. The Additional Stock is validly authorized and issued, is fully
paid and nonassessable, without any personal liability attaching to the
ownership thereof, and will not be issued in violation of any preemptive
rights of stockholders, and upon delivery of the Additional Stock in
accordance with the terms of the Over-allotment option, the Underwriters
will receive good title to the shares of Additional Stock purchased by
them, from the Company, free and clear of all liens, security interests,
pledges, charges, encumbrances, stockholder's agreements and voting trusts.
The Common Stock, the Stock, and the Additional Stock conform to all
statements relating thereto contained in the Registration Statement or the
Prospectus;
(viii) the Warrant Stock is validly authorized and has been duly and
validly reserved for issuance pursuant to the terms of the Representative's
Warrants. The Representative's Warrants have been duly and validly issued
and delivered. The Warrant Stock, when issued and delivered in accordance
with the Representative's Warrants, will be validly issued, fully paid, and
nonassessable, without any personal liability attaching to the ownership
thereof, and will not have been issued in violation of any preemptive
rights of stockholders. The Representative, and any other holders of the
Representative's Warrants, will receive good title to the securities
purchased by them upon exercise of the Representative's Warrants, free and
clear of all liens, security interests, pledges, charges, encumbrances,
stockholders'
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<PAGE>
agreements, and voting trusts. The Representative's Warrants and the
Warrant Stock conform to all statements relating thereto contained in the
Registration Statement or the Prospectus;
(ix) to the knowledge of such counsel, each contract, agreement,
instrument, lease, or license required to be described in the Registration
Statement or the Prospectus has been properly described therein, and each
contract, agreement, instrument, lease, or license required to be filed as
an exhibit to the Registration Statement has been filed with the Commission
as an exhibit to the Registration Statement;
(x) insofar as statements in the Prospectus purport to summarize the
status of litigation or the provisions of laws, rules, regulations, orders,
judgments, decrees, contracts, agreements, instruments, leases, or
licenses, such statements have been prepared or reviewed by such counsel
and accurately reflect the status of such litigation and provisions
purported to be summarized and are correct in all respects;
(xi) the Company is not an "investment company" as defined in Section
3(a) of the Investment Company Act and, if the Company conducts its
business as set forth in the Prospectus, will not become an "investment
company" and will not be required to be registered under the Investment
Company Act;
(xii) to the knowledge of such counsel, no person or entity has the
right to require registration of shares of Common Stock or other securities
of the Company because of the filing or effectiveness of the Registration
Statement; and
(xiii) the Registration Statement has become effective under the Act,
the Prospectus has been filed in accordance with Rule 424(b) of the
Regulations, including the applicable time periods set forth therein, or
such filing is not required. To the knowledge of such counsel, no Stop
Order has been issued and no proceeding for that purpose has been
instituted or threatened. On the basis of the participation of such
counsel in conferences at which the contents of the Registration Statement
and the Prospectus and related matters were discussed, but without
independent verification by such counsel of the accuracy, completeness, or
fairness of the statements contained in the Registration Statement, the
Prospectus, or any amendment or supplement thereto, such counsel has no
knowledge that
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(other than financial statements and other financial data and schedules
which are or should be contained therein, as to which such counsel need
express no opinion): (A) the Registration Statement, any Rule 430A
Prospectus, and the Prospectus, and any amendment or supplement thereto,
does not appear on its face to comply as to form in all material respects
with the requirements of the Act and the Regulations; (B) any of the
Registration Statement, any Rule 430A Prospectus, or the Prospectus, or any
amendment or supplement thereto, contains any untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; or (C)
since the effective date of the Registration Statement, any event has
occurred which should have been set forth in an amendment or supplement to
the Registration Statement or the Prospectus which has not been set forth
in such an amendment or supplement.
In rendering such opinion, counsel for the Company may rely (A) as to
matters involving the application of laws other than the laws of the United
States and the laws of the State of Delaware, to the extent counsel for the
Company deems proper and to the extent specified in such opinion, upon an
opinion or opinions (in form and substance satisfactory to counsel for the
Underwriters) of other counsel, acceptable to counsel for the Underwriters,
familiar with the applicable laws, in which case the opinion of counsel for the
Company shall state that the opinion or opinions of such other counsel are
satisfactory in scope, form, and substance to counsel for the Company and that
reliance thereon by counsel for the Company and the Underwriters is reasonable;
(B) as to matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company; and (C) to the extent they deem proper,
upon written statements or certificates of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company; provided that copies of any such opinions,
certificates, or statements shall be annexed as exhibits to the opinion of
counsel for the Company.
(c) On or prior to the Closing Date and any Additional Closing Date, as
the case may be, the Representative shall have been furnished such information,
documents, certificates, and opinions as it may reasonably require for the
purpose of enabling it to review the matters referred to in Section 7(b), and in
order to evidence the accuracy, completeness, or satisfaction of any of the
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representations, warranties, covenants, agreements, or conditions herein
contained, or as the Representative may reasonably request.
(d) At the Closing Date or any Additional Closing Date, as the case may
be, (i) the Registration Statement and the Prospectus and any amendments or
supplements thereto shall contain all statements which are required to be stated
therein in accordance with the Act and the Regulations, and in all material
respects conform to the requirements thereof, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto shall
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, (ii) there shall have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus, no
material adverse change, or any development involving a prospective material
adverse change, in the business, properties, or condition (financial or
otherwise), results of operations, capital stock, long-term or short-term debt,
or general affairs of the Company from that set forth in the Registration
Statement and the Prospectus, except changes which the Registration Statement
and Prospectus indicate might occur after the date on which the Registration
Statement becomes effective under the Act, and the Company shall not have
incurred any material liabilities or entered into any agreements not in the
ordinary course of business other than as referred to in the Registration
Statement and Prospectus, (iii) except as set forth in the Prospectus, no
litigation, arbitration, claim, governmental or other proceeding (formal or
informal), or investigation shall be pending, threatened, or in prospect (or any
basis therefor) with respect to the Company or any of its respective operations,
businesses, properties, or assets which would be required to be set forth in the
Registration Statement, wherein an unfavorable decision, ruling, or finding
would materially adversely affect the business, property, condition (financial
or otherwise), results of operations, or general affairs, of the Company, and
(iv) the Stock shall have been approved for listing on the NNM.
(e) At the Closing Date and any Additional Closing Date, as the case may
be, the Representative shall have received a certificate of the chief executive
officer, the chief financial officer, and the chief accounting officer of the
Company, dated the Closing Date or such Additional Closing Date, as the case may
be, to the effect that among other things (i) the conditions set forth in
Sections 7(a) and 7(d) have been satisfied, (ii) as of the date of this
Agreement and as of the
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Closing Date or such Additional Closing Date, as the case may be, the
representations and warranties of the Company contained herein were and are
accurate and correct in all materials respects, and (iii) as of the Closing Date
or such Additional Closing Date, as the case may be, the obligations to be
performed by the Company hereunder on or prior thereto have been fully
performed.
(f) At the time this Agreement is executed and at the Closing Date and any
Additional Closing Date, as the case may be, the Representative shall have
received a letter, addressed to the Underwriters, and in form and substance
satisfactory to the Representative, with reproduced copies or signed
counterparts thereof for each of the Underwriters, from Deloitte & Touche, LLP,
independent certified public accountants for the Company, dated the date of
delivery:
(i) confirming that they are, and during the period covered by their
report(s) included in the Registration Statement and the Prospectus were,
independent certified public accountants with respect to the Company within
the meaning of the Act and the published Regulations and stating that the
answer to Item 13 of the Registration Statement is correct insofar as it
relates to them;
(ii) stating that, in their opinion, the consolidated financial
statements and schedules of the Company included in the Registration
Statement examined by them comply in form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations;
(iii) stating that, on the basis of procedures (but not an examination
made in accordance with generally accepted auditing standards) consisting
of a reading of the latest available unaudited consolidated interim
financial statements of the Company (with an indication of the date of the
latest available unaudited interim financial statements), a reading of the
latest available minutes of the stockholders and Board of Directors of the
Company and committees of such Board of Directors, inquiries to certain
officers and other employees of the Company responsible for financial and
accounting matters, and other specified procedures and inquiries, nothing
has come to their attention that caused them to believe that: (A) the
unaudited consolidated financial statements and schedules of the Company
included in the Registration Statement and Prospectus do not comply in form
in all material respects with the applicable accounting requirements of the
Act and the Exchange Act and the
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Regulations or are not fairly presented in conformity with generally
accepted accounting principles (except to the extent that certain footnote
disclosures regarding any stub period may have been omitted in accordance
with the applicable rules of the Commission under the Exchange Act) applied
on a basis consistent with that of the audited financial statements
appearing therein; (B) there was any change in the capital stock or
long-term debt of the Company or any decrease in the net current assets or
stockholders' equity of the Company as of the date of the latest available
consolidated monthly financial statements of the Company or as of a
specified date not more than five business days prior to the date of such
letter, each as compared with the amounts shown in the most recent balance
sheet included in the Registration Statement and Prospectus, other than as
properly described in the Registration Statement and Prospectus or any
change or decrease (which shall be set forth therein) which the
Representative in its sole discretion shall accept, or (C) there was any
decrease in consolidated net sales, net earnings, or net earnings per share
of Common Stock of the Company, during the period from the date of such
balance sheet to the date of the latest available consolidated monthly
financial statements of the Company or to a specified date not more than
five business days prior to the date of such letter, each as compared with
the corresponding period in the preceding fiscal year, other than as
properly described in the Registration Statement and Prospectus or any
decrease (which shall be set forth therein) which the Representative in its
sole discretion shall accept; and
(iv) stating that they have compared specific numerical data and
financial information pertaining to the Company set forth in the
Registration Statement, which have been specified by the Representative
prior to the date of this Agreement, to the extent that such data and
information may be derived from the general accounting records of the
Company, and excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of specified
readings, inquiries, and other appropriate procedures (which procedures do
not constitute an examination in accordance with generally accepted
auditing standards) set forth in the letter, and found them to be in
agreement.
(g) All proceedings taken in connection with the issuance, sale, transfer,
and delivery of the Stock and the Additional Stock shall be satisfactory in form
and substance to the Representative
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and to counsel for the Underwriters, and the Representative shall have received
from such counsel for the Underwriters a favorable opinion, dated as of the
Closing Date and the Additional Closing Date, as the case may be, with respect
to such of the matters set forth under Section 7(b), and with respect to such
other related matters, as the Representative may reasonably request.
(h) The NASD, upon review of the terms of the public offering of the Stock
and the Additional Stock, shall not have objected to the Underwriters'
participation in such offering.
(i) Prior to or on the Closing Date, the Company shall have entered into
the Representative's Warrants with the Representative.
Any certificate or other document signed by any officer of the Company and
delivered to the Representative or to counsel for the Underwriters shall be
deemed a representation and warranty by the Company hereunder to the
Underwriters as to the statements made therein. If any condition to the
Underwriters' obligations hereunder to be fulfilled prior to or at the Closing
Date or any Additional Closing Date, as the case may be, is not so fulfilled,
the Representative may, on behalf of the Underwriters, may terminate this
Agreement or, if the Representative so elect, in writing waive any such
conditions which have not been fulfilled or extends the time for their
fulfillment.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each Underwriter, its officers, directors, partners,
employees, agents, and counsel, and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against any and all loss, liability, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 8, but not be
limited to, attorneys' fees and any and all expense whatsoever incurred in
investigating, preparing, or defending against any litigation, commenced or
threatened, or any claim whatsoever and any and all amounts paid in settlement
of any claim or litigation) as and when incurred arising out of, based upon, or
in connection with (i) any untrue statement or alleged untrue statement of a
material fact contained in (A) the Registration Statement, any Preliminary
Prospectus, any Rule 430A Prospectus, or the Prospectus (as from time to time
amended and supplemented), or any amendment or supplement thereto or (B) any
application or other document or communication (for purposes of this Section 8,
collectively referred to as an "application") executed by, or on behalf of, the
Company or based upon
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written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Stock or the Additional Stock under the
"blue sky" or securities laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, unless such statement or omission was made in reliance upon, and
in conformity with, written information furnished to the Company as stated in
Section 8(b) with respect to any Underwriter by, or on behalf of, such
Underwriter through the Representative expressly for inclusion in the
Registration Statement, any Preliminary Prospectus, any Rule 430A Prospectus, or
the Prospectus, or any amendment or supplement thereto, or in any application as
the case may be, or (ii) any breach of any representation, warranty, covenant,
or agreement of the Company contained in this Agreement. The foregoing
agreement to indemnify shall be in addition to any liability the Company may
otherwise have, including liabilities arising under this Agreement.
If any action is brought against an Underwriter or any of its officers,
directors, partners, employees, agents, or counsel, or any controlling persons
of an Underwriter (an "indemnified party") in respect of which indemnity may be
sought against the Company pursuant to the foregoing paragraph, such indemnified
party or parties shall promptly notify the Company in writing of the institution
of such action (but the failure so to notify shall not relieve the Company from
any liability it may have other than pursuant to this Section 8(a)) and the
Company shall promptly assume the defense of such action, including the
employment of counsel (satisfactory to such indemnified party or parties) and
payment of expenses. Such indemnified party or parties shall have the right to
employ its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such indemnified party or parties unless
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action or the Company shall not
have promptly employed counsel reasonably satisfactory to such indemnified party
or parties to have charge of the defense of such action or such indemnified
party or parties shall have reasonably concluded that there may be one or more
legal defenses available to it or them or to other indemnified parties which are
different from or additional to those available to the Company, in any of which
events such fees and expenses shall be borne by the Company, and the Company
shall not have the right to direct the defense of such action on behalf of the
indemnified
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party or parties. Anything in this paragraph to the contrary notwithstanding,
the Company shall not be liable for any settlement of any such claim or action
effected without its written consent, which shall not be unreasonably withheld.
The Company shall not, without the prior written consent of each indemnified
party that is not released as described in this sentence, settle or compromise
any action, or permit a default or consent to the entry of judgment or otherwise
seek to terminate any pending or threatened action, in respect of which
indemnity may be sought hereunder (whether or not any indemnified party is a
party thereto), unless such settlement, compromise, consent, or termination
includes an unconditional release of each indemnified party from all liability
in respect of such action. The Company agrees promptly to notify the
Representative and Underwriters of the commencement of any litigation or
proceedings against the Company or any of its officers or directors in
connection with the sale of the Stock or the Additional Stock, the Registration
Statement, any Preliminary Prospectus, any Rule 430A Prospectus, or the
Prospectus, or any amendment or supplement thereto, or any application.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each director of the Company, each officer of the Company who shall
have signed the Registration Statement, and each other person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, to the same extent as the foregoing indemnity from
the Company to the Underwriters in Section 8(a), but only with respect to
statements or omissions, if any, made in the Registration Statement, any
Preliminary Prospectus, any Rule 430A Prospectus, or the Prospectus (as from
time to time amended and supplemented), or any amendment or supplement thereto,
or on any application in reliance upon, and in conformity with, written
information furnished to the Company as stated in this Section 8(b) with respect
to the Representative expressly for inclusion in the Registration Statement, any
Preliminary Prospectus, any Rule 430A Prospectus, or the Prospectus, or any
amendment or supplement thereto, or on any application, as the case may be;
provided, however, that the obligation of the Representative to provide
indemnity under the provisions of this Section 8(b) shall be limited to the
amount which represents the product of the number of shares of Stock and
Additional Stock underwritten by the Representative and the initial public
offering price per share set forth on the cover page of the Prospectus. For all
purposes of this Agreement, the amounts of the selling concession and
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reallowance set forth in the Prospectus constitute the only information
furnished in writing by or on behalf of the Representative expressly for
inclusion in the Registration Statement, any Preliminary Prospectus, any Rule
430A Prospectus, or the Prospectus (as from time to time amended or
supplemented), or any amendment or supplement thereto, or in any application, as
the case may be. If any action shall be brought against the Company, any
Selling Stockholder, or any other person so indemnified based on the
Registration Statement, any Preliminary Prospectus, any Rule 430A Prospectus, or
the Prospectus, or any amendment or supplement thereto, or on any application,
and in respect of which indemnity may be sought against the Representative
pursuant to this Section 8(b), the Representative shall have the rights and
duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the indemnified parties,
by the provisions of Section 8(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 8(a) or
8(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case or (ii) any indemnified or indemnifying party seeks
contribution under the Act, the Exchange Act, or otherwise, then the Company
(including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed the Registration
Statement, and any controlling person of the Company) as one entity and the
Underwriters, in the aggregate (including for this purpose any contribution by
or on behalf of an indemnified party) as a second entity shall contribute to the
losses, liabilities, claims, damages, and expenses whatsoever to which any of
them may be subject, so that the Underwriters are responsible for the proportion
thereof equal to the percentage which the underwriting discount per share set
forth on the cover page of the Prospectus represents of the initial public
offering price per share set forth on the cover page of the Prospectus and the
Company is responsible for the remaining portion; in such proportions as are
appropriate to reflect the relative benefits received by the Company and the
Underwriters in the aggregate; provided, however, that if applicable law does
not permit such allocation, then other relevant equitable considerations such as
the relative fault of the Company and the Underwriters in the aggregate in
connection with the facts which resulted in such losses,
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<PAGE>
liabilities, claims, damages, and expenses shall also be considered. The
relative benefits received by the Company and the Underwriters in the aggregate
shall be deemed to be in the same proportion as (x) the total proceeds from the
offering of the Stock (net of underwriting discounts and commissions but before
deducting expenses) received by the Company (y) the total proceeds of the
offering of the Additional Stock (net of underwriting discounts and commissions
but before deducting expenses), and (z) the underwriting discounts and
commissions received by the Underwriters in the aggregate, in each case as set
forth in the table on the cover page of the Prospectus and in the footnotes
thereto. The relative fault, in the case of an untrue statement, alleged untrue
statement, omission, or alleged omission, shall be determined by, among other
things, whether such statement, alleged statement, omission, or alleged omission
relates to information supplied by the Company or by the Underwriters, and the
parties' relative intent, knowledge, access to information, and opportunity to
correct or prevent such statement, alleged statement, omission, or alleged
omission. The Company and the Underwriters agree that it would be unjust and
inequitable if the respective obligations of the Company and the Underwriters
for contribution were determined by pro rata or per capita allocation of the
aggregate losses, liabilities, claims, damages, and expenses (even if the
Underwriters and the other indemnified parties were treated as one entity for
such purpose) or by any other method of allocation that does not reflect the
equitable considerations referred to in this Section 8(c). In no case shall any
Underwriter be responsible for a portion of the contribution obligation imposed
on all Underwriters in excess of its pro rata share based on the number of
shares underwritten by it as compared to the number of shares underwritten by
all Underwriters who do not default in their obligations under this Section
8(c). No person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation. For purposes of this
Section 8(c), each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each
officer, director, partner, employee, agent, and counsel of an Underwriter shall
have the same rights to contribution as such Underwriter and each person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, each officer of the Company who shall have
signed the Registration Statement, and each director of the Company shall have
the same rights to contribution
39
<PAGE>
as the Company, subject in each case to the provisions of this Section 8(c).
Anything in this Section 8(c) to the contrary notwithstanding, no party shall be
liable for contribution with respect to the settlement of any claim or action
effected without its written consent. This Section 8(c) is intended to
supersede any right to contribution under the Act, the Exchange Act, or
otherwise.
9. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Stock or Additional Stock hereunder, and if the number of
shares of Stock or Additional Stock to which the defaults of all Underwriters in
the aggregate relate does not exceed 10% of the number of shares of Stock or
Additional Stock, as the case may be, which all Underwriters have agreed to
purchase hereunder, then such shares of Stock or Additional Stock to which such
defaults relate shall be purchased by the non-defaulting Underwriters in
proportion to their respective commitments hereunder.
(b) If such defaults exceed in the aggregate 10% of the number of
shares of Stock or Additional Stock, as the case may be, which all Underwriters
have agreed to purchase hereunder, the Representative may, in the
Representative's discretion, arrange for itself or for another party or parties
to purchase such shares of Stock or Additional Stock, as the case may be, to
which such default relates on the terms contained herein. If the Representative
does not arrange for the purchase of such shares of Stock or Additional Stock,
as the case may be, within five (5) business days after the occurrence of
defaults relating to in excess of 10% of the Stock or the Additional Stock, as
the case may be, then the Company shall be entitled to a further period of one
business day within which to procure another party or parties satisfactory to
the Representative to purchase such shares of Stock or Additional Stock, as the
case may be, on such terms. If the Representative or the Company with respect
to the Stock or Additional Stock do not arrange for the purchase of the shares
of Stock or Additional Stock, as the case may be, to which such defaults relate
as provided in this Section 9(b), this Agreement may be terminated by the
Representative or by the Company with respect to the Stock or Additional Stock,
in each case without liability on the part of the Company (except that the
provisions of Sections 5(a)(1), 6, 8, 10, and 13 shall survive such termination)
or the several Underwriters, but nothing in this Agreement shall relieve a
defaulting Underwriter of its liability,
40
<PAGE>
if any, to the other several Underwriters and to the Company for any damages
occasioned by its default hereunder.
(c) If the shares of Stock or Additional Stock to which such defaults
relate are to be purchased by the non-defaulting Underwriters, or are to be
purchased by another party or parties as aforesaid, the Representative or the
Company with respect to the Stock or Additional Stock or the Representative
shall have the right to postpone the Closing Date or the Additional Closing
Date, as the case may be, for a reasonable period but not in any event more than
seven business days in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus or in any other
documents and arrangements with respect to the Stock or the Additional Stock,
and the Company agrees to prepare and file promptly any amendment or supplement
to the Registration Statement or the Prospectus which in the opinion of counsel
for the Underwriters may thereby be made necessary. The term "Underwriter" as
used in this Agreement shall include any party substituted under this Section 9
as if such party had originally been a party to this Agreement and had been
allocated the number of shares of Stock and Additional Stock actually purchased
by it as a result of its original commitment to purchase Stock and Additional
Stock and its purchase of shares of Stock or Additional Stock pursuant to this
Section 9.
10. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, covenants, and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the Closing Date and any Additional Closing Date, and such
representations, warranties, covenants, and agreements of the Underwriters and
the Company, including the indemnity and contribution agreements contained in
Section 8, shall remain operative and in full force and effect regardless of any
investigation made by, or on behalf of, any Underwriter or any indemnified
person, or by, or on behalf of, the Company or any person or entity which is
entitled to be indemnified under Section 8(b), and shall survive termination of
this Agreement or the delivery of the Stock and the Additional Stock to the
several Underwriters. In addition, the provisions of Sections 5(a)(1), 6, 8,
10, 11, and 13 shall survive termination of this Agreement, whether such
termination occurs before or after the Closing Date or any Additional Closing
Date.
41
<PAGE>
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
(a)This Agreement shall become effective at 9:30 A.M., New York City
local time, on the first full business day following the day on which the
Registration Statement becomes effective under the Act or at the time of the
initial public offering by the Underwriters of the Stock, whichever is earlier.
The time of the initial public offering shall mean the time, after the
Registration Statement becomes effective under the Act, of the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Stock or the time, after the Registration
Statement becomes effective under the Act, when the Stock is first released by
the Representative for offering by the Underwriters or dealers by letter or
telegram, whichever shall first occur. The Representative or the Company may
prevent this Agreement from becoming effective without liability of any party to
any other party, except as noted below in this Section 11, by giving the notice
indicated in Section 11(d) before the time this Agreement becomes effective
under the Act.
(b) If the purchase price of the Stock has not been determined as
provided for in Section 3 prior to 4:30 p.m., New York City local time, on the
third full business day after the date the Registration Statement becomes
effective under the Act, this Agreement may be terminated at any time thereafter
either by the Representative or by the Company by giving notice to the other
unless before such termination the purchase price for the Stock has been so
determined. If the purchase price of the Stock has not been so determined prior
to 4:30 p.m., New York City local time, on the tenth full business day after the
date the Registration Statement becomes effective under the Act, this Agreement
shall automatically terminate forthwith.
(c) In addition to the right to terminate this Agreement pursuant to
Sections 7 and 9 hereof, the Representative shall have the right to terminate
this Agreement at any time prior to the Closing Date by giving notice to the
Company, and, if exercised, the Over-allotment Option, at any time prior to any
Additional Closing Date, by giving notice to the Company, (i) if any domestic or
international event, act, or occurrence has materially disrupted, or, in the
Representative's opinion, will in the immediate future materially disrupt, the
securities markets; or (ii) if there shall have been a general suspension of, or
a general limitation on prices for, trading in securities on the New York Stock
Exchange or the American Stock Exchange or in the over-the-counter market; or
(iii) if there
42
<PAGE>
shall have been an outbreak or increase in the level of major hostilities or
other national or international calamity; or (iv) if a banking moratorium has
been declared by a state or federal authority; or (v) if a moratorium in foreign
exchange trading by major international banks or persons has been declared; or
(vi) if there shall have been a material interruption in the mail service or
other means of communication within the United States; or (vii) if the Company
shall have sustained a material or substantial loss by fire, flood, accident,
hurricane, earthquake, theft, sabotage, or other calamity or malicious act,
whether or not such loss shall have been insured, or from any labor dispute or
court or government action, order, or decree, which will, in the
Representative's opinion, make it inadvisable to proceed with the offering,
sale, or delivery of the Stock or the Additional Stock, as the case may be; or
(viii) if any key person designated in Section 5(21) is rendered disabled or
dies or otherwise becomes unable to function in his official capacity at the
Company; or (ix) if any material governmental restrictions shall have been
imposed on trading in securities in general, which restrictions are not in
effect on the date hereof; or (x) if there shall be passed by the Congress of
the United States or by any state legislature any act or measure, or adopted by
any governmental body or authoritative accounting institute or board, or any
governmental executive any orders, rules, or regulations, which the
Representative believes likely to have a material adverse effect on the
business, financial condition, or financial statements of the Company or the
market for the Common Stock; or (xi) if there shall have been such change in the
market for the Company's securities or securities in general or in political,
financial, or economic conditions as in the Representative's judgment makes it
inadvisable to proceed with the offering, sale, and delivery of the Stock or the
Additional Stock, as the case may be, on the terms contemplated by the
Prospectus.
(d) If the Representative elects to prevent this Agreement from
becoming effective, as provided in this Section 11, or to terminate this
Agreement, the Representative shall notify the Company promptly by telephone,
telex, or telegram, confirmed by letter. If, as so provided, the Company elects
to prevent this Agreement from becoming effective or to terminate this
Agreement, the Company shall notify the Representative promptly by telephone,
telex, or telegram, confirmed by letter.
(e) Anything in this Agreement to the contrary notwithstanding other
than Section 11(f), if this Agreement shall not become effective by reason of an
election by the Representative
43
<PAGE>
pursuant to this Section 11 the sole liability of the Company to the
Underwriters, in addition to the obligations the Company assumed pursuant to
Section 6, will be to reimburse the Underwriters for such out-of-pocket expenses
(including the fees and disbursements of their counsel) as shall have been
incurred by them in connection with this Agreement or the proposed offer, sale,
and delivery of the Stock and the Additional Stock, and, upon demand, the
Company agrees to pay promptly the full amount thereof to the Representative for
the respective accounts of the Underwriters. Anything in this Agreement to the
contrary notwithstanding other than Section 11(f), if this Agreement shall not
be carried out within the time specified herein for any reason other than the
failure on the part of the Company to perform any covenant or agreement or
satisfy any condition of this Agreement by it to be performed or satisfied, the
Company shall have no liability to the Underwriters other than for obligations
assumed by the Company pursuant to Section 6.
If the offering does not proceed as a result of a termination by
the Company prior to the initial filing of the Registration Statement (a
"Pre-Filing Termination"), the Company shall pay the Representative all of the
Representative's reasonable and accountable expenses through such date up to a
maximum of $125,000; provided, however, that if there shall be a Pre-Filing
Termination and within a period ending one year after such termination, the
Company shall file a registration statement with the Commission an underwriter
not currently affiliated with the Representative or shall effect a private
placement with unaffiliated investors of the Company (a "Financing
Transaction"), the Company shall, in addition to the payment provided for in the
first part of this sentence, use its best efforts to cause the Representatives
to act as the co-managing underwriter or placement agent in such transaction.
If, after the filing of the Registration Statement and before the declaration of
effectiveness of the Registration Statement, the offering does not proceed for
any reason (a "Post-Filing Termination"), the Company shall pay the
Representative (i) all of the Representative's reasonable and accountable
expenses incurred through such date up to a maximum of $150,000 and (ii) an
additional fee of $500,000 if the Representative was willing to proceed with the
offering, but the Company decided not to proceed. In addition, if (i) there
shall be a Post-Filing Termination, (ii) the Representative was willing to
proceed with the offering, but the Company decided not to proceed and (iii)
within a period ending one year after such termination, the Company shall effect
a Financing Transaction or is party to any merger, acquisition, or other
44
<PAGE>
similar transaction, then the Company shall promptly pay the Representative a
fee equal to 1.5% of the consideration received by the Company or present
shareholders of the Company in such Financing Transaction or merger,
acquisition, or other similar transactions.
(g) Notwithstanding any election hereunder or any termination of this
Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Sections 5(a)(1), 6, 8, 10, and 13 shall not be in any way
affected by such election or termination or failure to carry out the terms of
this Agreement or any part hereof.
12. NOTICES. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
by letter, to such Underwriter, c/o Hampshire Securities Corporation, 640 Fifth
Avenue, New York, New York 10019, Attention: Mr. Richard Abbe, with a copy to
Morrison Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, New York, New York
10022, Attention: Robert H. Cohen, Esq.; or if sent to the Company shall be
mailed, delivered, or telexed or telegraphed and confirmed by letter, to the
Company, Response USA, Inc., 11-H Princess Road, Lawrenceville, New Jersey
08648, Attention: Richard M. Brooks, Chief Executive Officer and President, with
a copy to Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551 Fifth Avenue, New
York, New York 10176, Attention: Kenneth R. Koch, Esq. All notices hereunder
shall be effective upon receipt by the party to which it is addressed.
13. PARTIES. The Representative represents that it is authorized to act
on behalf of the several Underwriters named in Schedule I hereto, and the
Company shall be entitled to act and rely on any request, notice, consent,
waiver, or agreement purportedly given on behalf of the Underwriters when the
same shall have been given by the Representative on such behalf. This Agreement
shall inure solely to the benefit of, and shall be binding upon, the
Underwriters and the Company, and the persons and entities referred to in
Section 8 who are entitled to indemnification or contribution, and their
respective successors, legal representatives, and assigns (which shall not
include any buyer, as such, of the Stock or the Additional Stock), and no other
person shall have, or be construed to have, any legal or equitable right,
remedy, or claim under, in respect of, or by virtue of this Agreement or any
provision herein contained. Notwithstanding anything contained in this
45
<PAGE>
Agreement to the contrary, all of the obligations of the Underwriters hereunder
are several and not joint.
14. CONSTRUCTION. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS.
TIME IS OF THE ESSENCE IN THIS AGREEMENT.
15. CONSENT TO JURISDICTION. The Company irrevocably consents to the
jurisdiction of the courts of the State of New York and of any federal court
located in such State in connection with any action or proceeding arising out
of, or relating to, this Agreement, any document or instrument delivered
pursuant to, in connection with, or simultaneously with this Agreement, or a
breach of this Agreement or any such document or instrument. In any such action
or proceeding, the Company waives personal service of any summons, complaint, or
other process and agrees that service thereof may be made in accordance with
Section 12. Within 30 days after such service, or such other time as may be
mutually agreed upon in writing by the attorneys for the parties to such action
or proceeding, the Company shall appear or answer such summons, complaint, or
other process. Should the Company fail to appear or answer within such 30-day
period or such extended period, as the case may be, the Company shall be deemed
in default and judgment may be entered against the Company for the amount as
demanded in any summons, complaint, or other process so served.
46
<PAGE>
If the foregoing correctly sets forth the understanding between the
Representative and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
between us.
Very truly yours,
RESPONSE USA, INC.
BY:
------------------------------------
ACCEPTED AS OF THE DATE FIRST ABOVE
WRITTEN IN NEW YORK, NEW YORK
HAMPSHIRE SECURITIES CORPORATION*
BY:
---------------------------------
RICHARD ABBE
*ON BEHALF OF ITSELF AND THE OTHER SEVERAL
UNDERWRITERS NAMED IN SCHEDULE I HERETO.
47
<PAGE>
SCHEDULE I
Total
Number
of Shares
to be
UNDERWRITER PURCHASED
Hampshire Securities Corporation....
Total................
==========
2,400,000
48
<PAGE>
Exhibit 4(g)
REPRESENTATIVE'S WARRANT
THE SECURITIES REPRESENTED HEREBY AND ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, PURSUANT TO A REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. HOWEVER,
NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE
OFFERED OR SOLD EXCEPT PURSUANT TO (I) A POST-EFFECTIVE
AMENDMENT TO SUCH REGISTRATION STATEMENT, (II) A SEPARATE
REGISTRATION STATEMENT UNDER SUCH ACT, OR (III) AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT.
THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN.
THIS WARRANT IS NOT EXERCISABLE PRIOR TO __________ __, 1998.
VOID AFTER 5:00 P.M. NEW YORK CITY LOCAL TIME, __________ __, 2002.
RESPONSE USA, INC.
WARRANTS FOR THE PURCHASE
OF
240,000 SHARES OF COMMON STOCK, $.008 PAR VALUE
NO. _____
THIS CERTIFIES that, for receipt in hand of $ and other value
received, HAMPSHIRE SECURITIES CORPORATION (the "Holder") is entitled to
subscribe for, and purchase from, RESPONSE USA, INC., a Delaware corporation
(the "Company"), upon the terms and conditions set forth herein, at any time or
from time to time after ___________ __, 1998, New York City local time until
5:00 P.M. New York City local time on _________ __, 2002 (the "Exercise
Period"), up to an aggregate of 240,000 shares of common stock, $.008 par value
(the "Common Stock"), of the Company. This Warrant is initially exercisable at
$________ per share; provided, however, that upon the occurrence of any of the
events specified in Section 5 hereof, the rights granted by this Warrant,
including the exercise price and the number of shares of Common
<PAGE>
Stock to be received upon such exercise, shall be adjusted as therein specified.
The term "Exercise Price" shall mean, depending on the context, the initial
exercise price (as set forth above) or the adjusted exercise price per share.
This Warrant is the Representative's Warrant or one of the Representative's
Warrants (collectively, including any Representative's Warrant issued upon the
exercise or transfer of any such Representative's Warrants in whole or in part,
the "Warrants") issued pursuant to the Underwriting Agreement, dated _________
__, 1997 (the "Underwriting Agreement"), among the Company and Hampshire
Securities Corporation, as representative (the "Representative") of the several
underwriters named therein. As used herein, the term "this Warrant" shall mean
and include this Warrant and any Warrant or Warrants hereafter issued as a
consequence of the exercise or transfer of this Warrant in whole or in part.
This Warrant may not be sold, transferred, assigned, or hypothecated until
__________ __, 1998, except that it may be transferred, in whole or in part, to
(i) one or more officers or partners of the Holder (or the officers or partners
of any such partner); (ii) any other underwriting firm or member of the selling
group which participated in the public offering of shares of Common Stock which
commenced on __________ __, 1997 (or the officers or partners of any such firm);
(iii) a successor to the Holder, or the officers or partners of such successor;
(iv) a purchaser of substantially all of the assets of the Holder; or (v) by
operation of law. The term the "Holder" as used herein shall include any
transferee to whom this Warrant has been transferred in accordance with the
above.
Each share of Common Stock issuable upon the exercise hereof shall be
hereinafter referred to as a "Warrant Share."
1. This Warrant may be exercised during the Exercise Period, either in
whole or in part, by the surrender of this Warrant (with the election at the end
hereof duly executed) to the Company at its office at Response USA, Inc. 11-H
Princess Road, Lawrenceville, New Jersey 08642, or at such other place as is
designated in writing by the Company, together with a certified or bank
cashier's check payable to the order of the Company in an amount equal to the
product of the Exercise Price and the number of Warrant Shares for which this
Warrant is being exercised.
2. Upon each exercise of the Holder's rights to purchase Warrant Shares,
the Holder shall be deemed to be the holder of record of the Warrant Shares,
notwithstanding that the transfer books of the Company shall then be closed or
certificates representing the Warrant Shares with respect to which this Warrant
was exercised shall not then have been actually delivered to the Holder. As
soon as practicable after each such exercise of this Warrant, the Company shall
issue and deliver to the Holder a certificate or certificates representing the
Warrant Shares issuable upon such exercise, registered in the name of the Holder
or its designee. If this Warrant should be exercised in part only, the Company
shall, upon surrender of this Warrant for cancellation, execute and deliver a
Warrant identical in all respects to this Warrant but for the right of the
Holder to purchase the balance of the aggregate number of Warrant Shares
purchasable hereunder as to which this Warrant has not been exercised or
assigned.
-2-
<PAGE>
3. Any Warrants issued upon the transfer or exercise in part of this
Warrant shall be numbered and shall be registered in a warrant register (the
"Warrant Register") as they are issued. The Company shall be entitled to treat
the registered holder of any Warrant on the Warrant Register as the owner in
fact thereof for all purposes, and shall not be bound to recognize any equitable
or other claim to, or interest in, such Warrant on the part of any other person,
and shall not be liable for any registration or transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration or transfer, or
with the knowledge of such facts that its participation therein amounts to bad
faith. This Warrant shall be transferable on the books of the Company only upon
delivery thereof duly endorsed by the Holder or by his duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment,
or authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his, her, or its authority shall be produced. Upon any registration
of transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto. This Warrant may be exchanged, at the option of the Holder
thereof, for another Warrant, or other Warrants of different denominations, of
like tenor and representing in the aggregate the right to purchase a like number
of Warrant Shares (or portions thereof), upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Warrants to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations thereunder.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the Warrants, such number of shares of Common Stock as shall,
from time to time, be sufficient therefor. The Company represents that all
shares of Common Stock issuable upon exercise of this Warrant are duly
authorized and, upon receipt by the Company of the full payment for such Warrant
Shares, will be validly issued, fully paid, and nonassessable, without any
personal liability attaching to the ownership thereof and will not be issued in
violation of any preemptive or similar rights of stockholders.
5. (a) The Exercise Price for the Warrant in effect from time to time,
and the number of shares of Common Stock issuable upon exercise of the Warrant,
shall be subject to adjustment, as follows:
(i) In the event that the Company shall at any time after the date
hereof (A) declare a dividend on the outstanding Common Stock payable in shares
of its capital stock, (B) subdivide the outstanding Common Stock, (C) combine
the outstanding Common Stock into a smaller number of shares, or (D) issue any
shares of its capital stock by reclassification of the Common Stock (including
any such reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation), then, in each case, the Exercise
Price per Warrant Share in effect at the time of the record date for the
determination of stockholders entitled
-3-
<PAGE>
to receive such dividend or distribution or of the effective date of such
subdivision, combination, or reclassification shall be adjusted so that it shall
equal the price determined by multiplying such Exercise Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action, and the denominator of which shall be the
number of shares of Common Stock outstanding after giving effect to such action.
Such adjustment shall be made successively whenever any event listed above shall
occur and shall become effective at the close of business on such record date or
at the close of business on the date immediately preceding such effective date,
as applicable.
(ii) In the event that the Company shall fix a record date for the
determination of stockholders entitled to receive issuance of rights or warrants
to be issued to all holders of Common Stock entitling such stockholders to
subscribe for or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than the then Current Market Price (as defined below) per
share of Common Stock on such record date, the Exercise Price in effect at the
time of such record date shall be adjusted so that the same shall equal the
price determined by multiplying such Exercise Price in effect immediately prior
to the date of such issuance by a fraction, the numerator of which shall be the
sum of the number of shares of Common Stock outstanding on such record date and
the number of additional shares of Common Stock which the aggregate offering
price of the total number of shares of Common Stock so offered (or the aggregate
conversion price of the convertible securities so offered) would purchase at
such Current Market Price per share of the Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding on
such record date and the number of additional shares of Common Stock offered for
subscription or purchase (or into which the convertible securities so offered
are convertible). Such adjustment shall be made successively whenever such
rights or warrants are issued and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants; and, to the extent that shares of Common Stock are not
delivered (or securities convertible into Common Stock are not delivered) after
the expiration of such rights or warrants, the Exercise Price shall be
readjusted to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made upon the
basis of delivery of only the number of shares of Common Stock (or securities
convertible into Common Stock) actually delivered.
(iii) In the event the Company shall fix a record date for the
determination of stockholders entitled to receive (including any such
distribution made to the stockholders of the Company in connection with a
consolidation or merger in which the Company is the continuing corporation in a
distribution to all holders of Common Stock) evidences of its indebtedness,
cash, or assets (other than distributions and dividends payable in shares of
Common Stock), or rights, options, or warrants to subscribe for or purchase
shares of Common Stock, or securities convertible into, or exchangeable for,
shares of Common Stock (excluding those referred to in paragraph (ii) above) in
a distribution to all holders of Common Stock, then, in each case, the Exercise
Price in effect at the time of such record date shall be adjusted by multiplying
the Exercise Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the Current
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Market Price per share of Common Stock on such record date, less the fair market
value (as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error) of the portion of
the evidences of indebtedness or assets so to be distributed, or of such rights,
options, or warrants, or convertible or exchangeable securities, or the amount
of such cash, applicable to one share of Common Stock, and the denominator of
which shall be such Current Market Price per share of Common Stock on such
record date. Such adjustment shall be made successively whenever any event
listed above shall occur and become effective at the close of business on such
record date.
(iv) In case the Company shall issue shares of Common Stock for a
consideration per share (the "Offering Price") less than the Current Market
Price per share of Common Stock on the date the Company fixes the offering price
of such additional shares, the Exercise Price shall be adjusted immediately
thereafter so that it shall equal the price determined by multiplying such
Exercise Price by a fraction, the numerator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to the issuance
of such additional shares and the number of shares of Common Stock which the
aggregate consideration received (determined as provided in Subsection (i)
below) for the issuance of such additional shares would purchase at such Current
Market Price per share of Common Stock, and the denominator of which shall be
the number of shares of Common Stock outstanding immediately after the issuance
of such additional shares. Such adjustment shall be made successively whenever
such an issuance is made. Notwithstanding anything herein to the contrary, no
adjustment pursuant to this paragraph (a)(iv) of Section 5 shall take place as a
result of this issuance of shares of Common Stock pursuant to an employee,
officer, or director securities ownership or compensation plan duly adopted by
the Board of Directors of the Company.
(v) In case the Company shall issue any securities convertible into, or
exchangeable for, Common Stock (excluding securities issued in transactions
described in Subsections (ii) and (iii) above) for a consideration per share of
Common Stock (the "Conversion Price") initially deliverable upon conversion or
exchange of such securities (determined as provided in Subsection (i) below)
less than the Current Market Price per share of Common Stock in effect
immediately prior to the issuance of such securities, the Exercise Price in
effect immediately prior to the date of such issuance shall be adjusted
immediately thereafter so that it shall equal the price determined by
multiplying such Exercise Price by a fraction, the numerator of which shall be
the sum of the number of shares of Common Stock outstanding immediately prior to
the issuance of such securities and the number of shares of Common Stock which
the aggregate consideration received (determined as provided in Subsection (i)
below) for such securities would purchase at such Current Market Price per share
of Common Stock, and the denominator of which shall be the sum of the number of
shares of Common Stock outstanding immediately prior to such issuance and the
maximum number of shares of Common Stock deliverable upon conversion of, or in
exchange for, such securities at the initial conversion or exchange price or
rate. Such adjustment shall be made successively whenever such an issuance is
made. Notwithstanding anything herein to the contrary, no adjustment pursuant
to this paragraph (a)(v) of Section 5 shall take place as a result of the
issuance of securities convertible into, or exchangeable for, shares of Common
Stock pursuant to
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an employee, officer, or director securities ownership or compensation plan duly
adopted by the Board of Directors of the Company.
(b) The Current Market Price per share of Common Stock on any date shall
be deemed to be the average of the daily closing prices for the 30 consecutive
trading days immediately preceding the date in question. The closing price for
each day shall be the last reported sales price regular way or, in case no such
reported sale takes place on such day, the closing bid price regular way, in
either case on the principal national securities exchange (including, for
purposes hereof, the NASDAQ National Market System) on which the Common Stock is
listed or admitted to trading or, if the Common Stock is not listed or admitted
to trading on any national securities exchange, the highest reported bid price
for the Common Stock as furnished by the National Association of Securities
Dealers, Inc. through the Nasdaq SmallCap Market or a similar organization if
the Nasdaq SmallCap Market is no longer reporting such information. If, on any
such date, the Common Stock is not listed or admitted to trading on any national
securities exchange and is not quoted on the Nasdaq SmallCap Market or any
similar organization, the fair value of a share of Common Stock on such date, as
determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error, shall be used.
(c) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be.
(d) In any case in which this Section 5 shall require that an adjustment
in the number of Warrant Shares be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the Holder, if the Holder exercised this Warrant after such
record date, the Warrant Shares, if any, issuable upon such exercise over and
above the number of Warrant Shares issuable upon such exercise upon such
exercise on the basis of the number of shares of Common Stock included such
Units in effect prior to such adjustment; provided, however, that the Company
shall deliver to the Holder a due bill or other appropriate instrument
evidencing the Holder's right to receive such additional shares of Common Stock
upon the occurrence of the event requiring such adjustment.
(e) Whenever there shall be an adjustment as provided in this Section 5,
the Company shall within 15 days thereafter cause written notice thereof to be
sent by registered mail, postage prepaid, to the Holder, at its address as it
shall appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares issuable and
the Exercise Price thereof after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation thereof,
which officer's certificate shall be conclusive evidence of the correctness of
any such adjustment absent manifest error.
(f) The Company shall not be required to issue fractions of shares of
Common Stock or other capital stock of the Company upon the exercise of this
Warrant. If any fraction of a share of Common Stock would be issuable on the
exercise of this Warrant (or specified portions thereof),
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the Company shall purchase such fraction for an amount in cash equal to the same
fraction of the Current Market Price of such share of Common Stock on the date
of exercise of this Warrant.
(g) No adjustment in the Exercise Price per Warrant Share shall be
required if such adjustment is less than $.001; provided, however, that any
adjustments which by reason of this Section 5 are not required to be made shall
be carried forward and taken into account in any subsequent adjustment.
(h) Whenever the Exercise Price payable upon exercise of this Warrant is
adjusted pursuant to Subsections (a)(i), (a)(ii), (a)(iii), (a)(iv), or (a)(v)
above, the number of Warrant Shares issuable upon exercise of this Warrant shall
simultaneously be adjusted by multiplying the number of Warrant Shares
theretofore issuable upon exercise of this Warrant by the Exercise Price in
effect on the date hereof and dividing the product so obtained by the Exercise
Price, as adjusted.
(i) For purposes of any computation respecting consideration received
pursuant to Subsections (a)(iv) and (a)(v) above, the following shall apply:
(i) in the case of the issuance of shares of Common Stock for cash, the
consideration shall be the amount of such cash, provided that in no
case shall any deduction be made for any commissions, discounts, or
other expenses incurred by the Company for any underwriting of the
issue or otherwise in connection therewith;
(ii) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair market value thereof as
determined in good faith by the board of directors of the Company
(irrespective of the accounting treatment thereof), the determination
of which shall be a conclusive absent manifest error; and
(iii) in the case of the issuance of securities convertible into, or
exchangeable for, shares of Common Stock, the aggregate consideration
received therefor shall be deemed to be the consideration received by
the Company for the issuance of such securities plus the additional
minimum consideration, if any, to be received by the Company upon the
conversion or exchange thereof (the consideration in each case to be
determined in the same manner as provided in clauses (i) and (ii) of
this Subsection (i)).
(j) Notwithstanding anything herein to the contrary, if any adjustment
under this Section 5 of the Exercise Price or the number of shares of Common
Stock or other securities issuable upon exercise of this Warrant shall be
determined by the National Association of Securities Dealers, Inc. (the "NASD")
to violate either or both of Section (c)(6)(B)(vii)(g) or Section
(c)(6)(B)(vii)(h) of Rule 2710 of the Conduct Rules of the NASD, and such
determination shall not be subject to further appeal or review, the violative
provisions or provisions shall be deemed to be
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amended to the minimum extent necessary to cause each such provision to comply
with the applicable violated paragraph of Rule 2710 of the NASD Conduct Rules.
6. (a) In case of any capital reorganization, other than in the cases
referred to in Section 5(a) hereof, or the consolidation or merger of the
Company with or into another corporation (other than a merger or consolidation
in which the Company is the continuing corporation and which does not result in
any reclassification of the outstanding shares of Common Stock or the conversion
of such outstanding shares of Common Stock into shares of other stock or other
securities or property), or in the case of any sale, lease, or conveyance to
another corporation of the property and assets of any nature of the Company as
an entirety or substantially as an entirety (such actions being hereinafter
collectively referred to as "Reorganizations"), there shall thereafter be
deliverable upon exercise of this Warrant (in lieu of the number of Warrant
Shares theretofore deliverable) the number of shares of stock or other
securities or property to which a holder of the respective number of Warrant
Shares which would otherwise have been deliverable upon the exercise of this
Warrant would have been entitled upon such Reorganization if this Warrant had
been exercised in full immediately prior to such Reorganization. In case of any
Reorganization, appropriate adjustment, as determined in good faith by the board
of directors of the Company, shall be made in the application of the provisions
herein set forth with respect to the rights and interests of the Holder so that
the provisions set forth herein shall thereafter be applicable, as nearly as
possible, in relation to any shares or other property thereafter deliverable
upon exercise of this Warrant. Any such adjustment shall be made by, and set
forth in, a supplemental agreement between the Company, or any successor
thereto, and the Holder, with respect to this Warrant, and shall for all
purposes hereof conclusively be deemed to be an appropriate adjustment. The
Company shall not effect any such Reorganization unless, upon or prior to the
consummation thereof, the successor corporation, or if the Company shall be the
surviving corporation in any such Reorganization and is not the issuer of the
shares of stock or other securities or property to be delivered to holders of
shares of the Common Stock outstanding at the effective time thereof, then such
issuer, shall assume by written instrument the obligation to deliver to the
Holder such shares of stock, securities, cash, or other property as such holder
shall be entitled to purchase in accordance with the foregoing provisions. In
the event of sale, lease, or conveyance or other transfer of all or
substantially all of the assets of the Company as part of a plan for liquidation
of the Company, all rights to exercise this Warrant shall terminate 30 days
after the Company gives written notice to the Holder and each registered holder
of a Warrant that such sale or conveyance or other transfer has been
consummated.
(b) In case of any reclassification or change of the shares of Common
Stock issuable upon exercise of this Warrant (other than a change in par value
or from no par value to a specified par value, or as a result of a subdivision
or combination, but including any change in the shares into two or more classes
or series of shares), or in case of any consolidation or merger of another
corporation into the Company in which the Company is the continuing corporation
and in which there is a reclassification or change (including a change to the
right to receive cash or other property) of the shares of Common Stock (other
than a change in par value, or from no par value to a specified par value, or as
a result of a subdivision or combination, but including any change
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<PAGE>
in the shares into two or more classes or series of shares), the Holder or
holders of this Warrant shall have the right thereafter to receive upon exercise
of this Warrant solely the kind and amount of shares of stock and other
securities, property, cash, or any combination thereof receivable upon such
reclassification, change, consolidation, or merger by a holder of the number of
Warrant Shares for which this Warrant might have been exercised immediately
prior to such reclassification, change, consolidation, or merger. Thereafter,
appropriate provision shall be made for adjustments which shall be as nearly
equivalent as practicable to the adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution (other than
regularly scheduled cash dividends which are not in a greater amount per share
than the most recent such cash dividend) to all holders of Common Stock; or
(b) to issue any rights, warrants, or other securities to all holders
of Common Stock entitling them to purchase any additional shares of Common Stock
or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding shares of
Common Stock or any consolidation, merger, sale, lease, or conveyance of
property, as described in Section 6; or
(d) to effect any liquidation, dissolution, or winding-up of the
Company; or
(e) to take any other action which would cause an adjustment to the
Exercise Price per Warrant Share;
then, and in any one or more of such cases, the Company shall give written
notice thereof by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
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dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price per Warrant Share.
8. The issuance of any shares or other securities upon the exercise of
this Warrant and the delivery of certificates or other instruments representing
such shares or other securities shall be made without charge to the Holder for
any tax or other charge in respect of such issuance. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
9. (a) If, at any time for the period starting at the beginning of the
second year and concluding at the end of the seven-year commencing on
______________, 1997 the Company shall file a registration statement (other than
on Form S-4, Form S-8 or any successor form) with the Securities and Exchange
Commission (the "Commission") while any Registrable Securities (as hereinafter
defined) are outstanding, the Company shall give all the then holders of any
Registrable Securities (the "Eligible Holders") at least 45 days prior written
notice of the filing of such registration statement. If requested by any
Eligible Holder in writing within 30 days after receipt of any such notice, the
Company shall, at the Company's sole expense (other than the fees and
disbursements of counsel for the Eligible Holders and the underwriting
discounts, if any, payable in respect of the Registrable Securities sold by any
Eligible Holder), register or qualify all or, at each Eligible Holder's option,
any portion of the Registrable Securities of any Eligible Holders who shall have
made such request, concurrently with the registration of such other securities,
all to the extent requisite to permit the public offering and sale of the
Registrable Securities through the facilities of all appropriate securities
exchanges and the over-the-counter market, and will use its best efforts through
its officers, directors, auditors, and counsel to cause such registration
statement to become effective as promptly as practicable. Notwithstanding the
foregoing, if the managing underwriter of any such offering shall advise the
Company in writing that, in its opinion, the distribution of all or a portion of
the Registrable Securities requested to be included in the registration
concurrently with the securities being registered by the Company would
materially adversely affect the distribution of such securities by the Company
for its own account, then any Eligible Holder who shall have requested
registration of his, her, or its Registrable Securities shall delay the offering
and sale of such Registrable Securities (or the portions thereof so designated
by such managing underwriter) for such period, not to exceed 90 days (the "Delay
Period"), as the managing underwriter shall request, provided that no such delay
shall be required as to any Registrable Securities if any securities of the
Company are included in such registration statement and eligible for sale during
the Delay Period for the account of any person other than the Company and any
Eligible Holder unless the securities included in such registration statement
and eligible for sale during the Delay Period for such other person shall have
been reduced pro rata to the reduction of the Registrable Securities which were
requested to be included and eligible for sale during the Delay Period in such
registration. As used herein, "Registrable Securities" shall mean
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the Warrants and the Warrant Shares which, in each case, have not been
previously sold pursuant to a registration statement or Rule 144 promulgated
under the Act.
(b) If, on any two occasions during the four-year period commencing on
[one year from effective date of the Registration Statement], 1997, the Company
shall receive a written request from Eligible Holders who in the aggregate own
(or upon exercise of all Warrants or Warrants then outstanding would own) a
majority of the total number of shares of Common Stock then included (or upon
such exercises would be included) in the Registrable Securities (the "Majority
Holders"), to register the sale of all or part of such Registrable Securities,
the Company shall, as promptly as practicable, prepare and file with the
Commission a registration statement sufficient to permit the public offering and
sale of the Registrable Securities through the facilities of all appropriate
securities exchanges and the over-the-counter market, and will use its best
efforts through its officers, directors, auditors, and counsel to cause such
registration statement to become effective as promptly as practicable; provided,
that the Company shall only be obligated to file one such registration statement
pursuant to this Section 9(b) for which all expenses incurred in connection with
such registration (other than the fees and disbursements of counsel for the
Eligible Holders and underwriting discounts, if any, payable in respect of the
Registrable Securities sold by the Eligible Holders) shall be borne by the
Company. Within three business days after receiving any request contemplated by
this Section 9(b), the Company shall give written notice to all the other
Eligible Holders, advising each of them that the Company is proceeding with such
registration and offering to include therein all or any portion of any such
other Eligible Holder's Registrable Securities, provided that the Company
receives a written request to do so from such Eligible Holder within 30 days
after receipt by him, her, or it of the Company's notice.
(c) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall use its best efforts to cause the Registrable
Securities so registered to be registered or qualified for sale under the
securities or blue sky laws of such jurisdictions as the Holder or such holders
may reasonably request; provided, however, that the Company shall not be
required by reason of this Section 9(c) to register or qualify the Registrable
Securities in any jurisdiction where, as a result thereof, the Company would be
subject to service of general process or to taxation as a foreign corporation
doing business in such jurisdiction to which the Company is not then subject.
(d) The Company shall keep effective any registration or qualification
contemplated by this Section 9 and shall from time to time amend or supplement
each applicable registration statement, preliminary prospectus, final
prospectus, application, document, and communication for such period of time as
shall be required to permit the Eligible Holders to complete the offer and sale
of the Registrable Securities covered thereby. The Company shall in no event be
required to keep any such registration or qualification in effect for a period
in excess of nine months from the date on which the Eligible Holders are first
free to sell such Registrable Securities; provided, however, that, if the
Company is required to keep any such registration or qualification in effect
with respect to securities other than the Registrable Securities beyond such
period, the Company shall keep such registration or qualification in effect as
it relates to the Registrable Securities for so long as such
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registration or qualification remains or is required to remain in effect in
respect of such other securities.
(e) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall furnish to each Eligible Holder such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of copies
of each prospectus contained in such registration statement and each supplement
or amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act and the rules and regulations thereunder,
and such other documents, as any Eligible Holder may reasonably request to
facilitate the disposition of the Registrable Securities included in such
registration.
(f) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall furnish each Eligible Holder of any Registrable
Securities so registered with an opinion of its counsel (reasonably acceptable
to the Eligible Holders) to the effect that (i) the registration statement has
become effective under the Act and no order suspending the effectiveness of the
registration statement, or preventing or suspending the use of the registration
statement, any preliminary prospectus, any final prospectus or any amendment or
supplement thereto, has been issued, nor has the Commission or any securities or
blue sky authority of any jurisdiction instituted or threatened to institute any
proceedings with respect to such an order, (ii) the registration statement and
each prospectus forming a part thereof (including each preliminary prospectus),
and any amendment or supplement thereto, complies as to form with the Act and
the rules and regulations thereunder, and (iii) such counsel has no knowledge of
any material misstatement or omission in such registration statement or any
prospectus, as amended or supplemented. Such opinion shall also state the
jurisdictions in which the Registrable Securities have been registered or
qualified for sale pursuant to the provisions of Section 9(c).
(g) In the event of a registration pursuant to the provision of this
Section 9, the Company shall enter into a cross-indemnity agreement and a
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, without limitation, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Registrable
Securities.
(h) The Company agrees that until all the Registrable Securities have been
sold under a registration statement or pursuant to Rule 144 under the Act, it
shall keep current in filing all reports, statements, and other materials
required to be filed with the Commission to permit holders of the Registrable
Securities to sell such securities under Rule 144 under the Act.
(i) Except for rights in existence on the date hereof, the Company will
not, without the written consent of the Majority Holders, grant to any persons
the right to request the Company to register any securities of the Company,
provided that the Company may grant such registration rights to other persons so
long as such rights are subordinate to the rights of the Eligible Holders.
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10. (a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each Eligible Holder, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 10, without
limitation, attorneys' fees and any and all expense whatsoever incurred in
investigating, preparing, or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), as and when incurred, arising out of, based upon,
or in connection with, (i) any untrue statement or alleged untrue statement of a
material fact contained in (A) any registration statement, preliminary
prospectus, or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto, relating to the offer and sale of any of
the Registrable Securities, or (B) any application or other document or
communication (in this Section 10, referred to collectively as an "application")
executed by, or on behalf of, the Company or based upon written information
furnished by, or on behalf of, the Company filed in any jurisdiction in order to
register or qualify any of the Registrable Securities under the securities or
"blue sky" laws thereof or filed with the Commission or any securities exchange;
or any omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon, and in conformity
with, written information furnished to the Company with respect to such Eligible
Holder by, or on behalf of, such person expressly for inclusion in any
registration statement, preliminary prospectus or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant, or agreement of the
Company contained in this Warrant. The foregoing agreement to indemnify shall
be in addition to any liability the Company may otherwise have, including
liabilities arising under this Warrant.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability other than pursuant to this Section 10(a)) and the
Company shall promptly assume the defense of such action, including, without
limitation, the employment of counsel reasonably satisfactory to such
indemnified party or parties) and payment of expenses. Such indemnified party
or parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless the employment of such counsel shall have
been authorized in writing by the Company in connection with the defense of such
action or the Company shall not have promptly employed counsel reasonably
satisfactory to such indemnified party or parties to have charge of the defense
of such action or the named parties to such action include both the indemnified
and the indemnifying parties and such indemnified party or parties shall have
reasonably concluded that there may be one or more legal defenses available to
it or them or to other indemnified parties which are different
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from, or in addition to, those available to the Company, in any of which events
such fees and expenses shall be borne by the Company and the Company shall not
have the right to direct the defense of such action on behalf of the indemnified
party or parties. Anything in this Section 10 to the contrary notwithstanding,
the Company shall not be liable for any settlement of any such claim or action
effected without its written consent, which consent shall not be unreasonably
withheld. The Company shall not, without the prior written consent of each
indemnified party that is not released as described in this sentence, settle or
compromise any action, or permit a default or consent to the entry of judgment
in, or otherwise seek to terminate, any pending or threatened action, in respect
of which indemnity may be sought hereunder (whether or not any indemnified party
is a party thereto), unless such settlement, compromise, consent, or termination
includes an unconditional release of each indemnified party from all liability
in respect of such action. The Company agrees promptly to notify the Eligible
Holders of the commencement of any litigation or proceedings against the Company
or any of its officers or directors in connection with the sale of any
Registrable Securities or any preliminary prospectus, prospectus, registration
statement, or amendment or supplement thereto, or any application relating to
any sale of any Registrable Securities.
(b) Each Eligible Holder severally agrees to indemnify and hold harmless
the Company, each director of the Company, each officer of the Company who shall
have signed any registration statement covering Registrable Securities held by
such Eligible Holder, each other person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, and
its or their respective counsel, to the same extent as the foregoing indemnity
from the Company to the Eligible Holders in Section 10(a), but only with respect
to statements or omissions, if any, made in any registration statement,
preliminary prospectus, or final prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, or in any application, in
reliance upon, and in conformity with, written information furnished to the
Company with respect to any Eligible Holder by, or on behalf of, such Eligible
Holder expressly for inclusion in any such registration statement, preliminary
prospectus, or final prospectus, or any amendment or supplement thereto, or in
any application, as the case may be. If any action shall be brought against the
Company or any other person so indemnified based on any such registration
statement, preliminary prospectus, or final prospectus, or any amendment or
supplement thereto, or any application, and in respect of which indemnity may be
sought against any Eligible Holder pursuant to this Section 10(b), such Eligible
Holder shall have the rights and duties given to the Company, and the Company
and each other person so indemnified shall have the rights and duties given to
the indemnified parties, by the provisions of Section 10(a).
(c) To provide for just and equitable contribution, if (i) an indemnified
party makes a claim for indemnification pursuant to Section 10(a) or 10(b)
(subject to the limitations thereof), but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act, or otherwise, then the
Company (including for this purpose any contribution made by, or on behalf of,
any director of the Company, any officer of the Company who signed any such
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<PAGE>
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the Registrable
Securities included in such registration in the aggregate (including for this
purpose any contribution by, or on behalf of, an indemnified party), as a second
entity, shall contribute to the losses, liabilities, claims, damages, and
expenses whatsoever to which any of them may be subject, on the basis of
relevant equitable considerations such as the relative fault of the Company and
such Eligible Holders in connection with the facts which resulted in such
losses, liabilities, claims, damages, and expenses. The relative fault, in the
case of an untrue statement, alleged untrue statement, omission, or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission, or alleged omission relates to information supplied
by the Company or by such Eligible Holders, and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement, alleged statement, omission, or alleged omission. The Company and
the Eligible Holders agree that it would be unjust and inequitable if the
respective obligations of the Company and the Eligible Holders for contribution
were determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages, and expenses (even if the Eligible Holders and the
other indemnified parties were treated as one entity for such purpose) or by any
other method of allocation that does not reflect the equitable considerations
referred to in this Section 10(c). In no case shall any Eligible Holder be
responsible for a portion of the contribution obligation imposed on all Eligible
Holders in excess of its pro rata share based on the number of shares of Common
Stock owned (or which would be owned upon exercise of all Registrable
Securities) by it and included in such registration as compared to the number of
shares of Common Stock owned (or which would be owned upon exercise of all
Registrable Securities) by all Eligible Holders and included in such
registration. No person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. For purposes of
this Section 10(c), each person, if any, who controls any Eligible Holder within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and
each officer, director, partner, employee, agent, and counsel of each such
Eligible Holder or control person shall have the same rights to contribution as
such Eligible Holder or control person and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed any such
registration statement, each director of the Company, and its or their
respective counsel shall have the same rights to contribution as the Company,
subject in each case to the provisions of this Section 10(c). Anything in this
Section 10(c) to the contrary notwithstanding, no party shall be liable for
contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 10(c) is intended to supersede any
right to contribution under the Act, the Exchange Act, or otherwise.
11. Unless registered pursuant to the provisions of Section 9 hereof, the
Warrant Shares issued on exercise of the Warrants shall be subject to a stop
transfer order and the certificate or certificates representing the Warrant
Shares shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE BEEN REGISTERED UNDER THE
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SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
HOWEVER, SUCH SECURITIES MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (I) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION
STATEMENT, (II) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT,
OR (III) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT."
12. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Warrant (and upon surrender of any
Warrant if mutilated), and upon receipt by the Company of reasonably
satisfactory indemnification, the Company shall execute and deliver to the
Holder thereof a new Warrant of like date, tenor, and denomination.
13. The Holder of any Warrant shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Warrant.
14. This Warrant shall be construed in accordance with the laws of the
State of New York applicable to contracts made and performed within such State,
without regard to principles of conflicts of law.
15. The Company irrevocably consents to the jurisdiction of the courts of
the State of New York and of any federal court located in such State in
connection with any action or proceeding arising out of, or relating to, this
Warrant, any document or instrument delivered pursuant to, in connection with,
or simultaneously with, this Warrant, or a breach of this Warrant or any such
document or instrument. In any such action or proceeding, the Company waives
personal service of any summons, complaint, or other process and agrees that
service thereof may be made in accordance with Section 12 of the Underwriting
Agreement. Within 30 days after such service, or such other time as may be
mutually agreed upon in writing by the attorneys for the parties to such action
or proceeding, the Company shall appear to answer such summons, complaint, or
other process. Should the Company so served fail to appear or answer within
such 30-day period or such extended period, as the case may be, the Company
shall be deemed in default and judgment may be entered against the Company for
the amount as demanded in any summons, complaint, or other process so served.
Dated: ____________ __, 1997
RESPONSE USA, INC.
BY:
----------------------------------
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[Seal]
______________________
Secretary
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<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, ______________________ hereby sells, assigns, and
transfers unto _________________ a Warrant to purchase __________ shares of
Common Stock, $.008 par value, of Response USA, Inc., a Delaware corporation
(the "Company"), and does hereby irrevocably constitute and appoint ___________
attorney to transfer such Warrant on the books of the Company, with full power
of substitution.
Dated:
-----------------
Signature
-----------------------------------
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
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<PAGE>
ELECTION TO EXERCISE
To: Response USA, Inc.
11-H Princess Road
Lawrenceville, New Jersey 08648
The undersigned hereby exercises his, her, or its rights to purchase
shares of Common Stock, $.008 par value ("the Common Stock"), of Response USA,
Inc., a Delaware corporation (the "Company"), covered by the within Warrant and
tenders payment herewith in the amount of $_____ in accordance with the terms
thereof, and requests that certificates for the securities constituting such
shares of Common Stock be issued in the name of, and delivered to:
(Print Name, Address, and Social Security
or Tax Identification Number)
and, if such number of shares of Common Stock shall not constitute all such
shares of Common Stock covered by the within Warrant, that a new Warrant for the
balance of the shares of Common Stock covered by the within Warrant shall be
registered in the name of, and delivered to, the undersigned at the address
stated below.
Dated: Name
------------------------ -----------------------------------
(Print)
Address:
-------------------------------------
(Signature)
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Exhibit 4(j)
RESPONSE USA, INC.
1997 STOCK OPTION PLAN
SECTION 1. Purpose. The purpose of the Response USA, Inc., 1997 Stock
Option Plan (this "Plan") is to provide a means whereby selected employees,
officers, directors, agents, consultants and independent contractors of Response
USA, Inc., (the "Company") or of any parent or subsidiary (as defined in
subsection 5.7 and referred to hereinafter as "related corporations") thereof,
may be granted incentive stock options and/or non-qualified stock options to
purchase the Common Stock (as defined in Section 3) of the Company, in order to
attract and retain the services or advice of such employees, officers,
directors, agents, consultants and independent contractors and to provide added
incentive to them by encouraging stock ownership in the Company.
SECTION 2. Administration.
(a) This Plan shall be administered by the Board of Directors of the
Company (the "Board"), except to the extent the Board delegates its authority to
a committee of the Board to administer this Plan. The administrator of this Plan
shall hereinafter be referred to as the "Plan Administrator."
(b) For so long as the Company's Common Stock is registered under Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no
Option shall be granted to a director or officer (subject to Section 16 of the
Exchange Act) of the Company by the Board unless (i) approved in advance by the
Board or the Plan Administrator in accordance with the provisions of Rule
16b-3(d)(1) under the Exchange Act (where the Plan Administrator, if not the
entire Board, is a committee of the Board composed solely of two or more
non-employee directors who satisfy the requirements of Rule 16b-3(b)(3) under
the Exchange Act), or (ii) approved in advance, or subsequently ratified by, the
stockholders in accordance with the provisions of Rule 16b-3(d)(2) under the
Exchange Act, except that an option may be granted absent such approval if the
option provides that no officer or director of the Company may sell shares
received upon the exercise of such option during the six-month period
immediately following the grant of such option.
2.1 Procedures. The Board shall designate one of the members of the
Plan Administrator as chairman. The Plan Administrator may hold meetings at such
times and places as it shall determine. The acts of a majority of the members of
the Plan Administrator present at meetings at which a quorum exists, or acts
reduced to or approved in writing by all Plan Administrator members, shall be
valid acts of the Plan Administrator.
2.2 Responsibilities. Except for the terms and conditions explicitly
set forth in this Plan, the Plan Administrator shall have the authority, in its
discretion, to determine all matters relating to the options to be granted under
this Plan, including selection of the individuals to be granted options, the
number of shares to be subject to each option, the exercise price, and all other
terms and conditions of the options, including the designation of such options
as an incentive stock option or non-qualified stock option. Grants under this
Plan need not be identical in any respect, even when made simultaneously. The
interpretation and construction by the Plan Administrator of any terms or
provisions of this Plan or any option issued hereunder, or of any rule or
regulation
<PAGE>
promulgated in connection herewith, shall be conclusive and binding on all
interested parties, so long as such interpretation and construction with respect
to incentive stock options corresponds to the requirements of Internal Revenue
Code (the "Code") Section 422, the regulations thereunder, and any amendments
thereto.
2.3 Section 16(b) Compliance and Bifurcation of Plan. It is the
intention of the Company that this Plan comply in all respects with Section
16(b) and Rule 16b-3 under the Exchange Act, to the extent applicable, and, if
any Plan provision is later found not to be in compliance with such Section or
Rule, as the case may be, the provision shall be deemed null and void, and in
all events the Plan shall be construed in favor of its meeting the requirements
of Section 16(b) and Rule 16b-3 under the Exchange Act. Notwithstanding
anything in the Plan to the contrary, the Board, in its absolute discretion, may
bifurcate the Plan so as to restrict, limit or condition the use of any
provision of the Plan to participants who are officers and directors or other
persons subject to Section 16(b) of the Exchange Act without so restricting,
limiting or conditioning the Plan with respect to other participants.
SECTION 3. Stock Subject to This Plan. The stock subject to this Plan
shall be the Company's Common Stock, par value $0.008 per share (the "Common
Stock"), presently authorized but unissued or subsequently acquired by the
Company. Subject to adjustment as provided in Section 7 hereof, the aggregate
amount of Common Stock to be delivered upon the exercise of all options granted
under this Plan shall not exceed 500,000 shares as such Common Stock was
constituted on the effective date of this Plan. If any option granted under this
Plan shall expire, be surrendered, exchanged for another option, canceled or
terminated for any reason without having been exercised in full, the unpurchased
shares subject thereto shall thereupon again be available for purposes of this
Plan, including for replacement options which may be granted in exchange for
such surrendered, canceled or terminated options.
SECTION 4. Eligibility. An incentive stock option may be granted only to
any individual who, at the time the option is granted, is an employee of the
Company or any related corporation. A nonqualified stock option may be granted
to any director, employee, officer, agent, consultant or independent contractor
of the Company or any related corporation, whether an individual or an entity.
Any party to whom an option is granted under this Plan shall be referred to
hereinafter as an "Optionee".
SECTION 5. Terms and Conditions of Options. Options granted under this
Plan shall be evidenced by written agreements which shall contain such terms,
conditions, limitations and restrictions as the Plan Administrator shall deem
advisable and which are not inconsistent with this Plan (the "Option
Agreement"). Notwithstanding the foregoing, options shall include or incorporate
by reference the following terms and conditions:
5.1 Number of Shares and Price. The maximum number of shares that
may be purchased pursuant to the exercise of each option and the price per share
at which such option is exercisable (the "exercise price") shall be as
established by the Plan Administrator, provided that the Plan Administrator
shall act in good faith to establish the exercise price which shall be not less
than the fair market value per share of the Common Stock at the time the option
is granted with respect to incentive stock options and not less than 85% of the
fair market value per share of the Common Stock at the time the option is
granted with respect to nonqualified stock options and also provided
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<PAGE>
that, with respect to incentive stock options granted to greater than 10%
stockholders, the exercise price shall be as required by Section 6.
5.2 Term and Maturity. Subject to the restrictions contained in
Section 6 with respect to granting incentive stock options to greater than
10% stockholders, the term of each incentive stock option shall be as
established by the Plan Administrator and, if not so established, shall be 10
years from the date it is granted but in no event shall the term of any
incentive stock option exceed 10 years. The term of each nonqualified stock
option shall be as established by the Plan Administrator and, if not so
established, shall be 10 years from the date it is granted. To ensure that the
Company or related corporation will achieve the purpose and receive the benefits
contemplated in this Plan, any option granted to any Optionee hereunder shall,
unless the condition of this sentence is waived or modified in the agreement
evidencing the option or by resolution adopted by the Plan Administrator, be
exercisable in three equal annual installments unless otherwise determined by
action of the Company's Stock Option Committee; provided, however, all option
shares shall become immediately exercisable in the event that there is a merger,
consolidation, acquisition of property or stock, separation, reorganization,
liquidation or other Change of Control pursuant to Section 7.1.1 hereof.
5.3 Exercise. Subject to any vesting schedule described in
subsection 5.2 above, each option may be exercised in whole or in part;
provided, however, that no fewer than 100 shares (or the remaining shares then
purchasable under the option, if less than 100 shares) may be purchased upon any
exercise of an option hereunder and that only whole shares will be issued
pursuant to the exercise of any option. Options shall be exercised by delivery
to the Company of notice of the number of shares with respect to which the
option is exercised, together with payment of the exercise price.
5.4 Payment of Exercise Price. Payment of the option exercise price
shall be made in full at the time the notice of exercise of the option is
delivered to the Company and shall be in cash, bank certified or cashier's check
or personal check (unless at the time of exercise the Plan Administrator in a
particular case determines not to accept a personal check) for the Common Stock
being purchased.
The Plan Administrator can determine at the time the option is
granted for incentive stock options, or at any time before exercise for
nonqualified stock options, that additional forms of payment will be permitted.
To the extent permitted by the Plan Administrator and applicable laws and
regulations (including, but not limited to, federal tax and securities laws and
regulations and state corporate law), an option may be exercised by:
(a) delivery of shares of stock of the Company held by an Optionee
having a fair market value equal to the exercise price, such fair market value
to be determined in good faith by the Plan Administrator;
(b) delivery of a properly executed exercise notice, together with
irrevocable instructions to a broker, all in accordance with the regulations of
the Federal Reserve Board, to promptly deliver to the Company the amount of sale
or loan proceeds necessary to pay the exercise price and any federal, state or
local withholding tax obligations that may arise in connection with the
exercise; or
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<PAGE>
(c) delivery of a properly executed exercise notice together with
instructions to the Company to withhold from the shares that would otherwise be
issued upon exercise that number of shares having a fair market value equal to
the option exercise price.
5.5 Withholding Tax Requirement. The Company or any related
corporation shall have the right to retain and withhold from any payment of cash
or Common Stock under the Plan the amount of taxes required by any government to
be withheld or otherwise deducted and paid with respect to such payment. At its
discretion, the Company may require an Optionee receiving shares of Common Stock
to reimburse the Company for any such taxes required to be withheld by the
Company and withhold such shares in whole or in part until the Company is so
reimbursed. In lieu thereof, the Company, at its option in its sole discretion,
shall (a) have the right to withhold from any other cash amounts due or to
become due from the Company to the Optionee an amount equal to such taxes or (b)
retain and withhold a number of shares having a market value not less than the
amount of such taxes required to be withheld by the Company to reimburse the
Company for any such taxes and cancel (in whole or in part) any such shares so
withheld. If required by Section 16(b) of the Exchange Act, the election to pay
withholding taxes by delivery of shares held by any person who at the time of
exercise is subject to Section 16(b) of the Exchange Act, shall be made either
six months prior to the date the option exercise becomes taxable or at such
other times as the Company may determine as necessary to comply with Section
16(b) of the Exchange Act.
5.6 Assignability and Transferability of Option. Options granted
under this Plan and the rights and privileges conferred hereby may not be
transferred, assigned, pledged or hypothecated in any manner (whether by
operation of law or otherwise) other than (i) by will or by the applicable laws
of descent and distribution, (ii) pursuant to a qualified domestic relations
order as defined in Section 414(p) of the Code, or Title I of the Employee
Retirement Income Securities Act of 1974, as amended, or the rules thereunder or
(iii) as otherwise determined by the Plan Administrator and set forth in the
Option Agreement. Any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of any option under this Plan or of any right or privilege
conferred hereby, contrary to the Code or to the provisions of this Plan, or the
sale or levy or any attachment or similar process upon the rights and privileges
conferred hereby shall be null and void. The designation by an Optionee of a
beneficiary does not, in and of itself, constitute an impermissible transfer
under this Section.
5.7 Termination of Relationship. If the Optionee's relationship with
the Company or any related corporation ceases for any reason other than
termination for cause, death, retirement, permanent or total disability, and
unless by its terms the option sooner terminates or expires or is extended by
the Plan Administrator, then the Optionee may exercise, for a three-month
period, that portion of the Optionee's option which is exercisable at the time
of such cessation, but the Optionee's option shall terminate at the end of the
three-month period following such cessation as to all shares for which it has
not theretofore been exercised, unless, in the case of a nonqualified stock
option, such provision is waived in the agreement evidencing the option or by
resolution adopted otherwise by the Plan Administrator within 90 days of such
cessation. If, in the case of an incentive stock option, an Optionee's
relationship with the Company or related corporation changes (i.e., from
employee to non-employee, such as a consultant), such change shall constitute a
termination of an Optionee's employment with the Company or related corporation
and the Optionee's incentive stock option shall become a non-qualified stock
option.
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If an Optionee is terminated for cause, any option granted hereunder
shall automatically terminate as of the first discovery by the Company of any
reason for termination for cause, and such Optionee shall thereupon have no
right to purchase any shares pursuant to such option. "Termination for cause"
shall mean dismissal for willful misconduct, gross negligence, dishonesty,
conviction or confession of a crime punishable by law (except minor violations),
fraud, misconduct or disclosure of confidential information; provided, however,
in the case of an employee who is a party to an employment agreement with the
Company or any related corporation, "cause" shall have the meaning set forth in
such employee's employment agreement. If an Optionee's relationship with the
Company or any related corporation is suspended pending an investigation of
whether or not the Optionee shall be terminated for cause, all Optionee's rights
under any option granted hereunder likewise shall be suspended during the period
of investigation.
If an Optionee's relationship with the Company or any related
corporation ceases because of a retirement, permanent or total disability, the
Optionee's option shall not terminate or, in the case of an incentive stock
option, cease to be treated as an incentive stock option until the end of the
12-month period following such cessation (unless by its terms it sooner
terminates and expires). As used in this Plan, the term "total disability"
refers to a mental or physical impairment of the Optionee which is expected to
result in death or which has lasted or is expected to last for a continuous
period of 12 months or more and which causes the Optionee to be unable, in the
opinion of the Company and two (if more than one is required by the Company in
its sole discretion) independent physicians, to perform his or her duties for
the Company and to be engaged in any substantial gainful activity. Total
disability shall be deemed to have occurred on the first day after the Company
and the two (if more than one is required by the Company in its sole discretion)
independent physicians have furnished their opinion of total disability to the
Plan Administrator.
For purposes of this subsection 5.7, a transfer of relationship
between or among the Company and/or any related corporation shall not be deemed
to constitute a cessation of relationship with the Company or any of its related
corporations. For purposes of this subsection 5.7, with respect to incentive
stock options, employment shall be deemed to continue while the Optionee is on
military leave, sick leave or other bona fide leave of absence (as determined by
the Plan Administrator). The foregoing notwithstanding, employment shall not be
deemed to continue beyond the first 90 days of such leave, unless the Optionee's
reemployment rights are guaranteed by statute or by contract.
As used herein, the term "related corporation", when referring to a
subsidiary corporation, shall mean any corporation (other than the Company) or
other entity in, at the time of the granting of the option, an unbroken chain of
corporations ending with the Company, if stock or other interests possessing 50%
or more of the total combined voting power of all classes of stock or other
interests of each of the corporations or other entities other than the Company
is owned by one of the other corporations or other entities in such chain. When
referring to a parent corporation or other entity, the term "related
corporation" shall mean any corporation or other entity in an unbroken chain of
corporations or other entities ending with the Company if, at the time of the
granting of the option, each of the corporations or other entities other than
the Company owns stock or other interests possessing 50% or more of the total
combined voting power of all classes of stock or other interests in one of the
other corporations or other entities in such chain.
5.8 Death of Optionee. If an Optionee dies while he or she has a
relationship with
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the Company or any related corporation or within the three-month period (or
12-month period in the case of totally disabled Optionees) following cessation
of such relationship, any option held by such Optionee to the extent that the
Optionee would have been entitled to exercise such option, may be exercised
within one year after his or her death by the personal representative of his or
her estate or by the person or persons to whom the Optionee's rights under the
option shall pass by will or by the applicable laws of descent and distribution.
5.9 Status of Shareholder. Neither the Optionee nor any party to
which the Optionee's rights and privileges under the option may pass shall be,
or have any of the rights or privileges of, a shareholder of the Company with
respect to any of the shares issuable upon the exercise of any option granted
under this Plan unless and until such option has been exercised.
5.10 Continuation of Employment. Nothing in this Plan or in any
option granted pursuant to this Plan shall confer upon any Optionee any right to
continue in the employ of the Company or of a related corporation, or to
interfere in any way with the right of the Company or of any such related
corporation to terminate his or her employment or other relationship with the
Company at any time.
5.1 Modification and Amendment of Option. Subject to the
requirements of Code Section 422 with respect to incentive stock options and to
the terms and conditions and within the limitations of this Plan, the Plan
Administrator may modify or amend outstanding options granted under this Plan.
The modification or amendment of an outstanding option shall not, without the
consent of the Optionee impair or diminish any of his or her rights or any of
the obligations of the Company under such option. Except as otherwise provided
in this Plan, no outstanding option shall be terminated without the consent of
the Optionee. Unless the Optionee agrees otherwise, any changes or adjustments
made to outstanding incentive stock options granted under this Plan shall be
made in such a manner so as not to constitute a "modification" as defined in
Code Section 424(h) and so as not to cause any incentive stock option issued
hereunder to fail to continue to qualify as an incentive stock option as defined
in Code Section 422(b).
5.12 Limitation on Value for Incentive Stock Options. As to all
incentive stock options granted under the terms of this Plan, to the extent that
the aggregate fair market value (determined at the time the incentive stock
option is granted) of the stock with respect to which incentive stock options
are exercisable for the first time by the Optionee during any calendar year
(under this Plan and all other incentive stock option plans of the Company, a
related corporation or a predecessor corporation) exceeds $100,000, such options
shall be treated as nonqualified stock options. The previous sentence shall not
apply if the Code is amended or if the Internal Revenue Service publicly rules,
issues a private ruling to the Company, any Optionee, or any legatee, personal
representative or distributee of an Optionee or issues regulations, changing or
eliminating such annual limit, in which case the limitation shall be that
provided by the Code or the Internal Revenue Service, as the case may be.
5.13 Valuation of Common Stock Received Upon Exercise
5.13.1 Exercise of Options Under Sections 5.4(a) and (c). The
value of Common Stock received by the Optionee from an exercise under Sections
5.4(a) and 5.4(c) hereof shall be the fair market value, which shall mean the
last reported sales price, regular way, of the
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Common Stock on the date of receipt by the Company of the Optionee's delivery of
shares under Section 5.4(a) hereof or delivery of the exercise notice under
Section 5.4(c) hereof (or, if no sale takes place on any such day, the closing
bid price of the Common Stock on such day), on the principal securities exchange
(including the National Association of Securities Dealers, Inc. (the "NASD'S")
National Market System) on which the Common Stock is admitted or listed for
trading, or, if the Common Stock is not listed on any such exchange on any such
day, the highest reported bid price for the Common Stock as furnished by the
NASD through NASDAQ, or a similar organization if NASDAQ is no longer reporting
such information, or, if the Common Stock is not listed for trading on an
exchange and is not quoted on NASDAQ or any similar organization on any such
day, the fair value of a share of Common Stock on such day as determined by the
Plan Administrator of the Company in good faith.
5.13.2 Exercise of Option Under Section 5.4(b). The value of
Common Stock received by the Optionee from an exercise under Section 5.4(b)
hereof (a) in the case of the sale of the Common Stock received as a result of
the exercise by a broker on the date of receipt by the Company of the Optionee's
exercise notice, shall equal the sales price received for such shares; and (b)
in all other cases, shall be determined as provided in Section 5.13.1 hereof.
SECTION 6. Greater Than 10% Stockholders.
6.1 Exercise Price and Term of Incentive Stock Options. If incentive
stock options are granted under this Plan to employees who own more than 10% of
the total combined voting power of all classes of stock of the Company or any
related corporation, the term of such incentive stock options shall not exceed
five years and the exercise price shall be not less than 110% of the fair market
value of the Common Stock at the time the incentive stock option is granted.
This provision shall control notwithstanding any contrary terms contained in an
option agreement or any other document. The term and exercise price limitations
of this provision shall be amended to conform to any change required (or, in the
sole discretion of the Plan Administrator, permitted) by a change in the Code or
by a ruling or pronouncement of the Internal Revenue Service.
6.2 Attribution Rule. For purposes of subsection 6.1, in determining
stock ownership, an employee shall be deemed to own the stock owned, directly or
indirectly, by or for his or her brothers, sisters, spouse, ancestors and lineal
descendants. Stock owned, directly or indirectly, by or for a corporation,
partnership, estate or trust shall be deemed to be owned proportionately by or
for its stockholders, partners or beneficiaries. If an employee or a person
related to the employee owns an unexercised option or warrant to purchase stock
of the Company, the stock subject to that portion of the option or warrant which
is unexercised shall not be counted in determining stock ownership. For purposes
of this Section 6, stock owned by an employee shall include all stock owned by
him which is actually issued and outstanding immediately before the grant of the
incentive stock option to the employee.
SECTION 7. Adjustments Upon Changes in Capitalization. The aggregate
number and class of shares for which options may be granted under this Plan, the
number and class of shares covered by each outstanding option, and the exercise
price per share thereof (but not the total price), shall all be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock of the Company resulting from a split-up or consolidation of shares or any
like capital adjustment, or the payment of any stock dividend.
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<PAGE>
7.1. Effect of Liquidation, Reorganization or Change in Control.
7.1.1 Cash, Stock or Other Property for Stock. Except as
provided in subsection 7.1.2, upon a merger (other than a merger of the Company
in which the holders of Common Stock immediately prior to the merger have the
same proportionate ownership of common stock in the surviving corporation
immediately after the merger), consolidation, acquisition of property or stock,
separation, reorganization (other than a mere reincorporation or the creation of
a holding company), liquidation of the Company, or other "Change of Control" of
the Company as a result of which the stockholders of the Company receive cash or
property other than capital stock in exchange for or in connection with their
shares of Common Stock, any option granted hereunder shall terminate, but the
Optionee shall have the right immediately prior to any such merger,
consolidation, acquisition of property or stock, separation, reorganization,
liquidation or Change of Control to exercise such Optionee's option in whole or
in part whether or not the vesting requirements set forth in the option
agreement have been satisfied. A "Change of Control" of the Company shall be
deemed to have occurred in addition to the events set forth in this subsection
7.1.1, if any change occurs which would be required to be reported under item 1
on Form 8-K, promulgated under the Exchange Act.
7.1.2 Conversion of Options on Stock for Stock Exchange. If
the stockholders of the Company receive capital stock of another corporation
("Exchange Stock") in exchange for their shares of Common Stock in any
transaction involving a merger (other than a merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock, separation
or reorganization (other than a mere reincorporation or the creation of a
holding company), all options granted hereunder shall be converted into options
to purchase shares of Exchange Stock unless the Company and corporation issuing
the Exchange Stock, in their sole discretion, determine that any or all such
options granted hereunder shall not be converted into options to purchase shares
of Exchange Stock but instead shall terminate in accordance with the provisions
of subsection 7.1.1. The amount and price of converted options shall be
determined by adjusting the amount and price of the options granted hereunder in
the same proportion as used for determining the number of shares of Exchange
Stock the holders of the Common Stock receive in such merger, consolidation,
acquisition of property or stock, separation or reorganization. Unless the Board
determines otherwise, the converted options shall be fully vested whether or not
the vesting requirements set forth in the option agreement have been satisfied.
7.2 Fractional Shares. In the event of any adjustment in the number
of shares covered by an option, any fractional shares resulting from such
adjustment shall be disregarded and each such option shall cover only the number
of full shares resulting from such adjustment.
7.3 Determination of Board to Be Final. All Section 7 adjustments
shall be made by the Board, and its determination as to what adjustments shall
be made, and the extent thereof, shall be final, binding and conclusive. Unless
an Optionee agrees otherwise, any change or adjustment to an incentive stock
option shall be made in such a manner so as not to constitute a "modification"
as defined in Code Section 425(h) and so as not to cause his or her incentive
stock option issued hereunder to fail to continue to qualify as an incentive
stock option as defined in Code Section 422(b).
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<PAGE>
SECTION 8. Securities Regulation. Shares shall not be issued with respect
to an option granted under this Plan unless the exercise of such option and the
issuance and delivery of such shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations promulgated thereunder, and the requirements of any stock
exchange or inter-dealer quotation system upon which the shares may then be
listed, and shall be further subject to the approval of counsel for the Company
with respect to such compliance, including the availability of an exemption from
registration for the issuance and sale of any shares hereunder. Inability of the
Company to obtain from any regulatory body having jurisdiction the authority
deemed by the Company's counsel to be necessary for the lawful issuance and sale
of any shares hereunder or the unavailability of an exemption from registration
for the issuance and sale of any shares hereunder shall relieve the Company of
any liability in respect of the nonissuance or sale of such shares as to which
such requisite authority shall not have been obtained.
As a condition to the exercise of an option, the Company may require the
Optionee to represent and warrant at the time of any such exercise that the
shares are being purchased only for investment and without any present intention
to sell or distribute such shares if, in the opinion of counsel for the Company,
such representation is required by any relevant provision of the aforementioned
laws. At the option of the Company, a stop-transfer order against any shares of
stock may be placed on the official stock books and records of the Company, and
a legend indicating that the stock may not be pledged, sold or otherwise
transferred unless an opinion of counsel is provided (concurred in by counsel
for the Company) stating that such transfer is not in violation of any
applicable law or regulation, may be stamped on stock certificates in order to
assure exemption from registration. The Company may also require such other
action or agreement by the Optionees as it may from time to time deem to be
necessary or advisable. The Company shall not be obligated, by reason of this
provision or otherwise, to undertake registration of the options or stock
thereunder.
Should any of the Company's capital stock of the same class as the stock
subject to options granted hereunder be listed on a national securities exchange
or inter-dealer quotation system, all stock issued hereunder if not previously
listed on such exchange or inter-dealer quotation system shall be authorized by
that exchange or system for listing thereon prior to the issuance thereof.
SECTION 9. Amendment and Termination.
9.1 Board Action. The Board may at any time suspend, amend or
terminate this Plan, provided that except as set forth in Section 7, the
approval of the holders of a majority of the Company's outstanding shares of
voting capital stock present and entitled to vote at any meeting is necessary
for the adoption by the Board of any amendment which will:
(a) increase the number of shares which are to be reserved for
the issuance of options under this Plan;
(b) permit the granting of stock options to a class of persons
other than those presently permitted to receive stock options under this Plan;
or
(c) require shareholder approval under applicable law,
including Section 16(b) of the Exchange Act.
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<PAGE>
9.2 Automatic Termination. Unless sooner terminated by the Board,
this Plan shall terminate ten years from the earlier of (a) the date on which
this Plan is adopted by the Board or (b) the date on which this Plan is approved
by the stockholders of the Company. No option may be granted after such
termination or during any suspension of this Plan. The amendment or termination
of this Plan shall not, without the consent of the option holder, alter or
impair any rights or obligations under any option theretofore granted under this
Plan.
SECTION 10. Effectiveness Of This Plan. This Plan shall become effective
upon adoption by the Board so long as it is approved by the holders of a
majority of the Company's outstanding shares of voting capital stock present and
entitled to vote at any meeting at any time within 12 months before or after
the adoption of this Plan.
Adopted by the Board of Directors on ______________, 1997 and approved by
the stockholders on _____________.
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<PAGE>
RESPONSE USA, INC.
NONQUALIFIED STOCK OPTION LETTER AGREEMENT
Date: __________________
TO: _________________
We are pleased to inform you that you have been selected by the Plan
Administrator of the 1997 Stock Option Plan (the "Plan") of Response USA, Inc.,
(the "Company"). The Plan was adopted by the Board of Directors, by the
Stockholders at the Company's 1997 Annual Meeting of Stockholders. When you sign
and return to the Company the Acceptance and Acknowledgment attached to this
Stock Option Agreement you will be entitled to receive a nonqualified option for
the purchase of _________ shares of the Company's common stock, par value $0.008
per share ("Common Stock"), at an exercise price of $__ per share (the "exercise
price"), and subject to the vesting provisions set forth herein. A copy of the
Plan is attached and the provisions thereof, including, without limitation,
those relating to withholding taxes, are incorporated into this Agreement by
reference. It is understood that this Option is not intended to constitute an
incentive stock option as that term is defined in Section 422A of the Internal
Revenue Code of 1986, as amended.
The terms of the option are as set forth in the Plan and in this Agreement. The
most important of the terms set forth in the Plan are summarized as follows:
Number of Shares: The option granted to you covers an aggregate of
__________ shares of Common Stock.
Exercise Price: The exercise price per share of Common Stock subject to
your option is $______ per share (the "Exercise Price").
Adjustments. The number of shares of Common Stock subject to your option
and the Exercise Price may be subject to adjustment under certain circumstances
as described in the Plan.
Date of Grant: The date of grant of the option is _____________.
Term: The term of the option is ten years from date of grant, unless
sooner terminated.
Vesting: Your option shall vest in three equal annual installments unless
otherwise determined by the Plan Administrator.
Exercise: The vested position of the option may be exercised, in whole or
in part, but not as to any fractional shares, during the term of the option. You
should use a Notice of Exercise of Nonqualified Stock Option in the form
attached to this Agreement when you exercise the option. During your lifetime
only you can exercise the option. The Plan also provides for exercise of the
option by the personal representative of your estate or the beneficiary thereof
following your death.
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<PAGE>
Payment for Shares: The vested portion of this option may be exercised by
the delivery of:
(a) Cash, personal check (unless, at the time of exercise, the Plan
Administrator determines otherwise), certified or bank cashier's checks in an
amount equal to the aggregate Exercise Price for the number of shares as to
which the option is being exercised together with a properly executed Notice of
Exercise;
(b) Unless the Plan Administrator in its sole discretion determines
otherwise, shares of the capital stock of the Company held by you having a fair
market value at the time of exercise, as determined by the Plan Administrator in
accordance with the Plan, equal to the aggregate Exercise Price for the number
of shares as to which the option is being exercised;
(c) Unless the Plan Administrator in its sole discretion determines
otherwise, a properly executed Notice of Exercise together with instructions to
the Company to withhold from the shares that would otherwise be issued upon
exercise that number of shares having a fair market value equal to the aggregate
Exercise Price for the number of shares as to which the option is being
exercised; or
(d) A properly executed Notice of Exercise together with irrevocable
instructions to a broker to promptly deliver to the Company the amount of sale
or loan proceeds to pay the aggregate Exercise Price for the number of shares as
to which the option is being exercised;.
Upon receipt of written Notice of Exercise and payment and delivery of any
other required documentation, the Company shall deliver to the person exercising
the option a certificate or certificates for the appropriate number of shares of
Common Stock. It shall be a condition to the performance of the Company's
obligation to issue or transfer Common Stock upon exercise of this option that
you pay, or make provision satisfactory to the Company for the payment of, any
taxes which the Company is obligated to collect with respect to the issue or
transfer of Common Stock upon exercise.
Termination: Your option will terminate immediately upon termination for
cause, as defined in the Plan, or three months after cessation of your
relationship with the Company or a related corporation, unless cessation is due
to death, retirement, permanent or total disability, in which case the portion
of this option which is vested at the time of such termination shall terminate
one year after cessation of such relationship.
All unvested options will terminate immediately upon the cessation of your
relationship with the Company or a related corporation for any reason,
including, without limitation, termination for cause, resignation, death,
retirement, permanent or total disability.
Transfer of Option: The option is not transferable except by will or by
the applicable laws of descent and distribution or pursuant to a qualified
domestic relations order.
Notice: All notices sent in connection with this option shall be in
writing and, if to the Company, shall be delivered personally to the President
of the Company or mailed to its principal office, addressed to the attention of
the President, and, if to you, shall be delivered personally or
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<PAGE>
mailed to you at the address noted on the attached Acceptance and
Acknowledgment. Such addresses may be changed at any time by notice from one
party to the other.
YOUR PARTICULAR ATTENTION IS DIRECTED TO SECTION 8 OF THE PLAN WHICH
DESCRIBES CERTAIN IMPORTANT CONDITIONS RELATING TO FEDERAL AND STATE SECURITIES
LAWS THAT MUST BE SATISFIED BEFORE THE OPTION CAN BE EXERCISED AND BEFORE THE
COMPANY CAN ISSUE ANY SHARES TO YOU. THE COMPANY HAS NO OBLIGATION TO REGISTER
THE SHARES THAT WOULD BE ISSUED UPON THE EXERCISE OF YOUR OPTION, AND IF IT
NEVER REGISTERS THE SHARES, YOU WILL NOT BE ABLE TO EXERCISE THE OPTION UNLESS
AN EXEMPTION FROM REGISTRATION IS AVAILABLE. AT THE PRESENT TIME, EXEMPTIONS
FROM REGISTRATION UNDER FEDERAL AND STATE SECURITIES LAWS ARE VERY LIMITED AND
MIGHT BE UNAVAILABLE TO YOU PRIOR TO THE EXPIRATION OF THE OPTION. CONSEQUENTLY,
YOU MIGHT HAVE NO OPPORTUNITY TO EXERCISE THE OPTION AND TO RECEIVE SHARES UPON
SUCH EXERCISE. IN ADDITION, YOU SHOULD CONSULT WITH YOUR TAX ADVISOR CONCERNING
THE RAMIFICATIONS TO YOU OF HOLDING OR EXERCISING YOUR OPTIONS OR HOLDING OR
SELLING THE SHARES UNDERLYING SUCH OPTIONS.
It is the intention of the Company that this Plan comply in all respects
with Section 16(b) and Rule 16b-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"), to the extent applicable, and, if any Plan provision is later
found not to be in compliance with such Section or Rule, as the case may be, the
provision shall be deemed null and void, and in all events the Plan shall be
construed in favor of its meeting the requirements of Section 16(b) and Rule
16b-3 under the Exchange Act. Notwithstanding anything in the Plan to the
contrary, the Board, in its absolute discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan to
participants who are officers and directors or other persons subject to Section
16(b) of the Exchange Act without so restricting, limiting or conditioning the
Plan with respect to other participants.
All decisions or interpretations made by the Plan Administrator with
regard to any question arising hereunder or under the Plan shall be binding and
conclusive on the Company and you.
This Agreement shall bind and inure to the benefit of the parties hereto
and the successors and assigns of the Company and, to the extent provided in the
Plan, your executors, administrators, legatees and heirs.
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<PAGE>
Please execute the Acceptance and Acknowledgment set forth below on the
enclosed copy of this Agreement and return it to the undersigned.
Very truly yours,
Response USA, Inc.
By: __________________________
[NAME AND TITLE]
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<PAGE>
ACCEPTANCE AND ACKNOWLEDGMENT
I, a resident of the State of ________________, accept the nonqualified
stock option described above and in Response USA, Inc. 1997 Stock Option
Plan, and acknowledge receipt of a copy of this Agreement, including a copy
of the Plan. I have read and understand this Agreement and the Plan,
including the provisions of Section 8.
Dated: ______________________
_____________________________________ ____________________________________
Taxpayer I.D. Number
By his or her signature below, the spouse of the Optionee, if such
Optionee is legally married as of the date of his or her execution of this
Agreement, acknowledges that he or she has read this Agreement and the Plan and
is familiar with the terms and provisions thereof, and agrees to be bound by all
the terms and conditions of this Agreement and the Plan.
Dated: ______________________
____________________________
Spouse's Signature
____________________________
Printed Name
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<PAGE>
NOTICE OF EXERCISE
[NAME AND ADDRESS OF ISSUER]
Gentlemen:
I hereby exercise my right to purchase _______ shares of Common Stock (the
"Shares") of Response USA, Inc., a Delaware corporation, pursuant to, and in
accordance with, the Response USA, Inc. 1997 Nonqualified Stock Option Agreement
("Agreement") dated ___________. As provided in that Agreement, I deliver
herewith a certified or bank cashier's check in the amount of the aggregate
option price (unless alternative payment methods have been approved by the Plan
Administrator). Please deliver to me stock certificates representing the subject
shares registered as follows:
Name: ________________________________________
Address: ______________________________________
______________________________________
Social Security Number: __________________________
The aggregate exercise price is $ ____________(total number of shares to
be purchased $____ per share).
1. If the sale of the Shares and the resale thereof has not, prior to the
date hereof, been registered pursuant to a registration statement filed and
declared effective under the Securities Act of 1933, as amended (the "Act"), the
undersigned hereby agrees, represents, and warrants that:
(a) the undersigned is acquiring the Shares for his or her own
account (and not for the account of others), for investment and not with a view
to the distribution or resale thereof;
(b) by virtue of his or her position, the undersigned has access to
the same kind of information which would be available in a registration
statement filed under the Act;
(c) the undersigned is a sophisticated investor;
(d) the undersigned understands that he or she may not sell or
otherwise dispose of the Shares in the absence of either (i) a registration
statement filed under the Act or (ii) an exemption from the registration
provisions thereof; and
(e) the certificates representing the Shares may contain a legend to
the effect of subsection (d) of this Section 1.
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<PAGE>
2. If the sale of the Shares and the resale thereof has been registered
pursuant to a registration statement filed and declared effective under the Act,
the undersigned hereby represents and warrants that he or she has received the
applicable prospectus and a copy of the most recent annual report, as well as
all other material sent to stockholders generally.
3. The undersigned acknowledges that the number of shares of Common Stock
subject to the Agreement is hereafter reduced by the number of shares of Common
Stock represented by the Shares.
4. The undersigned understands that there are certain tax implications to
his or her exercise of his or her right to purchase shares of Common Stock under
the Agreement. The undersigned further understands that it is his or her
obligation to confer with his or her own tax advisor with respect to such tax
implications.
Very truly yours,
__________________________________
(signature)
__________________________________
(please type or print name)
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<PAGE>
RESPONSE USA, INC.
INCENTIVE STOCK OPTION LETTER AGREEMENT
Date: _______________
TO: ________________________
We are pleased to inform you that you have been selected by the Plan
Administrator of the 1997 Stock Option Plan (the "Plan") of Response USA, Inc.,
(the "Company") to receive stock options. The Plan was adopted by the Board of
Directors and approved by the stockholders of the Company at the Company's 1997
Annual Meeting of Stockholders. When you sign and return to the Company the
Acceptance and Acknowledgment attached to this Stock Option Agreement you will
be entitled to receive an incentive option for the purchase of _________ shares
of the Company's common stock, $0.008 par value ("Common Stock"), at an exercise
price of $______ per share (the "exercise price"). A copy of the Plan is
attached and the provisions thereof, including, without limitation, those
relating to withholding taxes, are incorporated into this Agreement by
reference.
The terms of the option are as set forth in the Plan and in this
Agreement. The most important of the terms set forth in the Plan are summarized
as follows:
Number of Shares: The option granted to you covers an aggregate of _______
shares of Common Stock.
Exercise Price: The exercise price per share of Common Stock subject to
your option is $______ per share (the "Exercise Price").
Adjustments. The number of shares of Common Stock subject to your option
and the Exercise Price may be subject to adjustment under certain circumstances
as described in the Plan.
Date of Grant: The date of grant of the option is ________________.
Term. The term of the option is ten years from date of grant, unless
sooner terminated.
Vesting. Your option shall vest in three equal annual installments unless
otherwise determined by the Plan Administrator.
Exercise. The vested portion of the option may be exercised, in whole or
in part, but not as to any fractional shares, during the term of the option. You
should use a Notice of Exercise of Incentive Stock Option in the form attached
to this Agreement when you exercise the option. During your lifetime only you
can exercise the option. The Plan also provides for exercise of the option by
the personal representative of your estate or the beneficiary thereof following
your death.
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<PAGE>
Payment for Shares. The vested portion of this option may be exercised by
the delivery of:
(a) Cash, personal check (unless at the time of exercise the Plan
Administrator determines otherwise), or certified or bank cashier's checks in an
amount equal to the aggregate Exercise Price for the number of shares as to
which the option is being exercised together with a properly executed Notice of
Exercise;
(b) Unless the Plan Administrator in its sole discretion determines
otherwise, a properly executed Notice of Exercise, together with shares of the
capital stock of the Company held by you having a fair market value at the time
of exercise, as determined by the Plan Administrator in accordance with the
Plan, equal to the aggregate Exercise Price for the number of shares as to which
the option is being exercised;
(c) Unless the Plan Administrator in its sole discretion determines
otherwise, a properly executed Notice of Exercise together with instructions to
the Company to withhold from the shares that would otherwise be issued upon
exercise that number of shares having a fair market value equal to the aggregate
Exercise Price for the number of shares as to which the option is being
exercised; or
(d) A properly executed Notice of Exercise together with irrevocable
instructions to a broker to promptly deliver to the Company the amount of sale
or loan proceeds to pay the aggregate Exercise Price for the number of shares as
to which the option is being exercised.
Upon receipt of written Notice of Exercise and payment and delivery of any
other required documentation, the Company shall deliver to the person exercising
the option a certificate or certificates for the appropriate number of shares of
Common Stock. It shall be a condition to the performance of the Company's
obligation to issue or transfer Common Stock upon exercise of this option that
you pay, or make provision satisfactory to the Company for the payment of, any
taxes which the Company is obligated to collect with respect to the issue or
transfer of Common Stock upon exercise.
Termination. Your option will terminate immediately upon termination for
cause, as defined in the Plan, or three months after cessation of your
relationship with the Company or a related corporation thereof, unless cessation
is due to death, retirement, permanent or total disability, in which case the
portion of this option which is vested at the time of such termination shall
terminate one year after cessation of such relationship. All unvested options
will terminate immediately upon the cessation of your relationship with the
Company or a related corporation for any reason, including, without limitation,
termination for cause, resignation, death, retirement, permanent or total
disability
Transfer of Option. The option is not transferable except by will or by
the applicable laws of descent and distribution or pursuant to a qualified
domestic relations order.
Notice: All notices sent in connection with this option shall be in
writing and, if to the Company, shall be delivered personally to the President
of the Company or mailed to its principal office, addressed to the attention of
the President, and, if to you, shall be delivered personally or mailed to you at
the address noted on the attached Acceptance and Acknowledgment. Such
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<PAGE>
addresses may be changed at any time by notice from one party to the other.
YOUR PARTICULAR ATTENTION IS DIRECTED TO SECTION 8 OF THE PLAN WHICH
DESCRIBES CERTAIN IMPORTANT CONDITIONS RELATING TO FEDERAL AND STATE SECURITIES
LAWS THAT MUST BE SATISFIED BEFORE THE OPTION CAN BE EXERCISED AND BEFORE THE
COMPANY CAN ISSUE ANY SHARES TO YOU. THE COMPANY HAS NO OBLIGATION TO REGISTER
THE SHARES THAT WOULD BE ISSUED UPON THE EXERCISE OF YOUR OPTION, AND IF IT
NEVER REGISTERS THE SHARES, YOU WILL NOT BE ABLE TO EXERCISE THE OPTION UNLESS
AN EXEMPTION FROM REGISTRATION IS AVAILABLE. AT THE PRESENT TIME, EXEMPTIONS
FROM REGISTRATION UNDER FEDERAL AND STATE SECURITIES LAWS ARE VERY LIMITED AND
MIGHT BE UNAVAILABLE TO YOU PRIOR TO THE EXPIRATION OF THE OPTION. CONSEQUENTLY,
YOU MIGHT HAVE NO OPPORTUNITY TO EXERCISE THE OPTION AND TO RECEIVE SHARES UPON
SUCH EXERCISE. IN ADDITION, YOU SHOULD CONSULT WITH YOUR TAX ADVISOR CONCERNING
THE RAMIFICATIONS TO YOU OF HOLDING OR EXERCISING YOUR OPTIONS OR HOLDING OR
SELLING THE SHARES UNDERLYING SUCH OPTIONS.
It is the intention of the Company that this Plan comply in all respects
with Section 16(b) and Rule 16b-3 under the Securities Exchange Act of 1934
(the "Exchange Act"), to the extent applicable, and, if any Plan provision is
later found not to be in compliance with such Section or Rule, as the case may
be, the provision shall be deemed null and void, and in all events the Plan
shall be construed in favor of its meeting the requirements of Section 16(b) and
Rule 16b-3 under the Exchange Act. Notwithstanding anything in the Plan to the
contrary, the Board, in its absolute discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan to
participants who are officers and directors or other persons subject to Section
16(b) of the Exchange Act without so restricting, limiting or conditioning the
Plan with respect to other participants.
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<PAGE>
All decisions or interpretations made by the Plan Administrator with
regard to any question arising hereunder or under the Plan shall be binding and
conclusive on the Company and you.
This Agreement shall bind and inure to the benefit of the parties
hereto and the successors and assigns of the Company and, to the extent
provided in the Plan, your executors, administrators, legatees and heirs.
Please execute the Acceptance and Acknowledgment set forth below on the
enclosed copy of this Agreement and return it to the undersigned.
Very truly yours,
[NAME AND TITLE]
By: _________________________
[NAME AND TITLE]
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<PAGE>
ACCEPTANCE AND ACKNOWLEDGMENT
I, a resident of the State of __________, accept the stock option
described above granted under the Response USA, Inc., 1997 Stock Option Plan,
and acknowledge receipt of a copy of this Agreement, including a copy of the
Plan. I have read and understand this Agreement and the Plan, including the
provisions of Section 8 thereof.
Dated: _______________________
_____________________________________ ____________________________________
Taxpayer I.D. Number Signature
By his or her signature below, the spouse of the Optionee, if such
Optionee is legally married as of the date of such Optionee's execution of this
Agreement, acknowledges that he or she has read this Agreement and the Plan and
is familiar with the terms and provisions thereof, and agrees to be bound by all
the terms and conditions of this Agreement and the Plan.
Dated: ____________________
_______________________________________
Spouse's Signature
_______________________________________
Printed Name
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<PAGE>
NOTICE OF EXERCISE
[NAME AND ADDRESS OF ISSUER]
Gentlemen:
I hereby exercise my right to purchase _______ shares of Common Stock (the
"Shares") of Response USA, Inc., a Delaware corporation, pursuant to, and in
accordance with, the Response USA, Inc., 1997 Incentive Stock Option Agreement
("Agreement") dated ___________. As provided in that Agreement, I deliver
herewith a certified or bank cashier's check in the amount of the aggregate
option price (unless alternative payment methods have been approved by the Plan
Administrator). Please deliver to me stock certificates representing the subject
shares registered as follows:
Name: _________________________________
Address: ______________________________
________________________________
Social Security Number: _______________
The aggregate exercise price is $_____________ (total number of shares to
be purchased $________ per share).
1. If the sale of the Shares and the resale thereof has not, prior to the
date hereof, been registered pursuant to a registration statement filed and
declared effective under the Securities Act of 1933, as amended (the "Act"), the
undersigned hereby agrees, represents, and warrants that:
(a) the undersigned is acquiring the Shares for his or her own
account (and not for the account of others), for investment and not with a view
to the distribution or resale thereof.
(b) by virtue of his or her position, the undersigned has access to
the same kind of information which would be available in a registration
statement filed under the Act;
(c) the undersigned is a sophisticated investor;
(d) the undersigned understands that he or she may not sell or
otherwise dispose of the Shares in the absence of either (i) a registration
statement filed under the Act or (ii) an exemption from the registration
provisions thereof; and
(e) the certificates representing the Shares may contain a legend to
the effect of subsection (d) of this Section 1.
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<PAGE>
2. If the sale of the Shares and the resale thereof has been registered
pursuant to a registration statement filed and declared effective under the Act,
the undersigned hereby represents and warrants that he or she has received the
applicable prospectus and a copy of the most recent annual report, as well as
all other material sent to stockholders generally.
3. The undersigned acknowledges that the number of shares of Common Stock
subject to the Agreement is hereafter reduced by the number of shares of Common
Stock represented by the Shares.
4. The undersigned understands that there are certain tax implications to
his or her exercise of his or her right to purchase shares of Common Stock under
the Agreement. The undersigned further understands that it is his or her
obligation to confer with his or her own tax advisor with respect to such tax
implications.
Very truly yours,
___________________________________
(signature)
___________________________________
( please type or print name)
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<PAGE>
Exhibit 11
RESPONSE USA, INC.
EARNINGS PER SHARE
30 JUN-96 END OF PRIOR PERIOD
30 JUN-97 END OF CURRENT PERIOD
<TABLE>
<CAPTION>
EARNINGS PER SHARE COMPUTATIONS:
MODIFIED TREASURY STOCK METHOD:
<S> <C>
TOTAL EXERCISE PROCEEDS $24,101,805
---------
PERIOD-END OUTSTANDING SHARES 5,309,222
---------
20% OF PERIOD-END OUTSTANDING SHARES 1,061,844
---------
AVERAGE SHARE PRICE DURING PERIOD $3.91
---------
PROCEEDS USED TO PURCHASE SHARES 4,151,812
---------
REMAINING PROCEEDS 19,949,993
---------
PROCEEDS USED TO RETIRE AVERAGE DEBT 10,302,238
---------
REMAINING PROCEEDS INVESTED $9,647,755
=========
ADJUSTED INCOME (LOSS):
NET INCOME (LOSS) ($11,177,623)
DIVIDENDS AND ACCRETION TO PREFERRED STOCK (6,876,521)
-
ADJUSTED INCOME (LOSS) (18,054,144)
INTEREST (EXPENSE) ON RETIRED DEBT (10.25%) 1,055,979
INTEREST INCOME ON PROCEEDS INVESTED (2.5%) 0
TAX EFFECT OF INTEREST ADJUSTMENTS (40%) (422,392)
---------
NET INCOME (LOSS) FOR EARNINGS PER SHARE PURPOSES (17,420,556)
---------
SHARES:
WEIGHTED AVERAGE SHARES OUTSTANDING 4,462,721
WEIGHTED AVERAGE EQUIVALENT SHARES OUTSTANDING 7,050,698
20% OF PERIOD-END OUTSTANDING SHARES (1,061,844)
---------
TOTAL SHARES FOR EARNINGS PER SHARE PURPOSES 10,451,574
---------
NET INCOME (LOSS) PER SHARE ($1.67)
=========
MAXIMUM INCOME (MINIMUM LOSS) PER SHARE:
ADJUSTED INCOME (LOSS) ($18,054,144)
---------
WEIGHTED AVERAGE SHARES OUTSTANDING 4,462,721
---------
NET INCOME (LOSS) PER SHARE ($4.05)
=========
</TABLE>
<PAGE>
EXHIBIT 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Response USA, Inc.
on Form SB-2 of our report dated October 8, 1997 appearing in the Prospectus,
which is part of this Registration Statement and to the reference to us under
the headings "Selected Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE
Philadelphia, Pennsylvania
October 8, 1997
<PAGE>
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form SB-2 of
Response USA, Inc. of our report dated August 22, 1996 (November , 1997 as to
the last paragraph thereof) on the consolidated financial statements of Response
USA, Inc. contained in such Registration Statement, and to the reference to use,
as appearing under the headings "Selected Financial Data" and "Experts" in the
Prospectus, which is a part of such Registration Statement.
FISHBEIN & COMPANY, P.C.
Elkins Park, PA
October 8, 1997
<PAGE>
EXHIBIT 23(c)
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement on Form SB-2 of our
report dated March 27, 1997, relating to the financial statements of Triple A
Security Systems, Inc.
We also consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" in the Registration.
TERRY H. JONES, CPA
West Hazelton, Pennsylvania
October 8, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 699
<SECURITIES> 75
<RECEIVABLES> 2,198
<ALLOWANCES> 437
<INVENTORY> 799
<CURRENT-ASSETS> 3,376
<PP&E> 3,875
<DEPRECIATION> 2,363
<TOTAL-ASSETS> 31,240
<CURRENT-LIABILITIES> 4,440
<BONDS> 0
0
7,758
<COMMON> 42
<OTHER-SE> 4
<TOTAL-LIABILITY-AND-EQUITY> 31,240
<SALES> 2,939
<TOTAL-REVENUES> 12,723
<CGS> 1,970
<TOTAL-COSTS> 4,097
<OTHER-EXPENSES> 15,793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,349
<INCOME-PRETAX> (8,628)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,550
<CHANGES> 0
<NET-INCOME> (11,178)
<EPS-PRIMARY> (4.05)
<EPS-DILUTED> (4.05)
</TABLE>
