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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended JUNE 30, 1997 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 0-20770
RESPONSE USA, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-3088639
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11-H PRINCESS ROAD, LAWRENCEVILLE, NEW JERSEY 08648
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609)896-4500
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.008 PAR VALUE AND COMMON STOCK PURCHASE WARRANTS
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's gross revenues for the most recent fiscal year were
$12,722,903.
The aggregate market value of the Voting Stock held by non-affiliates
(based upon the closing bid price) on October 4, 1997, was approximately
$19,079,440.
As of October 4, 1997, there were 6,596,589 shares of Common Stock,
Par Value $.008 Per Share (the "Common Stock"), outstanding.
Certain exhibits listed in Item 13 of Part IV have been incorporated
by reference. The index to exhibits appears on page 42.
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RESPONSE USA, INC.
1997 Form 10-KSB Annual Report
TABLE OF CONTENTS
Item 1. Business........................................................... 3
Item 2. Properties......................................................... 21
Item 3. Legal Proceedings.................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders................ 22
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters..................................................... 23
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 24
Item 7. Financial Statements............................................... 31
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 32
Item 9. Directors and Executive Officers of the Registrant ................ 33
Item 10. Executive Compensation............................................. 35
Item 11. Security Ownership of Certain Beneficial Owners and Management..... 40
Item 12. Certain Relationships and Related Transactions..................... 41
Item 13. Exhibits and Reports on Form 8-K................................... 42
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PART I
ITEM 1. BUSINESS
GENERAL
As used herein, 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"), and Response
Ability Systems, Inc. ("Systems") and HealthLink, Ltd. ("HealthLink"), an
entity in which the Company has a 50% equity interest.
THIS ANNUAL REPORT 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 ANNUAL REPORT
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. ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS.
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 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
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
services industry generates
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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 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."
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 hereof. 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
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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:
- 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
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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 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
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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.
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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 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 maintainance 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.
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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.
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, 1996, the Company consummated 16
acquisitions, purchasing approximately 9,200 subscriber accounts for an
aggregate consideration of $5,638,637 in cash and 294,045 shares of Common
Stock. As part of the acquisitions, the Company also issued 15,000 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 25,000 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.
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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.
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.
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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, based on the lesser of
market (as defined) at closing or the price per share of Common Stock with
respect to the Company's anticipated offering of Common Stock, and $750,000
in the assupmtion 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 the anticipated offering, and
the Company intends to utilize a portion of the proceeds from the anticipated
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
newspapers 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 Company has no previous experience and may
involve risks and uncertainties which are unknown to the Company.
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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.
12
<PAGE>
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 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 hardware, avoiding
any need for the user to access a telephone. Monitoring personnel verify the
nature of the emergency by speaking with the individual and, if necessary,
notify the predetermined emergency authorities in the user's area. If the
monitoring personnel are unable to establish voice communication with the user,
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
13
<PAGE>
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.
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
14
<PAGE>
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 1,094,166 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 30,000 shares of Common Stock for each 10,000 PERS products
sold by HealthLink at an exercise price of $3.00 per share up to a maximum of
450,000 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 hereof. 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.
15
<PAGE>
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 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.
16
<PAGE>
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 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
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 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
17
<PAGE>
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
$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.
18
<PAGE>
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-TM-" 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.
19
<PAGE>
COMPETITION
ELECTRONIC MONITORING SERVICES
The security services business is highly competitive and new competitors
are continually entering the field. Competition is based primarily on price in
relation to quality of service. Sources of competition in the security services
business are other providers of central monitoring services, systems directly
connected to police and fire departments, local alarm systems and other methods
of protection, such as manned guarding.
The central monitoring sector of the electronic security business is
characterized by low marginal costs associated with monitoring additional
customers. Despite the opportunity for economies of scale by consolidation of
monitoring and administrative functions, the industry is highly fragmented, with
thousands of small providers.
There are also a limited number of larger competitors, including ADT
Limited, 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.
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<PAGE>
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.
ITEM 2. PROPERTIES
The Company leases 15,000 square feet in Lawrenceville, New Jersey, for its
executive and administrative offices, at an annual rental of $172,000. The lease
expires in June 1999, after which the Company has a five-year renewal option.
The Company also leases (i)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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<PAGE>
ITEM 3. 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 of 1933 (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 60,000 shares of Common
Stock pursuant to what it claimed to be an exemption from registration under
Regulation S of the Securities Act. The Finding stated that such sales were
made under circumstances in which the Company knew or should have known that
such exemption was not available. Consequently, the Finding stated, the sales
were made in violation of the registration provisions of the Securities Act.
The Company consented to permanently cease and desist from committing or
causing any violation, and any future violation, of Section 5 of the
Securities Act.
Prior 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The following table sets forth the high and low "bid" and "asked"
prices, for the quarters indicated, for the Company's Common Stock in the
over-the-counter market. Such prices reflect inter-dealer prices, without
adjustments for retail mark-ups, mark-downs, or other fees or commissions,
and may not represent actual transactions.
<TABLE>
<CAPTION>
BID ASK
For Fiscal year Ending June 30, HIGH LOW HIGH LOW
1996
<S> <C> <C> <C> <C>
First Quarter 7 3/16 3 3/4 7 13/16 4 3/8
Second Quarter 6 4 1/4 6 1/4 4 5/8
Third Quarter 6 1/8 4 3/4 6 1/4 5
Fourth Quarter 8 1/2 5 1/8 8 3/4 5 1/4
<CAPTION>
BID ASK
For Fiscal year Ending June 30, HIGH LOW HIGH LOW
1997
<S> <C> <C> <C> <C>
First Quarter 8 7/8 3 1/8 9 1/8 3 1/4
Second Quarter 5 1/8 2 3/8 5 3/8 2 5/8
Third Quarter 5 3/8 2 11/16 5 5/8 2 7/8
Fourth Quarter 3 1 7/16 3 1/8 1 9/16
</TABLE>
On October 6, 1997 the closing bid price for the Common Stock was
$3.625 and there were approximately 220 holders of record of the Common Stock.
The Company has not paid any dividends on its Common Stock since its
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. The Company anticipates
that for the foreseeable future, earnings, if any, will be retained for use
in the business or for other corporate purposes, and it is not anticipated
that dividends will be paid.
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<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements 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, 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 294,045
shares of Common Stock. As part of the acquisitions, the Company also issued
15,000 shares of Common Stock 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 25,000
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).
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<PAGE>
In July 1996, the Company completed a restructuring of its long-term
debt. The Company obtained a $15,000,000 revolving credit facility (the
"Credit Line") from Mellon Bank, N.A. (the "Bank") and issued $7,500,000 of
its Series A Convertible Preferred Stock (the "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 monitoring subscribers as of the date hereof.
BALANCE OF PAGE INTENTIONALLY LEFT BLANK
25
<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, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997
Operating revenues:
<S> <C>
Product sales................... $2,352,449 21.6% $2,938,618 23.1%
Monitoring and Service.......... 8,515,247 78.4% 9,784,285 76.9%
---------- ----- ---------- -----
10,867,696 100.0% 12,722,903 100.0%
---------- ------ ---------- ------
Cost of Revenues*:
Product sales.................. 1,718,689 15.8% 1,970,158 15.5%
Monitoring and Service......... 1,779,490 16.4% 2,127,257 16.7%
--------- ----- --------- -----
3,498,179 32.2% 4,097,415 32.2%
--------- ----- --------- -----
Gross Profit................... $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%, 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
26
<PAGE>
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.
On December 16, 1996, the Company granted to employees non-qualified
stock options at $.10 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 $1.50 to $.01 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 13 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 used for rentals in the
amount 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 ($4.05) per share, based on 4,462,721 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
27
<PAGE>
$3,556,215, or $(.80) per share, based on 4,462,721 shares outstanding, as
compared to a net loss of $4,411,898, or $(2.87) per share, based on
1,536,537 shares outstanding for Fiscal 1996. The net losses for Fiscal 1996
and Fiscal 1997 are attributable to depreciation, amortization and interest
expense totaling approximately $5,386,497 and approximately $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.
28
<PAGE>
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 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 expensed in the period in which such activities occur.
SUBSCRIBER ATTRITION
Subscriber attrition has a direct impact on the Company's results of
operations, since it affects both the Company's revenues and its amortization
expense. Attrition can be measured in terms of canceled subscriber accounts
and in terms of decreased MRR resulting from canceled subscriber accounts.
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 numerator 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%.
29
<PAGE>
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 interest expense. As of September 15, 1997, the Company had
$2,615,000 available under the Credit Line. Amounts 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. There can be no
assurance that the Company will maintain compliance with the financial
covenants under the Credit Line, or the 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. 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. 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
30
<PAGE>
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. 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.
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 Notes 3
and 13 of Notes to Consolidated Financial Statements of the Company. Such
charges could have a material adverse effect on the Company's results of
operations.
ITEM 7. FINANCIAL STATEMENTS
The response to this Item is submitted as a separate section of this
report commencing on page F-1.
31
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The firm of Fishbein & Company, P.C. ("Fishbein") audited the
financial statements of the Company for the fiscal years ended June 30, 1990
through June 30, 1996. On July 2, 1997, the Board of Directors of the
Company determined not to appoint Fishbein to audit the financial statements
of the Company for the fiscal year ended June 30, 1997. On July 3, 1997,
pursuant to a vote of the Board of Directors, the firm of Deloitte & Touche
LLP was selected to audit the financial statements of the Company for the
year ended June 30, 1997.
The report of Fishbein on the Company's financial statements for the
previous years did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified or modified as to uncertainty, audit scope, or
accounting principles. During the entire period of the engagement of
Fishbein, through July 2, 1997, there had been no disagreement on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to
Fishbein's satisfaction, would have caused Fishbein to make reference in
connection with its reports to the subject matter of the disagreement.
BALANCE OF PAGE INTENTIONALLY LEFT BLANK.
32
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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.
33
<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.
34
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
<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 -- -- -- 708,333(2) --
President, Chief 1996 $ 217,980 -- -- -- -- --
Executive 1995 $ 175,003 -- -- -- -- --
Officer and
Chief Financial
Officer
Ronald A. Feldman, 1997 $ 137,307 -- -- -- 260,067(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 officers listed above 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 $2.50 per
share to $1.50 per share. On June 27, 1997, the Company further reduced the
exercise price of such options from $1.50 per share to $0.01 per share. See
"Management -- Reduction of Exercise Price of Certain Stock Options."
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted to
or held by the Named Executive Officers during the fiscal year ended June 30,
1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------------
PERCENT OF
TOTAL OPTIONS
NUMBER OF SECURITIES GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- ---- --------------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Richard M. Brooks . . . . . . 708,333(1) 42.7% $.03 11/14/04
Ronald A. Feldman . . . . . . 260,067(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 $2.50
per share to $1.50 per share. On June 27, 1997, the Company further reduced
the exercise price of such options from $1.50 per share to $0.01 per
share. See "Management -- Reduction of Exercise Price of Certain Stock
Options."
35
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER VALUE OF
OF SECURITIES UNEXERCISED IN-
UNDERLYING THE-MONEY
UNEXERCISED OPTIONS/SARS
SHARES VALUE SARS AT FY-END AT FY-END
ACQUIRED ON REALIZED EXERCISEABLE/ EXERCISEABLE/
NAME EXERCISE # ($) UEXERCISEABLE UNEXERCISEABLE(1)
<S> <C> <C> <C> <C>
Richard Brooks, President, Chief --- --- 708,333/0 $1,586,666/0
Executive and Financial Officer
Ronald A. Feldman, Chief Operating --- --- 260,067/0 $582,550/0
Officer, Vice President, Secretary
and Treasurer
</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 $2 1/4 at June 30, 1997, as reported by the Nasdaq SmallCap
Market, and the exercise price of the options.
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
36
<PAGE>
Messrs. Brooks and Feldman in any fiscal year shall not exceed $225,000 and
$150,000, respectively. Under 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 133,333 and 85,067 shares of
Common Stock, respectively, at a price equal to $3.75. These options are
exercisable until November 14, 2004. Messrs. Brooks and Feldman also received
options to purchase 600,000 and 200,000 shares of Common Stock, respectively,
awarded under the Company's Non-Qualified Stock Option Plan. In November 1995,
the exercise price on Messrs. Brooks' and Feldman's options were reduced to the
prevailing market price of $2.50 and subsequently reduced to $1.50 on June 15,
1997 and to $0.01 on June 27, 1997. During February 1996, Messrs. Brooks and
Feldman both exercised options to purchase 25,000 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 300,000 shares each of Common Stock at an
exercise price of $1.50. 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 5,000 shares of Common Stock at $5.00 per share, in
consideration of services to the Company. The exercise price of such warrant
was subsequently reduced to $.008 per share and the warrant was exercised. In
September 1994, Mr. Rubin was granted options to purchase 5,000 shares of
Common Stock at the prevailing market price of $.8125, which options were
exercised. In February 1995, Mr. Rubin was granted options to purchase
150,000 shares of Common Stock at a price of $3.75 per share, which options
are exercisable for a period of ten years. In November 1995, Mr. Rubin was
granted options to purchase 150,000 shares of Common Stock at the prevailing
market price of $2.50 and in November 1995, the exercise price of Mr.
Rubin's options granted in February 1995 were reduced to the prevailing
market price of $2.50. (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 $0.01. 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 252,624 shares of Common
Stock and converted subordinated debentures in the amount of $101,329 into
202,659 shares of Common Stock. See "Management" and "Principal Stockholders."
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 40,000 shares of Common Stock have been reserved for issuance under
the ISO Plan, all of which shares have been granted as of the date hereof.
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 the Company's Common Stock on
the date of grant, and not less than 110% of such fair market value in the
case of participants owning more than 10% of the Company's Common Stock.
Options expire no later than 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
37
<PAGE>
employee was granted an option under any Company plan during such calendar year.
Options terminate three months after the optionee ceases to be employed by the
Company unless the optionee's employment is terminated by reason of disability,
in which case, the options shall expire following one year after such employment
termination. The committee has the right to accelerate the expiration date in
certain events. Options granted under the ISO Plan are not transferable, except
by will or the law of descent and distribution.
NON-QUALIFIED STOCK OPTIONS
In August 1990, the Company's Board of Directors approved a
Nonqualified Stock Option Plan (the "NQO Plan") pursuant to which the Company
may grant stock options to directors, officers, key employees and consultants.
A total of 10,357 shares of Common Stock were reserved for issuance under the
NQO Plan, all of which shares have been granted as of June 30, 1997. Options
shall terminate six months after the optionee ceases to be employed by the
Company or any subsidiary, regardless of the cause for termination.
38
<PAGE>
REDUCTION OF EXERCISE PRICE OF CERTAIN STOCK OPTIONS
On June 15, 1997, the Company reduced the exercise price of options
to purchase 1,868,400 shares of Common Stock granted to officers, directors,
and a key employee of the Company, from $2.50 to $1.50, or the prevailing
market price. On June 27, 1997, the Company further reduced the exercise
price of options to purchase 1,268,400 shares of Common Stock granted to
officers and directors of the Company, from $1.50 to $0.01, which resulted
in a compensation expense of $1,889,916.
39
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 1997, the record and beneficial
ownership of Common Stock of the Company by each officer and director, all
officers and directors as a group, and each person known to the Company to own
beneficially or of record five percent or more of the outstanding shares of the
Company:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS* SHARES OWNED SHARES
BENEFICIALLY (1) OUTSTANDING
<S> <C> <C>
Richard M. Brooks (2) 710,315 11.8%
Ronald A. Feldman (3) 262,067 4.7%
Robert M. Rubin (4) 527,281 9.4%
9450 Aegean Drive
Boca Raton, FL 33496
Stuart Levin (5) 14,500 0.3%
Todd E. Herman (6) 308,000 5.5%
John Colehower (6) 301,500 5.4%
BKR, Inc. (7) 1,094,164 20.6%
Stuart R. Chalfin -0- ---
Bruce H. Luehrs -0- ---
Officers and Directors as a 1,822,163 26.4%
group (seven persons) (8)
</TABLE>
* Unless otherwise specified, the address of each named person is c/o
Response USA, Inc., 11-H Princess Road, Lawrenceville, New Jersey.
(1) Shares of Common Stock which are not outstanding but which a person has the
right to acquire within sixty days pursuant to outstanding options are
deemed outstanding for the purpose of computing such person's ownership of
Common Stock and percentage of
40
<PAGE>
outstanding Common Stock owned by such person, but are not deemed to be
outstanding for the purpose of computing number of shares or the percentage
of Common Stock owned by any other person.
(2) Includes 708,333 shares issuable upon exercise of currently exercisable
options. See "Management -- Employment and Consulting Agreements."
(3) Includes 260,067 shares issuable upon exercise of currently exercisable
options. See "Management -- Employment and Consulting Agreements."
(4) Mr. Rubin's wife and children own 5,520 shares of Common Stock, as to which
Mr. Rubin disclaims beneficial ownership. Includes 300,000 shares issuable
upon exercise of currently exercisable options. See
"Management--Employment and Consulting Agreements.''
(5) Of which 14,500 shares are issuable upon exercise of currently exerciseable
options.
(6) Of which 300,000 shares are issuable upon exercise of currently exercisable
options. See "Management--Employment and Consulting Argeements.''
(7) The address of BKR, Inc. is 7944 East Beck Lane, Suite 210, Scottsdale,
Arizona 85260.
(8) Includes 1,582,900 shares issuable upon exercise of currently
exercisable options referred to in notes 2,3,4,5 and 6 above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
OTHER TRANSACTIONS
None.
BALANCE OF PAGE INTENTIONALLY LEFT BLANK
41
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-B).
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2(a) Agreement and Plan of Reorganization dated August 9, 1990, by and among the Company (Corsica Capital
Corp.), Management of Corsica Capital Corp. and Lifecall Systems, Inc.
2(b) Plan and Agreement of Merger dated March 18, 1992 by and between Response USA, Inc. (Delaware) and
Lifecall America, Inc.
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
2(d) Nevada Articles of Merger of Response USA, Inc. (formerly Lifecall America, Inc.), a Nevada
corporation, into Response USA, Inc., a Delaware corporation
3(a) Certificate of Incorporation of the Company
3(b) Bylaws of the Company
4(a) Form of Common Stock Certificate
4(b) Form of Warrant Agreement
4(c) Form of Class A Warrant Certificate
4(d) Form of Class B Warrant Certificate
4(e) Form of Class C Warrant Certificate
4(f) Form of Preferred Warrant Certificate
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
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
10(a) Lifecall Systems, Inc. Third Amended Plan of Reorganization with Order Affirming Third Amended Plan
of Reorganization dated January 9, 1990
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
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
10(d) Employment Agreement dated March 4, 1994, by and among the Company, USS and Todd Herman
10(e) Employment Agreement dated March 4, 1994, by and among the Company, USS and John Colehower
10(f) Agreement dated as of November 22, 1996 between Sloan Electronics, Incorporated and the Company
10(g) Asset Purchase Agreement dated October 1, 1997 between the Company and Triple A Security Systems,
Inc.
10(h) Loan and Security Agreement dated as of June 30, 1996 between Mellon Bank, N.A. and the Company
10(i) Purchase Agreement dated as of March 4, 1997, among BKR, Inc., the Company and HealthLink, Ltd.
10(j) Operating Agreement of HealthLink, Ltd. dated as of March 4, 1997
10(k) Agreement dated as of June 18, 1997, by and among the Company and the holder of the Preferred Stock
who are signatories thereto
11 Statement re: computation of earnings (loss) per share
21 Subsidiaries of the registrant
23(a) Consent of Deloitte & Touche LLP
23(b) Consent of Fishbein & Company, PC
23(c) Consent of Terry H. Jones, CPA
24 Power of Attorney
27 Financial Data Schedule
(b) Reports on Form 8-K -- The Company has not filed any Reports on Form 8-K during the last quarter of
the fiscal year.
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
RESPONSE USA, INC. AND SUBSIDIARIES
Independent Auditors' Report for the Fiscal Year Ended
June 30, 1997......................................................... F-2
Independent Auditors' Report for the Fiscal Year Ended
June 30, 1996......................................................... F-3
Consolidated Balance Sheets at June 30, 1997........................... F-4
Consolidated Statements of Operations for the Fiscal
Years Ended June 30, 1996 and June 30, 1997........................... F-6
Consolidated Statements of Stockholders' Equity for
the Fiscal Years Ended June 30, 1996 and June 30, 1997................ F-7
Consolidated Statement of Cash Flows for the Fiscal
Years Ended June 30, 1996 and June 30, 1997........................... F-8
Notes to Consolidated Financial Statements............................. F-13
TRIPLE A SECURITY SYSTEMS, INC.
Independent Auditors' Report........................................... F-37
Balance Sheets at December 31, 1996 and December 31, 1995.............. F-38
Statements of Income and Retained Earnings for the Years
Ended December 31, 1996 and December 31, 1995......................... F-39
Statements of Cash Flows for the Years Ended December 31,
1996 and December 31, 1995............................................ F-40
Notes to Financial Statements.......................................... F-41
RESPONSE USA, INC. AND SUBSIDIARIES
Unaudited Pro Forma Financial Statements............................... F-51
Unaudited Pro Forma Condensed Consolidated Balance Sheet
at June 30, 1997...................................................... F-52
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Fiscal Year Ended June 30, 1997............................... F-53
Notes to Unaudited Pro Forma Financial Statements...................... F-54
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.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 8, 1997
F-2
<PAGE>
Stockholders and Directors
Response USA, Inc. and Subsidiaries
Lawrenceville, New Jersey
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated balance sheet (not included herein) of
RESPONSE USA, INC. AND SUBSIDIARIES as of June 30, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year then ended. 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 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 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 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
the year then ended, 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.
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
August 22, 1996 (March 13, 1997
as to the last paragraph hereof)
F-3
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT JUNE 30, 1997
----------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................. $ 698,551
Marketable securities............................................................ 75,000
Accounts receivable--Current portion
Trade-Net of allowance for doubtful accounts of $437,208....................... 1,443,203
Net investment in sales-type leases............................................ 89,124
Preferred stock subscription receivable..........................................
Inventory........................................................................ 798,814
Prepaid expenses and other current assets........................................ 271,087
-------------
Total current assets......................................................... 3,375,779
-------------
MONITORING CONTRACT COSTS--Net of accumulated amortization of $5,217,345........... 18,433,133
-------------
PROPERTY AND EQUIPMENT--Net of accumulated depreciation and amortization of
$2,363,067....................................................................... 1,512,077
-------------
OTHER ASSETS
Accounts receivable--Noncurrent portion
Trade.......................................................................... 49,046
Net investment in sales-type leases............................................ 179,752
Deposits......................................................................... 45,310
Investment in joint venture...................................................... 3,139,484
Deferred compensation expense.................................................... 892,500
Deferred financing costs--Net of accumulated amortization of $254,154............ 3,612,727
-------------
7,918,819
-------------
$ 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, 1997
----------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt
Notes payable................................................................. $ 100,329
Capitalized lease obligations................................................. 57,453
Accounts payable--Trade......................................................... 556,205
Purchase holdbacks.............................................................. 415,765
Accrued expenses and other current liabilities.................................. 1,288,332
Deferred revenue................................................................ 1,981,500
--------------
Total current liabilities................................................... 4,399,584
--------------
LONG-TERM LIABILITIES--Net of current portion
Long-term debt
Notes payable................................................................. 12,435,287
Capitalized lease obligations................................................. 85,435
Deferred compensation expense................................................... 2,550,000
--------------
15,070,722
--------------
COMMITMENTS AND CONTINGENCIES (Note 13)
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 5,309,206 shares..................................... 42,474
Additional paid-in capital...................................................... 35,411,194
Accumulated deficit............................................................. (31,441,949)
--------------
11,769,502
--------------
$ 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,
-----------------------------
<S> <C> <C>
1996 1997
------------- --------------
OPERATING REVENUES
Product sales..................................................... $ 2,352,449 $ 2,938,618
Monitoring and service............................................ 8,515,247 9,784,285
------------- --------------
10,867,696 12,722,903
------------- --------------
COST OF REVENUES
Product sales..................................................... 1,718,689 1,970,158
Monitoring and service............................................ 1,779,490 2,127,257
------------- --------------
3,498,179 4,097,415
------------- --------------
GROSS PROFIT........................................................ 7,369,517 8,625,488
------------- --------------
OPERATING EXPENSES
Selling, general and administrative............................... 6,416,486 9,126,641
Compensation--Options/Employment contracts........................ 3,689,700
Depreciation and amortization..................................... 2,200,894 2,976,433
Interest.......................................................... 3,185,603 1,349,480
------------- --------------
11,802,983 17,142,254
------------- --------------
LOSS FROM OPERATIONS................................................ (4,433,466) (8,516,766)
------------- --------------
OTHER INCOME/(EXPENSE)
Interest income................................................... 21,568 12,176
Joint venture loss................................................ (123,325)
------------- --------------
21,568 (111,149)
------------- --------------
LOSS BEFORE EXTRAORDINARY ITEM...................................... (4,411,898) (8,627,915)
EXTRAORDINARY ITEM
Loss on debt extinguishment....................................... 2,549,708
------------- --------------
NET LOSS............................................................ (4,411,898) (11,177,623)
Dividends and accretion on preferred stock........................ (6,876,521)
------------- --------------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS...................................................... $ (4,411,898) $ (18,054,144)
------------- --------------
------------- --------------
Loss per common share
Loss before extraordinary item.................................... $ (2.87) $ (1.93)
Extraordinary item................................................ (.57)
------------- --------------
Net loss.......................................................... $ (2.87) $ (2.50)
------------- --------------
------------- --------------
Net loss applicable to common shareholders........................ $ (2.87) $ (4.05)
------------- --------------
------------- --------------
Weighted average number of shares outstanding....................... 1,536,537 4,462,721
------------- --------------
------------- --------------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
PREFERRED STOCK COMMON STOCK LOSSES ON
---------------------- --------------------------- ADDITIONAL AVAILABLE-
NUMBER NUMBER PAID-IN FOR-SALE
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL SECURITIES
----------- --------- -------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance--June 30, 1995...................... 798,520 $ 6,388 $11,438,358 $ (68,343)
Exercise of stock options and warrants...... 1,455,300 11,643 4,421,100
Conversion of convertible subordinated
promissory notes--Net of related costs of
$383,088.................................. 1,116,986 8,936 2,842,976
Acquisitions................................ 309,043 2,472 818,086
Issuance of common stock for consulting
services.................................. 2,000 16 8,109
Issuance of common stock as payment of notes
payable................................... 173,095 1,385 665,736
Sale of preferred stock..................... 7,500 $1,605,000 4,756,875
Unrealized holding losses on
available-for-sale securities............. (125,000)
Net loss....................................
----------- --------- -------------- ----------- ---------- -----------
Balance--June 30, 1996...................... 7,500 1,605,000 3,854,944 30,840 24,951,240 (193,343)
Accretion on preferred stock due to
intrinsic value of conversion feature..... 5,895,000
Discount on and deemed dividends on
preferred stock........................... 876,521
Exercise of stock options and warrants...... 166,950 1,336 406,617
Issuance of warrants to consultants......... 689,000
Repricing of stock purchase warrants........ 2,848,765
Conversion of convertible subordinated
promissory notes--Net of related costs of
$5,068.................................... 11,110 89 44,843
Acquisitions................................ 41,700 334 74,666
Issuance of stock options................... 2,032,200
Investment in joint venture................. 1,094,164 8,753 3,291,247
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------ ----------
<S> <C> <C>
------------ ----------
Balance--June 30, 1995...................... $(8,975,907) $2,400,496
Exercise of stock options and warrants...... 4,432,743
Conversion of convertible subordinated
promissory notes--Net of related costs of
$383,088.................................. 2,851,912
Acquisitions................................ 820,558
Issuance of common stock for consulting
services.................................. 8,125
Issuance of common stock as payment of notes
payable................................... 667,121
Sale of preferred stock..................... 6,361,875
Unrealized holding losses on
available-for-sale securities............. (125,000)
Net loss.................................... (4,411,898) (4,411,898)
------------ ----------
Balance--June 30, 1996...................... ($13,387,805) $13,005,932
Accretion on preferred stock due to
intrinsic value of conversion feature..... (5,895,000) 0
Discount on and deemed dividends on
preferred stock........................... (876,521) 0
Exercise of stock options and warrants...... 407,953
Issuance of warrants to consultants......... 689,000
Repricing of stock purchase warrants........ 2,848,765
Conversion of convertible subordinated
promissory notes--Net of related costs of
$5,068.................................... 44,932
Acquisitions................................ 75,000
Issuance of stock options................... 2,032,200
Investment in joint venture................. 3,300,000
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
PREFERRED STOCK COMMON STOCK LOSSES ON
---------------------- --------------------------- ADDITIONAL AVAILABLE-
NUMBER NUMBER PAID-IN FOR-SALE
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL SECURITIES
----------- --------- -------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Conversion of preferred stock............... (610) (618,738) 190,338 1,522 617,216
Issuance of warrants to preferred
shareholders.............................. 105,000
Issuance of warrants in connection with
obtaining lines of Credit................. 350,000
Cancellation of common stock held in
escrow.................................... (50,000) (400) 400
Unrealized holding losses on available-for-
sale securities recognized in 1997........ 193,343
Net loss....................................
----------- --------- -------------- ----------- ---------- -----------
Balance--June 30, 1997...................... 6,890 $7,757,783 5,309,206 $ 42,474 $35,411,194 $ 0
----------- --------- -------------- ----------- ---------- -----------
----------- --------- -------------- ----------- ---------- -----------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------ ----------
<S> <C> <C>
Conversion of preferred stock............... 0
Issuance of warrants to preferred
shareholders.............................. (105,000) 0
Issuance of warrants in connection with
obtaining lines of Credit................. 350,000
Cancellation of common stock held in
escrow.................................... 0
Unrealized holding losses on available-for-
sale securities recognized in 1997........ 193,343
Net loss.................................... (11,177,623) (11,177,623)
------------ ----------
Balance--June 30, 1997...................... ($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
YEAR ENDED JUNE 30,
------------------
1996 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss........................................ ($4,411,898) ($11,177,623)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization of monitoring contract costs... 1,765,744 2,378,969
Depreciation and amortization of property
and equipment............................ 435,150 547,464
Gain on sale of monitoring contracts........ (91,663)
Loss on sale of property and equipment...... 39,851 15,389
Loss on available-for-sale securities....... 218,343
Amortization of deferred financing costs and
debt discount............................. 85,324 389,674
Amortization of goodwill (see Note 3)....... 50,000
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..................................... (423,709) (29,004)
Net investment in sales-type leases....... 31,344 53,843
Decrease in notes receivable
Related party............................. 50,000
Other..................................... 92,879
Increase in inventory....................... (171) (146,263)
Increase in prepaid expenses and other
current assets............................ (13,203) (152,397)
Decrease in deposits........................ 9,014 2,697
Increase (decrease) in accounts payable-
trade..................................... (78,479) 130,672
Increase (decrease) in accrued expenses and
other current liabilities................. 196,940 (712,877)
Increase in deferred revenues............... 302,488 390,395
---------- ----------
Net cash used in operating activities..... (1,990,415) (3,538,693)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in joint venture..................... (12,810)
Proceeds from the sale of monitoring contracts.. 298,938
Purchase of monitoring contracts (net of
purchase holdbacks)........................... (6,210,340) (3,863,360)
Proceeds from the sale of property and equipment 11,422 39,864
Purchase of property and equipment.............. (459,898) (636,659)
---------- -----------
Net cash used in investing activities...... (6,359,878) (4,472,965)
---------- -----------
See notes to consolidated financial statements
F-8
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1996 1997
------------- --------------
<S> <C> <C>
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................................. (952,537) 22,761
Convertible subordinated promissory notes issued in connection
with private placements......................................... 1,960,000
Proceeds of long-term notes payable............................... 6,963,891 15,235,000
Principal payments on long-term debt Notes payable................ (2,244,495) (15,292,934)
Capitalized lease obligations..................................... (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..................... 10,117,614 6,783,443
------------- --------------
NET INCREASE (DECREASE) IN CASH..................................... 1,767,321 (1,228,215)
CASH--BEGINNING..................................................... 159,445 1,926,766
------------- --------------
CASH--ENDING........................................................ $ 1,926,766 $ 698,551
------------- --------------
------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest............................ $ 3,012,698 $ 1,280,340
Cash paid (received) during the year for income taxes-- Net....... -- --
</TABLE>
See notes to consolidated financial statements
F-9
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(Continued)
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
During the years ended June 30, 1996 and 1997, convertible
subordinated promissory notes of $3,235,000 and $50,000, respectively, were
converted to common stock. The Company reduced deferred financing costs and
additional paid-in capital in the amount of $383,088 and $5,068, during the
years ended June 30, 1996 and 1997, respectively.
During the years ended June 30, 1996 and 1997, long-term notes payable
of $63,933 and $74,028, respectively, were incurred for the purchase of property
and equipment.
During the years ended June 30, 1996 and 1997, capitalized lease
obligations of $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 13,966 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, 1996 and 1997, the Company issued 309,043
and 41,700 shares of its common stock, valued at $820,558 and $75,000,
respectively, in connection with acquisitions (see Note 2). The amount includes
15,000 shares 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 recorded a discount on the preferred stock of $5,895,000.
F-10
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(Continued)
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
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 of the beneficial conversion feature within the preferred stock
dividend, 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 190,338 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 1,094,164
shares of its common stock, valued at $3,300,000 in connection with a joint
venture (see Note 3).
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.
F-11
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(Continued)
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
During the year ended June 30, 1996, the Company issued 173,095 shares
of its common stock, valued at $667,121, as payment on notes payable.
During the year ended June 30, 1996, the Company issued 2,000 shares
of its common stock, valued at $8,125 as payment for consulting services.
BALANCE OF PAGE INTENTIONALLY LEFT BLANK
F-12
<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) (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 maintanance 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 which is part of the PERS. 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.
F-13
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-14
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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.
F-15
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In December 1996, the Financial Accounting Standards Board ("FASB")
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 did not have any effect on the Company's financial
position or results of operations for its year ended June 30, 1997, and the
Company does not anticipate any material impact on the financial statements
of the registrant.
In February 1997, the FASB 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. 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. 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-16
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
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 eighteen months
based on performance guarantees of the seller), and issued 294,043 shares of its
common stock valued at $750,247. As part of the acquisitions, the Company also
issued 15,000 shares of restricted common stock valued at $70,311 as payment of
financing costs to the lender that financed the acquisitions.
F-17
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS (CONTINUED)
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.
Reliable-Hawk, Inc. 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 25,000
shares of its common stock valued at $75,000. Proforma results of the Company
for 1997 giving effect for the RHI acquisition as if it had occurred on July
1, 1996 are not materially different from the actual results of the Company
for 1997. The following represents total assets acquired and the liabilities
assumed:
Assets
Monitoring Contracts $1,707,781
Acquisition costs (assigned to monitoring contracts) 35,400
--------------------
Total Purchase Price $1,743,181
====================
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 personal
emergency response systems, (PERS) to the general public primarily through
national retail and pharmacy chains. In consideration of the Joint Venture, the
Company issued 1,094,164 shares of its common stock, valued at $3.3 million, to
BKR for their 50% interest in Healthlink Ltd.
At the date of the Company's investment in Healthlink, the investment
in Healthlink 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.
F-18
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT IN JOINT VENTURE (CONTINUED)
The Company's investment in Healthlink at June 30, 1997 is summarized as
follows:
Initial Investment $3,312,809
Cumulative equity in net losses of Healthlink (123,325)
Cumulative authorization of Goodwill (50,000)
----------
Total $3,139,484
----------
----------
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, 30,000
shares of common stock may be purchased at an exercise price of $3.00 per share,
and (ii) in no event shall this Warrant be exercisable to purchase more than
450,000 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 Healthlink, Ltd. for the four months ended
June 30, 1997:
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
F-19
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NET INVESTMENT IN SALES-TYPE LEASES
Information pertaining to the Company's net investment in sales-type
leases is as follows:
Minimum lease payments receivable $363,052
Less: Unearned Interest--Finance revenue (65,976)
Allowance for doubtful accounts (28,200)
--------
Net Investment in sales-type leases $268,876
===========
At June 30, 1997, minimum lease payments are receivable as follows:
YEAR ENDING JUNE 30,
YEAR ENDING JUNE 30,
1998 $127,683
1999 93,413
2000 76,776
2001 55,083
2002 10,097
----------------
$363,052
================
5. INVENTORY
Parts Inventory $613,646
Finished Goods 185,168
----------------
$798,814
================
F-20
<PAGE>
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated
useful lives
<S> <C> <C>
Machinery and equipment 5 years $16,715
Office furniture and equipment 5 years 2,496,405
Equipment held for lease 5 years 800,555
Automotive equipment 3 years 343,576
Leasehold improvements 5 years 217,893
----------------
3,875,144
Less accumulated depreciation and amortization 2,363,067
----------------
$1,512,077
================
</TABLE>
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.
F-21
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM NOTES PAYABLE
<TABLE>
LINE OF CREDIT AGREEMENT
<S> <C>
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 including interest
at rates ranging from 3.90% to 11.83%; final payments due April, 1997
through March, 2000; collateralized by related equipment 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 $ 58,894 201,557
Federal priority tax claims payable in annual installments of $2,211
through March, 1999, and $ 1,896 thereafter 10,109
------
12,535,616
Less Current Portion 100,329
-------
$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 15, 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.
F-22
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM NOTES PAYABLE (CONTINUED)
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, 1,032,135; (ii)
exercise price, $3.25 per share; (iii) expiration date, June 30, 2006; and (iv)
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 1,032,135 shares.
The Company recorded deferred financing costs of approximately
$6,800,000 related to the fair market value of the 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).
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 difference between the unamortized value of the old warrant and the fair
market value of the new warrant ($2,848,768 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.
BALANCE OF PAGE INTENTIONALLY LEFT BLANK
F-23
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM NOTES PAYABLE (CONTINUED)
On August 13, 1997 the Holder exercised the Warrant and received
321,789 shares of common stock and blank check preferred stock convertible into
306,958 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 100,000 shares of the Company's common stock at an
exercise price of $4.50 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.
YEAR ENDING JUNE 30,
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
=====================
F-24
<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 $5.00 or 80% of the average closing
bid price of the Company's common stock for the five days immediately preceding
the date of conversion. 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
$2.00 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.
F-25
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 900,000 shares of the company's common stock and
assisted in locating a purchaser for the 900,000 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 $2.00 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 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
The Company has an Incentive Stock Option Plan which provides for
the grant for key employees under to purchase a maximum of 40,000 shares of
the Company's 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 the Company's 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 27,050 ISO's
to Non-Qualified Stock Options during Fiscal 1998.
F-26
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)
On December 16, 1996, the Company granted 56,350 Non-Qualified Stock
Options (NQO) outside of the Restricted Stock Option Plan at $.10 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 25,000 NQO's and 4,000
Incentive Stock Options to employees at $2.625, the prevailing market price,
expiring November 27, 2001. As of June 30, 1997, 42,450 NQO's at $.10 and
2,500 NQO's at $3.875 were exercised. The Company recorded common stock of
$359 and additional paid-in capital of $13,261.
On June 15, 1997, the Company reduced the exercise price of options
for 1,868,400 shares of common stock, granted to officers, directors and a key
employee of the Company, from $2.50 to $1.50, the market price. On June 27,
1997, the Company further reduced the exercise price of options for 1,268,400
shares of common stock, granted to officers and a director of the Company, from
$1.50 to $.01, which resulted in a compensation expense of $1,889,916.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
OPTION PRICE AVERAGE
NUMBER OF SHARES PER SHARE EXERCISE PRICE
<S> <C> <C> <C>
Options outstanding at June 30, 1995 2,124,298 $3.75-70.00 $4.98
Options granted 129,250 $2.50-4.45 $4.053
Options exercised (52,500) $2.50-3.875 $2.565
Options canceled or expired (192,865) $5.00-70.00 $7.336
--------- ---------- ------
Options outstanding at June 30, 1996 2,008,183 $2.50-35.00 $2.637
Options granted 85,350 $0.01-2.625 $0.958
Options exercised (44,950) $0.10 $0.31
Options canceled or expired (9,625) $3.875-35.00 $5.896
--------- ---------- ------
Options outstanding at June 30, 1997 2,038,958 $0.01-4.45 $0.687
--------- ---------- ------
--------- ---------- ------
Options exercisable at June 30, 1997 2,038,958 $0.01-4.45 $0.687
--------- ---------- ------
--------- ---------- ------
</TABLE>
F-27
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMON STOCK AND ADDITIONAL PAID IN CAPITAL (CONTINUED)
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:
REPORTED PRO-FORMA
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 4.05 4.09
1996 Net Loss $4,411,898 $8,558,764
1996 Net Loss per Share $2.87 $5.57
The weighted average fair value of the stock options during the fiscal
years ended June 30, 1996 and 1997 ranged from $1.17 to $3.81.
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
(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 309,043 shares
of its common stock, valued at $820,558, in connection with acquisitions (see
Note 2).
During the year ended June 30, 1996, the Company issued 32,000 shares
of its common stock, valued at $147,200, as payment of a note payable in
connection with the acquisition of a division of Emergency Response Systems,
Inc. (see Note 2), and issued 141,095 shares of its common stock, valued at
$519,920, as payment of notes payable to stockholders and officers (including
interest of $11,849).
During the year ended June 30, 1996, the Company issued 2,000 shares
of its common stock, valued at $8,125, as payment for consulting services.
F-28
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMON STOCK AND ADDITIONAL PAID IN CAPITAL (CONTINUED)
The Company, in December, 1996, canceled 50,000 shares of its common
stock held in escrow, in connection with an acquisition.
In March, 1997, the Company issued 25,000 shares of its common stock
in connection with a purchase of monitoring contracts and 16,700 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 1,094,164 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 1,000 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 200,000 shares of the Company's common stock at a price of $5.125;
these warrants expire April 30, 1999. Also, as part of consulting agreements,
the Company issued warrants to purchase 1,285,000 shares of the Company's common
stock at prices ranging from $2.50 to $3.50; these warrants were 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 500,000 shares of the
Company's common stock at an exercise price of $6.13 per share and 250,000
shares of the Company's common stock at an exercise price of $8.00 per share;
these warrants expire June 30, 2001. The Company also issued warrants to a
consultant to purchase 75,000 shares of the Company's common stock at an
exercise price of $4.50; these warrants expire June 30, 2000.
F-29
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)
During the months July, 1996, through September, 1996, 122,000 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.
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, 1995 2,289,695 $2.50-4.50
Warrants issued in connection with 13.8% Notes-Class C 20,000 $3.26
Warrants issued in connection with 12 % Notes - Class A 30,667 $2.50
Warrants issued in connection with 10% Notes - Class C 61,000 $5.625
Warrants issued in connection with consulting agreements 1,485,000 $2.50-5.125
Warrants issued in connection with preferred stock 275,000 $4.50-8.00
Warrants issued in connection with line of credit agreement 1,132,135 $1.50-4.50
Warrants exercised in connection with 12% Notes - Class C (29,300) $3.75
Warrants exercised in connection with 10% Notes - Class C (28,500) $5.625
Warrants exercised in connection with consulting agreements (1,285,000) $2.50-3.50
------------- -------------
Warrants outstanding at June 30, 1996 3,950,697 $1.50-8.00
Warrants issued in connection with preferred stock litigation 344,500 $2.00
Warrants exercised in connection with 12% Notes- Class A (30,667) $2.50
Warrants exercised in connection with 10% Notes- Class C (30,000) $5.625
------------- -------------
Warrants outstanding at June 30, 1997 4,234,530 $1.50-8.00
============= =============
</TABLE>
F-30
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1996 1997
<S> <C> <C>
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>
At June 30, 1997, the cumulative temporary differences resulted in net
deferred tax assets or liabilities consisting primarily of:
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-
----------
----------
F-31
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED)
For income tax reporting, the Company has net operating loss carryforwards
available to reduce future federal and state income taxes. If not used, the
carryforwards will expire as follows:
Year ending June 30, Federal State
2000 --- $ 1,191,025
2001 --- 3,253,300
2002 --- 3,206,666
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
----------- -----------
----------- -----------
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.
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,
1996 and 1997, were $23,008 and $36,981, respectively.
F-32
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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. Total cost under this agreement was $494,000 and $703,470 for the
years ended June 30, 1996 and 1997, respectively.
F-33
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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:
YEAR ENDING JUNE 30,
1998 $321,074
1999 256,564
2000 40,038
2001 12,944
2002 -
---------
$630,620
---------
---------
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 $369,852 and $344,117 for the
years ended June 30, 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 $3.01 to
$5.00 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 94,402 shares of common stock which are expected to
be sufficient to satisfy the Company's obligation.
14. 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.
F-34
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
15. 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:
1995 1996
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
---------- ----------
---------- ----------
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.
F-35
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS (CONTINUED)
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 will be in compliance with the terms of the amended
covenants.
In October, 1997, the Company filed a Form SB-2 Registration Statement
under the Securities Act of 1933, offering 7,200,000 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 1,080,000 shares of Common Stock solely to cover
over-allotments, if any. In connection with the offering, the Underwriters will
receive warrants to purchase up to an aggregate of 720,000 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-36
<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 Jones, CPA
March 27, 1997
F-37
<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-38
<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>
The accompanying notes are an integral part of the financial statements.
F-39
<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.................................................. (699,788) (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 $ 140.76
---------- ----------
---------- ----------
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-40
<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.
F-41
<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)
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.
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-42
<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>
F-43
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 2: MARKETABLE SECURITIES (Cont'd)
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.
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>
F-44
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
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>
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>
F-45
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
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 $ 112,504
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-
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.
F-46
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
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 --
</TABLE>
F-47
<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
------------ ------------
<S> <C> <C>
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
Fidelity Bank:
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
</TABLE>
F-48
<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
------------ ------------
<S> <C> <C>
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>
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>
F-49
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
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-50
<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 twelve 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-51
<PAGE>
RESPONSE USA INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- -----------------------
RESPONSE TRIPLE A ADJUSTMENTS COMBINED
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash..................................................... $ 698,551 $ 139,645 $ 22,185,000(a) $ 838,196
(10,000,000)(b)
(12,185,000)(c)
Marketable securities.................................... 75,000 112,465 187,465
Accounts receivable (net) 1,532,327 278,114 1,810,441
Inventory................................................ 798,814 446,296 1,245,110
Prepaid expenses and other current assets................ 271,087 170,125 (86,893)(b) 354,319
----------- ---------- ------------ -----------
Total current assets............................... 3,375,779 1,146,645 (86,893) 4,435,531
----------- ---------- ------------ -----------
Monitoring Contract Costs (net)............................ 18,433,133 236,036 (236,036)(b) 28,083,461
9,650,328(b)
----------- ---------- ------------ -----------
Property and Equipment (net)............................... 1,512,077 1,832,798 3,344,875
----------- ---------- ------------ -----------
Other Assets...............................................
Accounts receivable (net)................................ 228,798 228,798
Deposits................................................. 45,310 11,737 57,047
Investment in joint venture.............................. 3,139,484 3,139,484
Deferred compensation expense............................ 892,500 892,500
Deferred financing costs (net)........................... 3,612,727 3,612,727
----------- ---------- ------------ -----------
7,918,819 11,737 7,930,556
----------- ---------- ------------ -----------
$31,239,808 $3,227,216 $ 9,327,399 $43,794,423
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt........................ $ 157,782 $ 411,452 ($411,452)(b) $ 157,782
Accounts payable-Trade................................... 556,205 331,505 (331,505)(b) 556,205
Purchase holdbacks....................................... 415,765 415,765
Accrued expenses and other current liabilities 1,288,332 152,223 (152,223)(b) 1,288,332
Deferred revenue......................................... 1,981,500 797,115 2,778,615
----------- ---------- ------------ -----------
4,399,584 1,692,295 (895,180) 5,196,699
----------- ---------- ------------ -----------
Long-Term Liabilities
Long-term debt........................................... 12,520,722 1,126,654 (1,126,654)(b) 8,810,722
(12,185,000)(c)
8,475,000(d)
Deferred compensation expense............................ 2,550,000 2,550,000
----------- ---------- ------------ -----------
15,070,722 1,126,654 (4,836,654) 11,360,722
----------- ---------- ------------ -----------
Stockholders' Equity.......................................
Preferred stock.......................................... 7,757,783 (7,757,783)(d)
Common stock............................................. 14,158 125,000 (125,000)(b) 34,651
1,293(b)
19,200(a)
Additional paid-in capital............................... 35,439,510 213,817 (213,817)(b) 58,644,300
1,756,207(b)
22,165,800(a)
(717,217)(d)
Accumulated Deficit...................................... (31,441,949) 69,450 (69,450)(b) (31,441,949)
----------- ---------- ------------ -----------
11,769,502 408,267 15,059,233 27,237,002
----------- ---------- ------------ -----------
$31,239,808 $3,227,216 $ 9,237,399 $43,794,423
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-52
<PAGE>
RESPONSE USA INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
RESPONSE TRIPLE A ADJUSTMENTS COMBINED
-------------- ------------ ------------ --------------
Operating Revenues
Product Sales...................................... $ 2,938,618 $ 1,787,897 $ 4,726,515
Monitoring and service............................. 9,784,285 3,345,642 13,129,927
-------------- ------------ ------------ --------------
12,722,903 5,133,539 17,856,442
Cost of Revenues..................................... 4,097,415 2,353,190 6,450,605
-------------- ------------ ------------ --------------
Gross Profit......................................... 8,625,488 2,780,349 11,405,837
-------------- ------------ ------------ --------------
Operating Expenses
Selling, general and administrative................ 9,126,641 2,044,430 11,171,071
Compensation--Options/Employment contracts......... 3,689,700 3,689,700
Depreciation and amortization...................... 2,976,433 463,914 (55,434)(e) 4,349,946
965,033(f)
Interest........................................... 1,349,480 128,574 (128,574)(g) 1,049,667
(298,913)(h)
-------------- ------------ ------------ --------------
17,142,254 2,636,918 (481,212) 20,260,384
-------------- ------------ ------------ --------------
Income/(Loss) From Operations........................ (8,516,766) 143,431 (481,212) (8,854,547)
-------------- ------------ ------------ --------------
Other Income/(Expense)
Interest Income.................................... 12,176 13,755 25,931
Joint Venture Loss................................. (123,325) (123,325)
-------------- ------------ ------------ --------------
(111,149) 13,755 0 (97,394)
-------------- ------------ ------------ --------------
Loss Before Extraordinary Item....................... (8,627,915) 157,186 (481,212) (8,951,941)
Extraordinary Item
Loss on debt extinguishment........................ 2,549,708 2,549,708
-------------- ------------ ------------ --------------
Net Income/(Loss).................................... (11,177,623) 157,186 (481,212) (11,501,649)
Dividends and accretion on preferred stock........... (6,876,521) 6,876,521(i) 0
-------------- ------------ ------------ --------------
Net Loss Applicable to Common Shareholders........... ($18,054,144) $ 157,186 $ 6,395,309 ($11,501,649)
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
Loss per common share
Loss before extraordinary item..................... ($5.80) ($2.21)
Extraordinary item................................. ($1.71) ($0.63)
-------------- --------------
Net loss........................................... ($7.51) ($2.84)
-------------- --------------
-------------- --------------
Net loss applicable to common shareholders......... ($12.14) ($2.84)
-------------- --------------
-------------- --------------
Weighted average number of shares outstanding........ 1,487,574 2,561,609(j) 4,049,183
-------------- ------------ --------------
-------------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-53
<PAGE>
RESPONSE USA INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Balance Sheet
- ---------------------------------
(a) To reflect the net proceeds from the Secondary Offering as if it occurred
on June 30, 1997 of $22,185,000.
(b) To record the acquisition of Triple A Sysytems, Inc. ("Triple A"). The
purchase price of $12,500,000 (payable in cash of $10,000,000, stock valued
at $1,750,000 and assumption of $750,000 in liabilities) which was allocated
to the assets acquired and liabilities assumed based on their fair value
with the remainder, $9,650,328, classified as Contract Monitoring Costs.
(c) To record principal paid on the line of credit from the remaining proceeds
from the Secondary Offering of $12,185,000
(d) To record the redemption of the preferred stock for $8,475,000
Unaudited Pro Forma Income Statement
- ------------------------------------
(e) To eliminate amortization of monitoring contracts purchased from Triple
A previously recorded in Triple A's historical financial statements.
(f) To provide amortization on the net increase or purchased monitoring
contracts. Monitoring contracts purchased from Triple A are amortized
using the straight-line method over a ten-year estimated life.
(g) To eliminate interest expense on debt not acquired.
(h) To reduce interest expense on the net decrease in long-term debt as a
result of using the remaining proceeds from the offering, after the Triple A
acquisition and the redemption of preferred stock, to repay bank debt.
(i) To eliminate dividends and accretion on preferred stock recorded during
the first quarter of 1997 since this preferred stock is presumed to have
been retired in these pro forma financial statements.
(j) In calculating earnings per share, effect has been given to the shares
issued in the acquisition of Triple A (161,609 shares) and the Secondary
Offering (2,400,000 shares).
F-54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized.
RESPONSE USA, INC.
By: /s/ Richard M. Brooks
-------------------------
Richard M. Brooks
President, Chief Executive,
and Financial Officer and a
Director
Dated: October 9, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons, which include the
Chief Executive Officer, the Chief Financial Officer and a majority of the Board
of Directors, on behalf of the Registrant and in the capacities and on the dates
indicated:
NAME TITLE DATE
/s/ Richard M. Brooks President, Chief Executive October 9, 1997
- ---------------------- and Financial Officer and a
Richard M. Brooks Director (Principal Executive
Financial Officer)
/s/ Ronald A. Feldman Chief Operating Officer, October 9, 1997
- ---------------------- Vice President, Secretary,
Ronald A. Feldman Treasurer and a Director
Director October , 1997
- ----------------------
Robert M. Rubin
Director October , 1997
- ----------------------
Bruce H. Luehrs
/s/ Stuart R. Chalfin Director October 9, 1997
- ----------------------
Stuart R. Chalfin
/s/ Todd Herman Director October 9, 1997
- ----------------------
Todd Herman
/s/ Stuart Levin Director October 9, 1997
- ----------------------
Stuart Levin
<PAGE>
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
4(f) Form of Preferred Warrant Certificate
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
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
10(d) Employment Agreement dated March 4, 1994, by and among the Company, USS and Todd Herman
10(e) Employment Agreement dated March 4, 1994, by and among the Company, USS and John Colehower
10(f) Agreement dated as of November 22, 1996 between Sloan Electronics, Incorporated and the Company
10(g) Asset Purchase Agreement dated October 1, 1997 between the Company and Triple A Security Systems,
Inc.
10(h) Loan and Security Agreement dated as of June 30, 1996 between Mellon Bank, N.A. and the Company
10(i) Purchase Agreement dated as of March 4, 1997, among BKR, Inc., the Company and HealthLink, Ltd.
10(j) Operating Agreement of HealthLink, Ltd. dated as of March 4, 1997
11 Statement re: computation of earnings (loss) per share
21 Subsidiaries of the registrant
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 4(f)
THE WARRANTS AND COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANTS HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED (THE "ACT"), AND THE
WARRANTS AND COMMON STOCK ISSUABLE ON EXERCISE OF WARRANTS MAY NOT BE SOLD
UNLESS THERE IS A REGISTRATION STATEMENT IN EFFECT COVERING THE
WARRANTS AND COMMON STOCK OR THERE IS AVAILABLE AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE ACT
Void after 5:00 P.M., New York City time, on _______, 2007
WARRANT TO PURCHASE [_____] SHARES OF COMMON STOCK
OF
RESPONSE USA, INC.
This is to certify that, for value received, [_______], or assigns
(the "Holder" or "Holders") is entitled to purchase, subject to the provisions
of this warrant, from Response USA, Inc., a Delaware corporation (the
"Company"), [_____] Thousand (______) fully paid and nonassessable shares (the
"Warrant Shares" or the "Shares") of the common stock, of the Company (the
"Common Stock"), at an exercise price of $2.00 per share (the "Purchase Price").
Of such [______] Thousand (_______) shares, [50%] Thousand (_______) shares may
be purchased at any time during the period commencing _________, 1998 (the
"Exercise Commencement Date"), and [50%] Thousand (________) shares may be
purchased at any time during the period commencing _______, 1999, in each case
until 5:00 P.M., New York City time, on ________, 2007 (which shall be referred
to herein as the "Exercise Term"), subject to adjustment as set forth
hereinafter. This warrant, and any warrant resulting from a transfer or
subdivision of this warrant shall sometimes
<PAGE>
hereinafter be referred to as a "Warrant." The number of shares of Common Stock
to be received upon the exercise of this Warrant and the price to be paid for a
share of Common Stock may be adjusted from time to time as set forth in Section
7 below.
1. EXERCISE OF WARRANT. This Warrant shall entitle the Holder hereof
to purchase the Warrant Shares covered hereby at an exercise price of $2.00 per
share of Common Stock. This Warrant may also be exercised in whole or in part at
any time or from time to time during the period commencing on the Exercise
Commencement Date through the last day of the Exercise Term, or if such day is a
day on which banking institutions in the State of New York are authorized by law
to close, then on the next succeeding day which shall not be such a day, by
either of the following methods: (a) the Holder may surrender this Warrant to
the Company at its principal office, or at the office of its stock transfer
agent, if any, with the Purchase Form annexed hereto duly executed and
accompanied by payment of the Purchase Price for the number of shares specified
in such form; or (b) the Holder may also exercise this Warrant, in whole or in
part, in a "cashless" or "net-issue" exercise by delivering to the offices of
the Company or its stock transfer agent, this Warrant, together with a
subscription notice specifying the number of Warrant Shares to be delivered to
such Holder ("Deliverable Shares") and the number of Warrant Shares with respect
to which this Warrant is being surrendered in payment of the aggregate Purchase
Price for the Deliverable Shares ("Surrendered Shares");
2
<PAGE>
provided that the Purchase Price multiplied by the number of Deliverable Shares
shall not exceed the value of the Surrendered Shares; and provided further that
the sum of the number of Deliverable Shares and the number of Surrendered Shares
so specified shall not exceed the aggregate Warrant Shares represented by this
Warrant. For the purposes of this provision, each Warrant Share as to which this
Warrant is surrendered will be attributed a value equal to the fair market value
(as defined below) of the Warrant Share minus the Purchase Price of the Warrant
Shares. For the purposes of this Warrant, "Fair market value" shall equal the
closing trading price of the Common Stock, on the principal trading exchange or
market for the Common Stock (the "Principal Market") on the date of
determination or, if the Common Stock is not listed or admitted to trading on
any national securities exchange, the average of the closing bid and asked
prices on the over-the-counter market as furnished by any New York Stock
Exchange member firm reasonably selected from time to time by the Company for
that purpose and reasonably acceptable to the Holder, or, if the Common Stock is
not listed or traded over-the-counter and the average price cannot be determined
as contemplated above, the fair market value of the Common Stock shall be as
reasonably determined in good faith by the Company's Board of Directors with the
concurrence of the Holder. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver, at the Company's expense, a new Warrant evidencing the rights of
3
<PAGE>
the Holder thereof to purchase the balance of the shares purchasable hereunder.
Upon receipt by the Company of this Warrant at its office, or by the stock
transfer agent of the Company at its office, in proper form for exercise and
accompanied by the appropriate payment for the Warrant Shares issuable upon such
exercise, the Holder shall be deemed to be the holder of record of such Warrant
Shares, notwithstanding that the stock transfer books of the Company shall then
be closed or that certificates representing such Warrant Shares shall not then
be actually delivered to the Holder. Certificates for the Warrant Shares shall
be delivered to the Holder as soon as practicable following the exercise of this
warrant and in any event within three (3) trading days thereafter.
2. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
(a) The Company shall take all necessary action and proceedings as may be
required and permitted by applicable law, rules and regulations, including,
without limitation, the notification of the Principal Market, for the legal and
valid issuance of this Warrant and the Warrant Shares to the Holder under this
Warrant.
(b) The Warrant Shares, when issued in accordance with the terms hereof,
will be duly authorized and, when paid for or issued in accordance with the
terms hereof, shall be validly issued, fully paid and non-assessable.
(c) With a view to making available to Holder the benefits of Rule 144
promulgated under the Act any other rule or
4
<PAGE>
regulation of the Securities and Exchange Commission ("SEC") that may at any
time permit Holder to sell securities of the Company to the public without
registration, the Company agrees to use its reasonable best efforts to furnish
to any Holder forthwith upon request a written statement by the Company that it
has complied with the reporting requirements of Rule 144 and of the Securities
Act of 1933, as amended (the "Securities Act") and the Exchange Act, a copy of
the most recent annual or quarterly report of the Company, and such other
reports and documents so filed by the Company as may be reasonably requested to
permit any such Holder to take advantage of any rule or regulation of the SEC
permitting the selling of any such securities without registration.
3. RESERVATION OF SHARES. The Company hereby agrees that at all
times there shall be reserved for issuance and delivery upon exercise of this
Warrant, such number of shares of its Common Stock as shall be required for
issuance and delivery upon exercise of this Warrant.
4. FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. Any
fraction of a share called for upon any exercise hereof shall be cancelled.
5. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant
is exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company at its office or at the office of its stock
transfer agent, if any, for other Warrants of different denominations entitling
the
5
<PAGE>
Holder thereof to purchase in the aggregate the same number of shares of Common
Stock as are purchasable hereunder. Subject to Section 10 hereof, upon surrender
of this Warrant to the Company at its principal office or at the office of its
stock transfer agent, if any, with the Assignment Form annexed hereto duly
executed and funds sufficient to pay the applicable transfer tax, if any, the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee named in such instrument of assignment and this Warrant shall
promptly be cancelled. This Warrant may be divided or combined with other
Warrants which carry the same rights upon presentation thereof at the office of
the Company or at the office of its stock transfer agent, if any, together with
a written notice signed by the Holder hereof specifying the names and
denominations in which new Warrants are to be issued. Upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and, in the case of loss, theft or
destruction, of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will execute and deliver
a new Warrant of like tenor and date. Any such new Warrant, when executed and
delivered, shall constitute an additional contractual obligation on the part of
the Company, whether or not this Warrant so lost, stolen, destroyed, or
mutilated shall be at any time enforceable by anyone.
6
<PAGE>
6. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder of the Company until exercise hereof.
However, in the event of any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, the Company shall mail to each Holder, at least 20 days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
7. REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Warrant Shares
issuable upon exercise of this Warrant will be registered under the Securities
Act as set forth in the registration rights agreement between the Company and
the Holder dated as of the date hereof and will be listed on each market or
exchange on which the shares of capital stock into which this warrant is then
exercisable are then traded.
7. (A) SUBDIVISION AND COMBINATION. In case the Company shall at any
time (i) combine or subdivide the outstanding shares of Common Stock, or (ii)
declare a dividend or distribution to its stockholders of its shares of Common
Stock, which dividend or distribution is payable in Common Stock or
7
<PAGE>
rights convertible into Common Stock, the Purchase Price shall forthwith be
proportionately increased or decreased, as the case may be.
(B) ADJUSTMENT IN NUMBER OF SHARES.
Upon each adjustment of the Purchase Price pursuant to the
provisions of this Section (7), the number of Shares issuable upon the exercise
of each Warrant shall be adjusted to the nearest full Share by multiplying a
number equal to the Purchase Price in effect immediately prior to such
adjustment by the number of Shares issuable upon exercise of the Warrants
immediately prior to such adjustment and dividing the product so obtained by the
adjusted Purchase Price.
(C) If at any time after the date hereof, the Company
distributes to holders of its Common Stock, other than as part of its
dissolution, liquidation or the winding up of its affairs, any shares of its
capital stock, any evidence of indebtedness or any of its assets (other than
cash, Common Stock or securities convertible into Common Stock), then the number
of Warrant Shares for which this Warrant is exercisable shall be adjusted to
equal: (i) the number of Warrant Shares for which this Warrant is exercisable
immediately prior to such event, (ii) multiplied by a fraction, (A) the
numerator of which shall be the fair market value per share of Common Stock on
the record date for the dividend or distribution, and (B) the denominator of
which shall be the fair market value per share of Common Stock on the record
date for the divided or distribution minus the amount
8
<PAGE>
allocable to one share of Common Stock of the value (as jointly determined in
good faith by the Board of Directors of the Company and the Holder) of any and
all such evidences of indebtedness, shares of capital stock, other securities or
property, so distributed. The Purchase Price shall be adjusted to equal: (i) the
Purchase Price in effect immediately before the occurrence of any event (ii)
multiplied by a fraction, (A) the numerator of which is the number of Warrant
Shares for which this Warrant is exercisable immediately before the adjustment,
and (B) the denominator of which is the number of Warrant Shares for which this
Warrant is exercisable immediately after the adjustment.
8. (A) RECLASSIFICATION, REORGANIZATION, CONSOLIDATION, MERGER, ETC.
In case of any reclassification, reorganization or other change of the
outstanding shares of Common Stock (other than a change in par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination), or in the case of any consolidation of the Company with, or merger
of the Company with or into, another corporation (other than a consolidation or
merger in which the Company is the surviving corporation and which does not
result in any reclassification, reorganization, change or exchange of the
outstanding shares of Common Stock, except a change as a result of a subdivision
or combination of such shares or a change in par value, as aforesaid), or in the
case of a sale or conveyance to another corporation of all or a substantial part
of the assets or property of the Company, the Holder shall
9
<PAGE>
thereafter have the right to purchase the kind and number of shares of stock and
other securities and property receivable upon such reclassification, change
(subject to further adjustment in accordance with the terms of this Warrant),
consolidation, merger, sale or conveyance as if the Holder were the owner of the
shares of Common Stock underlying the Warrants immediately prior to any such
events at a price equal to the product of (x) the number of shares issuable upon
exercise of the Warrants and (y) the Purchase Price in effect immediately prior
to the record date for such reclassification, change, consolidation, merger,
sale or conveyance as if such Holder had exercised the Warrants. It shall be a
condition of any such merger, consolidation or sale that the surviving or
successor corporation, as the case may be, expressly agree to be bound by the
terms of this Warrant.
(b) CHANGE OF CONTROL. Notwithstanding any provision to the contrary
contained herein, if at any time (x) there occurs any consolidation or merger of
the Company with or into any other corporation or other entity or person
(whether or not the Company is the surviving corporation), or any other
corporate reorganization or transaction or series of related transactions in
which in excess of 50% of the Company's voting power is transferred through a
merger, consolidation, tender offer or similar transaction, (y) in excess of 50%
of the Company's Board of Directors consists of directors not nominated by the
prior Board of Directors of the Company, or (z) any person (as defined in
Section 13(d) of the Securities Exchange Act of 1934, as
10
<PAGE>
amended (the "Exchange Act")), together with its affiliates and associates (as
such terms are defined in Rule 405 under the Securities Act of 1933, as amended
(the "Act")), beneficially owns or is deemed to beneficially own (as described
in Rule 13d-3 under the Exchange Act without regard to the 60-day exercise
period) in excess of 50% of the Company's voting power (the events in the
foregoing clauses (x), (y) and (z) collectively referred to as a "Change in
Control Transaction"), then upon announcement by the Company or any other person
of the proposal or commencement of any transaction or plan intended, or likely
to, result in a Change in Control Transaction, this Warrant shall become
immediately exercisable at the election of Holder.
(c) PURCHASE PRICE ADJUSTMENT. In the event that the Company issues or
sells any Common Stock or securities which are convertible into or exchangeable
for its Common Stock or any convertible securities, or any warrants or other
rights to subscribe for or to purchase or any options for the purchase of its
Common Stock or any such convertible securities (other than shares or options
issued or which may be issued pursuant to the Company's employee or director
option plans or shares issued upon exercise of options, warrants or rights
outstanding on the date of this Warrant and listed in the Company's most recent
periodic report filed under the Exchange Act) at an effective purchase price per
share which is less than the fair market value (as defined above) of the Common
Stock on the trading day next preceding such issue or sale, then in each such
case, the
11
<PAGE>
Purchase Price in effect immediately prior to such issue or sale shall be
reduced effective concurrently with such issue or sale to an amount determined
by multiplying the Purchase Price then in effect by a fraction, (x) the
numerator of which shall be the sum of (1) the number of shares of Common Stock
outstanding immediately prior to such issue or sale, plus (2) the number of
shares of Common Stock which the aggregate consideration received by the Company
for such additional shares would purchase at such fair market value then in
effect; and (y) the denominator of which shall be the number of shares of Common
Stock of the Company outstanding immediately after such issue or sale.
For the purposes of the foregoing adjustment, in the case of the
issuance of any convertible securities, warrants, options or other rights to
subscribe for or to purchase or exchange for, shares of Common Stock
("Convertible Securities"), the adjustment shall be made at the time the
Convertible Securities are converted, based upon the number of shares of Common
Stock issued at the time of conversion.
The number of shares which may be purchased hereunder shall be
increased proportionately to any reduction in Purchase Price pursuant to this
paragraph, so that after such adjustments the aggregate Purchase Price payable
hereunder for the increased number of Shares shall be the same as the aggregate
Purchase Price in effect for the Shares subject to this Warrant just prior to
such adjustments.
12
<PAGE>
9. DEFINITION OF "COMMON STOCK." For the purpose of this Warrant,
the term "Common Stock" shall mean, in addition to the class of stock designated
as the Common Stock, $.008 par value, of the Company on the date hereof, any
class of stock resulting from successive changes or reclassifications of the
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. If at any time, as a result of an
adjustment made pursuant to one or more of the provisions hereof, the shares of
stock or other securities or property obtainable upon exercise of this Warrant
shall include securities of the Company other than shares of Common Stock or
securities of another corporation, then thereafter the amount of such other
securities so obtainable shall be subject to adjustment from time to time in a
manner and upon terms as nearly equivalent as practicable to the provisions with
respect to Common Stock contained in Section (7) hereof and all other provisions
of this Warrant with respect to common Stock shall apply on like terms to any
such other shares or other securities.
10. TRANSFER TO COMPLY WITH THE ACT. This Warrant or the Shares or
any other security issued or issuable upon exercise of this Warrant may not be
sold or otherwise disposed of except as follows:
a. to a person who, in the opinion of counsel reasonably
acceptable to the Company, is a person to whom this Warrant or Warrant Shares
may legally be transferred without
13
<PAGE>
registration and without the delivery of a current prospectus under the Act with
respect thereto and then only against receipt of a letter from such person in
which such person represents that he is acquiring the Warrants or Warrant Shares
for his own account for investment purposes and not with a view to distribution,
and in which such person agrees to comply with the provisions of this Section
(8) with respect to any resale or other disposition of such securities; or
b. to any person upon delivery of a prospectus then meeting
the requirements of the Act relating to such securities and the offering thereof
for such sale or disposition; or
c. to any person upon delivery to the Company of reasonable
assurances that such transfer was made in accordance
with the requirements of Rule 144 under the Act.
11. NOTICE OF ADJUSTMENTS - NOTICES. Whenever the Purchase Price or
number of Shares purchasable hereunder shall be adjusted pursuant to the terms
and provisions hereof, the Company promptly shall execute and deliver to the
Holder a certificate setting forth, in reasonable detail, the event requiring
the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated and the Purchase Price and number of shares
purchasable hereunder after giving effect to such adjustment, and shall cause a
copy of such certificate to be mailed (by first class mail, postage prepaid) to
the Holder.
14
<PAGE>
12. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or mailed by registered or certified mail, return
receipt requested.
13. SUCCESSORS. All the covenants and provisions of this Warrant by
or for the benefit of the Holder shall inure to the benefit of its successors
and assigns hereunder.
14. TERMINATION. This Warrant will terminate on any earlier date
when it has been entirely exercised and all the Shares issuable upon exercise of
this Warrant have been resold to the public.
15. GOVERNING LAW. This Warrant shall be deemed to be made under the
laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State.
16. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Warrant and all
attachments hereto and all incorporation by references set forth herein, set
forth the entire agreement and understanding between the parties as to the
subject matter hereof and merges and supersedes all prior discussions,
agreements and understandings of any and every nature among them. This Warrant
may be amended, the Company may take any action herein prohibited or omit to
take any action herein required to be performed by it, and any breach of any
covenant, agreement, warranty or representation may be waived, only if the
Company has obtained the written consent or waiver of the Holder. No course of
dealing between or among any persons having any interest in this
15
<PAGE>
Warrant will be deemed effective to modify, amend or discharge any part of this
Warrant or any rights or obligations of any person under or by reason of this
Warrant.
RESPONSE USA, INC.
By:
----------------------------
Name: Richard M. Brooks
Title: President
16
<PAGE>
RESPONSE USA, INC.
ASSIGNMENT FORM
(To be signed only upon assignment of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________________________________________
________________________________________________________________________________
(Name and address of assignee must be printed or typewritten) the rights of the
undersigned represented by this Warrant, to the extent of ___ (_____) shares of
Common Stock, $.008 par value, of Response USA, Inc. (the "Company") hereby
irrevocably constituting and appointing ____________ Attorney to make such
transfer on the books of the Company, with full power of substitution in the
premises.
Dated: _________________, 199_ ______________________________________
Signature of Registered Holder
Signature Guaranteed:
- ------------------------------------
Note: The above signature must correspond with the
name as it appears upon the front page of
this Warrant in every particular, without
alteration or enlargement or any change
whatever.
17
<PAGE>
RESPONSE USA, INC.
PURCHASE FORM
RESPONSE USA, INC.
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by this Warrant for, and to purchase hereunder, ___________
shares of Common Stock, $.008 par value per share, of Response USA, Inc. (the
"Shares") provided for herein, and requests that certificates for the Shares be
issued in the name of: _________________________________________________________
________________________________________________________________________________
(Please print name, address and social security number) and, if said number of
Shares shall not be all the Share purchasable hereunder, that a new Warrant for
the balance of the Shares purchasable under this Warrant be registered in the
name of the undersigned Warrantholder or its Assignee as below indicated and
delivered to the address stated below.
Dated: ________________, 199_
Name of Warrantholder or Assignee:______________________________________________
(Please print)
Address: _______________________________________________________________________
_______________________________________________________________________
Signature: _____________________________________________________________________
Note: The above signature must correspond with the
name as it appears upon the front page of this
Warrant in every particular, without alteration
or enlargement or any change whatever, unless
this Warrant has been assigned.
18
<PAGE>
Exhibit 10(b)
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into this 30th day
of June, 1996 by and between Response USA, Inc. (the "Company"), a Delaware
corporation with a principal business office located in Lawrenceville, New
Jersey, and Richard M. Brooks ("Employee"), an individual residing in Wynnewood,
Pennsylvania.
NOW, THEREFORE, in consideration of the mutual consideration set forth herein
and intending to be legally bound hereby, the parties hereto agree as follows:
AGREEMENT
1. Term. This Agreement shall be effective from the date hereon, and shall
continue in force until June 30th, 2000, or such earlier time as Employee's
employment is terminated in accordance with Section 7 hereof, whichever first
occurs (the "Termination Date").
2. Duties.
a. Company shall employ Employee as Chief Executive Officer, President and
Treasurer of Company until the Termination Date. In such capacity, Employee
shall perform such executive duties as may be assigned to him, consistent with
his offices, from time to time by the Company's Board of Directors.
b. Employee's principal business office shall be in the Company's principal
executive office.
c. During the Term of this Agreement, Employee shall devote his best efforts, on
a full time basis, to the business and affairs of the Company and shall not
participate in the ownership, management, or control of, or be employed by, any
other company or business except with the Company's prior written approval.
3. Compensation.
a. Employee will be paid a base salary of Two Hundred Twenty Five Thousand
Dollars ($225,000.00) annually, payable in installments not less frequently than
monthly.
b. Company shall provide Employee with such disability, major medical, hospital,
surgical and life insurance coverage as it and its subsidiaries provide
generally for their executive officers.
c. Company shall provide either (i) a Company-owned or leased automobile for
Employee's use in performing his duties for Company for which Company shall
maintain automobile insurance and reimburse Employee for maintenance and other
expenses associated with the use of such automobile on Company business, or (ii)
a reasonable car allowance. Employee agrees that the automobile presently
provided for his use is satisfactory in all respects.
<PAGE>
4. Stock Option. In consideration for his entry into this Employment Agreement
and the services to be rendered by him hereunder, and previously, the Company
confirms the previous grant to Employee of options to purchase 733,333 shares of
Common Stock of Company (the "Option Shares").
a. Exercise Price - The Option Shares shall be exercisable at a price of $2.50
per share.
b. Vesting - The Option Shares are fully vested as of the date of this
Agreement.
c. Right to Exercise - Employee may exercise any or all Option shares until the
period ending November 14, 2004.
d. Exercise of Options - To exercise an option, Employee shall deliver a signed,
written notice to Company stating the number of Option Shares with respect to
which the option is being exercised, together with payment of the Exercise Price
therefor. The Exercise Price may be paid in cash or by check, bank draft or
money order payable to the order of the Company or in such other manner as
Company may permit. Upon the exercise of the option in accordance with this
Agreement and collection of the Exercise Price, Company shall deliver to
Employee a certificate or certificates for the Option Shares; provided, however,
that the time of such delivery may be postponed by Company for such period as
may be required for it with reasonable diligence to comply with any applicable
listing requirements of any national securities exchange or to comply with any
state or federal securities laws. The Employee may acquire such Option Shares
pursuant to any cashless exercise program approved by the Company.
e. Transferability of Options - The options granted herein shall not be
transferable by Employee except by will or the laws of descent and distribution,
or otherwise, without the written consent of Company, which consent shall be not
unreasonably withheld.
f. Securities Registration - the Option Shares have been registered with the
Securities and Exchange Commission as of the date herein.
5. Vacations.
a. In addition to any accrued vacation available to Employee for service to
Company prior to the date of this Agreement, Employee shall be entitled to
vacation leave of twenty (20) business days in each consecutive twelve month
period during the term hereof, calculated in accordance with and subject to the
terms and limitations as set forth below, during which time his compensation and
all benefits shall be paid in full. Without Company's consent, Employee shall
not take more than twenty (20) days vacation in any consecutive twelve month
period, nor take vacation prior to the accrual thereof.
<PAGE>
b. In no event may Employee have accrued more that thirty (30) vacation days.
Company shall have the option either of requiring Employee to take accrued
vacation time prior to Termination Date, or paying Employee for accrued vacation
time as of the Termination Date, up to the thirty (30) day accrued vacation
limit.
6. Expenses. Company shall reimburse Employee for reasonable expenses incurred
by him in connection with his performance of services hereunder upon
presentation by Employee of appropriately documented requests, including
original or copies of bills, vouchers, and itemized accounts as reasonably
required by the Company. Employee may incur non accountable expenses of One
Thousand Dollars ($1,000.00) per month.
7. Termination. Notwithstanding anything to the contrary herein, Employee's
employment by Company hereunder may be terminated, without breach in accordance
with the following terms and conditions:
a. Company may terminate Employee's employment for cause, as defined below,
effective upon delivery of written notice of termination to Employee specifying
with particularity the actions or inactions constituting such cause, and making
specific reference to this Section 7 (a). For the purpose of this Section 7(a),
cause for termination shall exist only upon the occurrence of one or more of the
following; (i) Employee's conviction of a crime punishable by imprisonment of
one year or more under the laws of the jurisdiction in which convicted involves
theft, misappropriation of funds, fraud or deception; (ii) Employee is charged
or indicted for a crime for which, if convicted, the Company would have the
right to terminate Employee's employment under (I) above but, if such charge or
indictment is disposed of without conviction, at Employee's request promptly
following the disposition of such charge or indictment, Employee shall be
reinstated in his employment hereunder to the position, salary and benefits held
immediately prior to such termination, and this Agreement shall be extended for
a period equal to the period from the date of termination to the date of
reinstatement. (iii) Willful misconduct or gross negligence by Employee in the
performance of his duties hereunder, provided that no act or failure to act on
Employee's part shall be considered "willful" unless done or omitted to be done
by Employee in bad faith and without reasonable belief that his action or
omission was in the best interest of the Company; (iv) Chronic alcoholism if
such condition materially impairs or precludes performance of Employee's duties,
drug addiction, or misappropriation of money or property of Company by Employee;
or (v) Employee's refusal, after written notice to Employee by Company and a
reasonable opportunity to cure, to carry our a written directive to Employee
from the Board of Directors of
<PAGE>
Company which relates to the performance of his executive duties and is not
unlawful or inconsistent with his position or status in Company's management
structure as contemplated herein.
b. Subject to applicable state and federal disabilities laws, Company may
terminate Employee's employment upon thirty (30) days prior written notice in
the event of the total disability of Employee ("Employee Disability"), which
notice shall make specific reference to this Section 7 (b). For purposes of this
Section 7(b), the term "Employee Disability" shall have the same meaning as
contained in any insurance policy maintained by Company which applies to
Employee's long term disability, or, in the absence of such a policy, the
inability of Employee to perform one or more important duties of his office for
a period of 180 days or more due to physical, mental or emotional impairment.
c. Employee's employment shall terminate upon Employee's death.
d. In addition to termination under Sections 7 (a), (b), or (c), Company may
terminate Employee's employment for any other reason whatsoever upon ninety (90)
days written notice, which notice shall make specific reference to this section
7 (d).
8. Severance Compensation.
a. If his employment is terminated under section 7(a), Company shall pay to
Employee (i) his base salary through the Termination Date, (ii) any benefits due
under any employee benefit plans and unpaid as of the Termination Date, (iii)
such other benefits that may be required under law. Thereafter, Employee shall
not receive any further compensation or benefits under this Agreement.
b. If his employment is terminated under section 7(b), Company shall pay to
Employee (i) his base salary through a period of thirty days following the
Termination Date, (ii) any benefits due under any employee benefit plans and
unpaid as of the Termination Date, (iii) such other benefits that may be
required under law. and (iv) an amount equal to the base annual salary that
would have been payable to him pursuant to paragraph 3(a) hereof if his
employment had not been so terminated, and as when such payments would have been
due hereunder but for the termination, less the greater of (A) 50% of such base
annual salary, or (B) any disability payments received by Employee in such
period from any insurance or other plan or program maintained by the Company, at
its expense, for Employee's benefit.
c. If his employment is terminated under section 7(c), Company shall pay to the
Employee's estate an amount equal to (i) the payments Employee would be entitled
to receive pursuant to section 8(b)(i),(ii),(iii) and (iv) had employment been
terminated under section 7(b), plus any other benefits due and payable at the
time of Employee's death or by reason thereof.
<PAGE>
d. If his employment has been terminated under Section 7(d), Company shall pay
to Employee (i) an amount equal to the present value (based on a 6% discount
factor) of the base salary to which Employee would have been entitled as
provided in Section 3, computed from the Termination Date through June 30, 2000,
plus (ii) any benefits due Employee under any employee benefit plans and unpaid
as of the Termination Date, and (iii) such other benefits that may be required
under law.
e. Any payments due to Employee under Section this section 8 shall be due and
payable within thirty (30) days following termination of his employment.
f. In calculating payments under this section 8, Company shall not be entitled
to set off against any such payments any amounts owed by Employee to Company.
9. Notices. Any notice or demand required or permitted to be given to any party
under this Agreement shall be in writing and shall be deemed to have been duly
given, made and received three business days after mailing if mailed by
certified mail, postage prepaid, return receipt requested, addressed to the
party at the address set forth below, provided that any party may alter the
address to which notice or demand is directed by giving notice of such change of
address in conformity herewith.
a. For notice to Company:
Response USA, Inc.
Attention: President
11-K Princess Road
Lawrenceville, NJ 08648
b. For notice to Employee:
Richard M. Brooks
465 Rock Glen Drive
Wynnewood, PA 19096
in each case a copy to:
Schneck, Weltman, Hashmall and Mischel
Attn: Tom Rose
1285 Avenue of the Americas
New York, NY 10019
10. Arbitration. Any dispute under this Agreement shall be resolved by
arbitration in Philadelphia, Pennsylvania; provided, however, that any action
other than demand in which equitable relief only is sought may be brought in any
court of competent jurisdiction over the subject matter of the dispute and the
parties thereto. Any arbitration shall be before a panel of
<PAGE>
three (3) arbitrators. The arbitrators shall be selected, and arbitrations
hereunder shall be conducted, in accordance with the rules and regulations of
the American Arbitration Association. The arbitration shall be commenced by
either party notifying the other parties and the American Arbitration
Association in writing, of a demand for arbitration and the subject matter of
the arbitration. The arbitrators shall not have any power to grant punitive
damages.
11. Miscellaneous.
a. At any time, and from time to time, after the signing of this Agreement, each
party will execute such additional instruments and take such action as may be
reasonably requested by the other party to carry out the intent and purposes of
this Agreement.
b. This Agreement shall be governed, construed and enforced in accordance with
the laws of the State of New Jersey, notwithstanding any conflicts-of-law
doctrines or laws of any jurisdiction to the contrary.
c. This Agreement shall be binding upon, and shall inure to the benefit of, the
parties and their heirs, personal representatives, successors and assigns.
d. This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
e. This Agreement shall not be interpreted in favor of or against either party
on account of such party having drafted this Agreement.
f. Neither the failure nor any delay on the part of either party to exercise any
right, remedy, power or privilege under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, remedy, power or
privilege with respect to any occurrence be construed as a waiver of such right,
remedy, power or privilege with respect to any other occurrence.
g. This Agreement contains the entire understanding among the parties hereto
with respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements and understandings, inducements or conditions,
express or implied, oral or written, except as herein contained. The express
terms hereof control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof. This Agreement may not be
modified or amended other than by an agreement in writing.
IN WITNESS HEREOF, the parties have set their hands and seal to this
Agreement on the day and year first above written.
<PAGE>
EMPLOYEE:
/s/______________
Richard M. Brooks
RESPONSE USA, INC.
By: ______________________
Chief Operating Officer
<PAGE>
Exhibit 10(c)
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into this 30th day
of June, 1996 by and between Response USA, Inc. (the "Company"), a Delaware
corporation with a principal business office located in Lawrenceville, New
Jersey, and Ronald A. Feldman ("Employee"), an individual residing in Huntingdon
Valley, Pennsylvania.
NOW, THEREFORE, in consideration of the mutual consideration set forth herein
and intending to be legally bound hereby, the parties hereto agree as follows:
AGREEMENT
1. Term. This Agreement shall be effective from the date hereon, and shall
continue in force until June 30th, 2000, or such earlier time as Employee's
employment is terminated in accordance with Section 7 hereof, whichever first
occurs (the "Termination Date").
2. Duties.
a. Company shall employ Employee as Chief Operating Officer, Vice President and
Secretary of Company until the Termination Date. In such capacity, Employee
shall perform such executive duties as may be assigned to him, consistent with
his offices, from time to time by the Company's Board of Directors.
b. Employee's principal business office shall be in the Company's principal
executive office.
c. During the Term of this Agreement, Employee shall devote his best efforts, on
a full time basis, to the business and affairs of the Company and shall not
participate in the ownership, management, or control of, or be employed by, any
other company or business except with the Company's prior written approval.
3. Compensation.
a. Employee will be paid a base salary of One Hundred Fifty Thousand Dollars
($150,000.00) annually, payable in installments not less frequently than
monthly.
b. Company shall provide Employee with such disability, major medical, hospital,
surgical and life insurance coverage as it and its subsidiaries provide
generally for their executive officers.
c. Company shall provide either (i) a Company-owned or leased automobile for
Employee's use in performing his duties for Company for which Company shall
maintain automobile insurance and reimburse Employee for maintenance and other
expenses associated with the use of such automobile on Company business, or (ii)
a reasonable car allowance. Employee agrees that the automobile presently
provided for his use is satisfactory in all respects.
<PAGE>
4. Stock Option. In consideration for his entry into this Employment Agreement
and the services to be rendered by him hereunder, and previously, the Company
confirms the previous grant to Employee of options to purchase 285,067 shares of
Common Stock of Company (the "Option Shares").
a. Exercise Price - The Option Shares shall be exercisable at a price of $2.50
per share.
b. Vesting - The Option Shares are fully vested as of the date of this
Agreement.
c. Right to Exercise - Employee may exercise any or all Option shares until the
period ending November 14, 2004.
d. Exercise of Options - To exercise an option, Employee shall deliver a signed,
written notice to Company stating the number of Option Shares with respect to
which the option is being exercised, together with payment of the Exercise Price
therefor. The Exercise Price may be paid in cash or by check, bank draft or
money order payable to the order of the Company or in such other manner as
Company may permit. Upon the exercise of the option in accordance with this
Agreement and collection of the Exercise Price, Company shall deliver to
Employee a certificate or certificates for the Option Shares; provided, however,
that the time of such delivery may be postponed by Company for such period as
may be required for it with reasonable diligence to comply with any applicable
listing requirements of any national securities exchange or to comply with any
state or federal securities laws. The Employee may acquire such Option Shares
pursuant to any cashless exercise program approved by the Company.
e. Transferability of Options - The options granted herein shall not be
transferable by Employee except by will or the laws of descent and distribution,
or otherwise, without the written consent of Company, which consent shall be not
unreasonably withheld.
f. Securities Registration - the Option Shares have been registered with the
Securities and Exchange Commission as of the date herein.
5. Vacations.
a. In addition to any accrued vacation available to Employee for service to
Company prior to the date of this Agreement, Employee shall be entitled to
vacation leave of twenty (20) business days in each consecutive twelve month
period during the term hereof, calculated in accordance with and subject to the
terms and limitations as set forth below, during which time his compensation and
all benefits shall be paid in full. Without Company's consent, Employee shall
not take more than twenty (20) days vacation in any consecutive twelve month
period, nor take vacation prior to the accrual thereof.
<PAGE>
b. In no event may Employee have accrued more that thirty (30) vacation days.
Company shall have the option either of requiring Employee to take accrued
vacation time prior to Termination Date, or paying Employee for accrued vacation
time as of the Termination Date, up to the thirty (30) day accrued vacation
limit.
6. Expenses. Company shall reimburse Employee for reasonable expenses incurred
by him in connection with his performance of services hereunder upon
presentation by Employee of appropriately documented requests, including
original or copies of bills, vouchers, and itemized accounts as reasonably
required by the Company. Employee may incur non accountable expenses of Five
Hundred Dollars ($500.00) per month.
7. Termination. Notwithstanding anything to the contrary herein, Employee's
employment by Company hereunder may be terminated, without breach in accordance
with the following terms and conditions:
a. Company may terminate Employee's employment for cause, as defined below,
effective upon delivery of written notice of termination to Employee specifying
with particularity the actions or inactions constituting such cause, and making
specific reference to this Section 7 (a). For the purpose of this Section 7(a),
cause for termination shall exist only upon the occurrence of one or more of the
following;
(i) Employee's conviction of a crime punishable by imprisonment of one year or
more under the laws of the jurisdiction in which convicted involves theft,
misappropriation of funds, fraud or deception;
(ii) Employee is charged or indicted for a crime for which, if convicted, the
Company would have the right to terminate Employee's employment under (I) above
but, if such charge or indictment is disposed of without conviction, at
Employee's request promptly following the disposition of such charge or
indictment, Employee shall be reinstated in his employment hereunder to the
position, salary and benefits held immediately prior to such termination, and
this Agreement shall be extended for a period equal to the period from the date
of termination to the date of reinstatement.
(iii) Willful misconduct or gross negligence by Employee in the performance of
his duties hereunder, provided that no act or failure to act on Employee's part
shall be considered "willful" unless done or omitted to be done by Employee in
bad faith and without reasonable belief that his action or omission was in the
best interest of the Company;
(iv) Chronic alcoholism if such condition materially impairs or precludes
performance of Employee's duties, drug addiction, or misappropriation of money
or property of Company by Employee; or
(v) Employee's refusal, after written notice to Employee by Company and a
reasonable opportunity to cure, to carry our a written directive to Employee
from the Board of Directors of
<PAGE>
Company which relates to the performance of his executive duties and is not
unlawful or inconsistent with his position or status in Company's management
structure as contemplated herein.
b. Subject to applicable state and federal disabilities laws, Company may
terminate Employee's employment upon thirty (30) days prior written notice in
the event of the total disability of Employee ("Employee Disability"), which
notice shall make specific reference to this Section 7 (b). For purposes of this
Section 7(b), the term "Employee Disability" shall have the same meaning as
contained in any insurance policy maintained by Company which applies to
Employee's long term disability, or, in the absence of such a policy, the
inability of Employee to perform one or more important duties of his office for
a period of 180 days or more due to physical, mental or emotional impairment.
c. Employee's employment shall terminate upon Employee's death.
d. In addition to termination under Sections 7 (a), (b), or (c), Company may
terminate Employee's employment for any other reason whatsoever upon ninety (90)
days written notice, which notice shall make specific reference to this section
7 (d).
8. Severance Compensation.
a. If his employment is terminated under section 7(a), Company shall pay to
Employee (i) his base salary through the Termination Date, (ii) any benefits due
under any employee benefit plans and unpaid as of the Termination Date, (iii)
such other benefits that may be required under law. Thereafter, Employee shall
not receive any further compensation or benefits under this Agreement.
b. If his employment is terminated under section 7(b), Company shall pay to
Employee (i) his base salary through a period of thirty days following the
Termination Date, (ii) any benefits due under any employee benefit plans and
unpaid as of the Termination Date, (iii) such other benefits that may be
required under law. and (iv) an amount equal to the base annual salary that
would have been payable to him pursuant to paragraph 3(a) hereof if his
employment had not been so terminated, and as when such payments would have been
due hereunder but for the termination, less the greater of (A) 50% of such base
annual salary, or (B) any disability payments received by Employee in such
period from any insurance or other plan or program maintained by the Company, at
its expense, for Employee's benefit.
c. If his employment is terminated under section 7(c), Company shall pay to the
Employee's estate an amount equal to (i) the payments Employee would be entitled
to receive pursuant to section 8(b)(i),(ii), (iii) and (iv) had employment been
terminated under section 7(b), plus any other benefits due and payable at the
time of Employee's death or by reason thereof.
<PAGE>
d. If his employment has been terminated under Section 7(d), Company shall pay
to Employee (i) an amount equal to the present value (based on a 6% discount
factor) of the base salary to which Employee would have been entitled as
provided in Section 3, computed from the Termination Date through June 30, 2000,
plus (ii) any benefits due Employee under any employee benefit plans and unpaid
as of the Termination Date, and (iii) such other benefits that may be required
under law.
e. Any payments due to Employee under Section this section 8 shall be due and
payable within thirty (30) days following termination of his employment.
f. In calculating payments under this section 8, Company shall not be entitled
to set off against any such payments any amounts owed by Employee to Company.
9. Notices. Any notice or demand required or permitted to be given to any party
under this Agreement shall be in writing and shall be deemed to have been duly
given, made and received three business days after mailing if mailed by
certified mail, postage prepaid, return receipt requested, addressed to the
party at the address set forth below, provided that any party may alter the
address to which notice or demand is directed by giving notice of such change of
address in conformity herewith.
a. For notice to Company:
Response USA, Inc.
Attention: President
11-K Princess Road
Lawrenceville, NJ 08648
b. For notice to Employee:
Ronald A. Feldman
1645 Fawn Lane
Huntingdon Valley, PA 19006
in each case a copy to:
Schneck, Weltman, Hashmall and Mischel
Attn: Tom Rose
1285 Avenue of the Americas
New York, NY 10019
10. Arbitration. Any dispute under this Agreement shall be resolved by
arbitration in Philadelphia, Pennsylvania; provided, however, that any action
other than demand in which equitable relief only is sought may be brought in any
court of competent jurisdiction over the subject matter of the dispute and the
parties thereto. Any arbitration shall be before a panel of
<PAGE>
three (3) arbitrators. The arbitrators shall be selected, and arbitrations
hereunder shall be conducted, in accordance with the rules and regulations of
the American Arbitration Association. The arbitration shall be commenced by
either party notifying the other parties and the American Arbitration
Association in writing, of a demand for arbitration and the subject matter of
the arbitration. The arbitrators shall not have any power to grant punitive
damages.
11. Miscellaneous.
a. At any time, and from time to time, after the signing of this Agreement, each
party will execute such additional instruments and take such action as may be
reasonably requested by the other party to carry out the intent and purposes of
this Agreement.
b. This Agreement shall be governed, construed and enforced in accordance with
the laws of the State of New Jersey, notwithstanding any conflicts-of-law
doctrines or laws of any jurisdiction to the contrary.
c. This Agreement shall be binding upon, and shall inure to the benefit of, the
parties and their heirs, personal representatives, successors and assigns.
d. This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
e. This Agreement shall not be interpreted in favor of or against either party
on account of such party having drafted this Agreement.
f. Neither the failure nor any delay on the part of either party to exercise any
right, remedy, power or privilege under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, remedy, power or
privilege with respect to any occurrence be construed as a waiver of such right,
remedy, power or privilege with respect to any other occurrence.
g. This Agreement contains the entire understanding among the parties hereto
with respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements and understandings, inducements or conditions,
express or implied, oral or written, except as herein contained. The express
terms hereof control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof. This Agreement may not be
modified or amended other than by an agreement in writing.
IN WITNESS HEREOF, the parties have set their hands and seal to this
Agreement on the day and year first above written.
<PAGE>
EMPLOYEE:
/s/______________
Ronald A. Feldman
RESPONSE USA, INC.
By: /s/
-----------------------
Chief Executive Officer
<PAGE>
EXHIBIT 10(d)
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into this 4th day of
March, 1994 by and among Response USA, Inc., a Delaware Corporation
("Response"), United Video Security, Inc., (the "Company"), a New Jersey
Corporation with a principal business office located at 11-C Princess Road,
Lawrenceville, New Jersey 08648, and Todd Herman ("Employee"), a New Jersey
resident.
BACKGROUND
Employee is presently employed by United Video Associates, Inc. ("UVA").
Company (which is a wholly-owned subsidiary of Response, has acquired the assets
of UVA as of the date hereof. Response and Company wish to provide for the
management resources that it believes it will require following such
acquisition, and to assure itself of the availability of Employee's services on
the terms and conditions hereinafter set forth. Employee desires to provide his
services to Company on such terms and conditions.
NOW, THEREFORE, in consideration of the mutual consideration set forth
herein and intending to be legally bound hereby, the parties hereto agree as
follows:
1. TERM. This Agreement shall be effective as of the date hereof and the
Term of employment shall continue in force until five years thereafter, or such
earlier time as Employee's employment is terminated in accordance with the
provisions of this Agreement, whichever first occurs (the "Termination Date").
2. DUTIES.
a. Company shall employ Employee as President and Treasurer of
Company until the Termination Date. In such capacity, Employee shall perform
such executive duties as may be assigned to him, consistent with his offices,
from time to time by Company's Board of Directors.
b. Employee's principal business office shall be in the Company's
office in Princeton, New Jersey. During the Term of this Agreement, Employee
shall not be required to perform his duties hereunder in an area other than the
greater Princeton area, except for business travel consistent with his duties.
c. During the Term of this Agreement, Employee shall devote
reasonable efforts, on a full-time basis, to the business and affairs of Company
and shall not participate in the ownership, management, or control of, or be
employed by, any other company or business except (i) with Company's prior
written approval, (ii) with respect to Universal Security Systems, Inc., or
(iii) otherwise with respect to any activities that do not violate Employee's
Covenant Not to Compete, dated the date thereof, and do not interfere in any
material respect with Employee's duties hereunder.
<PAGE>
3. COMPENSATION.
a. Employee will be paid a salary payable in installments not less
than frequently then monthly. Employee's salary shall be at an annual rate of
$120,000 and shall increase at the discretion of the Board of Directors, but in
any event, in an amount relative to the increases received by the executive
officers of Response.
b. Company shall provide Employee with such disability, medical,
major medical, hospital and surgical insurance coverage that is not less
favorable to Employee than coverage that Response, the Company or any other
majority-owned subsidiary of Response provides generally for its executive
officers.
c. Company shall provide either (i) a Company-owned or leased
automobile for Employee's use in performing his duties for Company for which
Company will maintain automobile insurance and reimburse Employee for
maintenance and other expenses associated with the use of such automobile on
company business, or (ii) a car allowance not to exceed $700 per month, plus
reasonable expenses associated therewith, including gas, maintenance and
insurance.
4. STOCK OPTIONS. Response hereby grants to Employee options (the
"Options") to purchase 300,000 shares of Response Common Stock (the "Option
Shares"), subject to the terms and conditions set forth below:
a. EXERCISE PRICE - The exercise price of the Options shall be equal
to the average closing bid price of Response Common Stock over the 20 trading
days immediately preceding the three days immediately preceding the date hereof
($1.7344).
b. VESTING. Options to purchase all Options Shares shall vest and
become exercisable on the fifth anniversary of the date hereof; provided,
however, that options may vest earlier as follows:
(i) Options to purchase 150,000 Option Shares shall vest and
become exercisable three years from the date hereof in the event that Company
has installed or acquired 5,000 "net alarm systems" prior to such date. Net
Alarm systems shall mean the total number of alarm systems as determined by
Company's regularly engaged independent auditors which exceeds the number of
alarm systems acquired by Company as of the date hereof from United Video and
National Security Finance Limited Partnership II.
(ii) Options to purchase 150,000 Option Shares shall vest and
become exercisable four years from the date hereof in the event that Company has
installed or acquired 10,000 net
2
<PAGE>
alarm systems prior to such date.
(iii) For purposes of computing the number of net alarm
systems, the "Company" shall include the Company as well as Response, any
majority-owned subsidiary of Response or any affiliate of any of them and any
accounts that are sold or otherwise transferred after the date hereof shall
nevertheless be included in the number of Systems.
c. RIGHT TO EXERCISE. No Options may be exercised until they have
vested, and no option that has vested may be exercised after six years from the
date hereof.
d. ADJUSTMENTS TO EXERCISE PRICE AND OPTION SHARES. If the
outstanding shares of Common Stock of Response are hereafter increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of Response or in the event of a consolidation,
recapitalization, reclassification, stock split, combination of shares, or
dividend payable in capital stock, appropriate adjustment shall be made by
Response (i) in the exercise price of outstanding options, and (ii) in the
number and kind of Option Shares as to which outstanding Options or portions
thereof then unexercised shall be exercisable, to the end that the extent and
nature of Employee's proportionate interest represented by outstanding Options
shall be maintained substantially as before the occurrence of such event. No
adjustments in outstanding Options shall change the aggregate exercise price
applicable to the unexercised portion of outstanding Options. Company shall
give prompt notice to Employee of any adjustment made pursuant to this
paragraph.
e. EXERCISE OF OPTIONS. To exercise an Option, Employee shall
deliver a signed, written notice to Response stating the number of Option Shares
with respect to which the option is being exercised (together with payment of
the exercise price therefor to be paid at the time of delivery of the Option
Shares). The exercise price may be paid in cash or by check, bank draft or
money order payable to the order of Response or in such other manner as Response
may permit. Upon the exercise of the Options in accordance with this Agreement
and collection of the exercise price, and subject to the terms of Section (g)
below, Response shall deliver to Employee a certificate or certificates for the
Option Shares; provided, however, that the time of such delivery may be
postponed by Response for such period as may be required for it with reasonable
diligence to comply with any applicable listing requirements of any national
securities exchange or to comply with any state or federal securities laws. The
Employee may pay the exercise price for any Options that are exercised by the
delivery of shares of Response Common Stock (which may be Option Shares to be
issued upon any such exercise) with a value equal to the exercise price being
paid, which value shall be the average closing
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bid price of Response Common Stock over five trading days immediately preceding
the date of exercise.
f. TRANSFERABILITY OF OPTIONS. The Options granted herein shall not
be transferable by Employee except by will or the laws of descent and
distribution, without the written consent of Response.
g. SECURITIES REGISTRATION. Neither the Options granted hereunder
nor the Option Shares are registered as of this time under any state or federal
securities laws. When issued upon exercise of the Options, the Option Shares
shall be duly registered for sale to and resale by the Employee under the
Securities Act and shall otherwise be freely transferrable by the Employee.
h. CONTINUATION OF OPTIONS. Employee's rights hereunder with
respect to the Options shall terminate in the event of the termination of
Employee's employment hereunder prior to the expiration of the fifth anniversary
of this Agreement, unless such termination shall be Without Cause (as
hereinafter defined). Provided, however, that in the event of the death of the
Employee or an Employee Disability (as hereinafter defined) prior to the fifth
anniversary of this Agreement, the Options shall be exercisable for a period of
six months from the date of termination of employment. The termination of
Employee's employment on or after such fifth anniversary shall not effect
Employee's rights hereunder with respect to the Options.
i. REORGANIZATION TRANSACTION. If Response becomes a party to a
Reorganization Transaction (defined below), the Board of Directors of Response
shall either: (i) provide for Employee to receive upon the exercise of the
Options, in substitution for Option Shares issuable or transferrable to him upon
the exercise of outstanding Options, the same stock, securities, cash or other
property to be received by owners of Common Stock of Response as a result of
such Reorganization Transaction; or (ii) upon written notice to the employee,
provide that the Options shall be immediately exercisable and further that they
shall be terminated unless exercised within 60 days after the date of such
notice. For the purposes hereof, the term "Reorganization Transaction" means a
merger, consolidation or similar reorganization of Response, the complete
liquidation of Response, or the sale of all or substantially all of the assets
of Response.
j. RESERVATION OF SHARES. Response shall reserve from authorized
but unissued shares of Common Stock, such number of shares as it may be required
to issue from time to time upon the exercise of Options.
k. ADDITIONAL PAYMENTS.
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(i) In the event Company shall increase its net alarm systems by at
least 10,000 accounts within five years from the date hereof, Company shall pay
Employee an amount equal to the difference between the fair market value of the
Options on the fifth anniversary of the date hereof (as determined by an
independent investment banking firm mutually selected by Employee and Company),
and $1,000,000, less the gross amount of any proceeds received from the sale or
exercise of the Options.
(ii) In the event Company shall increase its net alarm systems by at
least 15,000 accounts within five years from the date hereof, Company shall pay
Employee an amount equal to the difference between the fair market value of the
Options on the fifth anniversary of the date hereof (as determined by an
independent investment banking firm mutually selected by Employee and Company),
and $1,500,000, less the gross amount of any proceeds received from the sale or
exercise of the Options.
(iii) Any increase in net alarm systems between 10,000 and 15,000
accounts shall entitle Employee to a pro rated amount between $1,000,000 and
$1,500,000, as determined pursuant to sections a. and b. above.
(iv) Any amount payable to Employee pursuant to this paragraph 4.K.
shall be paid within 180 days of the fifth anniversary of the date hereof,
provided that interest shall accrue on all amounts due at the rate of the "prime
rate" of Citicorp., N.A. ("Prime"), for the period from five years and ninety
days from the date hereof through ninety days thereafter. After such date, the
Company will be in default and interest shall accrue at the rate of two times
Prime.
5. VACATIONS.
a. Employee shall be entitled to vacation leave of fifteen (15)
business days in each consecutive twelve month period during the term hereof,
calculated in accordance with and subject to the terms and limitations as set
forth below, during which time his compensation and all benefits shall be paid
in full. Vacation days shall accrue at a rate of 1.25 days per month (15
business days per 12-month period). Without Company's consent, Employee shall
not take more than fifteen (15) days vacation in any consecutive 12-month
period, nor take vacation prior to the actual accrual thereof.
b. In no event may Employee have accrued more than thirty
(30)vacation days. Company shall have the option either of requiring Employee
to take accrued vacation time prior to the Termination Date, or paying Employee
for accrued vacation time as of the Termination Date, up to thirty (30) day
accrued vacation limit.
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6. EXPENSES. Company shall reimburse Employee for reasonable expenses
incurred by him in connection with his performance of services hereunder upon
presentation by Employee of appropriately documented requests, including
original or copies of bills, vouchers and itemized accounts as reasonably
required by the Company.
7. TERMINATION. Notwithstanding anything to the contrary herein,
Employee's employment by Company hereunder may be terminated without breach, in
accordance with the following terms and conditions:
a. Company may terminate Employee's employment for cause, as defined
below, effective upon delivery of written notice of termination to Employee
specifying with particularly the actions or inactions constituting such cause,
and making specific reference to this Section 7(a). For the purpose of this
Section 7(a), cause for termination shall exist only upon the occurrence of one
or more of the following:
(i) Employee's conviction of a crime punishable by
imprisonment of one year or more under the laws of the jurisdiction in which
convicted which involves theft, misappropriation of funds, fraud or deception;
(ii) Employee is charged or indicted for a crime for which, if
convicted, the Company would have the right to terminate Employee's employment
under (i) above but, if such charge or indictment is disposed of without
conviction, at Employee's request promptly following the disposition of such
charge or indictment, Employee shall be reinstated in his employment hereunder
to the position, salary and benefits held immediately prior to such termination,
and this Agreement shall be extended for a period equal to the period from the
date of termination to the date of reinstatement.
(iii) Willful misconduct by Employee in the performance of his
duties hereunder, provided that no act or failure to act on Employee's part
shall be considered "willful" unless done or omitted to be done by Employee in
bad faith and without reasonable belief that his action or omission was in the
best interests of the Company;
(iv) Chronic alcoholism if such condition materially impairs
or precludes performance of Employee's duties, drug addiction, or
misappropriation of money or property of Company by Employee; or
(v) Employee's refusal, after written notice to Employee by
Company and a reasonable opportunity to cure, to carry
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out a written reasonable directive to Employee from the Board of Directors of
Company which related to the performance of his executive duties as set forth
herein and is not unlawful or inconsistent with his position or status in
Company's management structure as contemplated herein.
b. Subject to applicable state and federal disabilities laws,
Company may terminate Employee's employment upon thirty (30) days prior written
notice in the event of the total disability of Employee ("Employee Disability"),
which notice shall make specific reference to this Section 7(b). For the
purposes of this Section 7(b), the term "Employee Disability" shall have the
same meaning as contained in any insurance policy maintained by Company which
applies to Employee's long term disability, or, in the absence of such a policy,
the inability of employee to perform one or more important duties of his office
for a period of 180 days or more due to physical, mental or emotional
impairment.
c. Employee's employment shall terminate upon Employee's death.
d. In addition to termination under Sections 7(a), (b) or (c),
Company may terminate Employee's employment, for any other reason whatsoever
upon ninety (90) days written notice, which notice shall make specific reference
to this Section 7(d) ("Without Cause").
8. SEVERANCE COMPENSATION.
a. If his employment is terminated under Section 7(a), Company shall
pay to Employee (i) his base salary through the Termination Date, (ii) any
benefits due under any employee benefit plans and unpaid as of the Termination
Date, and (iii) such other benefits that may be required under law. Thereafter,
Employee shall not receive any further compensation or benefits under this
Agreement.
b. If his employment is terminated under Section 7(b), Company shall
pay to Employee an amount equal to (i) his base salary through a period of
thirty (30) days following the Termination Date, (ii) any benefits due under any
employee benefit plans and unpaid as of the Termination Date, (iii) such other
benefits that may be required under law, and (iv) an amount equal to the base
annual salary that would have been payable to him pursuant to paragraph 3(a)
hereof if his employment had not been so terminated, as and when such payments
would have been due hereunder but for the termination, less the greater of (A)
50% of such base annual salary, or (B) any disability insurance payments
received by Employee in such period from any insurance or other plan or program
maintained by the Company, at its expense, for Employee's benefit.
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c. If his employment is terminated under Section 7(c), Company shall
pay to Employee's estate an amount equal to (i)the payments Employee would be
entitled to receive pursuant to Section 7(b)(i), (iii), and (iv) had employment
been terminated under Section 7(b), plus any other benefits due and payable at
the time of Employee's death or by reason thereof.
d. If his employment is terminated under Section 7(d), Company shall
pay to employee (i) an amount equal to the present value (based on a 6% discount
factor) of the salary to which Employee would have been entitled as provided in
Section 3, computed from the day of Employee's termination through the remaining
term of this Agreement, plus (ii) any benefits due Employee under any employee
benefit plans and unpaid as of the Termination Date, and (iii) such other
benefits that may be required under law.
e. Any payments due to Employee under this Section 8 shall be due
and payable within thirty (30) days following the termination of his employment.
f. In calculating payments under this Section 8 or elsewhere under
this Agreement, Company shall not be entitled to set off against any such
payment any amounts owed by Employee to Company.
9. MANAGEMENT OF THE COMPANY.
a. For so long as the Employee continues as in the employment of the
Company, the Company shall comply with the following covenants:
(i) The Employee and John Colehower (or such persons as they may
nominate) shall be members of the Company's board of directors (the "Board").
(ii) The Board shall consist of not more than five members unless
the Employee gives his written consent to an increase.
(iii) The Employee and John Colehower shall be the sole officers
of the Company and shall be responsible for its day-to-day operations.
b. For so long as the Employee continues as an employee of the
Company, the Employee and John Colehower (or any entity designed by them shall
have the right to purchase the stock or assets of the Company upon terms
substantially the same as the terms on which United Video and NSF sold their
assets to the Company on the date hereof if (i) the Company files a petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code or
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is involuntarily placed in bankruptcy, (ii) Response agrees to sell or otherwise
transfer its shares of the Company without the consent of Employee, (iii) the
Company agrees to sell or otherwise transfer substantially all of its assets, or
(iv) Response fails to comply with Paragraph c. below.
c. During the first 12 months after the date hereof, Response shall
provide the Company, in such form as response shall determine, with $500,000 to
expand the business operations of the Company that are acquired for United Video
and NSDF, to be used in accordance with a budget agreed upon by Employee, John
Colehower and Response.
d. Until all Options issuable pursuant to this Agreement shall vest
and become exercisable, the Company hereby agrees not to change the primary
business activity of the Company to a business other than the installation and
servicing of burglar and fire alarms, without the consent of Employee.
e. Response hereby guaranties the Company's performance of, and
shall act as a surety with respect to, all agreements, covenants and other
actions to be taken by the Company hereunder.
f. During the Term of this Agreement, Employee shall be entitled to
attend meetings of the Board of Directors of Response as an observer, but shall
not be entitled to participate or vote at any such meetings.
10. NOTICES. Any notice or demand required or permitted to be given to
any party under this Agreement shall be in writing and shall be deemed to have
been duly given, made and received three business days after mailing if mailed
by certified mail, postage prepaid, return receipt requested, addressed to the
party at the address set forth below, provided that any party may alter the
address to which notice or demand is directed by giving notice of such change of
address in conformity herewith.
a. For notice to the Company:
United Video Security, Inc.
Attention: President
11-C Princess Road
Lawrenceville, New Jersey 08648
with a copy to:
Response USA, Inc.
1300 Admiral Wilson Blvd.
Camden, New Jersey 08101
Attention: Richard M. Brooks
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b. For notice to Employee:
Todd Herman
11-C Princess Road
Lawrenceville, New Jersey 08648
11. ARBITRATION. Any dispute under this Agreement shall be resolved by
arbitration in Camden, New jersey; provided, however, that any action other than
demand in which equitable relief only is sought may be brought in any court of
competent jurisdiction over the subject matter of the dispute and the parties
thereto. Any arbitration shall be before a panel of three (3) arbitrators. The
arbitrators shall be selected, and arbitrations hereunder shall be conducted, in
accordance with the rules and regulations then in effect of the American
Arbitration Association. The arbitration shall be commenced by either party
notifying the other parties and the American Arbitration Association, in
writing, of a demand for arbitration and the subject matter of the arbitration.
The arbitrators shall not have any power to grant punitive damages.
12. MISCELLANEOUS.
a. At any time, and form time to time, after the signing of this
Agreement, each party will execute such additional instruments and take such
action as may be reasonably requested by the other party to carry out the intent
and purposes of this Agreement.
b. This Agreement shall be governed, construed, and enforced in
accordance with the laws of the State of New Jersey, notwithstanding any
conflicts-of-law doctrines or laws of any jurisdiction to the contrary.
c. This Agreement shall be binding upon, and shall inure to the
benefit of, the parties and their heirs, personal representatives, successors
and assigns.
d. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
e. This Agreement shall not be interpreted in favor of or against
either party on account of such party having drafted this Agreement.
f. Neither the failure nor any delay on the part of either party to
exercise any right, remedy, power or privilege under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or
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privilege preclude any other or further exercise of the same or of any other
right, remedy, power or privilege with respect to any occurrence be construed as
a waiver of such right, remedy, power or privilege with respect to any other
occurrences.
g. This Agreement contains the entire understanding among the
parties hereto with respect to the subject matter hereof, and supersedes all
prior and contemporaneous agreements and understandings, inducements or
conditions, express of implied oral or written, except as herein contained. The
express terms hereof control and supersede any course of performance and/or
usage of the trade inconsistent with any of the terms hereof. This Agreement
may not be modified or amended other than by an agreement in writing.
_____________________________
TODD HERMAN
UNITED VIDEO SECURITY, INC.
By:___________________________
RESPONSE USA, INC.
By:___________________________
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EXHIBIT 10(e)
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into this 4th day of
March, 1994 by and among Response USA, Inc., a Delaware Corporation
("Response"), United Video Security, Inc., (the "Company"), a New Jersey
Corporation with a principal business office located at 11-C Princess Road,
Lawrenceville, New Jersey 08648, and John Colehower ("Employee"), a New Jersey
resident.
BACKGROUND
Employee is presently employed by United Video Associates, Inc. ("UVA").
Company (which is a wholly-owned subsidiary of Response, has acquired the assets
of UVA as of the date hereof. Response and Company wish to provide for the
management resources that it believes it will require following such
acquisition, and to assure itself of the availability of Employee's services on
the terms and conditions hereinafter set forth. Employee desires to provide his
services to Company on such terms and conditions.
NOW, THEREFORE, in consideration of the mutual consideration set forth
herein and intending to be legally bound hereby, the parties hereto agree as
follows:
1. TERM. This Agreement shall be effective as of the date hereof and the
Term of employment shall continue in force until five years thereafter, or such
earlier time as Employee's employment is terminated in accordance with the
provisions of this Agreement, whichever first occurs (the "Termination Date").
2. DUTIES.
a. Company shall employ Employee as President and Treasurer of
Company until the Termination Date. In such capacity, Employee shall perform
such executive duties as may be assigned to him, consistent with his offices,
from time to time by Company's Board of Directors.
b. Employee's principal business office shall be in the Company's
office in Princeton, New Jersey. During the Term of this Agreement, Employee
shall not be required to perform his duties hereunder in an area other than the
greater Princeton area, except for business travel consistent with his duties.
c. During the Term of this Agreement, Employee shall devote
reasonable efforts, on a full-time basis, to the business and affairs of Company
and shall not participate in the ownership, management, or control of, or be
employed by, any other company or business except (i) with Company's prior
written approval, (ii) with respect to Universal Security Systems, Inc., or
(iii) otherwise with respect to any activities that do not violate Employee's
Covenant Not to Compete, dated the date thereof, and do not interfere in any
material respect with Employee's duties hereunder.
<PAGE>
3. COMPENSATION.
a. Employee will be paid a salary payable in installments not less
than frequently then monthly. Employee's salary shall be at an annual rate of
$120,000 and shall increase at the discretion of the Board of Directors, but in
any event, in an amount relative to the increases received by the executive
officers of Response.
b. Company shall provide Employee with such disability, medical,
major medical, hospital and surgical insurance coverage that is not less
favorable to Employee than coverage that Response, the Company or any other
majority-owned subsidiary of Response provides generally for its executive
officers.
c. Company shall provide either (i) a Company-owned or leased
automobile for Employee's use in performing his duties for Company for which
Company will maintain automobile insurance and reimburse Employee for
maintenance and other expenses associated with the use of such automobile on
company business, or (ii) a car allowance not to exceed $700 per month, plus
reasonable expenses associated therewith, including gas, maintenance and
insurance.
4. STOCK OPTIONS. Response hereby grants to Employee options (the
"Options") to purchase 300,000 shares of Response Common Stock (the "Option
Shares"), subject to the terms and conditions set forth below:
a. EXERCISE PRICE - The exercise price of the Options shall be equal
to the average closing bid price of Response Common Stock over the 20 trading
days immediately preceding the three days immediately preceding the date hereof
($1.7344).
b. VESTING. Options to purchase all Options Shares shall vest and
become exercisable on the fifth anniversary of the date hereof; provided,
however, that options may vest earlier as follows:
(i) Options to purchase 150,000 Option Shares shall vest and
become exercisable three years from the date hereof in the event that Company
has installed or acquired 5,000 "net alarm systems" prior to such date. Net
Alarm systems shall mean the total number of alarm systems as determined by
Company's regularly engaged independent auditors which exceeds the number of
alarm systems acquired by Company as of the date hereof from United Video and
National Security Finance Limited Partnership II.
(ii) Options to purchase 150,000 Option Shares shall vest and
become exercisable four years from the date hereof in the event that Company has
installed or acquired 10,000 net
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alarm systems prior to such date.
(iii) For purposes of computing the number of net alarm
systems, the "Company" shall include the Company as well as Response, any
majority-owned subsidiary of Response or any affiliate of any of them and any
accounts that are sold or otherwise transferred after the date hereof shall
nevertheless be included in the number of Systems.
c. RIGHT TO EXERCISE. No Options may be exercised until they have
vested, and no option that has vested may be exercised after six years from the
date hereof.
d. ADJUSTMENTS TO EXERCISE PRICE AND OPTION SHARES. If the
outstanding shares of Common Stock of Response are hereafter increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of Response or in the event of a consolidation,
recapitalization, reclassification, stock split, combination of shares, or
dividend payable in capital stock, appropriate adjustment shall be made by
Response (i) in the exercise price of outstanding options, and (ii) in the
number and kind of Option Shares as to which outstanding Options or portions
thereof then unexercised shall be exercisable, to the end that the extent and
nature of Employee's proportionate interest represented by outstanding Options
shall be maintained substantially as before the occurrence of such event. No
adjustments in outstanding Options shall change the aggregate exercise price
applicable to the unexercised portion of outstanding Options. Company shall
give prompt notice to Employee of any adjustment made pursuant to this
paragraph.
e. EXERCISE OF OPTIONS. To exercise an Option, Employee shall
deliver a signed, written notice to Response stating the number of Option Shares
with respect to which the option is being exercised (together with payment of
the exercise price therefor to be paid at the time of delivery of the Option
Shares). The exercise price may be paid in cash or by check, bank draft or
money order payable to the order of Response or in such other manner as Response
may permit. Upon the exercise of the Options in accordance with this Agreement
and collection of the exercise price, and subject to the terms of Section (g)
below, Response shall deliver to Employee a certificate or certificates for the
Option Shares; provided, however, that the time of such delivery may be
postponed by Response for such period as may be required for it with reasonable
diligence to comply with any applicable listing requirements of any national
securities exchange or to comply with any state or federal securities laws. The
Employee may pay the exercise price for any Options that are exercised by the
delivery of shares of Response Common Stock (which may be Option Shares to be
issued upon any such exercise) with a value equal to the exercise price being
paid, which value shall be the average closing
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bid price of Response Common Stock over five trading days immediately preceding
the date of exercise.
f. TRANSFERABILITY OF OPTIONS. The Options granted herein shall not
be transferable by Employee except by will or the laws of descent and
distribution, without the written consent of Response.
g. SECURITIES REGISTRATION. Neither the Options granted hereunder
nor the Option Shares are registered as of this time under any state or federal
securities laws. When issued upon exercise of the Options, the Option Shares
shall be duly registered for sale to and resale by the Employee under the
Securities Act and shall otherwise be freely transferrable by the Employee.
h. CONTINUATION OF OPTIONS. Employee's rights hereunder with
respect to the Options shall terminate in the event of the termination of
Employee's employment hereunder prior to the expiration of the fifth anniversary
of this Agreement, unless such termination shall be Without Cause (as
hereinafter defined). Provided, however, that in the event of the death of the
Employee or an Employee Disability (as hereinafter defined) prior to the fifth
anniversary of this Agreement, the Options shall be exercisable for a period of
six months from the date of termination of employment. The termination of
Employee's employment on or after such fifth anniversary shall not effect
Employee's rights hereunder with respect to the Options.
i. REORGANIZATION TRANSACTION. If Response becomes a party to a
Reorganization Transaction (defined below), the Board of Directors of Response
shall either: (i) provide for Employee to receive upon the exercise of the
Options, in substitution for Option Shares issuable or transferrable to him upon
the exercise of outstanding Options, the same stock, securities, cash or other
property to be received by owners of Common Stock of Response as a result of
such Reorganization Transaction; or (ii) upon written notice to the employee,
provide that the Options shall be immediately exercisable and further that they
shall be terminated unless exercised within 60 days after the date of such
notice. For the purposes hereof, the term "Reorganization Transaction" means a
merger, consolidation or similar reorganization of Response, the complete
liquidation of Response, or the sale of all or substantially all of the assets
of Response.
j. RESERVATION OF SHARES. Response shall reserve from authorized
but unissued shares of Common Stock, such number of shares as it may be required
to issue from time to time upon the exercise of Options.
k. ADDITIONAL PAYMENTS.
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(i) In the event Company shall increase its net alarm systems by at
least 10,000 accounts within five years from the date hereof, Company shall pay
Employee an amount equal to the difference between the fair market value of the
Options on the fifth anniversary of the date hereof (as determined by an
independent investment banking firm mutually selected by Employee and Company),
and $1,000,000, less the gross amount of any proceeds received from the sale or
exercise of the Options.
(ii) In the event Company shall increase its net alarm systems by at
least 15,000 accounts within five years from the date hereof, Company shall pay
Employee an amount equal to the difference between the fair market value of the
Options on the fifth anniversary of the date hereof (as determined by an
independent investment banking firm mutually selected by Employee and Company),
and $1,500,000, less the gross amount of any proceeds received from the sale or
exercise of the Options.
(iii) Any increase in net alarm systems between 10,000 and 15,000
accounts shall entitle Employee to a pro rated amount between $1,000,000 and
$1,500,000, as determined pursuant to sections a. and b. above.
(iv) Any amount payable to Employee pursuant to this paragraph 4.K.
shall be paid within 180 days of the fifth anniversary of the date hereof,
provided that interest shall accrue on all amounts due at the rate of the "prime
rate" of Citicorp., N.A. ("Prime"), for the period from five years and ninety
days from the date hereof through ninety days thereafter. After such date, the
Company will be in default and interest shall accrue at the rate of two times
Prime.
5. VACATIONS.
a. Employee shall be entitled to vacation leave of fifteen (15)
business days in each consecutive twelve month period during the term hereof,
calculated in accordance with and subject to the terms and limitations as set
forth below, during which time his compensation and all benefits shall be paid
in full. Vacation days shall accrue at a rate of 1.25 days per month (15
business days per 12-month period). Without Company's consent, Employee shall
not take more than fifteen (15) days vacation in any consecutive 12-month
period, nor take vacation prior to the actual accrual thereof.
b. In no event may Employee have accrued more than thirty
(30)vacation days. Company shall have the option either of requiring Employee
to take accrued vacation time prior to the Termination Date, or paying Employee
for accrued vacation time as of the Termination Date, up to thirty (30) day
accrued vacation limit.
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6. EXPENSES. Company shall reimburse Employee for reasonable expenses
incurred by him in connection with his performance of services hereunder upon
presentation by Employee of appropriately documented requests, including
original or copies of bills, vouchers and itemized accounts as reasonably
required by the Company.
7. TERMINATION. Notwithstanding anything to the contrary herein,
Employee's employment by Company hereunder may be terminated without breach, in
accordance with the following terms and conditions:
a. Company may terminate Employee's employment for cause, as defined
below, effective upon delivery of written notice of termination to Employee
specifying with particularly the actions or inactions constituting such cause,
and making specific reference to this Section 7(a). For the purpose of this
Section 7(a), cause for termination shall exist only upon the occurrence of one
or more of the following:
(i) Employee's conviction of a crime punishable by
imprisonment of one year or more under the laws of the jurisdiction in which
convicted which involves theft, misappropriation of funds, fraud or deception;
(ii) Employee is charged or indicted for a crime for which, if
convicted, the Company would have the right to terminate Employee's employment
under (i) above but, if such charge or indictment is disposed of without
conviction, at Employee's request promptly following the disposition of such
charge or indictment, Employee shall be reinstated in his employment hereunder
to the position, salary and benefits held immediately prior to such termination,
and this Agreement shall be extended for a period equal to the period from the
date of termination to the date of reinstatement.
(iii) Willful misconduct by Employee in the performance of his
duties hereunder, provided that no act or failure to act on Employee's part
shall be considered "willful" unless done or omitted to be done by Employee in
bad faith and without reasonable belief that his action or omission was in the
best interests of the Company;
(iv) Chronic alcoholism if such condition materially impairs
or precludes performance of Employee's duties, drug addiction, or
misappropriation of money or property of Company by Employee; or
(v) Employee's refusal, after written notice to Employee by
Company and a reasonable opportunity to cure, to carry
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out a written reasonable directive to Employee from the Board of Directors of
Company which related to the performance of his executive duties as set forth
herein and is not unlawful or inconsistent with his position or status in
Company's management structure as contemplated herein.
b. Subject to applicable state and federal disabilities laws,
Company may terminate Employee's employment upon thirty (30) days prior written
notice in the event of the total disability of Employee ("Employee Disability"),
which notice shall make specific reference to this Section 7(b). For the
purposes of this Section 7(b), the term "Employee Disability" shall have the
same meaning as contained in any insurance policy maintained by Company which
applies to Employee's long term disability, or, in the absence of such a policy,
the inability of employee to perform one or more important duties of his office
for a period of 180 days or more due to physical, mental or emotional
impairment.
c. Employee's employment shall terminate upon Employee's death.
d. In addition to termination under Sections 7(a), (b) or (c),
Company may terminate Employee's employment, for any other reason whatsoever
upon ninety (90) days written notice, which notice shall make specific reference
to this Section 7(d) ("Without Cause").
8. SEVERANCE COMPENSATION.
a. If his employment is terminated under Section 7(a), Company shall
pay to Employee (i) his base salary through the Termination Date, (ii) any
benefits due under any employee benefit plans and unpaid as of the Termination
Date, and (iii) such other benefits that may be required under law. Thereafter,
Employee shall not receive any further compensation or benefits under this
Agreement.
b. If his employment is terminated under Section 7(b), Company shall
pay to Employee an amount equal to (i) his base salary through a period of
thirty (30) days following the Termination Date, (ii) any benefits due under any
employee benefit plans and unpaid as of the Termination Date, (iii) such other
benefits that may be required under law, and (iv) an amount equal to the base
annual salary that would have been payable to him pursuant to paragraph 3(a)
hereof if his employment had not been so terminated, as and when such payments
would have been due hereunder but for the termination, less the greater of (A)
50% of such base annual salary, or (B) any disability insurance payments
received by Employee in such period from any insurance or other plan or program
maintained by the Company, at its expense, for Employee's benefit.
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c. If his employment is terminated under Section 7(c), Company shall
pay to Employee's estate an amount equal to (i)the payments Employee would be
entitled to receive pursuant to Section 7(b)(i), (iii), and (iv) had employment
been terminated under Section 7(b), plus any other benefits due and payable at
the time of Employee's death or by reason thereof.
d. If his employment is terminated under Section 7(d), Company shall
pay to employee (i) an amount equal to the present value (based on a 6% discount
factor) of the salary to which Employee would have been entitled as provided in
Section 3, computed from the day of Employee's termination through the remaining
term of this Agreement, plus (ii) any benefits due Employee under any employee
benefit plans and unpaid as of the Termination Date, and (iii) such other
benefits that may be required under law.
e. Any payments due to Employee under this Section 8 shall be due
and payable within thirty (30) days following the termination of his employment.
f. In calculating payments under this Section 8 or elsewhere under
this Agreement, Company shall not be entitled to set off against any such
payment any amounts owed by Employee to Company.
9. MANAGEMENT OF THE COMPANY.
a. For so long as the Employee continues as in the employment of the
Company, the Company shall comply with the following covenants:
(i) The Employee and Todd Herman (or such persons as they may
nominate) shall be members of the Company's board of directors (the "Board").
(ii) The Board shall consist of not more than five members unless
the Employee gives his written consent to an increase.
(iii) The Employee and Todd Herman shall be the sole officers of
the Company and shall be responsible for its day-to-day operations.
b. For so long as the Employee continues as an employee of the
Company, the Employee and John Colehower (or any entity designed by them shall
have the right to purchase the stock or assets of the Company upon terms
substantially the same as the terms on which United Video and NSF sold their
assets to the Company on the date hereof if (i) the Company files a petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code or
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<PAGE>
is involuntarily placed in bankruptcy, (ii) Response agrees to sell or otherwise
transfer its shares of the Company without the consent of Employee, (iii) the
Company agrees to sell or otherwise transfer substantially all of its assets, or
(iv) Response fails to comply with Paragraph c. below.
c. During the first 12 months after the date hereof, Response shall
provide the Company, in such form as response shall determine, with $500,000 to
expand the business operations of the Company that are acquired for United Video
and NSDF, to be used in accordance with a budget agreed upon by Employee, Todd
Herman and Response.
d. Until all Options issuable pursuant to this Agreement shall vest
and become exercisable, the Company hereby agrees not to change the primary
business activity of the Company to a business other than the installation and
servicing of burglar and fire alarms, without the consent of Employee.
e. Response hereby guaranties the Company's performance of, and
shall act as a surety with respect to, all agreements, covenants and other
actions to be taken by the Company hereunder.
f. During the Term of this Agreement, Employee shall be entitled to
attend meetings of the Board of Directors of Response as an observer, but shall
not be entitled to participate or vote at any such meetings.
10. NOTICES. Any notice or demand required or permitted to be given to
any party under this Agreement shall be in writing and shall be deemed to have
been duly given, made and received three business days after mailing if mailed
by certified mail, postage prepaid, return receipt requested, addressed to the
party at the address set forth below, provided that any party may alter the
address to which notice or demand is directed by giving notice of such change of
address in conformity herewith.
a. For notice to the Company:
United Video Security, Inc.
Attention: President
11-C Princess Road
Lawrenceville, New Jersey 08648
with a copy to:
Response USA, Inc.
1300 Admiral Wilson Blvd.
Camden, New Jersey 08101
Attention: Richard M. Brooks
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b. For notice to Employee:
John Colehower
11-C Princess Road
Lawrenceville, New Jersey 08648
11. ARBITRATION. Any dispute under this Agreement shall be resolved by
arbitration in Camden, New jersey; provided, however, that any action other than
demand in which equitable relief only is sought may be brought in any court of
competent jurisdiction over the subject matter of the dispute and the parties
thereto. Any arbitration shall be before a panel of three (3) arbitrators. The
arbitrators shall be selected, and arbitrations hereunder shall be conducted, in
accordance with the rules and regulations then in effect of the American
Arbitration Association. The arbitration shall be commenced by either party
notifying the other parties and the American Arbitration Association, in
writing, of a demand for arbitration and the subject matter of the arbitration.
The arbitrators shall not have any power to grant punitive damages.
12. MISCELLANEOUS.
a. At any time, and form time to time, after the signing of this
Agreement, each party will execute such additional instruments and take such
action as may be reasonably requested by the other party to carry out the intent
and purposes of this Agreement.
b. This Agreement shall be governed, construed, and enforced in
accordance with the laws of the State of New Jersey, notwithstanding any
conflicts-of-law doctrines or laws of any jurisdiction to the contrary.
c. This Agreement shall be binding upon, and shall inure to the
benefit of, the parties and their heirs, personal representatives, successors
and assigns.
d. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
e. This Agreement shall not be interpreted in favor of or against
either party on account of such party having drafted this Agreement.
f. Neither the failure nor any delay on the part of either party to
exercise any right, remedy, power or privilege under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or privilege preclude any other or further exercise of the
same or of any other right, remedy, power or
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<PAGE>
privilege with respect to any occurrence be construed as a waiver of such right,
remedy, power or privilege with respect to any other occurrences.
g. This Agreement contains the entire understanding among the
parties hereto with respect to the subject matter hereof, and supersedes all
prior and contemporaneous agreements and understandings, inducements or
conditions, express of implied oral or written, except as herein contained. The
express terms hereof control and supersede any course of performance and/or
usage of the trade inconsistent with any of the terms hereof. This Agreement
may not be modified or amended other than by an agreement in writing.
_____________________________
JOHN COLEHOWER
UNITED VIDEO SECURITY, INC.
By:___________________________
RESPONSE USA, INC.
By:___________________________
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<PAGE>
Exhibit 10(f)
AGREEMENT
Agreement made as of the 22nd day of November, 1996, by and between
Sloan Electronics, Incorporated, a Florida corporation, maintaining its
principal business offices at 4860 Featherbed Lane, Sarasota, FL 34242
(Hereinafter referred to as "Manufacturer") and Response USA, Inc., a Delaware
corporation, maintaining its principal business offices at 11-H Princess Road,
Lawrenceville, NJ 08648 (Hereinafter referred to, together with its affiliates,
as "Distributor").
WITNESSETH:
WHEREAS, Manufacturer manufactures Wander Watch SPS-100 and the MPS-
C50 multi-resident system and desires to market said products.
WHEREAS, the distributor has proven to Manufacturer that it is
capable of providing the marketing efforts desired by Manufacturer.
WHEREAS, the Manufacturer has proven it can design and produce the
quality and quantity of products required by the Distributor.
NOW, THEREFORE, by reason of these premises and in consideration of
the mutual covenants herein set forth, the parties hereto agree as follows.
1. Definitions.
For the purpose of this Agreement, the following items shall be
defined as indicated below:
1.1 "SPS-100 Product" shall mean Manufacturer's item designated as
"Wander Watch SPS-100" and any additions, revisions and/or
modifications thereto.
1.2 "MPS-C50 Product" shall mean Manufacturer's item designated as
"Wander Watch MPS-C50 multi-resident system" and any
additions, revisions and/or modifications thereto.
1.3 "Products" shall mean the SPS-100 Product and the MPS-C50
Product.
1.4 "Customer" shall mean the initial purchaser from the
Distributor (which is generally a Healthcare Institution).
1.5 "End-User" shall mean the person who purchases a Product for
use, and not for resale (generally the customer of the
Customer).
<PAGE>
1.6 "Healthcare Industry" shall mean that segment of the economy
engaged in the provision and/or delivery of medical and
healthcare services to individuals.
1.7 "Healthcare Institutions" shall mean the businesses and
governmental agencies engaged in the Healthcare Industry,
including but not limited to hospitals, pharmacies, nursing
associations, home health care delivery organizations, and
municipal, state and federal agencies providing for the
delivery of and/or reimbursement for home healthcare services.
1.8 "Distributor's Healthcare Distribution Network" shall mean the
Distributor's existing and future network of Healthcare
Institutions and persons that Distributor now or in the future
may market its Personal Emergency Response Systems ("PERS")
to, including but not limited to dealers and franchisees of
Distributor and end-users of Distributor's PERS.
2. Appointment of Distributor.
2.1 During the term of this Agreement, manufacturer hereby
designates, constitutes, and appoints the Distributor to
market and solicit orders of the Products. The Distributor
shall have the exclusive worldwide Healthcare Industry rights
to the SPS-100 Product which shall entitle the Distributor to
have the exclusive right to sell the SPS-100 Product worldwide
to Healthcare Institutions and to individuals through
Distributor's Healthcare Distribution Network. The Distributor
shall have non-exclusive world-wide rights to the MPS-C50
Product which shall entitle the Distributor to have
non-exclusive right to sell the MPS-C50 Product worldwide.
Other than KingAlarm Distributors, Inc., of New Jersey
("KingAlarm"), the Manufacturer agrees to refrain from
appointing other distributors of the SPS-100 Product and from
selling the SPS-100 Product itself at the retail or wholesale
level (including sales to Healthcare Institutions, dealers and
End-Users) and that any orders submitted to the Manufacturer
for the SPS-100 Product from the Healthcare Industry shall be
directed to the Distributor.
2.2 Manufacturer hereby grants the Distributor a license to use
the trademarks and service marks of the Products and the trade
name "SEI" to identify the manufacturer of the Products.
2.3 In the event that (a) with respect to calendar year 1997,
Distributor fails to use reasonable efforts to fully and
effectively promote the sale of the SPS-100 Product to the
Healthcare Industry, (b) with respect to calendar year 1998,
Distributor's net sales of the SPS-100 Product for such year
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<PAGE>
are not at least 20% greater than its net sales of the SPS-100
Product for 1997 (and such shortfall is not due to any breach
of this Agreement by the Manufacturer), or (c) with respect to
any calendar year after 1998, Distributor's net sales of the
SPS-100 Product for such year are not at least 20% greater
than its net sales of the SPS-100 Product for the preceding
year (and such shortfall is not due to any breach by the
Manufacturer) and during each such year Distributor fails to
use reasonable efforts to fully and effectively promote the
sale of the SPS-100 Product to the Healthcare Industry, then
in any such case Manufacturer shall have the right, by written
notice given to Distributor within 90 days after the end of
the relevant calendar year, to cause Distributor's rights to
distribute the SPS-100 Product hereunder to the Healthcare
Industry to become non-exclusive, effective 90 days after the
date such notice is given. If Distributor's right to
distribute the SPS-100 Product to the Healthcare Industry
becomes non-exclusive, then Manufacturer shall have the right
to market and sell the SPS-100 Product itself and/or to
appoint other distributors of the SPS-100 Product to the
Healthcare Industry.
3. Distributor's Rights and Obligations.
During the term of this Agreement, the Distributor shall:
3.1 The Distributor shall provide Manufacturer with data regarding
the location of all products identified by a serial number
from Manufacturer, provided that Manufacturer agrees to keep
all such data (including the identities of Customers and
End-Users) confidential and not to disclose it to any third
party or use it for any purpose other than in connection with
recalls of Products or as otherwise required by law.
3.2 The Distributor shall have the right to use any and all of the
Manufacturer's marketing tools, resources, Healthcare Industry
customer lists and Healthcare Industry customer inquiries, and
any related information or supplies related to the Products
and market as may be appropriate, in connection with the
marketing and sale of the SPS-100 Product.
3.3 The Distributor, upon receipt of a written release and consent
in satisfactory form from KingAlarm as described in Section
4.6 below, shall pay to Manufacturer a licensing fee in the
amount of $35,000. Such fee will include the development of
the Communications Package described in Section 4.7 below.
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3.4 Distributor shall not produce any product(s) which could be
considered directly competitive with the product line
currently known as Wander Watch SPS-100.
4. Manufacturer's Rights and Obligations.
4.1 Manufacturer shall manufacture quality Products ready for
resale at mutually agreed upon time frames using quality
components and good manufacturing procedures. Manufacturer
shall deliver Products within a reasonable time after receipt
of Distributor's orders.
4.2 Manufacturer shall allocate such time and financial resources
as it deems necessary and appropriate for research and
development to improve the Products in accordance with changes
in the industry, advancements in technology, recommendations
from the Distributor and its agents in comparison with
competition, knowledge gained by Manufacturer, and related
enterprises.
4.3 Manufacturer shall not produce any product(s) which could be
considered directly competitive with the product line
currently known as Wander Watch SPS-100.
4.4 Manufacturer shall continue its best efforts to enhance and
expand Products to help Distributor meet its twenty percent
(20%) sales increase requirements in order to maintain
exclusivity under Section 2.3.
4.5 Manufacturer will not use the Distributor's name or logo in
any advertising or promotional materials without the prior
written approval of such materials by the Distributor.
4.6 Manufacturer shall, as a condition to the effectiveness of
this Agreement and payment of the fee described in Section 3.3
above, obtain a release and consent from KingAlarm
Distributors, Inc. of New Jersey, permitting Manufacturer to
enter into this Agreement with Distributor.
4.7 Manufacturer shall develop a digital communicator for the
Products to communicate to standard receivers used at
Distributor's central station (the "Communications Package").
Manufacturer shall use its best efforts to complete its
research and development of the Communications Package in
order that the Products may be manufactured with the
Communications Package fully installed, and available for
distribution on or before 60 days following the execution of
this Agreement.
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5. Training and Related Expenses.
5.1 Each of the parties hereto shall bear its own expenses for
travel and training. In the event that Distributor desires to
have individuals under its control attend meetings with
Manufacturer, it will contact Manufacturer so that a mutually
agreeable time and place can be established for the meetings.
6. Warranty, Maintenance, and Repairs.
6.1 Manufacturer shall issue a limited warranty on the Products as
published in its current promotional materials, a copy of
which is attached hereto as Schedule "B". The limited warranty
shall provide for the right to return the Product for credit
(in the full amount of the purchase price) within 60 days of
the date of purchase by the Customer and for the repair or
replacement of the Product at no charge for parts or labor for
two years (except transmitter batteries which shall be for one
year) from the date of purchase by the Customer, and shall
exclude any consequential damages the purchaser may suffer.
The Distributor shall be allowed to pass the Warranty to the
Customer and to the End-User.
6.2 The Manufacturer shall provide basic trouble-shooting to the
Distributor and to its Customers for any Product under
warranty during the Term of this Agreement and for two years
following the term of this Agreement.
6.3 If Manufacturer shall at its sole option decide to repair an
item under warranty, it shall make such repairs in a timely
manner at the expense of Manufacturer, and return the Product
directly to the Customer, the End-User, or the Distributor
when directed.
6.4 Products not under warranty shall be subject to the following
repair procedure. A reasonable repair cost estimate shall be
made by Manufacturer and reported immediately to the
Distributor for information and instruction as to whether to
repair or not. If directed by the Distributor to go ahead and
repair, Manufacturer will repair items for the reasonably
stated estimate, upon written request by Distributor.
Distributor shall pay the costs for the repair within 30 days
of delivery of the repaired Product. Costs shall include, but
not be limited to, labor, shipping, and parts.
7. Purchase.
7.1 Distributor hereby places an initial pre-production purchase
order for 100 units of the SPS-100 Product with the
Communications Package.
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<PAGE>
7.2 Distributor shall pay for all Products delivered within
forty-five (45) days of receipt, except that the initial
purchase referred to in Section 7.1 shall be paid for within
thirty (30) days of receipt.
7.3 The Distributor shall purchase mutually agreed upon quantities
of the Products at the prices shown on "Schedule A" pricing
from Manufacturer attached hereto. Any price change must be
reasonable and in line with the electronics/computer industry
(but in no event to exceed 10% per annum) and shall not become
effective until 60 days after the Manufacturer notifies the
Distributor of such change or, if later, such effective date
as may be specified by the Manufacturer. A schedule of
Products shall be published in January of each year. Each
order for Products shall be made by:
A. A Purchase Order signed by an authorized
officer or employee of the Distributor; and
B. Payment in the amount of one-half the order
amount to the Manufacturer's assembly firm (to be named
upon receipt of P.O.) to be placed in escrow pending
receipt of the Products by Distributor.
8. Assignment.
8.1 The parties shall not assign or otherwise transfer this
Agreement or any interest or rights herein without the prior
written consent of the other party. Any such purported
assignment, transfer or attempt to assign or transfer any
interest or right herein, without the prior written consent of
the other party, shall be null and void, and of no effect.
Notwithstanding the foregoing, either party may assign this
Agreement without the consent of the other party in connection
with the sale of the business of such party, whether by sale
of assets, merger or otherwise, and Distributor may assign
this Agreement to any of its subsidiary companies.
9. Municipal Bids.
9.1 Manufacturer expressly waives the right to sell directly to
any government entities engaged in the Healthcare Industry.
10. Commercial Sales.
10.1 Manufacturer retains the right to market and sell the SPS-100
Product solely in connection with sales of the MPS-C50 Product
by Manufacturer. The SPS-100 product is supplied in connection
with the MPS-C50 Product as a demonstrator only, and numbers
supplied have been limited. The
6
<PAGE>
provisions of this Section 10.1 shall not be construed as
restricting the Distributor or its Customers from selling the
SPS-100 Product in connection with sales of the MPS-C50
Product.
11. Term of Agreement.
11.1 This Agreement shall become effective upon the date first
written (hereinafter the "effective date") and shall be for a
term of two (2) years commencing on the date that the Products
containing the Communications Package are available for
purchase. The Agreement shall be automatically renewed on a
year-to-year basis thereafter unless either of the parties
fail to conform to the terms and conditions hereof. The party
alleging that the other party has failed to so conform shall
sixty (60) days prior to the expiration of the term notify the
other party as to the particulars of its allegation of
non-conformance and its desire to terminate this Agreement.
11.2 Either party may terminate this Agreement in the event that
the other party materially breaches this Agreement and fails
to cure such breach within 30 days after written demand
therefor.
12. Indemnification and Insurance.
12.1 Distributor shall indemnify and hold harmless Manufacturer and
its directors, officers, employees and agents from and against
any all losses, liabilities, damages and expenses (including
reasonable attorney's fees and expenses) which it may incur or
be obligated to pay in any action, claim of proceeding against
it, for or by reason of any negligence or misconduct by
Distributor or any of its agents or employees in connection
with Distributor's performance of this Agreement. The
provisions of this Section and Distributor's obligations
hereunder shall survive any termination of this Agreement.
12.2 Except to the extent Manufacturer is entitled to be
indemnified by Distributor pursuant to Section 12.1 hereof,
Manufacturer shall indemnify and hold harmless Distributor and
its directors, officers, employees and agents from and against
any and all losses, liabilities, damages and expenses
(including reasonable attorney's fees and expenses) which it
may incur or be obligated to pay in any action, claim or
proceeding against it arising out of or relating to the
manufacture, distribution, promotion, sale or use by Customers
or End-Users of the Products distributed by Distributor
hereunder. The provisions of this Section and Manufacturer's
obligations hereunder shall survive any termination of this
Agreement.
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12.3 Manufacturer shall indemnify and hold harmless Distributor and
its directors, officers, employees and agents from and against
any and all such losses, liability, damages and expenses
(including reasonable attorney's fees and expenses) which any
of them may incur or be obligated to pay in any action, claim
or proceeding against any of them for infringement of any
other person's patent rights, trademark rights or other
proprietary rights, but only where such action, claim or
proceeding results from the activities of Distributor
contemplated by the Agreement conducted in accordance with the
terms of this Agreement. Distributor shall give Manufacturer
prompt written notice of any such claim or action and
thereupon Manufacturer shall undertake and conduct the defense
of any suit so brought. Distributor shall have the right to
participate in the defense of any such claim or action at its
expense through counsel of its choosing. In the event
appropriate action is not taken by Manufacturer within 10 days
of its receipt of notice from Distributor or Manufacturer
fails to diligently pursue the defense of such claim
thereafter, Distributor shall have the right to defend such
claim or action in its own name, but no settlement or
compromise of any such claim or action may be made without
prior written approval of Manufacturer (which approval shall
not be unreasonably withheld or delayed). In either case,
Manufacturer and Distributor shall keep each other fully
advised of all developments and shall cooperate with each
other in all respects in connection with any such defense as
is made. The provisions of this Section and Manufacturer's
obligations hereunder shall survive any termination of this
Agreement.
12.4 Commencing on or before the date on which Manufacturer first
ships Products to Distributor hereunder, Manufacturer shall
obtain and maintain at lest $2 million of products liability
insurance coverage with respect to the Products distributed by
Distributor hereunder, with a deductible per occurrence of no
more than the customary deductible for products liability
insurance in the electronics/computer industry, but in any
event no more than $15,000, at Manufacturer's expense, and
shall cause Distributor to be named as an additional named
insured on the policy under which such insurance is provided.
Manufacturer shall maintain "tail" insurance coverage, of the
same type, amount and deductible as it is required to maintain
during the term of this Agreement, for a period of two years
after termination of this Agreement for any reason whatsoever.
13. Miscellaneous.
13.1 Neither party shall represent itself as the agent or legal
representative of the other party or shall have any right to
create or assume any obligation
8
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of any kind, express or implied, for or on behalf of the other
party in any way whatsoever. This Agreement and the
performance by any party under this Agreement shall not be
deemed to create a relationship other than as independent
contractors.
13.2 This Agreement constitutes the entire agreement of the parties
with respect to the subject matter hereof and this Agreement
may not be amended or modified, except in a writing signed by
both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
Sloan Electronics Response USA, Inc.
By: By:
------------------- --------------------
Paul A. Sloan
Its: President Its:
--------------------
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SCHEDULE A
Initial pre-production order of 100 units of SPS-100 Products $400.00 per Unit*
Minimum Orders of:
0-100 units of SPS-100 Products $____ per Unit*
101-500 units of SPS-100 Products $____ per Unit*
Over 500 units of SPS-100 Products $____ per Unit*
0-100 units of MPS-C50 Products $____ per Unit*
101-500 units of MPS-C50 Products $____ per Unit*
Over 500 units of MPS-C50 Products $____ per Unit*
In addition to the above price, Distributor shall pay to
Manufacturer a portion of the monthly monitoring fee equal to 20% of such
fee or $7.50 (whichever is lower) derived from central station monitoring
revenues actually received from Customers or End Users of the Products
during the Term of this Agreement.
*Including a built-in digital communicator. The prices are to be mutually agreed
upon between Manufacturer and Distributor following receipt of the initial 100
pre-production order of SPS-100 Products.
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Exhibit 10(g)
ASSET PURCHASE AGREEMENT
TRIPLE-A SECURITY SYSTEMS, INC.
TO
UNITED SECURITY SYSTEMS, INC.
<PAGE>
TABLE OF CONTENTS
1. Sale and Purchase of Assets.................................... 1
1.1 Purchase of Assets................................. 1
1.2 Excluded Assets.................................... 2
1.3 Included Liabilities............................... 3
1.4 Excluded Liabilities............................... 3
2. Purchase Price................................................. 4
2.1 Amount............................................. 4
2.2 Allocation......................................... 5
3. Payment of the Purchase Price.................................. 5
3.1 At Closing......................................... 5
3.2 Adjustment of Cash Portion of the Purchase Price... 6
3.3 Adjustments to Response Share Portion of the
Purchase Price..................................... 7
3.4 Due Diligence...................................... 7
4. Representations, Warranties and Covenants of Seller and
Shareholder.................................................... 8
4.1 Organization....................................... 8
4.3 Financial Statements............................... 9
4.4 No Material Adverse Change......................... 9
4.5 Tax Matters........................................ 9
4.6 Compliance with Laws; Etc.......................... 10
4.7 Permits and Approvals.............................. 10
4.8 Judgments and Litigation........................... 10
4.9 Employee Relations................................. 10
4.10 COBRA.............................................. 11
4.11 ADA................................................ 11
4.12 Title, Liens, Name. ............................... 11
4.14 Seller Contracts................................... 12
4.15 Warranty of Merchantability........................ 12
4.16 Agreement Not in Breach of Other Instruments
Affecting Seller or Shareholder;
Governmental Consent............................... 12
4.17 Information Not Misleading......................... 12
4.18 Customer Contracts................................. 13
4.19 Insurance; Customer Claims......................... 14
4.20 Patents, Trademarks, Copyrights, Corporate Names... 15
4.21 Interest in Competitors, Suppliers and Customers... 15
4.22 Buyer's Title...................................... 15
4.23 ERISA.............................................. 16
4.24 Restrictive Covenant of Confidentiality............ 16
4.26 Exclusive Dealing.................................. 16
4.27 Announcement Letter................................ 16
4.28 Environmental Representations...................... 16
4.29 Payables........................................... 17
<PAGE>
5. Representations, Warranties and Covenants of Buyer............. 17
5.1 Organization....................................... 18
5.2 Conflict as to Buyer............................... 18
5.3 Consents and Approvals of Governmental Authorities. 18
5.4 Intentionally Blank................................ 18
5.5 Litigation......................................... 18
5.6 Disclosure......................................... 18
5.7 Intentionally Blank................................ 19
5.8 No Actions to Make Representations and
Warranties Untrue ................................. 19
5.9 Additional Insured................................. 19
5.10 Access to Records.................................. 19
5.11 Confidentiality.................................... 19
5.12 Delivering of Announcement Letter.................. 20
5.13 Delivery of Response Shares........................ 20
6. Conduct of Business Prior to Closing........................... 20
6.1 Conduct of Business................................ 20
6.2 Buyer's Consent.................................... 21
7. Indemnification................................................ 22
7.1 Indemnification of Buyer........................... 22
7.2 Indemnification of Seller.......................... 23
7.3 Minimum and Maximum Amounts of Indemnity........... 23
7.4 Time Limit on Indemnity............................ 24
7.5 Notice............................................. 24
7.6 Third-Party Actions................................ 25
7.7 Waiver of Subrogation.............................. 25
7.8 Set-Off Rights..................................... 25
7.9 Exclusive Remedy................................... 26
8. Absence of Liabilities......................................... 26
9. Further Assurances After Closing............................... 26
10. Restrictive Covenant........................................... 26
10.1 Covenant Not to Compete............................ 26
10.2 Equitable Remedies................................. 27
10.3 Enforceability of Covenants........................ 27
11. Joinder of Response............................................ 28
12. Indemnity Against Brokerage Commissions........................ 28
13. Intentionally Blank............................................ 28
14. Transfer Taxes. ............................................... 28
<PAGE>
15. Fees and Expenses.............................................. 28
17. Breach......................................................... 28
18. Break-Up Fee................................................... 28
19. Closing........................................................ 29
19.1 Date and Place..................................... 29
19.2 Delivery by Seller to Buyer At Closing............. 29
19.3 Delivery by Buyer to Seller at Closing............. 31
20. Destruction of Assets.......................................... 32
21. Continuation and Survival of Representations and Warranties.... 32
22. Conditions Precedent to Buyer's Obligation to Close............ 32
22.1 Accuracy of Representations........................ 32
22.2 Performance of Obligations......................... 32
22.3 No Litigation...................................... 32
22.4 Delivery of Documents.............................. 33
22.5 No Material Change................................. 33
22.6 Approval of Counsel................................ 33
22.7 Satisfactory Review................................ 33
22.8 Closing of the Jupiter Agreement................... 33
22.9 Delivery of Customer Contracts..................... 33
22.10 Intentionally Blank................................ 33
22.11 Delivery of Financial Statements and Tax Returns... 33
22.12 Delivery of Certificate of Insurance............... 33
22.13 Liabilities........................................ 33
22.14 Delivery of Non-Solicitation, Non-Competition
and/or Non-Disclosure Agreements of Employees...... 33
22.15 Approval of Accountants............................ 34
22.16 Escrow Agreement. ................................ 34
23. Conditions Precedent to Seller's Obligation to Close........... 34
23.1 Accuracy of Representations........................ 34
23.2 Performance of Obligations......................... 34
23.3 No Litigation...................................... 34
23.4 Delivery of Documents.............................. 34
23.5 Approval of Counsel................................ 34
23.6 Delivery of Certificate of Insurance............... 34
24. Waiver; Reasonable Efforts..................................... 34
24.1 Waiver............................................. 35
24.2 Reasonable Efforts................................. 35
<PAGE>
25. Miscellaneous.................................................. 35
25.1 Notices............................................ 35
25.2 Entire Agreement................................... 36
25.3 Provisions Separable............................... 36
25.4 Waivers, Amendments and Indulgences................ 36
25.5 Binding Nature of Agreement; Assignment............ 36
25.6 Variations in Pronouns............................. 36
25.7 Exhibits........................................... 36
25.8 Time of the Essence................................ 37
25.9 Number of Days..................................... 37
25.10 Execution in Counterparts.......................... 37
25.11 Section Headings................................... 37
25.12 Jurisdiction and Venue............................. 37
25.13 Governing Law...................................... 37
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT, dated the ___________ day of
September, 1997, by and between UNITED SECURITY SYSTEMS, INC., a New Jersey
corporation ("Buyer"), RESPONSE USA, INC., a Delaware corporation ("Response"),
and TRIPLE A SECURITY SYSTEMS, INC., a Pennsylvania corporation ("Seller") and
ROBERT L. MAY, an individual ("Shareholder") (as it may be amended or
supplemented from time to time, this "Agreement"). Buyer, Seller and Shareholder
are sometimes individually called a "Party" and collectively called the
"Parties".
B A C K G R O U N D:
Shareholder is the sole shareholder of the Seller. Seller is
engaged, inter alia, in the business of the sale, installation, service,
inspection, testing and monitoring of fire, intrusion and other detection alarm
security devices and systems for customers (the "Business").
Buyer desires to acquire substantially all of the assets of Seller
(the "Assets") and Seller desires to sell such Assets to Buyer, all upon the
terms and subject to the conditions hereinafter set forth. Response is the
parent company of the Buyer.
Simultaneously with the execution of this Agreement, Response is
entering into a Stock Purchase Agreement with Robert L. May and Vito Verni for
the Stock of The Jupiter Group, Inc., T/A Triple A Security Patrol (the "Jupiter
Agreement").
NOW, THEREFORE, in consideration of the mutual agreements and
covenants contained herein and intending to be legally bound, the Parties agree
as follows:
1. Sale and Purchase of Assets.
1.1 Purchase of Assets. On the Closing Date (as that term is defined in
Section 19.1), subject to and upon the terms and conditions contained herein,
Seller shall sell, transfer, convey, assign and deliver to Buyer and Buyer shall
purchase and acquire from Seller all of Seller's right, title and interest in
and to all of the Assets. The assets being conveyed hereunder (the "Assets")
shall be more particularly described in Exhibit 1.1, and shall include but not
be limited to: all of Seller's assets listed in the Closing Financial Statement
(defined below); all assets owned by, leased or licensed to the Seller, or
otherwise used by the Seller in connection with its business; all of Seller's
alarm monitoring and servicing accounts (the "Alarm Accounts"), all of Seller's
local service accounts (the "Local
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Accounts") and all of Seller's sub-contract monitoring accounts (the
"Sub-contract Accounts") with the customers of Seller (the "Customers") all of
Seller's right, title and interest in and to all office equipment, furniture,
fixtures, inventory, computer hardware and software, central station equipment
and telephone system; all of Seller's right, title and interest in any
monitoring equipment, alarm equipment, or other equipment necessary for the
purpose of sending an alarm monitoring signal to a central monitoring station;
all telephone lines owned or leased by Seller and used in connection with the
Alarm Accounts (including any lines into the central station(s) used by Seller
and any lines used for Seller's customer service); all computer software
programs licensed to or used by Seller (including the data base connected
thereto) relating to billing, customer service and/or uploading and downloading
any of the Customer's alarm equipment; all Customer lists (including lists of
any non-monitored accounts installed or serviced by Seller); all licenses and
permits which are required for the conduct of Seller's business; all contracts
and agreements between Seller and the Customers; all Customer files; all
tradenames owned by Seller, including but not limited to "Triple A Security
Systems"; and all of Seller's right, title, and interest in all logos used by
Seller including but not limited to "AAA". Such conveyance shall be confirmed by
a Bill of Sale in the form attached hereto as Exhibit 1.1. Notwithstanding
anything contained in this Section 1.1 to the contrary, the Assets being
conveyed pursuant to this Agreement shall be limited to those that are
assignable by Seller as a matter of right or for which a consent to assignment
is delivered at Closing; provided, however, that in the event that an Asset
which is materially required to operate the Business as a going concern is not
assignable as a matter of right and the Seller is unable to obtain a consent to
assignment, the following provision(s) shall apply:
1.1.1 Consents. To the extent that the transfer of any of the Assets
to Buyer shall require the consent of any other party or parties thereto, and
such consent shall not have been obtained prior to the Closing Date, the Seller
and Shareholder agree that they will use commercially reasonable efforts to
obtain all consents to the transactions contemplated by this Agreement of any
party to any contract, agreement, arrangement or commitment to which the Seller
is a party or to which the Seller is subject or by which any of its property is
bound and to continue their best efforts after the Closing Date. If any such
consent is not obtained, the Seller and Shareholder agree to cooperate with
Buyer in any reasonable arrangement (such as subcontracting, sublicensing or
subleasing) designed to provide for Buyer the benefits of the Seller under any
applicable contract, agreement, arrangement or commitment, including, without
limitation, enforcement, for the benefit of Buyer, of any and all rights of the
Buyer and against any other party thereto arising out of the breach or
cancellation thereof by such party or otherwise.
1.2 Excluded Assets. Notwithstanding any provision of this Agreement to
the contrary, there is excluded from the sale and purchase contemplated by this
Section 1 the following assets of Seller (collectively, the "Excluded Assets"),
including:
1.2.1 All assets of a personal nature identified on Exhibit 1.2.1;
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1.2.2 All amounts owed to Seller by Shareholder identified on
Exhibit 1.2.2; and
1.2.3 All amounts included in prepaid expenses in the Closing
Statement which benefit the Seller only ("Prepaid Expenses").
1.3 Included Liabilities. At the Closing, Buyer shall assume and be
responsible to pay the liabilities of the Seller described below (the "Included
Liabilities"):
1.3.1 Buyer agrees to the continuation of those operating leases
listed on Schedule 1.3.1 hereto relating to the leased equipment used by the
Seller for the operation of its Business. With the exception of those leases
listed on Schedule 1.3.1, at or prior to Closing all outstanding liabilities of
the Seller, including but not limited to, all accounts payable, notes payable,
loans, federal, state and local payroll or other taxes will be fully satisfied
or adequately reserved for by the Seller.
1.3.2 Seller's obligations to provide services to the Customers
after the Closing.
1.3.3 Seller's obligations pursuant to all leases of real property,
identified below:
1.3.3.1 A Sub-Lease between Buyer and Seller in accordance
with the terms set forth on Exhibit 1.3.3.1 whereby Buyer subleases all of the
real property covered by the Agreement of Lease, as Amended, between Seller and
Shareholder dated October 27, 1995 covering the premises and improvements
located at 23 Casey Avenue, Wilkes-Barre, PA 18702, as the same may be amended
by Shareholder and Buyer.
1.3.3.2 Hamilton, Pennsylvania Lease.
1.3.3.3 Scranton, Pennsylvania Lease.
1.3.3.4 Stroudsburg, Pennsylvania Lease.
1.3.4 Seller's obligations pursuant to agreements set forth in
Exhibit 1.3.4.
1.3.5 Seller's obligations to provide (or pay for) unused accrued
vacations, personal days and sick time as of the Closing Date to employees of
Seller who are hired by Buyer in accordance with Exhibit 1.3.5.
1.4 Excluded Liabilities. It is understood and agreed between Seller and
Buyer that Buyer shall not assume or be responsible to pay any of the excluded
liabilities (the "Excluded Liabilities"), all of which shall remain Seller's
liabilities and responsibilities as
3
<PAGE>
between Seller and Buyer. Excluded Liabilities consist of the liabilities and
obligations of the following type:
1.4.1 All liabilities of the Seller (except for liabilities
specifically identified in Section 1.3., above) whether known or unknown, and
including but not limited to any liabilities set forth on the Financial
Statements. Seller agrees to pay, or adequately reserve, out of the proceeds of
the Purchase Price, all liabilities set forth in the Closing Financial Statement
simultaneously with the Closing. Taxes on services payable by Seller, payments
made or to be made as of the Closing Date under all Seller agreements, and
similar periodic charges shall be prorated between Seller and Buyer as of the
Closing Date based on the applicable period. Following the Closing, Seller shall
pay for any utilities, services or equipment provided to Seller prior to the
Closing but not billed until after the Closing Date.
1.4.2 Liabilities arising out of the relationship between Seller and
its employees, including, but not limited to, liabilities for payroll, payroll
withholding taxes, unfunded pension liabilities, liabilities under health and
welfare plans, and employment termination liabilities as of the Closing Date.
1.4.3 Taxes payable by Seller as of the Closing Date.
1.4.4 Tort liabilities including liabilities arising from the
manufacture, operation or sale of defective products prior to the Closing.
1.4.5 Criminal claims for conduct prior to the Closing Date.
1.4.6 Liabilities for underpaid or underfunded insurance premiums
including workers compensation and general liability insurance for periods prior
to the Closing Date.
1.4.7 Claims or liabilities arising out of actual or alleged
pollution of the environment for periods prior to the Closing Date.
1.4.8 Any liabilities or obligations for pre-Closing services.
1.4.9 Any liabilities or obligations of Seller to any related party.
2. Purchase Price.
2.1 Amount. In consideration of the sale, transfer, conveyance, assignment
and delivery of the Assets by Seller to Buyer, and in reliance upon the
representations and warranties made herein, Buyer shall pay to Seller a purchase
price equal to the sum of the following: the Cash Portion of the Purchase Price
described in Section 3.1.1 below plus the Response Shares described in Sections
3.1.2 and 3.1.3 below, as adjusted in accordance with the provisions of Sections
3.2 and 3.3 (the "Purchase Price") in the aggregate amount of
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<PAGE>
____________________________________________________________________________
($_______________________________).
2.2 Allocation. The Purchase Price shall be allocated among the Assets as
set forth in Exhibit 2.2. Each of the Parties agrees to report the purchase and
sale of the Assets for tax purposes in accordance with the allocation of the
Purchase Price as set forth in Exhibit 2.2.
3. Payment of the Purchase Price. Subject to the conditions set forth in this
Agreement, Buyer shall pay the Purchase Price as follows:
3.1 At Closing:
3.1.1 Buyer shall deliver to Seller an amount equal to
__________________________________ ($__________________) plus or minus the
Adjustments of Cash Portion of the Purchase Price (as defined in Subsection
3.2), by certified or bank cashier's check, or wire transfer of immediately
available federal funds, in Seller's sole and absolute discretion;
3.1.2 In consideration of the Current Assets being assigned to Buyer
hereunder, Buyer shall deliver to Seller an amount of shares of Common Stock in
Response (NASDAQ: RUOK) (the "Current Asset Shares") equal in value to the
amount of the Current Assets set forth on the Closing Financial Statement (now
estimated to be
____________________________________________________________________________
($___________________________________) based on the lesser of: (i) the average
closing bid price of such Response Shares on the ten (10) trading days prior to
Closing, or (ii) the price of the secondary public offering of Response Stock
expected to be completed immediately prior to the Closing Date (the "Agreed
Value").
3.1.3 In further consideration of the Customer Contracts being
assigned to Buyer hereunder, Buyer shall deliver to Seller an amount of shares
of Common Stock in Response (the "Additional Shares") equal in value to
__________________________________________________ ($__________________) based
on the Agreed Value. The Current Asset Shares together with the Additional
Shares are collectively called the "Response Shares".
3.1.4 The Response Shares shall be: (i) Securities and Exchange
Commission ("SEC") Rule 144 Stock, (ii) subject to a "lock-up" period in
accordance with the terms and conditions of the "Lock-Up Agreement" required by
Hampshire Security Corporation, attached hereto as Exhibit 3.1.4, and (iii)
subject to an orderly selling of the Response Shares by providing that no more
than forty thousand (40,000) of the Response Shares may be sold in any thirty
(30) day period and not more than two thousand (2,000) of the Response Shares
may be sold in any given trading day.
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3.1.5 Buyer has previously furnished to Stockholder (a) the most
recent 10-K Report as filed with the Securities and Exchange Commission (the
"SEC"); (b) all subsequent 10-Q's as filed with the SEC; (c) any subsequent
Reports on Form 8-K as filed with the SEC; (d) definitive proxy statements
relating to all meetings of its stockholders (whether annual or special) since
January 1, 1997; and (e) all other reports and registration statements filed by
Buyer with the SEC since January 1, 1997 (all of the foregoing, the "SEC
Filings"). As of their respective dates, the SEC Filings (including all
documents incorporated by reference therein) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except, in the case of
any SEC Filing, any statement or omission therein that has been corrected or
otherwise disclosed or updated in a subsequent SEC Filing. Since January 1, 1997
Buyer has timely filed with the SEC all reports, documents, registration
statements, definitive proxy statements and all other filings required to be
filed with the SEC under the rules and regulations of the SEC, and all such
reports, documents, registration statements, definitive proxy statements and
other filings complied in all material respects with all applicable requirements
of the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended, as applicable.
3.1.6 Buyer agrees that in the event that any of the Response Shares
are sold by Seller in open market transactions in accordance with the provisions
of Section 3.1.4 above within four (4) years from the Closing Date, and the
average gross sale price per share obtained by Seller is less than the Agreed
Value (as evidenced by copies of appropriate brokerage account statements or any
other manner reasonably acceptable to Buyer) (the "Shortfall Amount"), the Buyer
shall, at its option, either:
(a) Pay to the Seller within thirty (30) days after notice of
such sale an amount equal to the difference between the Agreed Value
per share and Seller's gross sale price per share (the
"Difference"); or
(b) Deliver to Seller within thirty (30) days after notice of
such sale such additional shares of Response Common Stock (the
"Additional Shares") with an aggregate market value (based on the
average closing bid price of the Common Stock during the ten (10)
trading days immediately preceding the date of delivery) equal to
such Difference, which shares shall be registered and freely
transferrable without restriction under the Securities Act, other
than any restriction arising from the holders status as an
"affiliate", as defined in Rule 144 under the Securities Act.
3.2 Adjustment of Cash Portion of the Purchase Price.
3.2.1 The cash portion of the purchase price described in Section
3.1.1 shall be reduced by an amount equal to the Deferred Revenue as set forth
on the Closing Financial Statement.
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3.2.1.1 Such other adjustments as Buyer and Seller may mutually
agree.
3.3 Adjustments to Response Share Portion of the Purchase Price.
3.3.1 The Response Share portion of the purchase price described in
Section 3.1.2 shall be reduced by the amount equal to the total of the
following:
3.3.1.1 The value of the Current Assets set forth in the
Closing Financial Statement shall be reduced by Prepaid Expenses and by any
amounts due from the Shareholder or any affiliate or related party (except for
the loan due and owing from The Jupiter Group, Inc., as reflected on the Closing
Financial Statement).
3.3.1.2 The value of the accounts receivable set forth in the
Current Assets section of the Closing Financial Statement shall be reduced by an
allowance for doubtful accounts in accordance with generally accepted accounting
principles and based on Seller's actual average write-off experience of 5.956%
for the years ending 12/31/94, 12/31/95, and 12/31/96, as confirmed by Buyer.
3.3.1.3 Such other adjustments as Buyer and Seller may
mutually agree.
3.4 Due Diligence.
3.4.1 Due Diligence Review by Buyer. Commencing on the date hereof
and continuing until fifty-one (51) calendar days (less ten (10) business days)
from the date that Response files its Registration Statement pertaining to the
financing of this transaction (the "Due Diligence Period"), Seller shall allow
Buyer to conduct a complete and thorough financial, legal and operational due
diligence review of the Seller. Between the Due Diligence Period and the Closing
Date, Seller shall continue to provide Buyer with such information as Buyer may
reasonably request to plan for an orderly operational transition after the
Closing and to prepare, with Seller, the Closing Financial Statement. In order
to conduct such due diligence, Seller will provide reasonable access (during
normal business hours) to its facilities, books, records, contracts, Customer
files and Customer premises for Buyer's representatives. Buyer agrees to conduct
its due diligence review in a manner that will not unreasonably interfere with
Seller's Customers or Seller's business and operations. Buyer agrees (i) the
Confidentiality Agreement between Seller and Buyer dated October 18, 1996 shall
survive the execution of this Agreement, and (ii) pursuant to the
Confidentiality Agreement to treat as confidential and to advise its
representatives to treat as confidential all information of the Seller provided
to Buyer in due diligence, and Buyer hereby agrees and acknowledges that this
covenant of confidentiality shall survive the execution (and termination) of
this Agreement and, if this Agreement is not terminated, shall remain in full
force and effect until the Closing of this transaction.
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3.4.2 On or before ten (10) business days prior to the Closing Date,
Buyer shall deliver a written notice to Seller specifying whether Buyer has
elected to terminate this Agreement and, if so, the factual basis for such
termination shall be set forth with specificity and in detail (the "Notice"). In
the event Buyer timely delivers the Notice to Seller, Seller shall have eight
(8) business days to substantially cure the factual basis for termination.
Thereafter, in the event Buyer does not withdraw the Notice and reasonably
elects to terminate this Agreement, except for those provisions, terms,
conditions, etc. which specifically survive the termination of this Agreement,
this Agreement, and all transactions or documents taken or delivered pursuant to
the terms hereof, shall be deemed void and of no further force or effect. In the
event Buyer fails to deliver the Notice on or before ten (10) business days
prior to the Closing Date, or, in the event of timely delivery of the Notice,
Buyer elects, in writing, to waive the Notice and proceed pursuant to this
Agreement to Closing, or, in the event of timely delivery of the Notice, Seller
timely substantially cures the factual basis for termination, Buyer shall be
obligated to close pursuant to this Agreement except for a material breach by
Seller of Section 22 hereof [Conditions Precedent to Buyer's Obligation to
Close]. Notwithstanding anything contained in this Agreement to the contrary,
the sole factual basis for the Buyer's termination of this Agreement without
being liable for the Break-Up Fee described in Section 18 shall be limited to
the delivery of a proper Notice pursuant to this Section 3.4.2 or a material
breach by Seller of Section 22 hereof.
4. Representations, Warranties and Covenants of Seller and Shareholder. As a
material inducement to Buyer to enter into this Agreement and to proceed through
Closing ("Close") hereunder, Seller and Shareholder hereby make the following
representations, warranties and covenants to Buyer as of the date of this
Agreement and as of the Closing Date, all of which shall survive Closing
hereunder. Unless the context clearly indicates otherwise, all exhibits shall be
delivered on or before fifteen (15) business days prior to the Closing and all
such representations and warranties shall be true both as of the date of this
Agreement and as of the Closing Date. Any and all reference to Seller's or
Shareholder's "knowledge" including, without limitation, any and all references
to "the best of__________'s knowledge" shall mean, for both, the actual (not
legal or constructive) knowledge of Robert L. May only, without any duty to
investigate (knowledge does not include "should have known").
4.1 Organization. Seller is a corporation duly incorporated, validly
existing and in good standing under the laws of the Commonwealth of
Pennsylvania, and all issued and outstanding shares of stock of Seller are owned
by Shareholder. Seller has the full power and authority to own, lease and
operate its assets, properties and business. Seller's Charter is valid and in
full force. Seller and Shareholder have full power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby
upon the terms and conditions herein provided. The execution, delivery and
performance by Seller of this Agreement have been duly authorized by all
necessary corporate action of Seller. This Agreement has been duly and validly
executed and delivered by the Shareholder and by an authorized officer on behalf
of Seller and constitutes a valid and binding obligation of Seller and
Shareholder, enforceable against Seller and Shareholder in accordance with its
terms.
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4.2 Conflict as to Seller. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby or the
performance of the obligations of Seller hereunder will (a) violate any
provision of the Certificate of Incorporation or Bylaws of Seller; (b) violate,
be in conflict with, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under any agreement or
commitment to which Seller or the Shareholder is a party; or (c) violate any
statute or law or any judgment, decree, order, regulation or rule of any court
or other governmental body applicable to Seller or Shareholder.
4.3 Financial Statements. The audited financial statements and notes
thereto of Seller (including the balance sheets and related statements of
income, retained earnings and changes in financial position) as, at and for the
fiscal years ended December 31, 1994, December 31, 1995, and December 31, 1996,
together with copies of all original accounting work papers for such fiscal
years which are available from Terry H. Jones, C.P.A., have been or will be made
available to Buyer (the "Audited Financial Statements"). In addition to the
Audited Financial Statements, Seller shall make available to Buyer unaudited
financial statements for the interim periods ending June 30, 1995, June 30,
1996, and June 30, 1997 (the "Unaudited Financial Statements"). In addition to
the Audited Financial Statements and the Unaudited Financial Statements, an
interim financial statement for fiscal 1997 through the month ending immediately
prior to the Closing Date (the "Closing Financial Statement) shall be jointly
prepared by Buyer and Seller prior to the Closing Date. The Audited Financial
Statements together with the Closing Financial Statement (but not including the
Unaudited Financial Statements) are collectively referred to as the "Financial
Statements". The Financial Statements were prepared in conformity with generally
accepted accounting principles, and fairly, in all material respects, present
the financial position of Seller as and at the respective dates of such balance
sheets and the results of operations of Seller for the applicable periods.
Except as set forth in Exhibit 4.3, the Financial Statements make adequate
provision for all material obligations and liabilities (whether fixed,
contingent, absolute, accrued or otherwise) of Seller as of the dates indicated.
4.4 No Material Adverse Change. To the best of Seller's and Shareholder's
knowledge, since the date of the latest Audited Financial Statements, there has
been no material adverse change in the Business, the prospects, conditions,
affairs, operations or financial condition of Seller. Neither Seller nor
Shareholder have any knowledge of any such change or event which is impending.
4.5 Tax Matters. Seller has duly and timely filed with the appropriate
governmental agencies (Federal, state and local) all tax returns required to be
filed by Seller. Seller shall deliver to Buyer a copy of Seller's Federal income
tax return for the years ending December 31, 1994, 1995 and 1996 and for 1997
(with a copy of all accountants' work papers which are reasonably available)
promptly after filing of the return(s). All Federal, state, local, profits,
income, unemployment, social security, sales, use, property, excise or other
taxes, assessments, interest, penalties and deficiencies whatsoever
(collectively the "Taxes") due, owing and payable, or which may be due, owing
and payable, fixed,
9
<PAGE>
contingent, or otherwise, have been fully paid or duly provided for in the
Financial Statements. Seller is not a party to any action or proceeding or
investigation or audit by any governmental authority for review, assessment or
collection of any Taxes and no claims for assessment or collection of any Taxes
have been asserted or, to the best of Seller's or Shareholder's knowledge,
threatened against Seller. No claim for Taxes due is being contested by Seller.
4.6 Compliance with Laws; Etc. To the best of Seller's and Shareholder's
knowledge, except as set forth on Exhibit 4.6, Seller is in substantial
compliance in all material respects with all applicable Federal, state and local
statutes and ordinances (collectively, the "Laws") relating to the Business.
4.7 Permits and Approvals. To the best of Seller's and Shareholder's
knowledge, except as set forth on Exhibit 4.7, Seller has all material licenses
and permits of any governmental body (collectively the "Permits") material to
the conduct of the Business, all of which Permits are listed on Exhibit 4.7.
4.8 Judgments and Litigation. Except as set forth on Exhibit 4.8, there is
no outstanding order, writ, injunction, fine, citation, penalty, decree or
unsatisfied judgment of any court, governmental body or arbitrator, or any
litigation existing or, to the best of Seller's and Shareholder's knowledge,
pending against Seller affecting, in any material way, the Business. Neither
Seller nor Shareholder is contemplating the institution of any claim, suit,
action, arbitration, administrative or other proceeding which could result in a
material valid claim, suit, action, arbitration, administrative or other
proceeding against Seller or Shareholder, nor to their knowledge does there
exist any basis for any thereof. To the best of Seller's and Shareholder's
knowledge, the execution and delivery of this Agreement, the consummation of the
transactions provided for herein, and the fulfillment of the terms hereof shall
not at Closing or thereafter result in the material breach or violation of any
of the terms and provisions of, or constitute (with or without the giving of
notice or lack of time, or both) a material default under, or conflict with, any
agreement, indenture, mortgage, lien, lease, note, consent, license, franchise
or other instrument to which Seller is subject or by which it is bound, or any
judgment, decree, order or award of any court, governmental body or arbitrator.
Except for customer claims or to the extent set forth in Exhibit 4.8, Seller has
not for the last five (5) years been a party to, or the subject of, any action,
suit, litigation, claim, administrative proceeding or governmental or
quasi-governmental investigation relating to its operations, assets, properties
or Business or prospects, or to this Agreement or the consummation of the
transactions contemplated, or material to such transactions.
4.9 Employee Relations.
4.9.1 Seller is not a party to any collective bargaining agreement
with any union and, to the best of Seller's and Shareholder's knowledge, any
pending or threatened labor dispute. Seller has paid or shall pay (or adequately
reserve out of the proceeds of the Purchase Price) before the Closing Date all
employees all amounts due to them for salaries,
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commissions and reimbursable expenses, (excluding unused and accrued vacations,
personal leave and sick pay) for all time up to and including the Closing Date.
Except as set forth on Exhibit 4.9.1, Seller does not have any employee whose
employment is not terminable at will. Any employee who has given notice to
Seller or indicated to Seller an intention to terminate employment with Seller
is set forth on Exhibit 4.9.1. Seller shall terminate all of its employees as of
the completion of Closing, and permit Buyer to make an offer of employment to
any employees of Seller that Buyer chooses.
4.9.2 There are no unfair employment or labor practice charges
presently pending affecting the Seller or its businesses or operations. Except
as set forth on Exhibit 4.9.2, to the best of Seller's and Shareholder's
knowledge, Seller does not have any employment-related litigation or
administrative proceedings presently pending, filed by or on behalf of any
employee or involving any employee.
4.9.3 Except as set forth on Exhibit 4.9.3, as of the date hereof,
to the best of Seller's and Shareholder's knowledge, there are no claims,
pending or threatened, by any governmental authority, labor organization or
employee of Seller alleging that Seller has violated any applicable laws
respecting employment practices. To the Seller's knowledge, it is in compliance
in all material respects with its obligations under all statutes, executive
orders and other governmental regulations governing its employment practices,
including, without limitation, provisions relating to wages, hours, equal
opportunity and payment of social security and other taxes.
4.10 COBRA. To the best of Seller's and Shareholder's knowledge, Seller
has complied in all material respects with Section 4980B(f) of the Internal
Revenue Code of 1986, as amended ("COBRA").
4.11 ADA. To the best of Seller's and Shareholder's knowledge and to the
extent it is applicable, if at all, Seller has complied in all material respects
with the Americans With Disabilities Act of 1990, as amended.
4.12 Title, Liens, Name.
4.12.1 Seller owns outright and has good, valid and marketable title
to all of its assets, which, as of the Closing, shall be free and clear of any
and all mortgages, liens, and ownership of pledges, security interests,
restrictions, prior assignments, encumbrances, claims or other restrictions of
every kind or character, including, without limitation, the claims or liens of
any bank or any taxing authority.
4.12.2 Except for the Excluded Assets, all of the property, real,
personal, tangible or intangible, including, without limitation, intellectual
property, which Seller owns is included in the Business (the "Included Assets").
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4.12.3 Except as set forth on Exhibit 4.12.3, to the best of
Seller's and Shareholder's knowledge, all of the Included Assets are in good
operating condition and repair, and are free from all material defects and
damage ordinary wear and tear excepted. Except as set forth on Exhibit 4.12.3,
to the best of Seller's and Shareholder's knowledge, all of the equipment and
systems at Customer premises installed by Seller has/have been installed in a
good and workmanlike manner.
4.12.4 All of the Inventory is new or used and was acquired in the
ordinary course of the Business, and is substantially free from material defects
and damage.
4.12.5 Except as set forth in Exhibit 4.12.5, Seller owns or leases
all of the telephone line(s) or telephone numbers into its Central Station onto
which the digital dialers of Seller's Alarm Accounts are programmed. As part of
the purchase, Seller will convey these lines to Buyer.
4.13 Liabilities. To the best of Seller's and Shareholder's knowledge,
Seller does not have any material liabilities, other than liabilities fully and
adequately reflected in the Financial Statements or listed on Exhibit 4.13
attached hereto.
4.14 Seller Contracts. Except as indicated on Exhibit 4.14, to the best of
Seller's and Shareholder's knowledge, the execution and delivery of this
Agreement, the consummation of the transactions provided for herein, and the
fulfillment of the terms hereof shall not result in an impairment or termination
of any of Seller's rights under any Seller contract which will have a material
adverse effect on the Business.
4.15 Warranty of Merchantability. To the best of Seller's and
Shareholder's knowledge, all material, goods, equipment and services supplied,
sold, leased or performed by Seller to or for its Customers are of merchantable
quality and to the best of Seller's and Shareholder's knowledge, Seller has not
materially breached or substantially violated any applicable express or implied
warranty of merchantability in connection with such sales, leases or services.
4.16 Agreement Not in Breach of Other Instruments Affecting Seller or
Shareholder; Governmental Consent. To the best of Seller's and Shareholder's
knowledge, the execution and delivery of this Agreement, the consummation of the
transactions provided for herein, and the fulfillment of the terms hereof:
4.16.1 Shall not result in the imposition of any lien, security
interest or encumbrance of any nature whatsoever on any Included Asset or the
Assets; and
4.16.2 Does not require the consent of any governmental authority.
4.17 Information Not Misleading. No representation or warranty of Seller
or Shareholder in this Agreement, as of their respective dates, or any
certificate, document
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or other paper furnished by Seller or Shareholder to Buyer in connection with
the transactions contemplated hereby did not or will not contain any untrue
statement of any material fact or omit to state a material fact required to be
stated herein or necessary to make the statements made therein, in light of the
circumstances under which they were made, neither false nor misleading, except,
in the case of any document or other paper furnished by Seller or Shareholder,
any statement or omission therein that has been corrected or otherwise disclosed
or updated subsequently by Seller or Shareholder. There is no fact known by
Seller or Shareholder not disclosed in writing to Buyer by Seller or Shareholder
that materially and adversely affects, or, so far as may reasonably be foreseen
by Seller or Shareholder, will materially and adversely affect, the Business.
4.18 Customer Contracts.
4.18.1 Set forth on Exhibit 4.18.1 attached hereto is a true,
correct and complete list of substantially all Customers from whom Seller is
entitled to receive regular periodic payments. Said list sets forth at least the
following information, given separately as to each Customer:
4.18.1.1 Customer's name and address;
4.18.1.2 Type of contract (commercial, residential or
governmental);
4.18.1.3 Amount of monthly recurring revenue charged and the
billing cycle; and
4.18.1.4 Such other information requested by Buyer that is
readily available from Seller's computer software and data base.
4.18.2 Seller shall make available to Buyer true, correct and
complete copies of all written customer contracts (the "Customer Contracts") and
all amendments thereto and shall deliver the original executed Customer
Contracts to Buyer at the Closing.
4.18.2.1 To the best of Seller's knowledge, substantially all
Customer Contracts are in full force and effect.
4.18.2.2 To the best of Seller's and Shareholder's knowledge,
each Customer Contract is not in default in any material respect other than a
failure of the Customer party to such Contract to pay timely all amounts due
thereunder. To the best of Seller's and Shareholder's knowledge, each Alarm
Account is free from any material claim, defense or offset.
4.18.2.3 To the best of Seller's and Shareholder's knowledge,
each Customer Contract is currently insured at regular rates for broad form
comprehensive
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general liability insurance coverage including, without limitation, errors and
omissions, products liability and completed operations coverages.
4.18.2.4 To the best of Seller's and Shareholder's knowledge,
no condition exists or event has occurred which, with the giving of notice or
lapse of time or both, would constitute a material default under any Customer
Contract, other than a failure of the Customer party to such Contract to pay
timely all amounts due thereunder, and to the best of Seller's and Shareholder's
knowledge, except as listed on Exhibit 4.18.2.4 attached hereto, no Customer
intends to cancel or has given notice of its intention to cancel or modify its
contractual relationship with Seller, or not to renew any such Contract when its
term shall expire, or otherwise to decrease or limit its purchase of services
from Seller, or has moved, terminated its business, made an assignment for the
benefit of creditors or filed for bankruptcy or reorganization. To the best of
Seller's and Shareholder's knowledge, except as further listed on Exhibit
4.18.2.4. effective for the period after the date of this Agreement, no Customer
has been promised any reduction in any monthly rate or service fees, free or
barter service or any other tangible or intangible item of value, or payment
terms other than payment in arrears. Except in the ordinary course of business,
during the last twelve (12) months immediately preceding the date of this
Agreement, Seller has not increased any monthly service billing rate.
4.18.3 Except for Sub-Contract Accounts as set forth in Exhibit
4.18.3, Seller does not provide monitoring services to the customers of any
other entity, whether pursuant to a written agreement or otherwise.
4.18.4 Alarm equipment installed at any Customer's location is
hereinafter referred to as an "Alarm System". To the best of Seller's and
Shareholder's knowledge, all Alarm Systems related to the Alarm Accounts are in
good working order and condition, contain digital dialers to communicate to
Seller's Central Station, and have been installed and maintained in accordance
with manufacturer's specifications and good and workmanlike practices prevailing
in the industry at the time of such installation and maintenance.
4.18.5 To the best of Seller's and Shareholder's knowledge, Seller
has not disclosed to any third party, a Customer list, originals or copies of
Customer Contracts, or specific Customer information or data of any kind related
to the Alarm Accounts.
4.18.6 To the best of Seller's and Shareholder's knowledge, all
Alarm Accounts are programmed to Seller's central station.
4.19 Insurance; Customer Claims.
4.19.1 Copies of all insurance policies, and all endorsements
thereon or amendments thereto shall be made available to Buyer and a current
Certificate of Insurance shall be attached hereto as Exhibit 4.19.1. To the best
of Seller's and Shareholder's
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knowledge, all such insurance policies are in full force and effect and, to the
best of Seller's or Shareholder's knowledge, Seller has complied with all of the
material conditions contained in such policies.
4.19.2 Exhibit 4.19.2 attached hereto is a true, correct and
complete summary of material Customer claims against Seller during the past
three (3) years and indicates the claims that are currently pending and those
that are being defended by Seller's insurance carriers.
4.19.3 Seller and Shareholder covenant to continuously maintain
comprehensive general liability insurance (including errors and omissions
coverage) in the amount of $10,000,000 per occurrence and in the aggregate for
the period of three (3) years from the Closing Date for (i) claims asserted
against the Seller after the Closing Date (ii) where the loss giving rise to
damages occurs after the Closing Date, and (iii) the act, error or omission
giving rise to the loss occurs before the Closing Date ("Runout Coverage"). If
permitted by the insurance policy or waived by the insurance company,
subrogation shall be waived as to the Buyer Indemnified Parties under such
Runout Coverage policy.
4.20 Patents, Trademarks, Copyrights, Corporate Names.
4.20.1 Within the past three (3) years, Seller has not done business
(a) under or been known by any name other than its present corporate name,
"Triple A Security Systems, Inc." or (b) at any location other than its present
location. No claim has been asserted against Seller involving any conflict or
claim of conflict of the name "Triple A Security Systems, Inc.", and, to the
best of Seller's and Shareholder's knowledge, of any basis for any such claim or
conflict.
4.20.2 Except as set forth in Exhibit 4.20.2, Seller does not
possess any patent, patent right, trademark or copyright and is not a party to
any license or royalty agreement with respect to any patent, trademark or
copyright.
4.20.3 To the best of Seller's and Shareholder's knowledge, no
equipment, system or service sold, leased or provided by Seller violates any
license or infringes any patent, copyright, trademark, service mark or trade
name of another.
4.21 Interest in Competitors, Suppliers and Customers. Except as set forth
in Exhibit 4.21, neither Seller nor Shareholder has any direct or indirect
interest in any corporation, partnership, firm or association which is a
competitor, potential competitor, customer or supplier of the Business.
4.22 Buyer's Title. Immediately after the Closing, Buyer shall receive
good and marketable title to the Assets and the Included Assets, free and clear
of all liens, security interests, mortgages, judgments, restrictions,
encumbrances or claims of any kind.
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4.23 ERISA. Except as set forth on Exhibit 4.23, Seller is not a party to,
nor does it sponsor or contribute to, or maintain any "employee benefit plan"
(including, without limitation, any multiemployer plan), within the meaning of
Section 3(3) of the Employee Retirement Insurance Security Act of 1974, as
amended, or any other fringe benefit plan, program or arrangement.
4.24 Restrictive Covenant of Confidentiality. For an unlimited period of
time from the completion of Closing, Seller and Shareholder shall hold all
information relating to the Business as confidential, proprietary and trade
secret information to be held in trust and confidence and shall not use or
disclose such information for any purpose whatsoever without the prior written
consent of Buyer, which consent shall be in Buyer's sole and absolute
discretion; provided, however, that Seller and Shareholder may disclose or use
such information (i) required by law or upon a final and unappealable order of a
court of competent jurisdiction on the condition precedent that Seller and
Shareholder use reasonable efforts to give to Buyer reasonable notice of, and an
opportunity to participate in, the decision concerning disclosure of any such
information in any such litigation, suit or claim, (ii) to the extent required
to enforce or defend claims arising out of or from or in connection with this
Agreement, (iii) as required by a governmental body on the condition precedent
that Seller and Shareholder use reasonable efforts to give to Buyer reasonable
notice of, and an opportunity to participate in, the decision concerning
disclosure of any such information in any such governmental proceeding. (iv)
that has been rightfully received by Seller and Shareholder from another source
on a non-confidential basis, or (v) that is available to the industry or the
public at large.
4.25 No Other Agreement. Other than this Agreement, Seller and Shareholder
have no contract, arrangement or understanding with respect to a sale or other
disposition of any shares of capital stock of Seller or, except in the ordinary
cause of business, any assets of Seller.
4.26 Exclusive Dealing. Seller and Shareholder agree that from the date
hereof until (i) the Closing Date, (ii) breach of this Agreement by Buyer, or
(iii) agreement of the Parties, neither Seller nor Shareholder shall solicit,
negotiate with, or accept an offer from any person or entity to purchase either
any of the outstanding shares of capital stock of Seller or any material assets
of Seller (other than in the ordinary course of business).
4.27 Announcement Letter. Seller and Buyer shall jointly prepare the
announcement letter (the "Announcement Letter"), attached hereto as Exhibit
4.27, concerning the sale of the Assets pursuant to this Agreement.
4.28 Environmental Representations. Seller and Shareholder represent and
warrant that the Business and the Seller are being operated in substantial
compliance with all material and applicable Federal, state and local laws and
regulations in effect relating to pollution of the environment (including,
without limitation, ambient air, surface water, ground water, land surface or
subsurface strata), including, without limitation, laws and
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regulations, in effect relating to emissions, discharges, releases or threatened
releases or chemicals, pollutants, contaminants, wastes, toxic substances,
petroleum and petroleum products or otherwise relating to the manufacture,
processing, distribution, uses, treatment, storage, disposal, transport or
handling of chemicals, pollutants, contaminates, wastes, toxic substances,
petroleum and petroleum products ("Environmental Law"). Neither Seller nor
Shareholder have received any written notice during the last five (5) years from
a governmental entity that alleges that either the Business or the Seller are
not in such full compliance with all applicable Environmental Laws. All material
permits or other governmental authorizations currently held by the Seller
relating to either the Business or the company pursuant to Environmental Laws
are identified in Exhibit 4.28 attached hereto.
4.29 Payables. Except as set forth on Exhibit 4.29, all accounts payable
owed by Seller to any creditors of Seller shall be paid prior to or at Closing
or reserved at Closing.
4.30 Seller Agreements. Except for agreements specifically identified in
this Agreement or listed on Exhibit 4.30 attached hereto, there are no Seller
agreements that Buyer will be responsible to perform after the Closing.
4.31 Access to Records. Subject to Section 4.24, for a period of six years
following the Closing Date, upon receipt of 48 hours prior written notice from
Buyer to Seller, Seller shall provide Buyer with reasonable access to its books,
records and personnel ("Information") relating to pre-Closing Date periods
during normal business hours (i) as required by any court or governmental body,
(ii) as necessary to respond to or defend against governmental bodies' requests
for information, audits, claims, administrative agency procedures or lawsuits,
(iii) as necessary to prepare, modify or defend tax returns, (iv) as necessary
to defend lawsuits and other dispute resolution alternatives (including
counterclaims, crossclaims, third-party claims, and other claims arising out of
or from, in connection with or as a result of such lawsuits), (vi) as necessary
to assert, pursue or defend rights, duties and obligations under this Agreement
(including access, as necessary, to Information relating to post-Closing Date
periods), (vii) as necessary for all tax disputes, and (viii) as necessary to
assert and pursue claims which Buyer certifies in writing to Buyer are material
to Buyer; provided, that Buyer requests for access to such Information shall be
in good faith. Notwithstanding anything to the contrary contained in this
Section 4.31, upon notice to Seller, any period of time set forth in this
Section 4.31, shall be extended for matters pending until such time as the
matter has been finally resolved.
5. Representations, Warranties and Covenants of Buyer. As a material inducement
to Seller to enter into this Agreement and to proceed through Closing ("Close")
hereunder, Buyer makes the following representations, warranties and covenants
to Seller and Shareholder as of the date of this Agreement and as of the Closing
Date, all of which shall survive Closing hereunder. Unless the context clearly
indicates otherwise, all exhibits shall be delivered fifteen (15) business days
prior to the Closing and all such representations and warranties shall be true
both as of the date of this Agreement and as of the Closing Date.
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Any and all reference to Buyer's "knowledge" including, without limitation, any
and all references to "the best of Buyer's knowledge" shall mean the actual (not
legal or constructive) knowledge of Buyer only, without any duty to investigate
(knowledge does not include "should have known").
5.1 Organization. Buyer is duly incorporated, validly existing and in good
standing under the laws of the State of New Jersey. Buyer has full power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby upon the terms and conditions herein provided.
The execution, delivery and performance by Buyer of this Agreement have been
duly authorized by all necessary corporate action of Buyer. This Agreement has
been duly and validly executed and delivered by an authorized officer on behalf
of Buyer and constitutes a valid and binding obligation of Buyer, enforceable
against Buyer in accordance with its terms.
5.2 Conflict as to Buyer. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby or the
performance of the obligations of Buyer hereunder will (a) violate any provision
of the Certificate of Incorporation or Bylaws of Buyer; (b) violate, be in
conflict with, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under any agreement or commitment
to which Buyer is a party; or (c) violate any statute or law or any judgment,
decree, order, regulation or rule of any court or other governmental body
applicable to Buyer.
5.3 Consents and Approvals of Governmental Authorities. To the best of
Buyer's knowledge, except for filings by Buyer's parent corporation, Response
USA, Inc. with the SEC, no consent, approval or authorization of, or
declaration, filing or registration with, any governmental body is required to
be made or obtained by Buyer in connection with the execution and delivery by
Buyer of this Agreement or the performance of Buyer's obligations hereunder or
the consummation of the transactions contemplated herein.
5.4 Intentionally Blank.
5.5 Litigation. There is no action, suit, inquiry, proceeding or
investigation by or before any court or governmental body pending or, to the
best of Buyer's knowledge, threatened against or involving Buyer, nor, to the
best of Buyer's knowledge, is there any reasonable basis therefor that would
prevent Buyer from consummating the transactions contemplated hereby.
5.6 Disclosure. No representation or warranty of Buyer in this Agreement
or any certificate, document or other paper furnished by Buyer to Seller
pursuant to this Agreement or in connection with the transactions contemplated
hereby contains any untrue statement of a material fact or omits to state a
material fact required to be stated herein or necessary to make the statements
made therein, in the context in which made, neither false nor misleading. There
is no fact known by Buyer not disclosed in writing to Seller by Buyer
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that materially and adversely affects, or, so far as may reasonably be foreseen
by Buyer, will materially and adversely affect, the ability of Buyer to perform
the transactions contemplated by this Agreement.
5.7 Intentionally Blank.
5.8 No Actions to Make Representations and Warranties Untrue. Buyer shall
not take or omit to take any action that would result in any of the
representations and warranties of Buyer set forth in this Agreement becoming
materially untrue or in any of the conditions to Closing set forth in Section 23
not being fully satisfied.
5.9 Additional Insured. As of the Closing Date and for six (6) years
thereafter, Buyer shall add Seller and Shareholder as additional insureds to its
comprehensive general liability insurance policy(ies) (including, without
limitation, errors and omissions coverage) which shall be continuously
maintained during such period by Buyer in the minimum amounts of $10,000,000 per
occurrence and in the aggregate (excluding products liability insurance, which
is limited to $5,000,000 per occurrence and in the aggregate). Certificates of
insurance shall be supplied by Buyer to Seller evidencing that (i) the said
insurance coverage is in force, (ii) Seller and Shareholder are additional
insureds, and (iii) if permitted by the insurance policy or waived by the
insurance company, subrogation is waived as to Seller and Shareholder.
5.10 Access to Records. Subject to Section 5.11, for a period of six years
following the Closing Date, upon receipt of 48 hours prior written notice from
Seller to Buyer, Buyer shall provide Seller with reasonable access to its books,
records and personnel ("Information") relating to pre-Closing Date periods
during normal business hours (i) as required by any court or governmental body,
(ii) as necessary to respond to or defend against governmental bodies' requests
for information, audits, claims, administrative agency procedures or lawsuits,
(iii) as necessary to prepare, modify or defend tax returns, (iv) as necessary
to defend lawsuits and other dispute resolution alternatives (including
counterclaims, crossclaims, third-party claims, and other claims arising out of
or from, in connection with or as a result of such lawsuits), (vi) as necessary
to assert, pursue or defend rights, duties and obligations under this Agreement
(including access, as necessary, to Information relating to post-Closing Date
periods), (vii) as necessary for all tax disputes, and (viii) as necessary to
assert and pursue claims which Seller certifies in writing to Buyer are material
to Seller; provided, that Seller requests for access to such Information shall
be in good faith. Notwithstanding anything to the contrary contained in this
Section 5.10., upon notice to Buyer, any period of time set forth in this
Section 5.10, shall be extended for matters pending until such time as the
matter has been finally resolved.
5.11 Confidentiality. Except for filings required to be made by Buyer's
parent corporation, Response USA, Inc., with the SEC, before or after the
Closing Date, for an unlimited period of time, Buyer shall hold in trust and
confidence and use its best efforts to keep strictly confidential the financial
and other terms and conditions of this Agreement,
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and not disclose, publish, use or permit others to use the same, except that
Buyer may disclose such terms and conditions with its agents, representatives,
counsel, accountants, officers, directors and others with whom Buyer has a
business relationship where there is a need to know. The foregoing restriction
shall not, however, apply to any portion of the foregoing which (a) becomes
generally available to the public in any manner or form through no fault of
Buyer, or its employees, agents or representatives, or (b) is rightfully
received from another source on a non-confidential basis, or (c) is released for
disclosure with the consent of Seller, or (d) is required by a court or a
governmental agency to be disclosed or is otherwise required by law or is
necessary in order to establish rights under this Agreement or any other
agreements referred to herein; provided, that, with respect to clause (d) above,
the Buyer shall first notify Seller of such required disclosure and shall take
such steps at Seller's expense as Seller shall reasonably request to limit the
scope of such disclosure and otherwise protect the confidentiality of such
confidential and proprietary information. On and after the Closing Date, the
Confidentiality Agreement between Seller and Buyer dated October 18, 1996 shall
terminate and be of no further force and effect.
5.12 Delivering of Announcement Letter. Buyer shall deliver the
Announcement Letter to all of the Customers at any time after the Closing.
5.13 Delivery of Response Shares. Buyer shall deliver or cause its parent
corporation, Response USA, Inc., to deliver the Response Shares pursuant to
Subsections 3.1.2 and 3.1.3 of this Agreement.
6. Conduct of Business Prior to Closing.
6.1 Conduct of Business. From the date hereof through the Closing Date,
Seller shall:
6.1.1 Conduct the Business in the ordinary course of business
consistent with past practices, with the provisions contained in this Agreement,
and in substantial compliance in all material respects with all applicable
Federal, state and local statutes and ordinances (collectively, the "Laws")
relating to the Business. Seller shall not, without the prior written consent of
Buyer, change any business policies (including, without limitation, accounting,
advertising, marketing, pricing, purchasing, personnel, sales, returns, budget,
salary or product acquisition policies).
6.1.2 Maintain in force (including necessary renewals thereof)
insurance policies consistent with Seller's past practices in the ordinary
course of business and make no change in any insurance coverage without the
prior written consent of Buyer.
6.1.3 Subject to Section 3.4, allow, upon reasonable notice to
Seller and at such times and places as agreed by Seller in his reasonable
discretion, the employees, attorneys, accountants, and other representatives of
Buyer free and full access to the files, books and records of Seller. Seller
shall cooperate fully, and shall use reasonable efforts to
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cause Seller's attorneys and accountants to cooperate fully with Buyer and
Buyer's employees, attorneys, accountants, and other representatives.
6.2 Buyer's Consent. Between the signing of this Agreement and the Closing
Date, without the prior written consent of Buyer, Seller shall:
6.2.1 Not take, suffer or permit any action which would (a)
materially interfere with or preclude the effectuation or consummation of the
transactions contemplated by this Agreement, or (b) result in any of the
representations and warranties of Seller set forth in this Agreement becoming
materially untrue or (c) result in any of the conditions to Closing set forth in
Section 22 not being fully satisfied.
6.2.2 Not omit to take any action, the omission of which would (a)
materially interfere with or preclude the effectuation or consummation of the
transactions contemplated by this Agreement, or (b) result in any of the
representations and warranties of Seller set forth in this Agreement becoming
materially untrue or (c) result in any of the conditions to Closing set forth in
Section 22 not being fully satisfied.
6.2.3 Not enter into any contract, agreement, commitment or
arrangement with any party, except with Customers and suppliers in the ordinary
course of Business.
6.2.4 Use its best efforts to preserve its business organization and
reputation intact, and to preserve its relationship with Customers, suppliers
and others with whom it deals.
6.2.5 Use reasonable efforts consistent with past practice to keep
its operating facilities and all of the Included Assets in good working order
and repair and perform all necessary and reasonable repairs and maintenance.
6.2.6 Continue to maintain all of its usual books and records
consistent with Seller's past practices in the ordinary course of business.
6.2.7 Except in the ordinary course of business, not waive any
material right or cancel any material claim.
6.2.8 Maintain its corporate existence and not merge or consolidate
with any other entity, nor make any amendment to its Charter or By-laws.
6.2.9 Substantially comply in all material respects with all
material provisions of the Customer Contracts and all material applicable laws,
rules and regulations.
6.2.10 File all required tax returns and pay all required taxes.
6.2.11 Not guaranty any obligation of any third party.
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6.2.12 Except for sales in the ordinary course of business, not
sell, transfer, encumber or mortgage any of the Included Assets.
6.2.13 Give notice to Buyer of any unusual event or circumstance
which would materially adversely affect Seller, the Business or any of the
Included Assets.
6.2.14 Except in the ordinary course of business, make no change in
the rate of compensation to employees or hire any additional personnel.
6.2.15 Except in the ordinary course of business, not incur any
liability.
6.2.16 Except in the ordinary course of business, not amend or
terminate any of the Customer Contracts.
6.2.17 Except in the ordinary course of business, not change any of
the rates charged to Customers.
6.2.18 Give notice to Buyer immediately of any employee who gives
notice to Seller or indicates to Seller an intention to terminate employment
with Seller.
6.2.19 Not derogate or defame Buyer.
6.2.20 Not attempt to invoice, accelerate or collect for prebilled
(unearned) revenue for services to Customers except in the ordinary course of
business consistent with past practices.
7. Indemnification.
7.1 Indemnification of Buyer. Seller will indemnify and hold harmless
Buyer and its officers, directors and shareholders (the "Buyer Indemnified
Parties"), from and against any claims, actions, damage, expense, liability,
loss or deficiency, including without limitation, reasonable attorneys' fees and
other costs and expenses incident to any suit, action, claim or proceeding
(collectively, "Damages"), arising out of or resulting from:
7.1.1 Any material inaccuracy in any representation or the material
breach of any warranty made by Seller in this Agreement or in any Exhibit or any
other document delivered pursuant hereto by Seller;
7.1.2 Any material failure of Seller to perform or observe any term
or covenant of this Agreement; or
7.1.3 the operation of the Business or the ownership of the Included
Assets prior to Closing.
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7.2 Indemnification of Seller. Buyer will indemnify and hold harmless
Seller and its officers, directors and shareholders (the "Seller Indemnified
Parties"), from and against any claims, actions, damage, expense, liability,
loss or deficiency including without limitation, reasonable attorneys' fees and
other costs and expenses incident to any suit, action, claim or proceeding,
arising out of or resulting from:
7.2.1 Any material inaccuracy in any representation or the material
breach of any warranty made by Buyer in this Agreement or any other document
delivered pursuant hereto by Buyer;
7.2.2 any material failure of Buyer to perform or observe any term
or covenant of this Agreement; or
7.2.3 the operation of the Business or the ownership of the Included
Assets after Closing.
7.3 Minimum and Maximum Amounts of Indemnity.
7.3.1 No amounts shall be payable by Seller for first-party claims
(i.e., claims against Seller by the Buyer Indemnified Parties) under Section
7.1. until such amounts exceed One Hundred Thousand Dollars ($100,000), (the
"Deductible") and then only amounts in excess of the Deductible shall be due and
payable. Notwithstanding anything to the contrary contained in this Section
7.3., liabilities for (i) breach of any of the representations and warranties in
Section 4.5. [Taxes], (ii) fraud, (iii) Section 4.29 [Payables], (iv) Section
22.13 [Liabilities], (v) Section 8 [Absence of Liabilities], or (vi) third-party
claims, shall be subject to indemnification without regard to any minimum
amount.
7.3.2 No amounts in excess of fifty percent (50%) of the Purchase
Price actually received by Seller (the "Maximum Indemnity") in the aggregate
shall be recoverable by the Buyer Indemnified Parties for first-party claims.
Seller may elect to satisfy its obligations under Section 7.1 by delivering to
Buyer either cash or the Response Shares or a combination thereof. In the event
Seller elects to deliver such Response Shares, the value of the Response Shares
delivered shall be the greater of the Agreed Value or the average closing bid
price of such Response Shares on the ten (10) trading days prior to delivery.
Notwithstanding anything to the contrary contained in this Section 7., (i)
liabilities for Taxes shall be subject to indemnification without regard to any
maximum amount, (ii) damages for fraud shall be limited to compensatory damages
only, (iii) each Party shall first submit claims which may be insured to its
insurance company and use all reasonable best efforts to obtain full payment, it
being the intention of the Parties that all claims for Damages for which a Party
receives the benefits of insurance payments to others or proceeds paid to itself
shall be waived to the extent of such payment and the other Party shall be
released to the extent of such payment including, without limitation,
subrogation claims, and in the event an insurance company fails or refuses to
honor a claim or denies coverage, the insured Party shall assign
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its rights against the insurance company to the other Party, (iv) only the
substantially prevailing Party in any litigation between the Parties shall be
entitled to receive its attorneys' fees and other costs and expenses of suit,
(v) third-party claims subject to indemnification shall be reduced by the
proceeds received from each Party's insurance polic(ies) applicable to the claim
for Damages, and (vi) the indemnification obligation of the Seller for any
third-party claims that are not covered by the Seller's insurance policy(ies)
required to be carried after the Closing shall be limited to the Maximum
Indemnity, but the indemnification obligation of the Seller for any third party
claims that are covered by the Seller's insurance policy(ies) required to be
carried after the Closing shall be limited to the proceeds received from the
Seller's insurance policy(ies) applicable to the claim for Damages.
7.3.3 Any qualifying reference to Seller's or Shareholder's
knowledge contained in any of the representations or warranties set forth in
this Agreement shall not limit, reduce or modify Buyer's rights to
indemnification under this Agreement to the extent that such representations or
warranties were not so qualified. Notwithstanding anything contained in this
Sub-section 7.3.3 to the contrary, except for third-party claims, Buyer's right
to indemnification for breach of any Seller or Shareholder representation or
warranty qualified by knowledge shall be limited to fraud or intentional
misrepresentation by Seller or Shareholder.
7.4 Time Limit on Indemnity.
7.4.1 Notwithstanding any other provisions of this Section 7, no
claim for indemnification under Section 7.1. or 7.2. shall be made by Buyer
Indemnified Parties or Seller Indemnified Parties (i) with respect to First
Party claims pursuant to Section 7.1. or 7.2. after the first anniversary of the
Closing Date (except that in the case of a breach of Seller's representations
and warranties in Section 4.5. [Taxes], claims of indemnification may be made
until the expiration of the applicable statute of limitations; (ii) with respect
to claims for breach of Seller's covenants in Sections 4.24. [Confidentiality],
Section 5.10 [Access to Records] and Section 10. [Non-Compete], after the
expiration of the periods provided in such Sections; with respect to claims for
breach of Buyer's covenants in Section 5.9. [Additional Insured], Section 5.10.
[Access to Records], or Section 5.11 [Confidentiality], after the expiration of
the periods provided in such Sections.
7.4.2 No Claim for indemnification under Section 7.1 or 7.2 shall be
made by Buyer Indemnified Parties or Seller Indemnified Parties with respect to
or involving third-party actions, demands, claims or Damages after the third
anniversary of the Closing Date.
7.5 Notice. Any claim by an indemnified party for Damages under Sections
7.1. or 7.2. will be made in writing and will state in detail the basis on which
the claim for Damages is made. The indemnified party may not take (i) legal
action against the indemnifying party or (ii) offset Damages against payments
due the indemnified party under this Agreement unless such written claim has
been given and the indemnifying party has not given notice to the indemnified
party of a bona fide objection within twenty (20) days after
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the indemnified party notice is given, in which event no offset shall be
permitted until after the entry of a final and unappealable judgement of a court
of competent jurisdiction.
7.6 Third-Party Actions.
7.6.1 All claims for indemnification under Section 7.1. or 7.2.
involving third-party actions or demands shall be made in accordance with the
procedure set forth in this Section 7.6.
7.6.2 Promptly after receipt by an indemnified party of notice of
any third-party action or demand which gives rise to Damages, such indemnified
party shall notify the indemnifying party. Failure so to notify the indemnifying
party shall relieve it of any liability that it may have to any indemnified
party to the extent that the defense of such action is materially prejudiced by
such failure, provided the indemnifying party did not receive or otherwise have
actual notice thereof.
7.6.3 The indemnifying party shall be entitled to participate in the
defense of the third-party action or demand and, at its option, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party
provided (i) that the indemnifying party confirm that the action or demand is
covered by its indemnification obligation or, if not, that the indemnified party
be entitled to participate in the defense, and (ii) Buyer reserves the right to
retain control of the defense of any action or demand which could reasonably be
expected to materially affect Buyer's on-going operations or materially exceed
the maximum indemnity amount payable by Seller under Section 7.1. hereof. If the
indemnifying party receives notice of any action or demand, it shall promptly
notify the indemnified party as to whether it intends to control the defense
thereof.
7.6.4 If notice is given to an indemnifying party of the
commencement of any action and it does not, within 20 days after the indemnified
party's notice is given, give notice to the indemnified party of its election to
assume the defense thereof, the indemnified party shall be entitled to assume
the defense thereof until such time as the indemnifying party elects to assume
the defense thereof. In such event, the indemnifying party shall not be bound by
any compromise or settlement thereof effected by the indemnified party without
its consent, which shall not be unreasonably withheld.
7.7 Waiver of Subrogation. To the extent permitted by each Party's general
liability insurance policy, subrogation for all claims, losses, damages, costs
and expenses is hereby waived. Evidence of such waiver shall be delivered to the
other Party upon written request.
7.8 Set-Off Rights. Either Party may, from time to time, set-off against
any amounts due to the other under this Agreement an amount equal to the
aggregate amount of the uncontested Damages. This right of set-off shall
continue unimpaired and shall not be exhausted by a single exercise thereof. The
right of set-off specified herein shall not be
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deemed to impair or preclude the exercise by either Party of any other right or
remedy it/he might have on account of the existence of any Damages or breach or
violation of this Agreement by the other Party.
7.9 Exclusive Remedy. Except for Section 18 of this Agreement, the parties
agree that all claims for Damages shall be brought against the other Party
pursuant to this Article 7 only.
8. Absence of Liabilities. Seller has no material liabilities except as and to
the extent reflected on the Closing Financial Statement or in this Agreement or
in any Exhibit hereto. Seller shall have no material liabilities arising after
the Closing Financial Statement except those liabilities created in the ordinary
course of business of the Seller and not assumed by the Buyer hereunder, all of
which shall be paid or reserved for by Seller as of the Closing.
9. Further Assurances After Closing. At any time and from time to time after the
Closing Date, at Buyer's reasonable request and without further consideration,
Seller shall promptly execute and deliver all such further instruments or
documents or perform such acts as Buyer may reasonably request in order to more
fully consummate the transactions contemplated herein.
10. Restrictive Covenant.
10.1 Covenant Not to Compete. Seller and Shareholder jointly and severally
covenant and agree that they shall not, for a period of five (5) years after the
Closing Date in the counties of Carbon, Columbia, Lackawanna, Luzerne, Monroe,
Pike, Schuylkill, Sullivan, and Wyoming in the Commonwealth of Pennsylvania,
except with the express prior written consent of Buyer (the execution of which
shall be in Buyer's sole and absolute discretion) or except in connection with
Shareholder's employment with Buyer and for the sole benefit of Buyer, directly
or indirectly, whether as owner, principal, member, stockholder (registered or
beneficial), partner, joint venturer, trust, trustee, executor, administrator,
director, officer, employee, agent, representative, consultant, independent
contractor, investor, financier, lender, operator, manager, guarantor,
professional advisor, or in any other capacity, for his own account or for the
benefit of any other person or entity:
10.1.1 Participate in any entity involved in the retail electronic
security alarm business including, without limitation, the design, installation,
service, maintenance, lease, sale, marketing, inspection, testing and monitoring
of fire, intrusion, sprinkler or other detection alarm security services,
equipment, devices or systems for end-users of such services, equipment, devices
or systems;
10.1.2 Solicit, divert, accept business from or otherwise entice,
take away or interfere or attempt to entice, take away or interfere with any
Customer of the Business including, without limitation, any developer, builder
or contractor;
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10.1.3 Solicit, entice, induce or interfere with any of Seller's
employees;
10.1.4 Otherwise interfere with the Business or the Customers or
Alarm Accounts or derogate or defame Buyer.
10.1.5 Notwithstanding anything contained herein to the contrary,
Seller's and Shareholder's covenants contained in Subsections 10.1.2., 10.1.3.
and 10.1.4. shall (i) be increased or decreased to the period of time that Buyer
is in contract with each such customer, employee or independent contractor, and
(ii) not apply to general advertising, marketing or other efforts that do not
specifically target particular Customers, employees, the Business, Alarm
Accounts or Buyer, provided that Seller and Shareholder shall continue to be
bound by the covenants of Subsections 10.1.2, 10.1.3 and 10.1.4 even as to
Customers who are the recipient of such general advertising, marketing or other
efforts.
10.1.6 Notwithstanding anything contained herein to the contrary,
Seller's and Shareholder's covenants contained in Subsection 10.1.1. shall not
be applicable to any passive financial investment (debt or equity), provided
that such investment does not exceed a five percent (5%) debt or equity interest
in such company or entity.
10.2 Equitable Remedies. The restrictive covenants contained in this
Section 10 are deemed essential parts of this Agreement and material to the
purchase of the Assets. Buyer is entitled to any and all equitable remedies, as
well as remedies in law, to enforce these covenants.
Seller and Shareholder each acknowledge that the restrictions
contained in this Section 10 and in Section 4.24 are reasonable and necessary in
order to protect Buyer's legitimate interest and that any violation thereof may
result in irreparable injury to Buyer. Seller and Shareholder, jointly and
individually, acknowledge and agree that in the event of any material violation
thereof, Buyer shall be authorized and entitled to request, from any court of
competent jurisdiction, preliminary and permanent injunctive relief as well as
an equitable accounting of all profits or benefits arising out of such
violation, which rights and remedies shall be cumulative and in addition to any
other rights or remedies to which Buyer may be entitled. The covenants and
agreements set forth in this Section 10 and in Section 4.24 are made solely in
consideration of the proceeds to be paid at the Closing pursuant to this
Agreement, and shall not be deemed to be waived, diminished, or affected in any
manner by any real or alleged breach by Buyer of this Agreement or any other
Agreement which is claimed by Seller or Shareholders after the Closing date.
10.3 Enforceability of Covenants. If any portion of the covenants or
agreements contained herein, or the application thereof, is construed to be
invalid or unenforceable, then the other portions of such covenant(s) or
agreement(s) or the application thereof shall not be affected and shall be given
full force and effect without regard to the invalid or unenforceable portions.
If any covenant or agreement herein is held to be
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unenforceable because of the area covered, the duration thereof, or the scope
thereof, then the court making such determination shall reduce the area and/or
duration and/or limit the scope thereof, and the covenant or agreement shall
then be enforceable in its reduced form.
11. Joinder of Response. Response acknowledges and agrees that Seller and
Shareholder are unwilling to enter into this Agreement with Buyer unless
Response is a surety, guarantor and accommodation party to Buyer's
representations, warranties, covenants, agreements, commitments and obligations
pursuant to this Agreement and all related documents (the "Obligations").
Response hereby joins in this Agreement to guarantee the full performance of the
Obligations of the Buyer, including but not limited to the obligations regarding
the Response Shares. This guarantee shall be immediately effective without any
notice to Response or Buyer, and will continue in full force and effect until
all of Buyer's Obligations have been fully and finally satisfied. Response
agrees that Seller and Buyer may, without notice to or consent of Response, from
time to time (i) modify this Agreement and any and all related documents, (ii)
compromise, waive, extend or accelerate the Buyer's Obligations, (iii) release,
substitute or agree not to sue the Buyer, or (iv) assign or transfer this
guarantee to Seller's successor and to Shareholder and his personal
representatives, heirs and assigns. This guarantee is binding on the successors
of Response, but is not assignable by Response. This guarantee may not be
amended except in writing signed by Seller, Shareholder, and Response.
12. Indemnity Against Brokerage Commissions. Buyer represents and warrants to
Seller and Seller represents and warrants to Buyer, that there is no person or
entity entitled to receive any brokerage commission or finder's fee in
connection with this Agreement or the transactions provided for herein.
13. Intentionally Blank.
14. Transfer Taxes. The Parties shall share equally all transfer taxes due with
respect to, arising out of or from, or as a result of the execution of this
Agreement, the sale of the Assets and any and all other transactions
contemplated hereby.
15. Fees and Expenses. Except as provided in Section 17 hereof, each Party shall
bear its own costs, fees and expenses including, without limitation, attorneys'
fees, incurred in connection with the transactions contemplated hereby.
16. Intentionally Blank.
17. Breach. Notwithstanding anything contained herein to the contrary, each
Party shall bear its own costs, fees and expenses including, without limitation,
its own attorneys' fees.
18. Break-Up Fee. In the event that at any time following fifty-one (51) days
after the date that Shareholder informs Seller's employees of the existence of
this Agreement (and following the date that Response files the Registration
Statement pertaining to the financing of this Agreement), (i) Buyer elects to
terminate this Agreement for any reason other than the giving of Notice pursuant
to Section 3.4.2, (ii) Seller elects to terminate this Agreement
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for material breach or violation by Buyer, or (iii) the Closing Date is not
extended by agreement of the Parties for any or no reason (the "Termination
Date"), Buyer shall pay Seller a "Break-up Fee" in the amount of Two Hundred
Thousand Dollars ($200,000) on, as and at the Termination Date. For each thirty
(30) day period of time following the initial fifty one (51) days as described
above that the Closing Date is extended pursuant to Section 19.1 below, the
Break-up Fee shall increase by Fifty Thousand Dollars ($50,000). At the election
of Buyer, this Break-up Fee may be paid in the form of Response Shares equal in
value to the Break-up Fee based on the average Closing Bid price of such
Response Shares on the ten (10) trading days prior to the Termination Date. In
such event, Response shall file a registration statement regarding such Response
Shares with all appropriate governmental agencies including, without limitation,
the Securities and Exchange Commission ("SEC"), on or before Ninety (90) days
after the Termination Date in order that such Response Shares become
unrestricted securities, able to be freely bought and sold without restriction
under all applicable statutes, laws, rules and regulations. The Agreed Value of
the Response Shares identified in this Section shall be guaranteed by Buyer for
a period of one (1) year following the effectiveness of the above described
registration statement pursuant to the procedures described in Section 3.1.6 of
this Agreement. No Break-up fee shall be due and owing in the event that Closing
actually occurs hereunder. This Break-up Fee shall be the sole and exclusive
obligation of Buyer to Seller in the event of a termination for any reason other
than the giving of a Notice pursuant to Section 3.4.2 (in which event there
shall be no Break-up Fee or liability owing from Buyer to Seller).
19. Closing.
19.1 Date and Place. Consummation of the transactions referred to in this
Agreement (the "Closing") shall take place on the "Closing Date". The term
"Closing Date" shall mean fifty-one (51) days following the date that Response
files the Registration Statement pertaining to the financing of this
transaction, or such earlier date as the Parties may agree in writing. The
Closing shall take place at the offices of Seller, at 10:00 a.m., on the Closing
Date or such other place as the Parties may agree in writing. The Closing Date
is of the essence of this Agreement. Notwithstanding anything contained herein
to the contrary, either party may, in its or his sole and absolute discretion,
postpone the Closing Date one time for a period up to thirty (30) days, by
giving notice to the other party at least two (2) days prior to the Closing Date
or any rescheduled Closing Date; provided, however, that the aggregate number of
days that the Closing Date is postponed by both parties does not exceed thirty
(30) days; and provided, further, Buyer's right to an extension hereunder shall
be subject to the occurrence of a delay in the closing of its secondary public
offering which is used to finance this transaction, and that such extension
shall not be longer than ten (10) days following the effective date of such
secondary public offering.
19.2 Delivery by Seller to Buyer At Closing. At Closing, Seller shall
deliver or cause to be delivered to Buyer the following:
19.2.1 The Assets and such bills of sale, instruments of assignment
and other instruments and documents as may be reasonably necessary, in the
reasonable opinion of Buyer's counsel, to transfer to Buyer good, valid and
marketable title to the Assets.
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19.2.2 A certificate of Seller, dated as of the Closing Date of
Seller confirming the truth, correctness and completeness of all of the
representations and warranties of Seller contained herein as of the Closing Date
and as of all times between the date hereof and the Closing Date, and confirming
that all agreements, covenants and undertakings of Seller contained herein and
to be performed or fulfilled prior to Closing have been so performed or
fulfilled.
19.2.3 A good standing certificate dated within three (3) business
days before the Closing Date issued by the Secretary of the Commonwealth of
Pennsylvania indicating that Seller is a corporation in good standing with a
valid charter, accompanied by a certified copy of the Seller's Articles of
Incorporation and any amendments thereto.
19.2.4 All Permits and licenses of Seller.
19.2.5 Satisfactory proof of removal or no encumbrances filed
pursuant to the Uniform Commercial Code in all applicable jurisdictions and in
all applicable courts with respect to judgments and other liens.
19.2.6 Seller's UL Certificate for its Central Station, properly
transferred to Buyer's name or receipt by Buyer of a commitment from UL to
transfer such certificate to Buyer following the Closing.
19.2.7 Original signed copies of all Customer Contracts, and
original copies of all customer and supplier lists and Customer files. Each file
must also contain the Programming Codes for each Customer. Programming Codes
include all information necessary to perform maintenance and downloading on the
Alarm Accounts, including dealer lock-out codes, installation codes, pass-key
numbers, pass-words, communicator identification, programming information, and
such other information as Buyer may reasonably request.
19.2.8 All keys, codes and combinations needed to access and/or
utilize all or any part of the Business.
19.2.9 Alarm Registration Numbers for any accounts located within
the City of Philadelphia or any other jurisdictions requiring same.
19.2.10 The Certificate of Insurance referred to in Section 4.19.1
above.
19.2.11 A copy of Seller's billing database on tape or disk, a copy
of Seller's downloading database on tape or disk (including all required
passcodes as set forth in Subsection 19.2.8.) and a Masterfile of each Alarm
Account from Seller's Central Station on tape or disk (in ASCII comma delimited
form).
19.2.12 Unanimous Resolution of the Shareholders and Directors of
Seller approving this transaction.
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19.2.13 Subleases or the Assignment of the written Leases referred
to in Section 1.3.3.
19.2.14 Telephone Transfer Agreements transferring the telephone
lines of Seller referred to herein to Buyer.
19.2.15 Transfers of Title to the vehicles being conveyed hereunder.
19.2.16 Non-solicitation, Non-competition and/or Non-disclosure
Agreements that are available and assignable from any key employees of the
Seller and any sellers of Alarm Accounts sold to the Seller.
19.2.17 The Runout Coverage Certificate of Insurance referred to in
Section 4.19.3 above.
19.2.18 An Employment Agreement between Buyer and Shareholder
executed by Shareholder.
19.2.19 Such additional certificates, proceedings, instruments and
other documents as Buyer or its counsel may reasonably request to evidence
substantial compliance in all material respects by Seller with legal
requirements, the truth, accuracy and completeness, as of the time of Closing,
of Seller's representations and warranties herein contained and due performance
or satisfaction by Seller at or prior to such time of all agreements then to be
performed and all conditions then to be satisfied by Seller.
19.3 Delivery by Buyer to Seller at Closing. At Closing, Buyer shall
deliver or cause to be delivered to Seller the following:
19.3.1 The amount required to be paid by Buyer to Seller pursuant to
the provisions of Section 3.1.
19.3.2 A Certificate dated as of the Closing Date of the appropriate
officers of Buyer confirming the truth and correctness of all of the
representations and warranties of Buyer contained herein as of the Closing Date
and as of all times between the date hereof and the Closing Date, and confirming
that all agreements, covenants and undertakings of Buyer contained herein and to
be performed or fulfilled prior to Closing have been so performed or fulfilled.
19.3.3 A Certificate (and certified copies of all necessary
resolutions) dated as of the Closing Date of the appropriate officers of Buyer
certifying that all necessary corporate action by Buyer has been taken to
authorize or ratify the making of this Agreement by Buyer and to authorize the
consummation of the transactions provided for herein.
19.3.4 Such additional certificates, proceedings, instruments and
other documents as Seller or its counsel may reasonably request to evidence
compliance by Buyer with legal requirements, the truth, accuracy and
completeness, as of the time of Closing, of
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Buyer's representations and warranties herein contained and due performance or
satisfaction by Buyer at or prior to such time of all agreements then to be
performed and all conditions then to be satisfied by Buyer.
19.3.5 The Response Shares.
19.3.6 An Employment Agreement between Buyer and Shareholder
executed by Buyer.
20. Destruction of Assets. Damage to, or destruction or loss of any of the
Included Assets prior to the Closing Date shall be repaired or replaced by
Seller at its sole cost and expense and Seller shall retain insurance proceeds,
if any; provided, however, that if any such damage or destruction materially
adversely affects the ability or capacity of Seller to operate the Business as a
whole and cannot reasonably be restored or repaired at or before the Closing
Date, Seller shall give Buyer notice thereof and Buyer may, at its option,
exercised by notice in writing within ten (10) days after Seller's notice,
terminate this Agreement and, in such case, all agreements and obligations of
the Parties hereto shall cease. In the event Buyer elects not to so terminate
this Agreement, this Agreement shall continue in full force and effect.
21. Continuation and Survival of Representations and Warranties. All
representations and warranties made in this Agreement shall continue to be true
and correct at and as of the Closing Date and at all times between the signing
of this Agreement and the Closing Date, as if made at each of such times. All
representations and warranties contained herein shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any Party. All such representations and warranties shall survive the Closing for
a period of one (1) year from the Closing Date; provided, however, that the
representations and warranties set forth in Section 4.5 [Tax Matters] shall
survive until the applicable statute of limitations has run.
22. Conditions Precedent to Buyer's Obligation to Close. The following shall be
conditions precedent to the obligation of Buyer to Close hereunder, any of which
may be waived by Buyer in its sole and absolute discretion:
22.1 Accuracy of Representations. Each of the representations and
warranties of Seller contained in this Agreement is now and (except as to those
expressly limited to the date hereof or Closing Date) at all times after the
date of this Agreement, to and including the time of Closing, shall be true,
correct and complete in all material respects.
22.2 Performance of Obligations. Each of the agreements, covenants and
undertakings of Seller contained in this Agreement, except for those calling for
performance after Closing, will have been fully performed and complied with at
or before Closing.
22.3 No Litigation. No material litigation, governmental action or other
proceeding involving or potentially involving material liabilities, obligations
or losses on the
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part of Seller, which have not been reasonably reserved by Seller, shall be
threatened in good faith or commenced against Seller or with respect to the
consummation of the transactions provided for herein.
22.4 Delivery of Documents. All documents required to be delivered by
Seller at or prior to Closing, shall be delivered or shall be tendered at the
time and place of Closing, except that the Exhibits to this Agreement shall be
delivered by Seller to Buyer at least fifteen (15) business days prior to the
Closing.
22.5 No Material Change. No material adverse change in the financial
condition, operations or prospects of Seller, the Business, or the Included
Assets shall have occurred between the date of the latest Financial Statements
and the Closing Date.
22.6 Approval of Counsel. All actions, proceedings, instruments and
documents required to be delivered to Buyer in connection with this Agreement,
and all other legal matters, shall have been reasonably approved by counsel for
Buyer.
22.7 Satisfactory Review. No Notice has been properly issued or, if
issued, not withdrawn, pursuant to Subsection 3.4.2.
22.8 Closing of the Jupiter Agreement. Response, Robert L. May and Vito
Verni shall have completed the Closing (in escrow) of the Jupiter Agreement.
22.9 Delivery of Customer Contracts. All original Customer Contracts shall
have been delivered to Buyer.
22.10 Intentionally Blank.
22.11 Delivery of Financial Statements and Tax Returns. Copies of all
Audited Financial Statements, Unaudited Financial Statements and the Closing
Financial Statement and all Federal income tax returns of Seller for the years
ending September 30, 1994, 1995 and 1996 (with copies of all accountants' work
papers which are reasonably available from Terry H. Jones, C.P.A.) shall have
been delivered to Buyer.
22.12 Delivery of Certificate of Insurance. A certificate of insurance
from Seller's comprehensive general liability insurance company (E&O Carrier)
confirming that (i) Seller is insured for a minimum of $10,000,000 and (ii)
subrogation is waived as to the Buyer Indemnified Parties.
22.13 Liabilities. Except for bona fide disputes, all Excluded Liabilities
of Seller due or incurred on or prior to the Closing Date shall be paid in full
or reserved by Seller.
22.14 Delivery of Non-Solicitation, Non-Competition and/or Non-Disclosure
Agreements of Employees. All Non-Solicitation, Non-Competition and/or
Non-Solicitation Agreements signed by any Employees of the Seller (or signed by
any employees of
33
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companies who sold accounts to the Buyer) that are assignable shall be delivered
at the Closing.
22.15 Approval of Accountants. All items identified in Sections 4.3. and
4.5. which are sufficient in the reasonable judgment of Buyer's accountants to
enable the Buyer to complete audited financial statements to comply with SEC
requirements shall be delivered to Buyer at the Closing.
22.16 Escrow Agreement. An Escrow agreement between the Parties hereto and
Seller's counsel pertaining to proceeds of sale that are to be reserved pursuant
to this Agreement.
23. Conditions Precedent to Seller's Obligation to Close. The following shall be
conditions precedent to the obligations of Seller to Close hereunder, any of
which may be waived by Seller in his sole and absolute discretion:
23.1 Accuracy of Representations. Each of the representations and
warranties of Buyer contained in this Agreement is now and (except as to those
expressly limited to the date hereof or the Closing Date) at all times after the
date of this Agreement, to and including the time of Closing, shall be true,
correct and complete in all respects.
23.2 Performance of Obligations. Each of the agreements, covenants and
undertakings of Buyer contained in this Agreement, except for those calling for
performance after Closing, shall have been fully performed and complied with at
or before Closing.
23.3 No Litigation. No material litigation, governmental action or other
proceeding involving or potentially involving liabilities, obligations or losses
on the part of Buyer shall be threatened in good faith or commenced against
Buyer or with respect to the consummation of the transactions provided for
herein.
23.4 Delivery of Documents. All documents, including all approvals and
consents required to be delivered by Buyer at or prior to Closing, shall be
delivered or shall be tendered at the time and place of Closing.
23.5 Approval of Counsel. All actions, proceedings, instruments and
documents required to be delivered to Seller in connection with this Agreement,
and all other legal matters, shall have been reasonably approved by counsel for
Seller.
23.6 Delivery of Certificate of Insurance. A certificate of insurance from
Buyer's comprehensive general liability insurance company (E&O Carrier)
confirming that (i) Buyer is insured for a minimum of $10,000,000 (Products
Liability $5,000,000) (ii) Seller and Shareholder are additional insureds, and
(iii) subrogation is waived as to Seller and Shareholder.
24. Waiver; Reasonable Efforts.
34
<PAGE>
24.1 Waiver. Buyer on the one hand, and Seller on the other hand, may
waive in writing any or all of the conditions precedent to their respective
obligations to Close hereunder, and such waiver shall release and relieve Seller
or Buyer, as the case may be, of any liability for breach of any representation,
warranty or covenant herein contained that has been waived.
24.2 Reasonable Efforts. Nothing herein contained shall be construed to
relieve either Party of their respective obligations to use reasonable efforts
to fulfill the conditions of Closing required herein and otherwise to consummate
the transactions contemplated herein.
25. Miscellaneous.
25.1 Notices. Any and all notices or other communications required or
permitted hereunder shall be in writing and either delivered personally to the
addressee, telexed or telecopied to the addressee, or mailed, certified or
registered mail, return receipt requested, or express mail, postage prepaid, and
shall be deemed to have been duly given on the day when so delivered personally,
telexed, or telecopied, or if by certified or registered mail, four (4) days
after the date of mailing, or if by express mail, two (2) days after the date of
mailing, as follows:
If to Buyer:
United Security Systems, Inc.
11-H Princess Road
Lawrenceville, NJ 08648
Attention: John H. Colehower
FAX: (609) 896-9545
If to Seller:
Robert L. May
23 Casey Avenue
Wilkes-Barre, PA 18702
Fax: (717) 829-8189
with a copy to:
Tannenbaum & Chanin, LLP
10th Floor,
1515 Market Street
Philadelphia, PA 19102
Attention: Carl S. Tannenbaum, Esq.
FAX: (215) 523-5339
35
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or to such other address or addresses as any Party may designate to the others
by notice in conformity with the provisions of this Section 25.1.
25.2 Entire Agreement. This Agreement (including the Exhibits hereto) and
the documents referred to herein contain the entire agreement among the Parties
with respect to the purchase of the Assets and related transactions and
supersede all prior and any other contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, with respect
thereto except as herein contained.
25.3 Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provisions shall be
affected or rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be held invalid or unenforceable in whole
or in part in any jurisdiction.
25.4 Waivers, Amendments and Indulgences. This Agreement may not be
amended, modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may not be waived in any way, except by a written instrument
signed by all the Parties or, in the case of a waiver, by the Party waiving
compliance, in either case the execution of which shall be in each Party's sole
and absolute discretion. Neither the failure nor any delay on the part of any
Party to exercise, in full or in part, any right, remedy, power or privilege
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other or future occurrence. The rights and remedies granted
hereunder or under any other document delivered hereunder or in connection
herewith are cumulative and may be exercised concurrently or consecutively, and
are not exclusive of any rights or remedies otherwise provided at law or in
equity.
25.5 Binding Nature of Agreement; Assignment. All of the terms and
provisions of this Agreement shall be binding upon, inure to the benefit of and
be enforceable by each of the Parties and their respective legal
representatives, heirs, executors, administrators, nominees, successors and
assigns. Prior to the completion of Closing, except for an assignment by Buyer
to a related party, neither Party shall assign, transfer, delegate or encumber
its rights or obligations under this Agreement without the prior written consent
of the other Party, which consent shall be in that Party's sole and absolute
discretion, and any purported assignment, transfer, delegation or encumbrance
without such consent shall be void.
25.6 Variations in Pronouns. Words used herein, regardless of the number
and gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine, or
neuter, as the context indicates is appropriate.
25.7 Exhibits. All Exhibits attached hereto are hereby incorporated by
reference into, and made a part of, this Agreement.
36
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25.8 Time of the Essence. The Parties agree that time is of the essence
with respect to all terms and provisions of this Agreement.
25.9 Number of Days. In computing the number of days for purposes of this
Agreement, all days shall be counted, including Saturdays, Sundays and holidays;
provided, however, that if the final day of any time period falls on a Saturday,
Sunday or holiday, then the final day shall be deemed to be the next day which
is not a Saturday, Sunday or holiday.
25.10 Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any of the Parties whose signature appears thereon, and all of which
shall together constitute one and the same instrument. This Agreement shall
become binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of all of the Parties reflected hereon as
the signatories. It is agreed by all parties that facsimile (faxed) forms,
agreements, signatures, and initials are acceptable and shall have the same
force and effect as originals.
25.11 Section Headings. The section headings in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
25.12 Jurisdiction and Venue. The Parties irrevocably acknowledge and
agree that any suit, action, claim or other proceeding, legal or equitable (a
"Proceeding") arising out of or from, in connection with or as a result of this
Agreement or any of the transactions contemplated hereby shall be brought
exclusively in the state courts for the County of Luzerne, Pennsylvania or the
courts of the United States for the Middle District of Pennsylvania. Each Party
irrevocably assents and submits to the jurisdiction and venue of each such court
in any Proceeding, and unconditionally and irrevocably waives any objection that
it may now or hereafter have to jurisdiction or venue in any such Proceeding in
any of such courts. Each Party irrevocably consents to service of any complaint,
summons, notice or other process relating to any such Proceeding in accordance
with the provisions of Section 25.1 hereof.
25.13 Governing Law. Regardless of the place of contracting, place of
performance or otherwise, this Agreement and all amendments, modifications,
authorizations or supplements hereto, and all questions relating to its
validity, interpretation, performance and
37
<PAGE>
enforcement shall be governed by and construed in accordance with the laws of,
the Commonwealth of Pennsylvania, without regard to the conflicts of law rules
governing in the Commonwealth of Pennsylvania and without regard to any rule of
construction as to which Party drafted this Agreement.
IN WITNESS WHEREOF, the Parties hereto, intending to be legally
bound hereby, have executed or caused a duly authorized officer to execute this
Agreement as of the day and year first above written.
ATTEST: UNITED SECURITY SYSTEMS, INC.
_________________________ By:______________________
, Secretary President
ATTEST: RESPONSE USA, INC.
_________________________ By:______________________
, Secretary President
WITNESS: TRIPLE A SECURITY SYSTEMS, INC.
_________________________ By:______________________
Robert L. May, President
WITNESS: SHAREHOLDER
_________________________ _________________________
Robert L. May
Individually
38
<PAGE>
Exhibit 10(h)
MELLON BANK, N.A.
WITH
RESPONSE USA, INC.
UNITED SECURITY SYSTEMS, INC.
RESPONSE ABILITY SYSTEMS, INC.
EMERGENCY RESPONSE SYSTEMS, INC.
SHELTON SECURITY, INC.
AND
MSG SECURITY SYSTEMS, INC.
---------------------------
LOAN AND SECURITY AGREEMENT
---------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION 1. DEFINITIONS AND INTERPRETATION................................. 1
1.1 Terms Defined.................................................. 1
1.2 Accounting Principles.......................................... 10
SECTION 2. THE LOAN....................................................... 10
2.1 Revolving Line of Credit - Description......................... 10
2.2 Revolving Credit - Termination by Borrowers.................... 11
2.3 Interest....................................................... 11
2.4 Loan Disbursements............................................. 12
2.5 Fees........................................................... 12
2.6 Payments....................................................... 12
2.7 Use of Proceeds................................................ 13
2.8 Capital Adequacy............................................... 13
2.9 Mandatory Repayment............................................ 13
SECTION 3. COLLATERAL..................................................... 13
3.1 Description.................................................... 13
3.2 Lien Documents................................................. 14
3.3 Other Actions.................................................. 15
3.4 Collateral Pledge.............................................. 15
3.5 Searches....................................................... 15
3.6 Landlord's and Mortgagee's Waivers............................. 16
3.7 Filing Security Agreement...................................... 16
3.8 Power of Attorney.............................................. 16
<PAGE>
SECTION 4. CLOSING AND CONDITIONS PRECEDENT TO ADVANCES................... 16
4.1 Resolutions, Opinions, and Other Documents..................... 17
4.2 Absence of Certain Events...................................... 18
4.3 Warranties and Representations at Closing...................... 18
4.4 Compliance with this Agreement................................. 18
4.5 Chief Executive Officer's Certificate.......................... 18
4.6 Verifications.................................................. 19
4.7 Sale of Preferred Stock........................................ 19
4.8 Closing........................................................ 19
4.9 Non-Waiver of Rights........................................... 19
4.10 Future Advances................................................ 19
4.11 Warranties and Representations upon Future Advances............ 19
SECTION 5. REPRESENTATIONS AND WARRANTIES................................. 20
5.1 Corporate Organization and Validity............................ 20
5.2 Insurance...................................................... 20
5.3 Litigation..................................................... 21
5.4 Title to Properties............................................ 21
5.5 Patents and Trademarks......................................... 21
5.6 Governmental Consent........................................... 21
5.7 Taxes.......................................................... 22
5.8 Financial Statements........................................... 22
5.9 Full Disclosure................................................ 22
5.10 Subsidiaries and Affiliates.................................... 22
5.11 Guarantees, Contracts, etc..................................... 22
5.12 Government Regulations and Compliance.......................... 23
<PAGE>
5.13 Business Interruptions......................................... 25
5.14 Names and Addresses............................................ 25
5.15 Other Associations............................................. 25
5.16 Environmental Matters.......................................... 25
5.17 Regulation O................................................... 26
5.18 Capital Stock.................................................. 26
5.19 Solvency....................................................... 26
5.20 Monthly MRR.................................................... 26
5.21 Qualified Accounts............................................. 27
SECTION 6. AFFIRMATIVE COVENANTS.......................................... 27
6.1 Payment of Taxes and Claims.................................... 27
6.2 Maintenance of Properties, Collateral and Corporate
Existence...................................................... 27
6.3 Places of Business............................................. 29
6.4 Business Conducted............................................. 29
6.5 Litigation..................................................... 29
6.6 Certain Taxes.................................................. 29
6.7 Bank Accounts.................................................. 29
6.8 Employee Benefit Plans......................................... 29
6.9 Submission of Collateral Documents............................. 30
6.10 Other Governmental Contracts................................... 30
6.11 Financial Covenants............................................ 30
6.12 Financial and Business Information............................. 32
6.13 Officers' Certificates......................................... 33
6.14 Inspection and Verification.................................... 34
<PAGE>
6.15 Tax Returns and Reports........................................ 34
6.16 Information to Participant..................................... 34
6.17 Material Adverse Developments.................................. 34
6.18 Lockbox Agreements............................................. 34
6.19 Executive Management........................................... 35
6.20 Interest Rate Cap Agreement.................................... 35
6.21 Notice of Certain Events....................................... 35
6.22 Board Nominee.................................................. 36
6.23 Board Observation.............................................. 36
6.24 Additional Policy.............................................. 36
6.25 Monitoring Agreements.......................................... 36
SECTION 7. NEGATIVE COVENANTS.............................................. 37
7.1 Sales, Merger, Consolidation, Dissolution or Liquidation....... 37
7.2 Acquisitions................................................... 37
7.3 Liens and Encumbrances......................................... 38
7.4 Transactions With Affiliates or Subsidiaries................... 38
7.5 Indebtedness or Guarantees..................................... 38
7.6 Distributions, Redemptions and Other Indebtedness.............. 39
7.7 Loans and Investments.......................................... 39
7.8 Use of Lender's Name........................................... 39
7.9 Change in Capital Stock........................................ 39
7.10 Method of Business............................................. 39
7.11 Officer/Shareholder Compensation............................... 40
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7.12 Capital Expenditures........................................... 40
7.13 MRR Sales...................................................... 40
7.14 Purchases of MRR............................................... 40
7.15 Prohibited Transactions........................................ 40
7.16 Consulting Agreements.......................................... 40
7.17 Delinquencies.................................................. 40
7.18 Additional MRR Test............................................ 41
7.19 Modification of Financial Covenants............................ 41
7.20 Miscellaneous Covenants........................................ 41
SECTION 8. DEFAULT........................................................ 41
8.1 Events of Default.............................................. 41
8.2 Rights and Remedies............................................ 44
8.3 Continuation of Event of Default............................... 45
8.4 Nature of Remedies............................................. 45
8.5 Set-Off........................................................ 45
8.6 Confession of Judgment......................................... 45
SECTION 9. MISCELLANEOUS.................................................. 46
9.1 Governing Law.................................................. 46
9.2 Integrated Agreement........................................... 46
9.3 Waivers, Releases and Indemnification.......................... 46
9.4 Time........................................................... 48
9.5 Expenses of Lender............................................. 48
9.6 Brokerage...................................................... 48
9.7 Notices........................................................ 49
9.8 Headings....................................................... 50
9.9 Survival....................................................... 50
<PAGE>
9.10 Successors and Assigns......................................... 50
9.11 Duplicate Originals............................................ 50
9.12 Modification................................................... 50
9.13 Signatories.................................................... 50
9.14 Third Parties.................................................. 50
9.15 Discharge of Taxes, Borrowers' Obligations, Etc................ 51
9.16 Withholding and Other Tax Liabilities.......................... 51
9.17 Consent to Jurisdiction........................................ 52
9.18 Waiver of Jury Trial........................................... 52
9.19 Future Commitments............................................. 52
<PAGE>
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement ("Agreement") is dated as of June 30,
1996 among RESPONSE USA, INC., a Delaware corporation ("RUSA"), UNITED SECURITY
SYSTEMS, INC., a New Jersey corporation ("USS"), RESPONSE ABILITY SYSTEMS, INC.,
a New Jersey corporation ("RAS"), EMERGENCY RESPONSE SYSTEMS, INC., a Delaware
corporation ("ERS"), SHELTON SECURITY, INC., a New Jersey corporation ("SSI")
and MSG SECURITY SYSTEMS, INC., a Pennsylvania corporation ("MSG") (each a
"Borrower" and collectively "Borrowers") and MELLON BANK, N.A. ("Lender").
BACKGROUND
A. Borrowers desire to establish certain financing arrangements with and
borrow funds and obtain other credit accommodations from Lender, and Lender is
willing to establish such arrangements for and make loans and extensions of
credit to Borrowers under the terms and provisions hereinafter set forth.
B. The parties desire to define the terms and conditions of their
relationship and to reduce their agreements to writing.
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
SECTION 1. DEFINITIONS AND INTERPRETATIONSECTION 1. DEFINITIONS AND
INTERPRETATIONSECTION 1. DEFINITIONS AND INTERPRETATION
1.1 Terms Defined.1 Terms Defined.1 Terms Defined: As used in this
Agreement, the following terms shall have the following respective meanings:
Account - Any right to payment for goods sold or leased or for
services rendered which is not evidenced by an instrument or chattel paper,
whether or not it has been earned by performance.
Account Debtor - Any Person obligated on any Account.
Additional Policy - The life insurance policy to be issued by Banner
Life Insurance Company, to be owned by RUSA, insuring the life of Richard M.
Brooks in the face amount of $1,000,000.
<PAGE>
Advances - Any monies advanced or credit extended to Borrowers by
Lender under the Revolving Credit.
Affiliate - Any entity (other than a Subsidiary) which directly or
indirectly through one or more intermediaries controls, is controlled by, or is
under common control with any Borrower. Control may be by ownership, contract,
or otherwise.
Applicable Rate - The Contract Rate or the Default Rate, as
applicable and in effect from time to time.
Authorized Officer - Any officer of a Borrower authorized by
specific resolution of a Borrower to request Advances as set forth in the
incumbency certificate referred to in Section 4.1(d) of this Agreement (or any
replacement thereof) delivered to Lender.
Available Credit - The excess (if any) of the Maximum Revolving
Credit Amount over the aggregate Advances then outstanding.
Bankruptcy Code - Title 11 of the United States Code, 11 U.S.C. ss.
101 et seq. in effect as of the date hereof.
Business Day - Any day other than a Saturday, Sunday, or legal
holiday on which Lender is not open for business in Philadelphia, Pennsylvania.
Business Operations - all business offerings and services of
Borrower, including, without limitation, Monitoring Services, Rentals and
Servicing.
Capital Expenditures - Any expenditure (whether in cash or deferred
obligation, and whether by purchase or through a capital lease) that would be
classified as a capital expenditure on a statement of cash flow of Borrowers
prepared in accordance with GAAP, consistently applied.
Capital Leases - Leases which under GAAP are capitalized and treated
as debt of the lessee and are carried as a liability on the lessee's balance
sheet.
Capitalized Lease Obligations - All debts, liabilities and
obligations of a lessee under Capital Leases.
Cash Equivalents - All cash (excluding cash held for customers or
other Persons), cash equivalents (as reasonably determined by Lender) and trade
Accounts.
<PAGE>
Cash Flow - Earnings of Borrowers before interest expense, income
taxes, depreciation and amortization, as shown on a consolidated statement of
income for Borrowers prepared in accordance with GAAP; such earnings shall be
calculated for each Fiscal Quarter and then multiplied by four (4).
Change in Control - means a transaction or transactions in which (i)
one or more Persons shall have acquired Voting Control of RUSA or (ii) there
shall have occurred a merger, consolidation or similar combination as a result
of which one or more Persons shall have acquired Voting Control of RUSA or its
successor corporation.
Closing - As defined in Section 4.6.
Closing Date - As defined in Section 4.6.
Collateral - As defined in Section 3.1.
Commitment Fee - As defined in Section 2.5(b).
Contract Rate - Shall equal the Prime Rate plus one and
three-quarters percent (1.75%) per annum.
Controller's Certificate - A certificate signed by the Chief
Financial Officer or Controller of a Borrower in the form of Exhibit "A" hereto.
Default Rate - Shall equal the Prime Rate plus three and
three-quarters percent (3.75%) per annum.
Delinquent Recurring Monthly Revenue - As defined in Section 7.17
herein.
Distribution -
(1) Dividends or other distributions on capital stock of Borrower;
and
(2) The redemption, repurchase or acquisition of such stock or of
warrants, rights or other options to purchase such stock.
ERISA - The Employee Retirement Income Security Act of 1974, as the
same may be amended from time to time.
Event of Default - As defined in Section 8.1.
Expenses - As defined in Section 9.5.
<PAGE>
Extended Warranty/Service - Providing extended warranty and
maintenance services under contract in connection with sales, rentals or leases
of alarm systems and personal emergency response systems.
Extended Warranty/Service Agreements - Agreements between a Borrower
and its customers pursuant to which such Borrower provides Extended
Warranty/Service services.
Extended Warranty/Service Revenues - Borrower's revenues from
Extended Warranty/Services net of all residential and commercial service time
and materials costs.
Facility Fee - As defined in Section 2.5(a).
Financial Statements - Consolidated and consolidating balance sheet,
income statement, statement of cash flow and statement of Shareholder's Equity
of Borrowers, all prepared in accordance with GAAP consistently applied and
accompanied by a Controller's Certificate. All Financial Statements shall set
forth both the current Fiscal Year and the comparative period of the prior
Fiscal Year; monthly and quarterly Financial Statements shall also include year
to date information and information for the comparative period for the prior
Fiscal Year.
Fiscal Quarter - A fiscal quarter of Borrowers (currently the three
month periods ending March 31, June 30, September 30 and December 31 of each
year).
Fiscal Year - A fiscal year of Borrowers (currently the period
beginning each July 1 and ending on June 30 of following calendar year).
GAAP - Generally accepted accounting principles applied in a manner
consistent with the audited financial statements of Borrower provided to Lender
on or prior to the date hereof.
Holdings - APT Holdings Corporation, a Delaware corporation.
Indebtedness - As to any Person, at a particular time, all items
which would, in conformity with GAAP, be classified as liabilities on a balance
sheet of such Person as at such time, and also including (a) indebtedness
arising under acceptance facilities and the face amount of all letters of credit
issued for the account of such Person, and, without duplication, all drafts
drawn thereunder, (b) all liabilities secured by any Lien on any property owned
by such Person even though it has not assumed or otherwise
<PAGE>
become liable for the payment thereof, (c) obligations under leases which have
been, or under GAAP are required to be, capitalized, (d) all liabilities for
which such Person is liable as a surety, guarantor, co-signer or accommodation
maker, and (e) all liabilities with respect to redeemable preferred stock.
Inventory - In addition to the term as defined in the UCC, any
inventory now or hereafter owned or acquired by Borrowers, wherever located,
and, in any event, including all inventory, merchandise, goods and other
personal property which are held by or on behalf of Borrowers for sale or lease
or are furnished or are to be furnished under a contract of service or which
constitute raw materials, work in progress, or materials used or consumed or to
be used or consumed in Borrowers' business, or in the processing, packaging,
advertising, promotion, delivery or shipping of the same, and all finished
goods.
Key Man Policies - The key man life insurance policies issued by
First Colony Insurance Company and Transamerica Occidental Life Insurance
Company, which are owned by RUSA, insure the life of Richard M. Brooks and
are in the aggregate face amount of $2,000,000.
Lien - Any interest in property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether such interest
is based on the common law, statute or contract, and including, but not limited
to, a security interest, lien, mortgage, encumbrance, pledge, conditional sale,
other title retention agreement, trust receipt, lease, consignment or bailment
for security purposes or trust. The term "Lien" shall include reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances affecting
Property other than those which would not materially interfere with Borrowers'
use of the Property or would not materially detract from the value of the
Property. For the purposes of this Agreement, Borrowers shall be deemed to be
the owner of any Property which they have acquired or holds subject to a
conditional sale agreement or other arrangement pursuant to which title to the
Property has been retained by or vested in some other person for security
purposes.
Life Insurance Policies - The Key Man Policies and the Additional
Policy.
Loan Documents - This Agreement, the Revolving Credit Note, the
Pledge Agreement, the Warrant Documents and each other document, instrument or
agreement required to be delivered hereby, as each may be amended, supplemented
or replaced from time to time.
<PAGE>
Material Adverse Effect - A material adverse effect on the business,
Property, financial condition, operations or business prospects of a Borrower or
the ability of a Borrower to pay and perform its obligations under this
Agreement.
Maturity Date - June 30, 2000.
Maximum Revolving Credit Amount - Fifteen Million ($15,000,000)
Dollars, subject to reduction as provided in Sections 2.9 and 6.2(b) herein.
Monitoring Agreements - Agreements between any Borrower and its
customers pursuant to which such Borrower provides Monitoring Services.
Monitoring Business - The provision of Monitoring Services to
customers pursuant to Monitoring Agreements.
Monitoring Revenues - Borrowers' revenues from performance of
Monitoring Services.
Monitoring Services - The monitoring of signals received from alarm
systems and personal emergency response systems installed at a specified
location and the response to such signals in accordance with the written
instructions prepared by the customer and delivered to a Borrower.
Monthly Recurring Revenue - (MRR) - The sum of Borrowers' (i)
Monitoring Revenues, (ii) Rental Revenues and (iii) Extended Warranty/Services
Revenues during the last month of each Fiscal Quarter. MRR does not include any
revenues from the sale of alarm systems, personal emergency response systems or
other products.
Net Income (Loss) - The net before tax income (or loss) of
Borrowers, as such would appear on a consolidated statement of income of
Borrowers prepared in accordance with GAAP, consistently applied, except that
such income or loss shall be calculated without taking into account the original
issue discount amortization expense with respect to (i) the Warrant and the
Revolving Credit Note and (ii) the Preferred Stock.
Obligations - All liabilities and obligations of Borrowers to
Lender, including, without limitation, indebtedness evidenced by the Revolving
Credit Note issued pursuant hereto, obligations under the other Loan Documents,
all fees and charges owing by Borrowers, and all other liabilities and
obligations of every kind or nature whatsoever of Borrowers to Lender, whether
hereunder or otherwise, whether incurred, created, acquired or arising on the
date thereof or hereafter incurred, created or arising, joint or several,
matured, unmatured or contingent, direct
<PAGE>
or indirect, primary or secondary, related or unrelated, due or to become due,
including, but not limited to, any extensions, modifications, substitutions,
increases and renewals thereof, and substitutions therefor; the payment of all
amounts advanced by Lender to preserve, protect, defend, and enforce its rights
hereunder and in the Collateral in accordance with the terms of this Agreement;
and the payment of all Expenses incurred by Lender.
Operating Contracts - All Monitoring Agreements, Rental Agreements
and Service Agreements.
Permitted Bank Accounts - Borrowers' bank accounts listed on
Schedule "6.7" hereto, but only for the time periods set forth in Section 6.7
and only if there is compliance with Section 6.18 herein.
Permitted Liens - As defined in Section 7.3 herein.
Person - An individual, partnership, corporation, trust,
unincorporated association or organization, limited liability company or
partnership, joint venture or any other entity.
Pledge Agreement - A collateral pledge agreement from RUSA, of even
date herewith, pledging the Pledged Stock to Lender to secure the Obligations.
Pledged Stock - The capital stock of all of RUSA's Subsidiaries.
Potential Default - any event or condition the occurrence or
existence of which, with the giving of notice or passage of time or both, would
become or constitute an Event of Default.
Preferred Stock - The 7,500 shares of 1996 Series A Preferred Stock
issued by RUSA on or prior to the date hereof.
Prime Rate - That rate designated by Lender in its discretion from
time to time as Lender's "Prime Rate", which shall not necessarily constitute
Lender's lowest or best available rate to any customer or group or class of
customers.
Property - Any interest of any Person in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
Purchase Money Lien - A Lien upon equipment securing purchase money
indebtedness incurred to finance the purchase of such equipment so long as (i)
the Lien shall at all times be confined to the purchased equipment, (ii)
indebtedness secured by
<PAGE>
such Lien does not exceed eighty percent (80%) of the purchase price of the
purchased equipment, and (iii) the removal or deactivation of the purchased
equipment would not have an adverse effect on the operation or value of the
Collateral or a Borrower's Business Operations.
Qualified Account - An Account of a Borrower meeting all the
following specifications: (i) it is lawfully and solely owned by a Borrower and
subject to no Lien or assignment (other than the Lien of Lender), and such
Borrower has the right of assignment thereof and the power to grant a security
interest to Lender therein; (ii) it is a valid and enforceable Account,
representing the undisputed indebtedness of an Account Debtor outstanding not
more than ninety (90) days past the payment date specified in the invoice
therefor; (iii) the Account is not subject to any defense, set-off,
counterclaim, deduction, discount, credit, chargeback, freight claim, allowance
or adjustment of any kind; (iv) the Account is net of all amounts representing
goods the sale of which has given rise to the Account which have been returned,
rejected, lost or damaged; (v) if it arises from the sale of goods by such
Borrower, such sale was an absolute sale and not on consignment or on approval
or on a sale-or-return basis nor subject to any other repurchase or return
agreement, and such goods have been shipped to the Account Debtor or its
designee; (vi) if it arises from the performance of services, such services have
actually been performed; (vii) it arose in the ordinary course of such
Borrower's Business Operations; (viii) no notice of the bankruptcy,
receivership, reorganization or insolvency of the Account Debtor has been
received; (ix) the Account Debtor is not a Subsidiary or Affiliate of Borrowers;
(x) except for Voxcom, Inc. it is not an Account of an Account Debtor having its
principal place of business or executive office outside the United States, the
payment of which Account is not guaranteed by an irrevocable letter of credit in
form and substance satisfactory to Lender and assigned to Lender; (xi) it does
not represent a sale to the government of the United States of America or any
subdivision thereof unless such Borrower has complied, for the benefit of
Lender, with the Federal Assignment of Claims Act; (xii) not more than fifty
percent (50%) of the aggregate balance of all Accounts owing from the Account
Debtor obligated on the Account are outstanding more than sixty (60) days past
their payment date; (xiii) it is not an Account of an Account Debtor obligated
to a Borrower under any instrument; and (xiv) the payment date for such Account
is not later than thirty (30) days after its original invoice date. A Qualified
Account does not include that portion of an Account representing interest
charges for past due balances, credit memos, or sales tax.
Registration Agreement - The Registration Rights Agreement dated the
date hereof between RUSA and Holdings.
<PAGE>
Rental Agreements - Contracts with customers pursuant to which a
Borrower leases (as lessor) alarm systems or personal emergency response
systems.
Rental Revenues - Borrower's revenues from Rentals.
Rentals - The leasing (as lessor) of alarm systems and personal
emergency response systems.
Revolving Credit - As defined in Section 2.1(a).
Revolving Credit Note - That certain promissory note described in
Section 2.1(b), as it may be amended, supplemented or replaced from time to
time.
Senior Funded Debt - The unpaid balance of Advances outstanding
under the Revolving Credit on the last day of a Fiscal Quarter.
Service Agreements - Contracts with customers pursuant to which a
Borrower provides Servicing.
Subordinated Debt - Indebtedness subordinated to the Obligations
pursuant to a subordination agreement in form and substance acceptable to
Lender.
Subsidiary - Any corporation more than fifty (50%) percent of whose
voting stock is legally and beneficially owned by a Borrower or owned by a
corporation more than fifty (50%) percent of whose voting stock is legally and
beneficially owned by a Borrower.
Voting Control - shall mean the power directly or indirectly,
individually, or as a member of a "control group" (as such term is defined in
Section 13 of the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder), to cast votes, or to cause votes to be
cast, either through voting (individually, as a voting trustee or as an officer,
director or controlling shareholder of a corporate shareholder, as a general
partner of a shareholder which is a partnership or as a trustee of a shareholder
which is a trust) or by agreement or proxy, for the election of a majority of
the members of the board of directors of RUSA (or any successor of RUSA as a
result of any merger, consolidation or otherwise).
Warrant - The Common Stock Purchase Warrant dated the date hereof
issued by RUSA to Holdings, on the date hereof, there are 1,032,135 shares of
RUSA's Common Stock issuable thereunder.
<PAGE>
Warrant Agreement - The Warrant Agreement dated the date hereof
between RUSA and Holdings.
Warrant Documents - The Warrant, Warrant Agreement and the
Registration Agreement.
1.2 Accounting Principles:
Where the character or amount of any asset or liability or item of income or
expense is required to be determined or any consolidation or other accounting
computation is required to be made for the purposes of this Agreement, this
shall be done in accordance with GAAP, to the extent applicable, except where
such principles are inconsistent with the requirements of this Agreement.
SECTION 2. THE LOAN
2.1 Revolving Line of Credit - Description:
(a) Subject to the terms and conditions of this Agreement, Lender
hereby establishes for the benefit of Borrowers a revolving credit facility
("Revolving Credit") under which Advances shall be extended to or for the
benefit of Borrowers from time to time hereunder. The aggregate principal amount
of all Advances outstanding shall not, at any time, exceed the Maximum Revolving
Credit Amount. Subject to such limitation, the outstanding balance of unpaid
Advances under the Revolving Credit may fluctuate from time to time, to be
reduced by repayments made by Borrowers, and to be increased by future Advances
which may be made by Lender to or for the benefit of Borrowers. For the purposes
of this Agreement, any determination as to whether there is Available Credit for
Advances shall be determined by Lender and shall be final and binding upon
Borrowers. Subject to the existence of Available Credit and up to the amount
thereof, the fulfillment of any and all other conditions to borrowing contained
in this Agreement and the absence of an Event of Default or Potential Default,
Borrowers may borrow, repay and reborrow under the Revolving Credit from time to
time prior to the Maturity Date. If the aggregate principal amount of all
Advances at any time exceeds the Maximum Revolving Credit Amount, Borrowers
will, upon Lender's request, and without impairing any other rights of Lender,
immediately repay such excess in full.
(b) At Closing, Borrowers shall execute and deliver a promissory
note to Lender in the principal sum of the Maximum
<PAGE>
Credit Amount, in form and substance acceptable to Lender, (the "Revolving
Credit Note") to evidence its unconditional obligation to repay Lender for all
Advances made from time to time under the Revolving Credit, with interest as
herein and therein provided. Each Advance made from time to time under the
Revolving Credit shall be deemed evidenced by the Revolving Credit Note, which
is deemed incorporated herein by reference and made part hereof.
(c) The term of the Revolving Credit and Lender's obligation to make
Advances hereunder shall expire on the Maturity Date. On such date, all of the
outstanding Obligations under the Revolving Credit, unless having been sooner
demanded by Lender pursuant to the terms hereof or of the Revolving Credit Note,
shall be due and payable in full and as of and after such due date no further
Advances shall be available from Lender.
2.2 Revolving Credit - Termination by Borrowers:
Borrowers may at any time prior to the Maturity Date and on not
less than thirty (30) days prior written notice to Lender, terminate the
Revolving Credit; provided, however, that on the termination date Borrowers
shall pay in full all of the outstanding Obligations.
2.3 Interest:
(a) Rate: Interest on outstanding Advances shall accrue at a per
annum rate equal to Contract Rate, subject to the provisions of subparagraph (b)
below.
(b) Default Rate: After the occurrence and during the continuance of
an Event of Default hereunder, interest on the outstanding Advances shall accrue
at a per annum rate equal to the Default Rate.
(c) Calculation and Payment of Interest: Interest on all Advances
shall be computed daily for the actual number of days elapsed, but calculated on
the basis of a year of 360 days. The interest rate charged on each such
obligation shall change on the same day as Lender's Prime Rate may change from
time to time. Interest on the outstanding Advances shall be payable monthly, in
arrears, on the first day of each calendar month.
(d) Continuation of Interest Charges: Interest shall continue to
accrue on all outstanding Advances and be paid at the Applicable Rate even after
default, maturity, acceleration, judgment, bankruptcy, insolvency proceedings of
any kind, or the happening of any other event or occurrence.
<PAGE>
(e) Applicable Interest Limitations: In no contingency or event
whatsoever shall the aggregate of all amounts deemed interest hereunder and
charged or collected pursuant to the terms of this Agreement exceed the highest
rate permissible under any law which a court of competent jurisdiction shall, in
a final determination, deem applicable hereto. In the event that any court
determines Lender has charged or received interest hereunder in excess of the
highest applicable rate, such rate shall automatically be reduced to the maximum
rate permitted by such law and the amount of any excess previously received by
Lender determined to be refundable shall be offset and applied against other
Obligations due or to become due as Lender may determine.
2.4 Loan Disbursements:
(a) Advances made by Lender under the Revolving Credit shall be made
available to Borrowers by crediting such proceeds to the operating account(s) of
Borrowers with Lender. Advances will be made available to Borrowers on any
Business Day after a telephonic request by Borrowers to Lender (made before
11:00 A.M. Philadelphia time) on such Business Day. Each such request shall be
confirmed by Borrowers in writing on the same day as the Advance is requested
(confirmation by facsimile transmission being acceptable), which confirmation
shall be accompanied by a Borrowing Base Certificate. Lender may rely upon any
and all telephonic and written requests and confirmations purported to be made
by Borrowers through any of their Authorized Officers. All Advances requested by
Borrowers shall be in a minimum amount of Fifty Thousand Dollars ($50,000) and
in equal increments of Ten Thousand Dollars ($10,000) thereafter.
(b) Lender may, in its sole discretion, without any obligation to do
so, charge the operating account(s) of Borrowers with Lender for the Obligations
as they become due from time to time under this Agreement including, without
limitation, interest, principal, fees and reimbursement of Expenses.
2.5 Fees:
(a) Borrowers shall be unconditionally obligated to pay Lender One
Hundred Fifty Thousand ($150,000) Dollars on the Closing Date (the "Facility
Fee") to which Lender is entitled for committing to and creating the Revolving
Credit for the benefit of Borrowers; Borrowers shall be credited for payments
made by them to Lender prior to the Closing Date on account thereof.
(b) So long as the Revolving Credit has not been terminated pursuant
to the terms hereof and the Obligations have
<PAGE>
not been satisfied in full, Borrowers shall unconditionally pay to Lender a fee
("Commitment Fee") equal to one-half of one percent (0.5%) per annum of the
average daily Available Credit, which fee shall be computed on a monthly basis
in arrears and due and payable on the first day of each month commencing on the
first day of the first full month after Closing and on the Maturity Date.
2.6 Payments: Except to the extent otherwise set forth in this
Agreement, or as may be otherwise designated by Lender in writing, all
payments of principal and of interest on Advances under the Revolving Credit,
the Facility Fee, the Commitment Fee, all other charges and any other
Obligations of Borrower hereunder, shall be made to Lender at Mellon
Independence Center, 701 Market Street, 5B South, Philadelphia, Pennsylvania
19106, Attn: Loan Administration, in United States dollars, in immediately
available funds. All payments shall be applied in the manner designated by
Borrower if not so designated or if an Event of Default is outstanding, may
be applied by Lender against the Obligations in such order as Lender may
determine in its discretion.
2.7 Use of Proceeds: The proceeds of Advances shall be used to satisfy
Borrowers' borrowed indebtedness to its current lender and the balance shall
be used for acquisitions and for the working capital needs of Borrowers.
2.8 Capital Adequacy: If any present or future law, governmental rule,
regulation, policy, guideline, directive or similar requirement (whether or
not having the force of law) imposes, modifies, or deems applicable any
capital adequacy, capital maintenance or similar requirement which affects
the manner in which Lender allocates capital resources to its commitments
(including any commitments hereunder), and as a result thereof, in the
opinion of Lender, the rate of return on Lender's capital with regard to the
Advances is reduced to a level below that which Lender could have achieved
but for such circumstances, then in such case and upon notice from Lender to
Borrowers, from time to time, Borrowers shall pay Lender such additional
amount or amounts as shall compensate Lender for such reduction in Lender's
rate of return. Such notice shall contain the statement of Lender with regard
to any such amount or amounts which shall, in the absence of manifest error,
be binding upon Borrowers. In determining such amount, Lender may use any
method of averaging and attribution that it deems applicable, in its sole
discretion.
2.9 Mandatory Repayment: Upon the death of Richard M. Brooks (i) the
<PAGE>
proceeds of the Life Insurance Policies shall be applied to repay outstanding
Advances as follows: if at such time an Event of Default or Potential Default
has occurred and is continuing, all of the proceeds of such Policies shall be so
applied; otherwise $1,500,000 of the proceeds shall be so applied and (ii) the
Maximum Credit Amount shall automatically be reduced by an amount equal to the
amount required to be repaid.
SECTION 3. COLLATERAL
3.1 Description: As security for the full and timely payment of the
Obligations, and satisfaction by the Borrowers of all covenants and
undertakings contained in this Agreement and the other Loan Documents,
Borrowers each hereby respectively assign and grant to Lender a continuing
lien on and security interest in, upon and to the following Property (the
"Collateral"):
(a) Accounts, Contract Rights, Etc. - All of such Borrowers'
respective now owned and hereafter acquired, created or arising Accounts,
accounts receivable, notes receivable, contract rights, chattel paper, documents
(including documents of title), instruments and letters of credit;
(b) Inventory - All of such Borrower's respective now owned or
hereafter acquired Inventory of every nature and kind, wherever located;
(c) General Intangibles - All of such Borrower's now owned and
hereafter acquired, created or arising general intangibles of every kind and
description, including, without limitation, all existing and future customer
lists, choses in action, claims, books, records, patents and patent
applications, copyrights, trademarks, tradenames, tradestyles, trademark
applications, blueprints, drawings, designs and plans, trade secrets, contracts,
licenses, license agreements, distribution agreements, formulae, tax and any
other types of refunds, returned and unearned insurance premiums, rights and
claims under insurance policies including, without limitation, credit, life and
casualty insurance policies, and computer information, software, records and
data;
(d) Equipment - All of such Borrower's now owned and hereafter
acquired equipment, including, without limitation, machinery, vehicles,
furniture and fixtures, wherever located, and all replacements, parts,
accessions, substitutions and additions thereto;
<PAGE>
(e) Deposit Accounts - All of such Borrower's now existing and
hereafter acquired or arising deposit accounts of every nature, wherever
located, and all documents and records associated therewith;
(f) Property in Lender's Possession - All Property of each Borrower
now or hereafter in Lender's possession;
(g) Life Insurance - The Key Man Policies and the Additional Policy;
(h) Pledged Stock - The Pledged Stock; and
(i) Proceeds - The proceeds (including, without limitation,
insurance proceeds), whether cash or non-cash, of all of the foregoing.
3.2 Lien Documents: At Closing and thereafter as Lender reasonably
deems necessary, Borrowers shall execute and deliver to Lender, or have
executed and delivered (all in form and substance satisfactory to Lender):
(a) Financing Statements - Financing statements covering the
Collateral pursuant to the UCC (the "Financing Statements"), which Lender may
file from time to time in any jurisdiction where any Collateral is or may be
located and in any other jurisdiction that Lender deems appropriate; and
(b) Other Agreements - Any other agreements, documents, assignments,
instruments and writings required to evidence, perfect or protect Lender's lien
and security interest in the Collateral required hereunder or as Lender may
reasonably request from time to time.
3.3 Other Actions: In addition to the foregoing, Borrowers shall do
anything further that may be lawfully and reasonably required by Lender to
secure Lender and effectuate the intentions and objects of this Agreement,
including, but not limited to, the execution and delivery of continuation
statements, amendments to financing statements, security agreements,
contracts and any other documents required hereunder. At Lender's request,
Borrowers shall also immediately deliver to Lender all items for which Lender
must receive possession to obtain a perfected security interest, including,
without limitation, all notes, letters of credit, certificates and documents
of title, chattel paper (including, but not limited to, all Rental
Agreements), warehouse receipts, instruments, and any other similar
instruments constituting Collateral.
<PAGE>
3.4 Collateral Pledge: On the Closing Date, as further security for
payment of the Obligations and satisfaction by Borrowers of all covenants and
undertakings contained in this Agreement and the other Loan Documents, Lender
shall receive a collateral pledge from RUSA of all of the capital stock of
each of the other Borrowers.
3.5 Searches:
(a) Lender shall, prior to or at Closing, and thereafter as Lender
may determine from time to time, all at Borrowers' expense, obtain, or Borrowers
shall obtain at Lender's request, the following searches against each Borrower,
under their current and former names and the names of each Person from whom any
Borrower acquired assets outside of the ordinary course of business within the
past five years (the results of which are to be consistent with the warranties
and representations made by Borrowers in this Agreement):
(i) UCC searches with the Secretary of State/Commonwealth and
local filing office of each state where each Borrower maintains or has
maintained its respective executive office, a place of business, or assets;
(ii) Judgment, federal tax lien and corporate tax lien
searches, in all applicable filing offices of each state/commonwealth searched
under subparagraph (a)(i) above.
(b) Borrowers shall, prior to or at Closing and at its expense,
obtain and deliver to Lender good standing certificates showing each Borrower to
be in good standing in its state/commonwealth of incorporation and in each other
state or foreign country in which it is doing and presently intends to do
business for which qualification is required.
3.6 Landlord's and Mortgagee's Waivers: Borrowers will cause each owner of
any premises occupied by any Borrower or to be occupied by any Borrower and each
mortgagee of any premises owned or occupied by any Borrower to execute and
deliver to Lender an instrument, in form and substance satisfactory to Lender,
under which such owner(s) or mortgagee(s) respectively, subordinates
its/his/their interests in and waives its/his/their right to distrain on or
foreclose against the Collateral and agrees to allow Lender to remain on such
premises to dispose of or deal with any Collateral located thereon.
<PAGE>
3.7 Filing Security Agreement: A carbon, photographic or other
reproduction or other copy of this Agreement or of a financing statement is
sufficient as and may be filed in lieu of a financing statement.
3.8 Power of Attorney: Each of the officers of Lender is hereby
irrevocably made, constituted and appointed the true and lawful attorney for
each Borrower (without requiring any of them to act as such and without
liability of any kind for so acting) with full power of substitution to do
the following: (1) execute in the name of such Borrower any financing
statements, amendments, schedules, assignments, instruments, documents and
statements that such Borrower is obligated to give Lender hereunder or which
are necessary or desirable to perfect Lender's security interest or lien in
the Collateral; (2) endorse the name of such Borrower upon any and all
checks, drafts, money orders and other instruments for the payment of monies
that are payable to such Borrower and constitute collections on Accounts or
other Collateral; and (3) following the occurrence and during the continuance
of an Event of Default, do such other and further acts and deeds in the name
of such Borrower that Lender may deem necessary or desirable to enforce or
collect any Account or other Collateral.
SECTION 4. CLOSING AND CONDITIONS PRECEDENT TO ADVANCES
Closing is subject to the following conditions precedent (all documents to
be in form and substance satisfactory to Lender and Lender's counsel):
4.1 Resolutions, Opinions, and Other Documents: Borrowers shall have
delivered to Lender the following:
(a) this Agreement and the Revolving Credit Note properly executed
by Borrowers;
(b) each Loan Document required to be executed by any Borrower or by
any other Person under any provision of this Agreement or any related agreement;
(c) certified copies of (i) resolutions of each Borrower's board of
directors authorizing the execution and performance of this Agreement, the
Revolving Credit Note to be issued hereunder and each other Loan Document to be
delivered from
<PAGE>
time to time in conjunction with this Agreement and (ii) each Borrower's
Articles and Certificate of Incorporation and By-laws;
(d) an incumbency certificate for each Borrower identifying all
Authorized Officers, with specimen signatures;
(e) good standing certificates for each Borrower;
(f) a written opinion from and executed by independent counsel for
Borrowers addressed to Lender;
(g) such financial statements, reports, certifications and other
operational information concerning Borrowers, including, without limitation,
Borrowers' June 30, 1995 consolidated audited financial statements and
unqualified opinion (without explanatory paragraphs) of its independent
certified public accountants and any other information required to be delivered
hereunder;
(h) certificate of each Borrower's chief executive officer stating
that there has not occurred as of the Closing any material adverse change in the
business, operations, condition (financial or otherwise) or prospects of such
Borrower since June 30, 1995 and March 31, 1996;
(i) payment by Borrowers of all fees and expenses including, without
limitation, the balance of the Facility Fee to be paid to Lender as of the
Closing and all Expenses associated with this Agreement incurred to the Closing
Date;
(j) all documents and agreements required with respect to the
Collateral, including without limitation, landlord's and mortgagees' waivers
properly executed, Financing Statements properly executed by Borrowers, and
payoff letters and UCC-3 termination statements terminating all Liens (other
than Permitted Liens) on the Collateral, properly executed by the secured
parties;
(k) the Pledge Agreement, accompanied by the original stock
certificates for all stock pledged thereunder and stock powers endorsed in
blank, all properly executed by RUSA;
(l) collateral assignments of the Key Man Policies, properly
executed by RUSA;
(m) the Warrant Documents, properly executed by RUSA;
(n) evidence that acceptable liability, property, casualty and
business interruption insurance is in place for each Borrower and that Lender is
named as lender's loss payee and additional insured with respect thereto; and
<PAGE>
(o) all Rental Agreements [and Monitoring Agreements] in effect; and
(p) such other documents, instruments and agreements which Lender
reasonably requests and which must be satisfactory to Lender.
4.2 Absence of Certain Events: At the Closing Date, no Potential
Default or Event of Default hereunder shall have occurred and be continuing,
nor shall there have occurred, since either June 30, 1995 or March 31, 1996,
any material adverse change in the assets, operations, condition (financial
or otherwise), products or prospects of either Borrower.
4.3 Warranties and Representations at Closing: The warranties and
representations of Borrowers contained in Section 5 as well as any other
section of this Agreement or any other Loan Document shall be true and
correct on the Closing Date with the same effect as though made on and as of
that date. No Borrower shall have taken any action or permitted any condition
to exist which would have been prohibited by in this Agreement or any other
Loan Document.
4.4 Compliance with this Agreement: Borrowers shall have performed and
complied with all agreements, covenants and conditions contained herein or in
any other Loan Document which are required to be performed or complied with
by them before or at the Closing Date, including, without limitation, the
provisions of Sections 4 and 6 hereof.
4.5 Chief Executive Officer's Certificate: Each Borrower shall provide
Lender with an officer's certificate signed by its chief executive officer
certifying that all conditions to Closing contained in this Agreement have been
fulfilled.
4.6 Verifications: Lender shall have received verifications of
Borrowers' Monitoring Agreements and other Operating Contracts satisfactory
to it.
4.7 Sale of Preferred Stock: RUSA shall have sold all 7,500 shares of
Preferred Stock for an aggregate sale price of at least $7,500,000.
<PAGE>
4.8 Closing: Subject to the conditions of this section, the initial
Advances shall be made available on such date (the "Closing Date") and at
such time as may be mutually agreeable to the parties contemporaneously with
the execution hereof (the "Closing") at such place as may be requested by
Lender.
4.9 Non-Waiver of Rights: By completing the Closing hereunder, or by
making Advances hereunder, Lender does not thereby waive a breach of any
warranty or representation made by any Borrower hereunder or a breach under
any agreement, document, or instrument delivered to Lender or otherwise
referred to herein, and all of Lender's claims and rights resulting from any
breach or misrepresentation by any Borrower are specifically reserved by
Lender.
4.10 Future Advances: Lender shall have no obligation of any kind to
make any Advance after the Closing Date if a Potential Default or an Event of
Default is outstanding. If Lender at any time or from time to time elects (in
its sole and absolute discretion) to make an Advance notwithstanding the
existence of a Potential Default or Event of Default, the making of such
Advance shall not constitute or create (a) any waiver of such a Potential
Default or Event of Default or (b) any duty or obligation to make Advances
thereafter.
4.11 Warranties and Representations upon Future Advances: Each request
by Borrowers for an Advance under the Revolving Credit in any form following
the Closing Date shall constitute an automatic representation and warranty by
Borrowers to Lender to the effect that:
(a) No Event of Default or Potential Default then exists;
(b) Each Advance is within and fully complies with the terms and
conditions of this Agreement (including, but not limited to, the conditions for
Advances); and
(c) Each representation and warranty set forth in Section 5 of this
Agreement is then true and correct in all material respects, as though made on
the funding date for such Advance, except for such changes as are expressly
permitted by a covenant contained herein.
<PAGE>
SECTION 5. REPRESENTATIONS AND WARRANTIES
Each Borrower jointly and severally warrants and represents to Lender that:
5.1 Corporate Organization and Validity:
(a) Each Borrower is a corporation duly organized and validly
existing under the laws of the state identified as the state of incorporation in
Section 1 above and is duly qualified, is in good standing and has lawful power
and authority to engage in business in each state where the nature and extent of
its business requires qualification except where the absence of good standing
would not have a Material Adverse Effect. A list of all states and other
jurisdictions where each Borrower is qualified to do business is attached hereto
as Schedule "5.1" and made a part hereof.
(b) The making and performance of this Agreement and each Loan
Document will not breach or violate any law, statute, government rule or
regulation, any judgment, order, decree, writ, injunction or award, or the
charter, minutes or bylaws of each Borrower or violate or result in a default
(immediately or with the passage of time or notice or both) under any contract,
indenture, agreement or instrument to which any Borrower is a party, or by which
any Borrower is bound. No Borrower is in violation of any term of any material
agreement or instrument to which it is a party or by which it may be bound or of
any provision of its charter, minutes or bylaws.
(c) Each Borrower has all requisite corporate power and authority to
enter into and perform this Agreement and each Loan Document to which it is a
party and to incur the obligations herein provided for, and has taken all proper
and necessary corporate action to authorize the execution, delivery and
performance of this Agreement, the Revolving Credit Note and the other Loan
Documents.
(d) This Agreement, the Revolving Credit Note, and all other Loan
Documents, when delivered, will be valid and binding upon the respective
Person(s) who are parties thereto and enforceable in accordance with their
respective terms.
5.2 Insurance: Schedule "5.2" sets forth all policies of property,
casualty, liability, business interruption and other insurance maintained by
Borrowers. All such policies are in full force and effect and the amounts of
coverage, deductibles, risks insured against and other terms and provisions
<PAGE>
are customary in Borrowers' industry and are adequate for Borrowers' business
and assets.
5.3 Litigation: Except as set forth on Schedule "5.3" thereto, (i)
there are no judgments or judicial, administrative, regulatory or arbitration
orders, decrees, rulings, or awards outstanding, or (ii) proceedings or
litigation pending or, to the knowledge of any Borrower, threatened against
or affecting any Borrower in any court or before any governmental authority
or arbitration board or tribunal seeking either equitable relief or damages
of $25,000 or more. No Borrower is in default with respect to any order,
decree, ruling or award of any court, governmental authority, regulatory
agency or arbitration board or tribunal. All lawsuits against any Borrower
commenced during the past five years and seeking damages of $50,000 or more
are set forth on Schedule "5.3" hereto.
5.4 Title to Properties: Each Borrower has exclusive title to all of
its Property in fee simple (or its equivalent under applicable law) free from
Liens and free from the claims of any other Person, except for (i) those
existing Liens set forth on Schedule "5.4" attached hereto and made part
hereof, (ii) mechanics', carriers', workmen's, repairmen's or other like
Liens arising or incurred in the ordinary course of such Borrower's business;
and (iii) Liens, if any, for taxes, assessments and other governmental
charges which are not due and payable, but may nevertheless exist by
operation of law. No Borrower owns any real property except as set forth on
Schedule "5.4(b)" hereto.
5.5 Patents and Trademarks: Each Borrower owns or has the exclusive
unconditional right to use all the patents, patent applications, trademarks,
trademark applications, service marks, trade names, and copyrights, that are
material for the present and planned future conduct of its business, without
any known conflict with the rights of others. A list of all such patents,
patent applications, trademarks, trademark applications, licenses, and
copyrights owned or otherwise used by any Borrower (indicating the nature of
such Borrower's interest) is attached hereto as Schedule "5.5", and made a
part hereof. No Borrower is in default of any obligation or undertaking with
respect to such Property or rights. Except as set forth on Schedule "5.5"
hereto, no Borrower licenses or sublicenses any such rights or property
interests to any other Person.
5.6 Governmental Consent: Neither the nature of any Borrower or of its
business or Property, nor any relationship between any Borrower and any other
Person, nor any circumstance affecting any Borrower in
<PAGE>
connection with the execution or delivery of any Loan Document is such as to
require a consent, approval or authorization of, or filing (other than filing of
UCC-1 financing statements), registration or qualification with, any
governmental authority on the part of any Borrower in conjunction with the
execution, delivery and performance of this Agreement or the issuance or
delivery of the Revolving Credit Note, or other Loan Documents.
5.7 Taxes: All tax returns required to be filed by each Borrower in any
jurisdiction have in fact been filed, and all taxes, assessments, fees and
other governmental charges upon each Borrower or upon any of its Property,
income or franchises, which are due and payable have been paid, except for
those taxes being contested in good faith with due diligence by appropriate
proceedings for which appropriate reserves have been maintained under GAAP.
No Borrower is aware of any proposed additional tax assessment or tax to be
assessed against or applicable to any Borrower.
5.8 Financial Statements:
The Fiscal Year of each Borrower ends on June 30 of each year.
Borrowers' audited consolidated and consolidating Financial Statements as at and
for the year ended June 30, 1995 fairly present the financial condition and
results of operations of Borrowers (and each of them) as of the date(s) and for
the period(s) set forth therein, and have been prepared in accordance with GAAP.
Borrower's unaudited consolidated and consolidating financial statements as at
and for the nine months ended March 31, 1996 fairly present the financial
condition and results of operations of Borrowers (and each of them) as of the
date(s) and for the period(s) set froth therein, and have been prepared in
accordance with GAAP consistently applied. There has been no material adverse
change in the financial condition or results of operations of Borrowers (as set
forth in the consolidating and consolidated audited year-end Financial
Statements) since either March 31, 1996 or June 30, 1995.
5.9 Full Disclosure: Neither the financial statements referred to in
Section 5.8, nor this Agreement or related agreements and documents or any
written statement furnished to Lender in connection with the negotiation of
the Revolving Credit and contained in any financial statements or documents
relating to the Collateral contain any untrue statement of a material fact or
omit a material fact necessary to make the statements contained therein or
herein not misleading. There is no fact presently known to any officer of any
Borrower which has not
<PAGE>
been disclosed to Lender in writing, which is reasonably likely to cause a
Material Adverse Effect.
5.10 Subsidiaries and Affiliates: RUSA has no direct or indirect
Subsidiaries or Affiliates other than the other Borrowers.
5.11 Guarantees, Contracts, etc:
(a) No Borrower owns or holds any equity or long term debt
investments in, has any outstanding advances to, has any outstanding guarantees
for the obligations of, or has any outstanding borrowings from, any Person,
except as described in Schedule "5.11(a)" attached hereto and made part hereof.
(b) No Borrower is a party to any contract with any vendor or
customer for the purchase, sale or license of inventory or the performance of
services with respect to any Borrower's business operations, except as described
on Schedule "5.11(b)" attached hereto and made part hereof. Each such contract
or agreement is in full force and effect, no notice of termination has been
given with respect thereto, and Borrower is not in default thereof.
(c) No Borrower is a party to any contract or agreement, or subject
to any charter or other corporate restriction, which is reasonably likely to
cause a Material Adverse Effect.
(d) Except as otherwise specifically provided in this Agreement, no
Borrower has agreed or consented to cause or permit any of its Property whether
now owned or hereafter acquired to be subject in the future (upon the happening
of a contingency or otherwise) to a Lien not permitted by this Agreement.
(e) No Borrower is a party to any contract with any consultant or
other advisor for the receipt of consulting or similar services with respect to
such Borrower's business operations, except as described in Schedule "5.11(e)"
attached hereto and made a part hereof.
(f) Monitoring Agreements are separate agreements from Rental
Agreements; no Monitoring Agreement is also a Rental Agreement.
(g) No Borrower is a party to any lease for any real or personal
property except as set forth in Schedule "5.11(g)" hereto. True and correct
copies of all leases listed on Schedule "5.11(g)" have been delivered to Lender
and all such leases remain
<PAGE>
in full force and effect and no party is in breach or violation thereof.
5.12 Government Regulations and Compliance:
(a) The use of the proceeds of the Advances and each Borrower's
issuance of the Revolving Credit Note will not directly or indirectly violate or
result in a violation of the Securities Act of 1933 or the Securities Exchange
Act of 1934, as amended, or any regulations issued pursuant thereto, including,
without limitation, Regulations U, T, G and X of the Board of Governors of the
Federal Reserve System, 12 C.F.R., Chapter II. No Borrower owns or intends to
carry or purchase any "margin security" within the meaning of said Regulations.
(b) (i) Each Employee Benefit Plan, as defined in Section 3(3) of
ERISA, (other than a multi-employer plan described in Section 3(37) of ERISA)
maintained by any Borrower or in which any Borrower is a participating employer
has been maintained in all material respects in accordance with its terms and
with applicable law, and (ii) each such Employee Benefit Plan which is intended
to be tax-qualified currently satisfies, and for all years subsequent to the
establishment of such Plan and with respect to which any Borrower's income tax
returns are open to audit, has satisfied, the requirements of Section 401(a) or
403 of the Code, except that if any such requirement has not been satisfied, the
failure to satisfy such requirements has not had, and in the future will not
have, a Material Adverse Effect (assuming the continued conduct of the any
Borrower's business is substantially consistent with past practice), (iii) no
such Employee Benefit Plan has engaged in or been involved in a Prohibited
Transaction (as defined in ERISA) under ERISA or the Internal Revenue Code, and
(iv) no such Employee Benefit Plan has been terminated, which termination is
reasonably likely to have a Material Adverse Effect. No Borrower nor any member
of a Controlled Group (as defined in ERISA) has received notice of a claim
asserted against any Borrower or other members of the Controlled Group for
withdrawal liability (as defined in the Multiemployer Pension Plan Amendments
Act of 1980, as amended) with respect to any multiemployer pension plan. All
Borrowers have timely made all contributions when due with respect to any
multiemployer pension plan in which any of them participate and, no event has
occurred triggering a claim against any Borrower or any member of a Controlled
Group including any Borrower for withdrawal liability with respect to any
multi-employer pension plan. All Employee Benefit Plans and multi-employer plans
maintained by any Borrower are listed on Schedule "5.12" attached hereto and
made a part hereof.
<PAGE>
(c) No Borrower is in violation of any applicable statute,
regulation or ordinance of the United States of America, or of any state, city,
town, municipality, county or of any other jurisdiction, or of any agency
thereof, (including without limitation, environmental laws and regulations and
regulations of any Public Utility Commission) which violation by itself or in
the aggregate with any other such violations would have a Material Adverse
Effect on the Borrowers, and each Borrower possesses all licenses, permits and
governmental and quasi-governmental approvals needed to operate its business,
except where the failure to do so would not, individually or in aggregate, have
a Material Adverse Effect on the Borrowers.
(d) Each Borrower is current with all reports and documents required
to be filed with any state or federal securities commission or similar agency
and is in full compliance in all material respects with all applicable rules and
regulations of such commissions.
<PAGE>
5.13 Business Interruptions: Within two (2) years prior to the Closing
Date, neither the business, Property nor operations of any Borrower have been
materially and adversely affected in any way by any casualty, strike,
lockout, combination of workers, order of the United States of America, or
any state or local government, or any political subdivision or agency
thereof, directed against such Person. There are no pending or threatened
labor disputes, strikes, lockouts or similar occurrences or grievances
against the business being operated by any Borrower.
5.14 Names and Addresses: During the five (5) years prior to the
Closing Date, no Borrower has (i) except as set forth on Schedule "5.14",
conducted business under or used any other names (whether corporate or
assumed) except for its present corporate name or, (ii) acquired any assets
outside of the ordinary course of business or (iii) conducted business at any
addresses except for the addresses listed in Schedule "5.14". Each Borrower
is the sole owner of its name and any and all business done and all invoices
using such Borrower's name or any names listed in Schedule "5.14" represent
sales and business of such Borrower and are owned solely by such Borrower.
5.15 Other Associations: Except as shown on Schedule "5.15" hereto, no
Borrower is engaged in any joint venture or partnership with any other Person.
5.16 Environmental Matters: Except as shown on Schedule "5.16" attached
hereto and made a part hereof, no Borrower has knowledge:
(a) of the presence of any Hazardous Substances or underground
storage tanks on any of the real property on which the Collateral is located, or
(b) of any on-site spills, releases, discharges, disposal or storage
of Hazardous Substances that have occurred or are presently occurring on any of
such real property, or
(c) of any spills, releases, discharges or disposal of Hazardous
Substances that have occurred, are presently occurring, on or at any other real
property as a result of the activities, conduct, action or inaction of any
Borrower, or
<PAGE>
(d) of any notice, summons, citation or other communication sent to
any Borrower from any state or federal agency concerning any intentional or
unintentional action or conduct, inaction or omission, past or present which is
or may be in violation of any state or federal environmental law, rule or
regulation.
As used herein, the term "Hazardous Substances" means any substances defined or
designated as hazardous or toxic waste, hazardous or toxic material, hazardous
or toxic substance or similar term, by any environmental statute, rule or
regulation of any governmental entity presently in effect and applicable to such
real property.
5.17 Regulation O: No director, executive officer or principal
shareholder of any Borrower is a director, executive officer or principal
shareholder of Lender. For the purposes hereof the terms "director" (when
used with reference to Lender), "executive officer" and "principal
shareholder" have the respective meanings assigned thereto in Regulation O
issued by the Board of Governors of the Federal Reserve System.
5.18 Capital Stock: The authorized and outstanding capital stock of
each Borrower is as set forth on Schedule "5.18" attached hereto and made
part hereof. All of the capital stock of each Borrower have been duly and
validly authorized and issued and are fully paid and nonassessable and have
been sold and delivered to the holders thereof in compliance with, or under
valid exemption from, all federal and state laws and the rules and
regulations of all regulatory bodies thereof governing the sale and delivery
of securities. Except as provided in Schedule "5.18", there are no
subscriptions, warrants, options, calls, commitments, rights or agreements by
which any Borrower is bound relating to the issuance, transfer, voting or
redemption of shares of any of their capital stock or any pre-emptive rights
held by any Person with respect to the pre-emptive rights held by any party
with respect to the shares of capital stock of any Borrower. Except as
provided in Schedule "5.18", no Borrower has issued any securities
convertible into or exchangeable for shares of its capital stock or any
options, warrants or other rights to acquire such shares or securities
convertible into or exchangeable for such shares.
5.19 Solvency: Each Borrower is able to pay its debts as they become
due, has sufficient capital to carry on its business operations, and
presently owns property having a fair salable value which is greater than the
amount required to pay all of such Borrower's debts as they become due.
<PAGE>
5.20 Monthly MRR: Each Operating Contract entered into before, from and
after the date hereof, will be valid and enforceable in accordance with its
terms and will arise from the performance in the ordinary course of business
of services by a Borrower. Additionally, all Operating Contracts between a
Borrower and its customers are and shall be set forth in a written contract,
which contract shall be in a form consistent with standard industry practice
and such Borrower's standard forms.
5.21 Qualified Accounts: Except as set forth in Schedule "5.21", all
Accounts are Qualified Accounts.
SECTION 6. AFFIRMATIVE COVENANTS
Each Borrower covenants that until all of the Obligations to Lender are
paid and satisfied in full and the Revolving Credit has been terminated:
6.1 Payment of Taxes and Claims: Each Borrower shall pay, before they
become delinquent,
(a) all taxes, assessments and governmental charges or levies
imposed upon Borrowers or upon the Collateral, including, without limitation,
excise taxes, and
(b) all claims or demands of materialmen, mechanics, carriers,
warehousemen, landlords and other like Persons entitled to the benefit of
statutory or common law Liens, which, if unpaid, might result in the imposition
of a Lien upon its Property; provided, however, that no Borrower shall be
required to pay any such tax, assessment, charge, levy or claim if the amount,
applicability or validity thereof shall at the time be contested diligently and
in good faith and by appropriate proceedings by such Borrower, and if such
Borrower shall have set aside on its books adequate reserves in respect thereof,
if so required in accordance with GAAP; which deferment of payment is
permissible so long as such Borrower's title to, and its right to use, the
Collateral are not materially adversely affected thereby and Lender's Lien and
priority on the Collateral are not materially and adversely affected, altered or
impaired thereby.
<PAGE>
6.2 Maintenance of Properties, Collateral and Corporate Existence:
(a) Property - Each Borrower shall maintain its Property in good
condition and make all renewals, replacements, additions, betterments and
improvements thereto reasonably required in the ordinary course of such
Borrower's business, and will pay and discharge when due the cost of repairs and
maintenance to its Property.
(b) Property Insurance - Each Borrower shall maintain insurance on
all insurable tangible Collateral against fire, flood, casualty and such other
hazards as may be acceptable to Lender in such amounts, with such deductibles
and with such insurers as may be acceptable to Lender. The policies of all such
casualty insurance shall contain standard Lender's Loss Payable clauses issued
in favor of Lender under which all losses thereunder shall be paid to Lender as
Lender's interest may appear. Such policies shall expressly provide that the
requisite insurance cannot be altered or canceled without thirty (30) days prior
written notice to Lender and shall insure Lender notwithstanding the act or
neglect of the insured. At or prior to Closing, Borrowers shall furnish Lender
with duplicate original policies of insurance or such other evidence of
insurance as Lender may require. In the event Borrowers fail to procure or cause
to be procured any such insurance or to timely pay or cause to be paid the
premium(s) on any such insurance, Lender may do so for Borrowers but Borrowers
shall continue to be liable for the same. Each Borrower hereby appoints Lender
as its attorney-in-fact, exercisable at Lender's option, to endorse any check
which may be payable to such Borrower in order to collect the proceeds of such
insurance. Any and all amount or amounts received or collected by Lender
pursuant to the provisions of this paragraph may be applied by Lender to any
Obligations (in which case the Maximum Credit Amount shall be reduced by the
amount so applied) or to repair, reconstruct or replace the loss of or damage to
Collateral as Lender in its sole judgment may from time to time determine.
(c) Public Liability and Business Interruption Insurance - Each
Borrower shall maintain, and shall deliver to Lender upon Lender's request
evidence of, public liability insurance in such amounts as is customary for
companies in the same or similar businesses located in the same or similar area
including, without limitation, business interruption insurance.
<PAGE>
(d) Financial Records - Each Borrower shall keep current and
accurate books of records and accounts in which full and correct entries will be
made of all of its business transactions, and will reflect in its financial
statements adequate accruals and appropriations to reserves, all in accordance
with GAAP.
(e) Corporate Existence and Rights - Each Borrower shall do (or
cause to be done) all things necessary to preserve and keep in full force and
effect its existence, good standing, rights and franchises.
(f) Compliance with Law - Each Borrower shall comply with all laws,
ordinances, governmental rules and regulations to which it is subject, and shall
obtain and maintain any licenses, permits, franchises or other governmental
authorizations, necessary to the ownership of its Property or to the conduct of
its business.
(g) Collection of Accounts - Each Borrower shall continue to collect
its Accounts in the ordinary course of its business.
6.3 Places of Business: Borrowers shall give thirty (30) days prior
written notice to Lender of any change in the location of any place of
business of any Borrower, of the places where records concerning its Accounts
are kept, of the places where the Collateral is kept, or of the establishment
of any new, or the discontinuance of any existing places of business.
6.4 Business Conducted: Each Borrower shall continue in the business
presently operated by it using its best efforts to maintain its customers and
goodwill. Based upon representations made by Borrower to Lender to induce
Lender to establish the Revolving Credit for Borrower, no Borrower shall
engage, directly or indirectly, in any line of business substantially
different from the business conducted by it immediately prior to the Closing
Date, or engage in business or lines of business which are not reasonably
related thereto.
6.5 Litigation: Borrowers shall give prompt written notice to Lender of
any litigation pending, threatened or affecting any Borrower which involves
in any such case more than (i) $25,000 or (ii) Recurring Monthly Revenue of
$5,000 or more.
<PAGE>
6.6 Certain Taxes: Borrowers shall pay all taxes (other than taxes
based upon or measured by Lender's income or revenues or any personal
property tax), if any, in connection with the issuance of the Revolving
Credit Note, and the recording of any Lien documents. The obligations of
Borrowers under this Section 6.6 shall survive the payment of the Obligations
and the termination of this Agreement.
6.7 Bank Accounts: As additional consideration for the Loans and in
order to more fully secure Borrowers' Obligations to Lender, each Borrower
shall maintain all of its principal depository and disbursement account(s)
with Lender except for (i) Borrowers' payroll account(s) and (ii) until
creation of the lockbox accounts required by Section 6.18 herein, the
Permitted Bank Accounts.
6.8 Employee Benefit Plans: Each Borrower will (a) fund all its
Employee Benefit Plans in a manner that will satisfy the minimum funding
standards of Section 302 of ERISA, or will promptly satisfy any accumulated
funding deficiency that arises under Section 302 of ERISA, (b) furnish
Lender, promptly after the filing of the same, with copies of all reports or
other statements filed with the United States Department of Labor, the
Pension Benefit Guaranty Corporation ("PBGC") or the Internal Revenue Service
("IRS") with respect to all Employee Benefit Plans, or which any Borrower or
any member of a Controlled Group, may receive from the United States
Department of Labor, the IRS or the PBGC, with respect to all such Employee
Benefit Plans, and (c) promptly advise Lender of the occurrence of any
Reportable Event (as defined in Section 4043 of ERISA other than the type of
event with respect to which the PBGC has waived the 30-day notice requirement
of Section 4043 of ERISA) or Prohibited Transaction (as defined by ERISA)
with respect to any such Employee Benefit Plan(s) and the action which such
Borrower proposes to take with respect thereto. Each Borrower will make all
contributions when due with respect to any multi-employer pension plan in
which it participates and will promptly advise Lender (i) upon its receipt of
notice of the assertion against such Borrower of a claim for withdrawal
liability, (ii) upon the occurrence of any event which, to the best of such
Borrower's knowledge, would trigger the assertion of a claim for withdrawal
liability against such Borrower, and (iii) upon the occurrence of any event
which, to the best of such Borrower's knowledge, would place such Borrower in
a Controlled Group (other than those Controlled Groups in which any Borrower
is a member as of the Closing Date) as a result of which any member
(including any other Borrower) thereof is reasonably likely to be subject to
a claim for withdrawal liability, whether liquidated or contingent.
<PAGE>
6.9 Submission of Collateral Documents: Borrowers shall promptly notify
Lender if an Account becomes evidenced or secured by an instrument or chattel
paper. Borrowers will promptly deliver to Lender any instrument evidencing an
Account and all chattel paper including, but not limited to, all Rental
Agreements (and all amendments and extensions thereof).
6.10 Other Governmental Contracts: Following the occurrence of an Event
of Default and if requested by Lender, Borrowers will execute any documents
or agreements and take any steps required by Lender so that all monies due
and to become due under any contract(s) with the United States or any
department, agency or instrumentality thereof are assigned to Lender and
notice thereof given to and acknowledged by the appropriate government agency
or authority under the Federal Assignment of Claims Act.
6.11 Financial Covenants: Borrowers shall maintain and comply with the
following financial covenants, all of which shall be calculated on a
consolidated basis:
(a) Ratio of Cash Flow to Interest Expense: Borrowers shall have and
maintain ratios of Cash Flow to Interest Expense of not less than the following
ratios as of the last day of each Fiscal Quarter for each of the following
Fiscal Quarters then ending:
Fiscal Quarter Ending Minimum Ratio
--------------------- -------------
September 30, 1996 1.50 to 1.0
December 31, 1996 2.00 to 1.0
March 31, 1997 2.25 to 1.0
June 30, 1997 2.50 to 1.0
September 30, 1997 2.75 to 1.0
December 31, 1997 and thereafter 3.00 to 1.0
(b) Senior Funded Debt to Monthly Recurring Revenue: Borrowers shall
have and maintain ratios of Senior Funded Debt to Monthly Recurring Revenue of
not more than 20.0 to 1.00 as of the last day of each Fiscal Quarter for the
Fiscal Quarters then ending.
<PAGE>
(c) Ratio of Senior Funded Debt to Cash Flow: Borrowers shall have
and maintain ratios of Senior Funded Debt to Cash Flow of not more than the
following ratios as of the last day of each Fiscal Quarter for the following
Fiscal Quarters then ending.
Fiscal Quarter Ending Maximum Ratio
--------------------- -------------
September 30, 1996 5.00 to 1.0
December 31, 1996 4.75 to 1.0
March 31, 1997 4.50 to 1.0
June 30, 1997 4.00 to 1.0
September 30, 1997 4.00 to 1.0
December 31, 1997 3.75 to 1.0
March 31, 1998 3.75 to 1.0
June 30, 1998 and thereafter 3.50 to 1.0
(d) Net Income (Loss): Borrowers shall have Net Income (Loss) of not
worse than the following amounts during each of the following Fiscal Quarters:
Fiscal Quarter Ending Net Income (Loss)
--------------------- -----------------
September 30, 1996 $(580)
December 31, 1996 (440)
March 31, 1997 (360)
June 30, 1997 (330)
September 30, 1997 (280)
December 31, 1997 (240)
March 31, 1998 (180)
June 30, 1998 (130)
September 30, 1998 (30)
December 31, 1998 20
March 31, 1999 20
June 30, 1999 20
September 30, 1999 120
and thereafter
6.12 Financial and Business Information: Borrowers shall deliver to
Lender the following:
<PAGE>
(a) Financial Statements and Collateral Reports: (i) detailed
monthly accounts receivable and accounts payables aging reports within thirty
(30) days after the end of each calendar month; (ii) internally prepared monthly
Financial Statements for Borrowers, accompanied by a Controller's Certificate,
within thirty (30) days after the end of each calendar month and together with
those monthly Financial Statements delivered as of the end of each Fiscal
Quarter, Borrowers shall deliver Financial Statements reflecting Borrowers'
results for the Fiscal Quarter then ending; (iii) annual projections (budget) of
profit and loss statements, balance sheets and cash flow reports (prepared on a
monthly basis) for the current Fiscal Year within forty-five (45) days after the
start of each of Borrowers' Fiscal Years; (iv) annual audited Financial
Statements for each Fiscal Year, accompanied by (1) the unqualified opinion
(without explanatory paragraphs) of Borrowers' independent certified public
accountants (which shall be Fishbein & Co. for Fiscal Year 1996 and a Big Six
firm for all Fiscal Years thereafter) selected by Borrowers and acceptable to
Lender and (2) a Controller's Certificate, within one hundred five (105) days
after the end of each of Borrower's Fiscal Years; (v) an annual management
letter and covenant compliance certificate prepared and executed by Borrower's
independent certified public accountants, within one hundred five (105) days
after the end of each of Borrower's Fiscal Years; (vi) within thirty (30) days
after the end of each month, Borrowers shall submit to Lender (a) an aging of
its MRR accounts receivable and an MRR reconciliation report, and within thirty
(30) days after the end of each Fiscal Quarter, a detailed aging of its MRR;
(vii) copies of all reports sent to RUSA's shareholders and copies of all
reports and registration statements filed under the Securities and Exchange
Commission; and (viii) such other data, reports, certificates and information
concerning Borrowers' financial or operating condition or status as Lender may
request from time to time. Annual Financial Statements shall set forth in
comparative form figures for the corresponding periods in the prior Fiscal Year.
(b) Notice of Event of Default - Promptly upon becoming aware of the
existence of any condition or event which constitutes a Potential Default or an
Event of Default under this Agreement, a written notice to Lender specifying the
nature and period of existence thereof and what actions Borrowers are taking
(and propose to take) with respect thereto;
(c) Accuracy of Projections - Each projection delivered to Lender
pursuant to paragraph 6.12(a)(iii) above will be prepared in good faith and
shall reflect each Borrower's reasonable estimate based upon facts and
conditions then known to such Borrower. No fact known to any Borrower which will
be reasonably
<PAGE>
likely to cause any such projections to be inaccurate or misleading will be
withheld from Lender.
<PAGE>
6.13 Officers' Certificates: Within thirty (30) days of the end of
each calendar quarter, each Borrower shall deliver to Lender a certificate
from such Borrower's chief financial officer, in form and substance
reasonably satisfactory to Lender, setting forth:
(a) Covenant Compliance - the information (including detailed
calculations) required in order to establish whether such Borrower is in
compliance with the requirements of Sections 6 and 7 as of the end of the period
covered by the Financial Statements then being furnished and any exhibits
appended to such Financial Statements under Section 6.12; and
(b) Event of Default - That the signers have reviewed the relevant
terms of this Agreement, and has made (or caused to be made under their
supervision) a review of the transactions and conditions of such Borrower from
the beginning of the accounting period covered by the Financial Statements being
delivered therewith to the date of the certificate, and that such review has not
disclosed the existence during such period of any condition or event which
constitutes an Event of Default or which is then, or with the passage of time or
giving of notice, or both, would become an Event of Default hereunder, and if
any such condition or event existed during such period or now exists, specifying
the nature and period of existence thereof and what action such Borrower(s) have
taken or proposes to take with respect thereto.
6.14 Inspection and Verification: So long as the Revolving Credit has
not been terminated and the Obligations paid in full, each Borrower will
permit any of Lender's officers, agents or other representatives to visit and
inspect, at any time (provided, however, that Lender shall, prior to the
occurrence of an Event of Default, provide Borrower with prior reasonable
notice of such visits or inspections), any of the Collateral, to examine all
of such Borrower's books of account, records, reports and other papers, to
make copies and extracts therefrom and to discuss its affairs, finances and
accounts with its officers, employees and independent public accountants. All
reasonable costs relating to any such visits and inspections shall be paid by
Borrowers.
6.15 Tax Returns and Reports: Borrowers shall promptly furnish Lender
with copies of the annual federal and state income tax returns of Borrowers.
Borrowers further agree that if requested by Lender, they shall promptly
furnish Lender with copies of all reports filed by each Borrower with any
federal, state or local governmental authority or agency, board or
commission.
<PAGE>
6.16 Information to Participant: Lender may divulge to any participant
or prospective participant it may obtain in the Revolving Credit or any
portion thereof, all information in its possession concerning Borrowers,
their Property and financial condition, and furnish to such participant
copies of reports, financial statements, projections, certificates, and
documents obtained under any provision of this Agreement, or related
agreements and documents, as well as copies of the Loan Documents.
6.17 Material Adverse Developments: Borrowers agree that promptly upon
becoming aware of any development or other information outside the ordinary
course of business (excluding matters of a general economic, financial or
political nature) which would have a Material Adverse Effect, or of Lender's
failure to perform any of its obligations to Borrowers under this Agreement
it shall give to Lender telephonic or facsimile notice specifying the nature
of such development or information and such anticipated effect. In addition,
such verbal communication shall be confirmed by written notice thereof to
Lender on the same day such verbal communication is made.
6.18 Lockbox Agreements: Each Borrower shall within sixty (60) days
after Closing execute lockbox agreements satisfactory to Lender establishing
arrangements under which all of each Borrower's Accounts are paid into a
lockbox operated by Lender with collections transferred to Borrowers' deposit
account with Lender subject to such check clearance procedures as Lender may
establish; such lockbox agreements shall become effective (and shall be in
effect at all times thereafter) upon execution thereof. During the
continuance of an Event of Default, all lockbox collections may, at Lender's
discretion, be applied by Lender to the Obligations as Lender may determine
in accordance with applicable law. Until the lockboxes are created with
Lender, Borrowers shall cause all monies collected in the Permitted Accounts
to be immediately transferred to Borrowers' accounts with Lenders.
6.19 Executive Management: At all times (i) Richard M. Brooks
("Brooks") shall be the Chairman, President and Chief Executive Officer of
RUSA, (ii) Ronald A. Feldman ("Feldman") shall be the Chief Operating Officer
of RUSA, and (iii) Todd Herman shall be the President of USS. On or before
September 30, 1996, RUSA shall have hired a chief financial officer
acceptable to Lender and such person shall, at all times, remain such chief
financial officer, subject to RUSA's right to replace such person with
another individual reasonably acceptable to Lender.
<PAGE>
6.20 Interest Rate Cap Agreement: Borrowers shall on or before
September 30, 1996 obtain and at all times until the second anniversary of
the Closing have in effect an interest rate cap agreement with any financial
institution reasonably acceptable to Lender under which Borrower eliminates
its risk with respect to $7,500,000 of the Revolving Credit from increases in
the Prime Rate above ten and one-half percent (10.5%) per annum.
6.21 Notice of Certain Events: Give prompt written notice to Lender of:
(a) any claim that, if decided adversely to a Borrower, is
reasonably likely to have a Material Adverse Effect, or which is the subject of
a proceeding between any Borrower and any governmental regulatory body or law
enforcement agency;
(b) any labor controversy resulting or likely to result in a strike
or work stoppage against any Borrower;
(c) any proposal made in writing to any Borrower or any public
action taken by any public authority to acquire the assets or business of any
Borrower by eminent domain and/or condemnation;
(d) the location of any Collateral other than at a Borrower's place
of business disclosed in this Agreement other than Collateral in transit in the
ordinary course of a Borrower's business;
(e) any actual change in (i) the name of any Borrower; or (ii)
corporate structure of any Borrower;
(f) any circumstance or event which becomes known to any Borrower by
virtue of which or in connection with which any Borrower may have or may incur
any liability, expense or responsibility under any environmental law or
regulation which is reasonably likely to have a Material Adverse Effect;
(g) any information of which any Borrower has knowledge received by
any Borrower with respect to Accounts or Recurring Monthly Revenue that is
reasonably likely to materially and adversely affect the aggregate value thereof
or the rights and remedies of Lender with respect thereto; and
(h) any Account ceasing to be a Qualified Account.
<PAGE>
6.22 Board Nominee: At each election of members of RUSA's Board of
Directors, a person recommended by Lender and reasonably acceptable to RUSA
shall be nominated for election to RUSA's Board of Directors.
6.23 Board Observation: Lender shall be entitled to send up to two
representatives to attend each meeting of (i) RUSA's Board of Directors, (ii)
RUSA's Executive Committee and (iii) RUSA's shareholders. RUSA shall send
written notice to Lender of all such meetings in the same form and at the
same time it sends notice of such meetings to all other persons.
6.24 Additional Policy: Within 60 days after Closing RUSA will (i)
obtain the Additional Policy and (ii) collaterally assign to Lender (by an
assignment in form and substance satisfactory to Lender) such Policy.
6.25 Monitoring Agreements: [Within ten (10) days after the end of each
month, Borrowers will deliver to Lender (i) all Monitoring Agreements entered
into by Borrowers during such month, and (ii) all extensions and amendments of
existing Monitoring Agreements executed during such month.] Monitoring
Agreements will conform to the warranties and representations set forth in this
Agreement and to the following additional warranties and representations:
(i) A Borrower's right to receive payment is absolute and not
contingent upon the fulfillment of any condition whatsoever, except for (1) its
continuing to provide services under such contracts and (2) with respect to
contracts arising in the ordinary course of its Monitoring Business pursuant to
which customers prepay for services, such Borrower will render such services in
the future;
(ii) such Agreements do not arise from transactions with an
affiliate, parent, division or subsidiary of RUSA or to a person controlled by
an affiliate, subsidiary or parent of RUSA;
(iii) such Agreements do not arise from the exchange or barter
of any goods or services;
(iv) such Agreements are not the obligation of a customer
located in a foreign country;
<PAGE>
(v) such Agreements do not contain a prohibition against
assigning or granting a security interest therein;
(vi) such Agreements do not arise from a transaction with a
customer which is a creditor or an inventory or trade supplier of any Borrower;
(vii) to the best knowledge of Borrowers, the customers
thereunder have not (1) made a general assignment for the benefit of creditors
or (2) filed or have had filed against it any petition under any bankruptcy law
or other law or laws for the relief of debtors, or (3) suspended business; and
(viii) the customers thereunder have not denied or contested
their obligations to make payment or commenced litigation against any Borrower.
SECTION 7. NEGATIVE COVENANTS
Each Borrower covenants that until all of the Obligations are paid and
satisfied in full and the Revolving Credit has been terminated, that:
7.1 Sales, Merger, Consolidation, Dissolution or Liquidation:
(a) No Borrower shall sell, lease, license, transfer or otherwise
dispose of any of its Property, other than (1) inventory sold in the ordinary
course of Borrower's business; and (2) obsolete equipment sold or discarded in
the ordinary course of such Borrower's business the absence of which (or a
replacement item of similar value, quality or usefulness) would not be
reasonably likely to have a Material Adverse Effect.
(b) No Borrower shall merge or consolidate with any other Person, or
commence a dissolution or liquidation, other than a merger of one or more
Borrowers.
(c) No Borrower shall permit its name to be changed without at least
thirty (30) days prior written notice to Lender.
<PAGE>
7.2 Acquisitions: Without Lender's express prior written consent, no
Borrower shall acquire all or a material portion of the stock, securities or
assets of any Person in any transaction or in any series of related
transactions (an "Acquisition") unless (i) such Acquisition is of an existing
Monitoring Business and (ii) the purchase price payable by such Borrower for
such Acquisition does not exceed either $1,000,000 or 31.5 times Monthly
Recurring Revenue of the Monitoring Business being acquired. No Borrower
shall enter into any sale and leaseback transaction.
7.3 Liens and Encumbrances: No Borrower shall cause or permit or agree
or consent to cause or permit in the future (upon the happening of a
contingency or otherwise), its Property (including, without limitation, the
Collateral), whether now owned or hereafter acquired, to be subject to a Lien
except for the following ("Permitted Liens"):
(a) Liens securing taxes, assessments or governmental charges or
levies or the claims or demands of materialmen, mechanics, carriers,
warehousemen, landlords, and other like persons, provided the payment thereof is
not at the time required by Section 6.1;
(b) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance,
social security and other like laws and in connection with leases or trade
contracts;
(c) Existing and other Liens described in Section 5.4 and set forth
on Exhibit "5.4" hereto which are not required to be terminated on the date
hereof; and
(d) Purchase Money Liens securing purchase money indebtedness not
exceeding, in the aggregate as to all Borrowers, $100,000.00 in any rolling
twelve month period (on a non-cumulative basis) which amount shall include the
principal amount of all Capital Leases.
7.4 Transactions With Affiliates or Subsidiaries:
(a) No Borrower shall enter into any transaction involving the
purchase, sale, contribution or exchange of Property, or the loaning or giving
of funds to or with any Subsidiary, any Affiliate, other than sales or
acquisitions of inventory and
<PAGE>
payments therefor in the ordinary course of such Borrower's business;
(b) No Borrower shall create or acquire any Subsidiary without
Lender's express prior written consent.
<PAGE>
7.5 Indebtedness or Guarantees: Excepting (i) the endorsement in the
ordinary course of business of negotiable instruments for deposit or
collection, (ii) the Obligations, (iii) Indebtedness under Purchase Money
Liens permitted under Section 7.3(d), and (iv) Subordinated Indebtedness, (v)
trade payables and other accrued liabilities incurred in the ordinary course
of business, and (vi) Indebtedness listed on Schedule "7.5" hereto, no
Borrower shall be liable for any Indebtedness or subject to any liability,
direct or indirect, primary or secondary, matured or contingent, in any
manner, whether as borrower, obligor, principal, guarantor, surety,
accommodation maker, or otherwise, for existing or future indebtedness of any
kind, its own or of any other Person.
7.6 Distributions, Redemptions and Other Indebtedness:
No Borrower shall: (1) declare or pay or make any forms of
Distribution to its shareholders other than stock dividends on the Preferred
Stock; (2) make any prepayments on any existing or future indebtedness for
borrowed money (including capital leases) to any Person; (3) make any payments
on any existing or future indebtedness for borrowed money (including Capital
Leases) to any Person after the occurrence of an Event of Default hereunder; or
(4) hereafter borrow money or obtain credit from or incur indebtedness to any
Person other than Lender, except (i) trade credit in the ordinary course of
business for the purchase of inventory to be sold in the ordinary course of
Borrower's business, (ii) purchase money indebtedness as permitted under Section
7.3(d) and (iii) other indebtedness specifically permitted to be incurred
thereafter under the terms of this Agreement.
7.7 Loans and Investments: No Borrower shall make or have outstanding
loans, advances, or extensions of credit to, or capital contributions or
investments in, any Person, including, without limitation, any officers,
employees and directors of any Borrower, except for (i) loans to or
investments in another Borrower and (ii) loans not exceeding $2,500.
<PAGE>
7.8 Use of Lender's Name: No Borrower shall use Lender's name (or the
name of any of Lender's affiliates) in connection with any of its business
operations except in press releases approved in writing in advance by Lender.
Borrowers may nevertheless disclose to third parties that they have a deposit
and borrowing relationship with Lender. Nothing herein contained is intended
to permit or authorize any Borrower to make any contract or commitment on
behalf of Lender.
7.9 Change in Capital Stock: There shall occur no change in the
ownership of the stock of Borrowers (other than RUSA).
7.10 Method of Business: No Borrower shall change the nature or methods
of operation of its Business Operations in any material respect.
7.11 Officer/Shareholder Compensation: The salary and bonuses of
Brooks and Feldman may not exceed $225,000 and $150,000, respectively, in any
Fiscal Year.
7.12 Capital Expenditures: Borrowers shall not expend, on an aggregate
basis, for Capital Expenditures (calculated on a non-cumulative basis) more
than $150,000 in any rolling twelve month period.
7.13 MRR Sales: No Borrower shall sell or otherwise dispose of
Operating Contracts without Lender's prior written consent, except that
without such consent Borrowers may, during any rolling twelve month period,
sell or otherwise dispose of in the aggregate up to two percent of their
Operating Contracts.
7.14 Purchases of MRR: No Borrower shall purchase or otherwise acquire
any Operating Contract without Lender's prior written consent except as
expressly permitted in Section 7.2 herein.
<PAGE>
7.15 Prohibited Transactions: No Borrower shall without Lender's prior
written approval, (A) subcontract any services (other than arm's length
subcontracting with unaffiliated third parties for response, installation and
service calls in a manner acceptable to Lender) or otherwise not maintain
full possession, dominion and control over all of its MRR, (B) provide
subcontracting or so called "wholesale" services to other alarm businesses
other than in arm's length transactions for which a Borrower can reasonably
expect to earn a reasonable profit; or (C) provide personnel and/or assets to
any Affiliate for use in the management or operation of its business on other
than fair, reasonable and arm's length cash compensation, payable not less
often than monthly. Except as set forth in Schedule "7.15", under no
circumstances may a Borrower subcontract to third parties the monitoring of
any of such Borrower's MRR except upon the occurrence of any event which
renders such Borrower's monitoring facility inoperative, and then only for
the period of time during which such Borrower is required to repair or
relocate such monitoring facility.
7.16 Consulting Agreements: Other than the consulting agreements set
forth in Schedule "5.11(e)", Borrowers shall not enter into any consulting or
similar agreements requiring payments by Borrowers thereunder exceeding
$50,000 in the aggregate in any Fiscal Year.
7.17 Delinquencies: Borrowers shall not allow Delinquent Recurring
Monthly Revenue to be more than six percent (6%) of MRR at any time. As used
herein "Delinquent Recurring Monthly Revenue" means MRR under contracts with
customers that are overdue in payment as follows: residential and personal
accounts, more than ninety (90) days past due; commercial accounts, more than
one hundred twenty (120) days past due; and municipal, hospital and school
system accounts, more than one hundred fifty (150) days past due.
7.18 Additional MRR Test: Notwithstanding Section 7.17 immediately
above, Borrowers shall maintain at all times not less than $500,000 of MRR
which is not Delinquent Recurring Monthly Revenue.
7.19 Modification of Financial Covenants: If Borrowers make any sales or
acquisitions of MRR permitted hereunder, Borrowers and Lender agree to negotiate
in good faith to establish new Financial Covenants to appropriately reflect the
effect of such permitted sales and/or acquisitions of MRR. If Borrowers and
Lender cannot so agree, then the Financial Covenants shall remain as set forth
herein.
<PAGE>
7.20 Miscellaneous Covenants:
(a) No Borrower shall become or be a party to any contract or
agreement which would breach this Agreement, or breach, in any material respect,
any other instrument, agreement or document to which any Borrower is a party or
by which it is or may be bound.
<PAGE>
(b) No Borrower shall carry or purchase any "margin security" within
the meaning of Regulations U, G, T or X of the Board of Governors of the Federal
Reserve System, 12 C.F.R., Chapter II.
(c) Borrowers will not amend, terminate or modify any Monitoring
Agreement, Rental Agreement or Extended Warranty/Service Agreement except in the
ordinary course of business consistent with past practices.
SECTION 8. DEFAULT
8.1 Events of Default: Each of the following events (subject to the
passage of any applicable notice, grace or cure period set forth herein)
shall constitute an event of default ("Event of Default") and Lender shall
thereupon have the option to declare, as to each Borrower, all Obligations to
Lender immediately due and payable all without demand, notice, presentment or
protest or further action of any kind (it also being understood that the
occurrence of any of the Events of Default set forth in subparagraphs (j),
(k) or (l) shall automatically cause an acceleration of the Obligations):
(a) Payments - if any Borrower fails to make any payment of
principal or interest hereunder when such payment is otherwise due and payable;
or
(b) Other Charges - if any Borrower fails to pay any other charges,
fees or other monetary obligations owing to Lender arising out of or incurred in
connection with this Agreement or the other Loan Documents when such payment is
due and payable; or
(c) Particular Covenant Defaults - if any Borrower fails to perform
or observe any covenant, condition or undertaking contained in this Agreement,
provided, however, that Borrowers shall have a ten (10) day cure period (without
notice) with respect to the first three (3) covenant defaults of those covenants
set forth in Sections 6.1, 6.2, 6.5, 6.6, 6.9, 6.10, 6.13, 6.15 and 6.21 hereof
(such defaults may regard the same or different covenants set forth in such
Sections), whether or not such covenant defaults are declared by Lender; or
(d) Information - if any statement, report, financial statement, or
certificate made or delivered by any Borrower or any of its officers, employees
or agents, to Lender is not true and correct, in all material respects, when
made or deemed made; or
<PAGE>
(e) Uninsured Loss - if there shall occur any uninsured or
underinsured damage to or loss, theft, or destruction of the Collateral in an
amount in excess of $100,000; or
(f) Warranties or Representations - if any warranty, representation
or other statement by or on behalf of any Borrower contained in this Agreement,
or in any other Loan Document, or in reference to this Agreement, or in any
other existing or future agreement between any Borrower and Lender, is false,
erroneous, or misleading in any material respect when made or deemed made; or
(g) Agreements with Others - if any Borrower shall default beyond
any grace or cure period under any agreement with any creditor for borrowed
money of such Borrower, (including Capital Leases), and if as a result of such
default, the holder of such Borrower's obligations declares or is permitted to
declare any such obligation of such Borrower to become due prior to its maturity
date or prior to its regularly scheduled date of payment; or
(h) Other Agreements with Lender - if any Borrower breaches or
violates any material term of, or if a Potential Default or an Event of Default,
occurs under, any Loan Document or any other existing or future agreement
(related or unrelated) between such Borrower and Lender (subject to any
applicable grace or cure period which may be contained in any such other
agreement); or
(i) Judgments - if any final unappealable judgment for the payment
of money which is not fully covered by insurance shall be rendered by any court
of record against any Borrower, and such outstanding judgment has not been
dismissed, discharged or satisfied within twenty (20) days after the entry
thereof; or
(j) Assignment for Benefit of Creditors, etc. - if any Borrower
makes an assignment for the benefit of creditors generally, offers a composition
or extension to creditors, or makes or sends notice of an intended bulk sale of
any business or assets now or hereafter conducted by such Borrower; or
<PAGE>
(k) Bankruptcy, Dissolution, etc. - upon the commencement of any
action for the dissolution or liquidation of any Borrower or the commencement of
any case or proceeding for reorganization or liquidation of any Borrower's debts
under the Bankruptcy Code or any other state or federal law, now or hereafter
enacted for the relief of debtors, whether instituted by or against such
Borrower, which in the case of any involuntary case under the Bankruptcy Code is
not dismissed within thirty (30) days from the commencement thereof (Lender
having no obligation to make Advances and being entitled to seek adequate
protection or otherwise protect its rights during such thirty (30) day period);
or
(l) Receiver - upon the application for the appointment of a
receiver, liquidator, custodian, trustee or similar official or fiduciary for
any Borrower or for any Borrower's Property; or
(m) Execution Process, etc. - the issuance of any execution or
distraint process against any Borrower or any of Borrower's Property; or
(n) Termination of Business - if any Borrower ceases any material
portion of the Business Operations as presently conducted or alters the Business
Operations in a material manner from the manner in which the Business Operations
are currently conducted; or
(o) Unlawful Activity - if any Borrower commits or is indicted for
committing any criminal activity, or any Borrower engages in or is reasonably
likely to have engaged in any type of activity which, in Lender's discretion,
might result in the forfeiture of any material Property of such Borrower to any
governmental entity, federal, state or local; or
(p) Tax Liens - if a notice of a Lien, levy or assessment is filed
of record with respect to any or all of any Borrower's Property by the United
States government, or any department, agency or instrumentality thereof, or by
any state, county, municipal or other government agency, or if any taxes or
debts owing at any time hereafter to any one or more of such entities becomes a
Lien, whether choate or otherwise, upon any or all of any Borrower's Property;
or
(q) Change of Control - RUSA shall suffer any Change in Control.
8.2 Rights and Remedies:
<PAGE>
(a) In addition to all other rights, options and remedies granted to
Lender under this Agreement, Lender may, upon or at any time after the
occurrence and during the continuance of an Event of Default terminate the
Revolving Credit, cease making Advances thereunder, and exercise all other
rights granted to it hereunder and all rights under the UCC and any other
applicable law or in equity, and under all Loan Documents permitted to be
exercised after the occurrence of an Event of Default, including the following
rights and remedies (which list is given by way of example and is not intended
to be an exhaustive list of all such rights and remedies):
(i) The right to take possession of, send notices regarding,
and collect directly the Collateral, with or without judicial process
(including, without limitation, the right to notify the United States postal
authorities to redirect mail addressed to any Borrower to an address designated
by Lender);
(ii) The right to, by its own means or with judicial
assistance, enter any Borrower(s)' premises and take possession of the
Collateral, or render it unusable, or dispose or dismantle of the Collateral on
such premises, without any liability for rent, storage, utilities or other sums;
(iii) The right to require Borrowers at Borrowers' expense to
assemble all or any part of the Collateral and make it available to Lender at
any place designated by Lender; and
(iv) The right to reduce the Maximum Revolving Credit Amount
or to modify the terms and conditions upon which Lender is willing to consider
making Advances under the Revolving Credit.
(b) Borrowers hereby agree that a notice received by them at least
seven (7) days before the time of any intended public sale or of the time after
which any private sale or other disposition of the Collateral is to be made,
shall be deemed to be reasonable notice of such sale or other disposition. If
permitted by applicable law, any perishable inventory or Collateral or Pledged
Collateral which threatens to speedily decline in value or which is sold on a
recognized market may be sold immediately by Lender without prior notice to
Borrowers. Borrowers covenant and agree not to interfere with or impose any
obstacle, resistance or disruption to Lender's exercise of its rights and
remedies with respect to the Collateral, after the occurrence and during the
continuance of an Event of Default hereunder.
<PAGE>
(c) In addition to all other rights, options and remedies granted to
Lender under this Agreement, Lender may, at any time, in its sole discretion
with or without cause, relinquish or abandon any Collateral or any security
interest therein.
8.3 Continuation of Event of Default: Borrowers acknowledge and agree
that if an Event of Default occurs it shall be deemed continuing unless
Lender expressly agrees, in its sole discretion, and without any duty or
obligation of any kind to agree or consider to agree, to waive or accept a
cure of any such Event of Default.
8.4 Nature of Remedies: Lender shall have the right to proceed against
all or any portion of the Collateral and Pledged Collateral in any order and
may apply such Collateral and Pledged Collateral to the Obligations in any
order. All rights and remedies granted Lender hereunder and under any
agreement referred to herein, or otherwise available at law or in equity,
shall be deemed concurrent and cumulative, and not alternative remedies, and
Lender may proceed with any number of remedies at the same time until the
Obligations are satisfied in full. The exercise of any one right or remedy
shall not be deemed a waiver or release of any other right or remedy, and
Lender, upon the occurrence and during the continuance of an Event of
Default, may proceed against Borrowers (or any one or more them), and/or the
Collateral and Pledged Collateral, at any time, under any agreement, with any
available remedy and in any order.
8.5 Set-Off: If any bank account of any Borrower with Lender or with
any participant is attached or otherwise liened or levied upon by any third
party, Lender (and any participant) need not await the running of any
applicable grace period hereunder, but Lender (and such participant as agent
for Lender) shall have and be deemed to have the immediate right of set-off
and may apply the funds or amount thus set-off against any Obligations.
8.6 Confession of Judgment:
<PAGE>
(a) EACH BORROWER HEREBY IRREVOCABLY AND INDEPENDENTLY AUTHORIZES
AND EMPOWERS ANY ATTORNEY(S) OR THE PROTHONOTARY OR CLERK OF ANY COURT OF RECORD
IN THE COMMONWEALTH OF PENNSYLVANIA, OR ELSEWHERE, FOLLOWING THE OCCURRENCE OF
AN EVENT OF DEFAULT, TO APPEAR FOR SUCH Borrower IN ANY SUCH COURT, WITH OR
WITHOUT DECLARATION FILED, AS OF ANY TERM OR TIME, AND CONFESS OR ENTER JUDGMENT
AGAINST SUCH BORROWER IN LENDER'S FAVOR FOR ALL OBLIGATIONS DUE OR TO BECOME DUE
BY SUCH BORROWER HEREUNDER, WITH COSTS OF SUIT, RELEASE OF ERRORS AND TEN
PERCENT (10%) OF SUCH SUMS ADDED FOR REASONABLE ATTORNEYS' FEE; AND FOR THE
PURPOSE HEREOF A COPY OF THIS AGREEMENT SHALL BE SUFFICIENT WARRANT. SUCH
AUTHORITY AND POWER SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF AND JUDGMENT
MAY BE CONFESSED FROM TIME TO TIME HEREUNDER AS LENDER MAY DETERMINE.
(b) EACH BORROWER, BEING FULLY AWARE OF THE RIGHT TO NOTICE AND A
HEARING CONCERNING THE VALIDITY OF ANY AND ALL CLAIMS THAT MAY BE ASSERTED
AGAINST SUCH BORROWER BY LENDER BEFORE A JUDGMENT CAN BE ENTERED HEREUNDER OR
BEFORE EXECUTION MAY BE LEVIED ON SUCH JUDGMENT AGAINST ANY AND ALL PROPERTY OF
SUCH BORROWER, HEREBY UNCONDITIONALLY WAIVES THESE RIGHTS AND AGREES AND
CONSENTS TO JUDGMENT BEING ENTERED BY CONFESSION IN ACCORDANCE WITH THE TERMS
HEREOF AND EXECUTION BEING LEVIED ON SUCH JUDGMENT AGAINST ANY AND ALL PROPERTY
OF BORROWER, IN EACH CASE WITHOUT FIRST GIVING NOTICE AND THE OPPORTUNITY TO BE
HEARD ON THE VALIDITY OF THE CLAIM OR CLAIMS UPON WHICH SUCH JUDGMENT IS
ENTERED.
SECTION 9. MISCELLANEOUS
9.1 Governing Law: This Agreement, and all related agreements and
documents shall be governed by and construed in accordance with the laws of
the Commonwealth of Pennsylvania, without regard to its otherwise applicable
principles of conflicts of laws. The provisions of this Agreement and other
agreements and documents referred to herein are to be deemed severable, and
the invalidity or unenforceability of any provision shall not affect or
impair the remaining provisions which shall continue in full force and effect.
9.2 Integrated Agreement: The Revolving Credit Note, this Agreement,
and all other Loan Documents shall be construed as integrated and
complementary of each other, and as augmenting and not restricting Lender's
rights, remedies and security. If, after applying the foregoing, an
inconsistency still exists, the provisions of this Agreement shall constitute
an amendment thereto and shall control.
<PAGE>
9.3 Waivers, Releases and Indemnification:
<PAGE>
(a) No omission or delay by Lender in exercising any right or power
under this Agreement or any other Loan Document will impair such right or power
or be construed to be a waiver of any default, or Event of Default or an
acquiescence therein, and any single or partial exercise of any such right or
power will not preclude other or further exercise thereof or the exercise of any
other right, and no waiver of Lender's rights hereunder will be valid unless in
writing and signed by Lender, and then only to the extent specified.
(b) Each Borrower expressly waives presentment for payment, demand,
notice of dishonor, protest, notice of protest, diligence of collection, and any
other notice of any kind, and hereby consents to any number of renewals and
extensions of time of payment hereof, which renewals and extensions shall not
affect the liability of any party hereto. Each Borrower further agrees that
Lender may accept, by way of compromise or settlement, from any one or more of
the parties liable hereunder a sum or sums less than the amount of the
Obligations, and may give releases to such parties without affecting the
liability of any other party for the unpaid balance. Any such renewals or
extensions may be made and any such partial payments accepted or releases given
without notice to any such party.
(c) Each Borrower hereby waives and releases all errors, defects and
imperfections in any proceedings instituted by Lender under the terms of this
Agreement, or of any of the other Loan Documents, as well as all benefit that
might accrue to Borrower by virtue of any present or future laws exempting the
Property, or any other property, real, personal or mixed, or any part of the
proceeds arising from any sale of such property, from attachment, levy or sale
under execution, or providing for any stay of execution, exemption from civil
process, or extension of time for payment. Each Borrower agrees that any real
estate that may be levied upon pursuant to a judgment obtained by virtue hereof,
or upon any writ of execution issued thereon, may be sold upon any such writ in
whole or in part in any order desired by Lender.
<PAGE>
(d) Each Borrower releases and shall indemnify, defend and hold
harmless Lender, its officers, employees and agents, of and from any claims,
demands, liabilities, obligations, judgments, injuries, losses, damages and
costs and expenses (including, without limitation, reasonable attorneys' fees)
resulting from (i) acts or conduct of any Borrower under, pursuant or related to
this Agreement and the other Loan Documents, (ii) any Borrower's breach or
violation of any representation, warranty, covenant or undertaking contained in
this Agreement or the other Loan Documents, and (iii) any Borrower's failure to
comply with any or all laws, statutes, ordinances, governmental rules,
regulations or standards, whether federal, state or local, or court or
administrative orders or decrees (including, without limitation, environmental
laws, etc.) and all costs, expenses, fines, penalties or other damages resulting
therefrom. The Obligations of Borrowers under this Section 9.3(d) shall survive
the occurrence of any and all events whatsoever, including, without limitation,
payment of the Obligations or investigations by or knowledge of Lender.
9.4 Time:
(a) Whenever any Borrower shall be required to make any payment, or
perform any act on a Saturday, Sunday or a legal holiday under the laws of the
Commonwealth of Pennsylvania or such other jurisdiction where such Borrower may
be required to make any payment or perform any act, such payment may be made, or
such act may be performed, on the next succeeding Business Day.
(b) Time is of the essence in each Borrower's performance under all
provisions of this Agreement and all other Loan Documents.
<PAGE>
9.5 Expenses of Lender:
(a) At Closing and from time to time thereafter, Borrowers will pay,
immediately on demand, all reasonable expenses (including, without limitation,
the fees and expenses of legal counsel for Lender) relating to this Agreement,
the Loan Documents, and all related agreements and documents, including, without
limitation, expenses incurred in the analysis, negotiation, preparation,
closing, administration, audit and enforcement of this Agreement, the Loan
Documents, and all related agreements and documents, the enforcement, protection
and defense of the rights of Lender in connection with the Revolving Credit,
this Agreement, the Collateral, Pledged Collateral or otherwise hereunder,
including the right to take possession of any Collateral and the proceeds
thereof and to hold, collect, prepare for sale, sell and dispose of any
Collateral and Pledged Collateral, and any expenses relating to extensions,
amendments, waivers or consents pursuant to the provisions hereof, the Loan
Documents, or any related agreements and documents or relating to agreements
with other creditors, or termination of this Agreement (collectively, the
"Expenses").
(b) Expenses shall also include but not be limited to the costs of
(i) reproducing this Agreement, the Loan Documents and related agreements and
documents; (ii) filing and recording fees; (iii) searches; and (iv) appraisal
and verification fees.
<PAGE>
9.6 Brokerage: Except for the involvement of Berwind Financial Group,
L.P. (to whom Borrowers have agreed to pay a $450,000 fee), this transaction
was brought about and entered into by Lender and Borrowers acting as
principals and without any brokers, agents or finders being the effective
procuring cause hereof. Borrowers represent that they have not committed
Lender to the payment of any brokerage fee, commission or charge in
connection with this transaction other than as expressly set forth above. If
any claim for any such fee, commission or charge is made on Lender by any
broker, finder or agent or other Person (including, but not limited to,
Berwind Financial Group, L.P.), Borrowers will jointly and severally
indemnify, defend and save Lender harmless against such claim and further
will defend any action or actions to recover on such claim, at Borrowers' own
costs and expense, including, without limitation, Lender's counsel fees.
Borrowers further agree that until any such claim is adjudicated in Lender's
favor, the amount demanded shall be deemed a liability of Borrowers under
this Agreement, secured by the Collateral.
9.7 Notices:
(a) Any notices or consents required or permitted by this Agreement
shall be in writing and shall be deemed given if delivered in person, sent by
telegram (with messenger service specified) or sent by nationally recognized
overnight courier service, or sent by certified or registered mail postage
prepaid, return receipt requested, as follows, unless such address is changed by
written notice hereunder:
If to Lender to: Mellon Bank, N.A.
610 West Germantown Pike
Suite 200
Plymouth Meeting ,PA 19462
Attn: Liz A. Mellace
FAX: (610) 941-4136
With a copy to: Blank Rome Comisky & McCauley
1200 Four Penn Center Plaza
Philadelphia, PA 19103
Attn: Lawrence Finkelstein, Esquire
FAX: (215) 569-5555
<PAGE>
If to Borrowers: Response USA, Inc.
11-K Princess Drive
Lawrenceville, NJ 08648
Attn: Richard M. Brooks, President
FAX: (609) 896-3535
With a copy to: Schneck Weltman Hashmall & Mischel LLP
1285 Avenue of the Americas
New York City, NY 10019
Attn: Thomas A. Rose, Esquire
FAX: (212) 956-3252
(b) All notices sent by Lender or any Borrower by any of the methods
described above shall be deemed to be given when so received.
9.8 Headings: The headings of any paragraph or Section of this
Agreement are for convenience only and shall not be used to interpret any
provision of this Agreement.
9.9 Survival: All warranties, representations, and covenants made by
Borrowers herein, or in any other Loan Document or on any certificate,
document or other instrument delivered by it or on its behalf under this
Agreement, shall be considered to have been relied upon by Lender, and shall
survive the delivery to Lender of the Revolving Credit Note, regardless of
any investigation made by Lender or on its behalf. All statements in any Loan
Document, certificate or other instrument prepared and/or delivered for the
benefit of Lender shall constitute warranties and representations by
Borrowers hereunder. Except as otherwise expressly provided herein, all
covenants made by Borrowers hereunder or under any other agreement or
instrument shall be deemed continuing until all Obligations are satisfied in
full.
9.10 Successors and Assigns: This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties. Lender may participate or assign any or all of its rights or
obligations hereunder, without notice to or consent of Borrowers, to any
commercial lender, financial institution, or affiliate of such entity. No
Borrower may transfer, assign or delegate any of its duties or obligations
hereunder.
<PAGE>
9.11 Duplicate Originals: Two or more duplicate originals of this
Agreement may be signed by the parties, each of which shall be an original
but all of which together shall constitute one and the same instrument.
9.12 Modification: No modification hereof or any agreement referred to
herein shall be binding or enforceable unless in writing and signed on behalf
of the party against whom enforcement is sought.
9.13 Signatories: Each individual signatory hereto represents and
warrants that he/she is duly authorized to execute this Agreement on behalf
of his principal and that he/she executes the Agreement in such capacity and
not as a party.
9.14 Third Parties: No rights are intended to be created hereunder, or
under any related agreements or documents for the benefit of any third party
donee, creditor or incidental beneficiary of any Borrower(s). Nothing
contained in this Agreement shall be construed as a delegation to Lender of
any Borrower's duty of performance, including, without limitation such
Borrower's duties under any account or contract in which Lender has a
security interest.
9.15 Discharge of Taxes, Borrowers' Obligations, Etc.: Lender, in its
discretion, shall have the right at any time, and from time to time, with
reasonable prior notice to Borrowers if Borrowers fail to do so, to (a)
obtain insurance covering any of the Collateral as required hereunder (b) pay
for the performance of any of any Borrower's obligations hereunder, (c)
discharge taxes and Liens at any time levied or placed on any of the
Collateral in violation of this Agreement unless Borrowers are in good faith
with due diligence by appropriate proceedings, in the judgment of Lender,
contesting such taxes or Liens, (d) pay for the maintenance and preservation
of any of the Collateral. Expenses and Advances by Lender under this
paragraph shall bear interest at the same rate applied to the Revolving
Credit and until reimbursed to Lender, shall be secured by the Collateral.
Such payments and Advances made by Lender shall not be construed as a waiver
by Lender of an Event of Default under this Agreement.
<PAGE>
9.16 Withholding and Other Tax Liabilities: Lender shall have the
right to refuse to make any Advances from time to time unless Borrowers shall,
at Lender's request, have given to Lender evidence, reasonably satisfactory to
Lender, that Borrowers have properly deposited or paid, as required by law, all
withholding taxes and all federal, state, city, county or other taxes,
including, without limitation, excise taxes, due up to and including the date of
the loan. Until all of Obligations to Lender have been paid in full, Lender
shall be entitled to continue to hold any and all of the Collateral until
Borrowers have given to Lender evidence, reasonably satisfactory to Lender, that
Borrowers have properly deposited or paid, as required by law, all federal
withholding taxes due up to and including the date of such expiration or
termination. Copies of deposit slips showing payment shall likewise constitute
satisfactory evidence for such purpose. In the event that any Lien, assessment
or tax liability against Borrower shall arise in favor of any taxing authority,
whether or not notice thereof shall be filed or recorded as may be required by
law, Lender shall have the right (but shall not be obligated, nor shall Lender
hereby assume the duty) upon reasonable prior notice to Borrowers to pay any
such lien, assessment or tax liability by virtue of which such charge shall have
arisen; provided, however, that Lender shall not pay any such tax, assessment or
Lien if the amount, applicability or validity thereof is being contested in good
faith and by appropriate proceedings by Borrowers and further provided that each
Borrower's title to and its right to use, its respective Collateral are not
materially adversely affected and Lender's lien and priority in the Collateral
are not affected, altered or impaired thereby. In order to pay any such Lien,
assessment or tax liability, Lender shall not be obliged to wait until said
Lien, assessment or tax liability is filed before taking such action as
hereinabove set forth. Any sum or sums which Lender shall have paid for the
discharge of any such lien shall be added to the Revolving Credit and shall be
paid by Borrowers to Lender with interest thereon, upon demand, and Lender shall
be subrogated to all rights of such taxing authority against Borrowers.
9.17 Consent to Jurisdiction: Each Borrower irrevocably consents to the
jurisdiction of the Courts of Common Pleas of Philadelphia and Montgomery
County, Commonwealth of Pennsylvania or the United States District Court for
the Eastern District of Pennsylvania in any and all actions and proceedings
whether arising hereunder or under any other agreement or undertaking and
irrevocably agrees to service of process as set forth in Section 9.7 hereof,
to the address of Borrower set forth herein.
<PAGE>
9.18 Waiver of Jury Trial: EACH BORROWER AND LENDER HEREBY WAIVE ANY
AND ALL RIGHTS EITHER MAY HAVE TO A JURY TRIAL IN CONNECTION WITH ANY
LITIGATION COMMENCED BY OR AGAINST LENDER WITH RESPECT TO RIGHTS AND
OBLIGATIONS OF THE PARTIES HERETO.
<PAGE>
9.19 Future Commitments: Except as expressly set forth in this
Agreement, Lender has made no agreement or commitment to lend money or extend
credit to Borrowers, and has made no agreement or commitment to any Borrower
to modify or consider any modification of any nature whatsoever of the terms
of this Agreement.
IN WITNESS WHEREOF, the undersigned parties have executed this Loan and
Security Agreement the day and year first above written.
MELLON BANK, N.A. RESPONSE USA, INC.
By:_________________________ By:
Title:______________________
UNITED SECURITY SYSTEMS, INC.
By:
Title:
SHELTON SECURITY, INC. RESPONSE ABILITY SYSTEMS, INC.
By: By:
------------------------- -------------------------
Title:______________________ Title:______________________
MSG SECURITY SYSTEMS, INC. EMERGENCY RESPONSE SYSTEMS, INC.
By: By:
------------------------- -------------------------
Title:______________________ Title:______________________
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
Schedule 5.1 -- Qualification to do Business
Schedule 5.2 -- Insurance
Schedule 5.3 -- Litigation
Schedule 5.4 -- Existing Liens and Claims
Schedule 5.5 -- Patents, Copyrights, Trademarks, Licenses,
Franchises, etc.
Schedule 5.11(a) -- Existing Guaranties, Investments and
Borrowings
Schedule 5.11(b) -- Written Contracts and Agreements
Schedule 5.12 -- Employee Benefit Plans
Schedule 5.14 -- Names and Addresses
Schedule 5.15 -- Other Associations
Schedule 5.16 -- Environmental Matters
Schedule 5.18 -- Capital Stock, Warrants, Options
Schedule 5.21 -- Accounts that are not Qualified Accounts
Schedule 6.7 -- Permitted Accounts
Schedule 7.5 -- Indebtedness
Schedule 7.15 -- Subcontracting Arrangements
Exhibit "A" -- Controller's Certificate
<PAGE>
Exhibit 10(i)
PURCHASE AGREEMENT
dated as of
March 4, 1997
among
BKR, INC.,
a Nevada corporation
Response USA, Inc.,
a Delaware corporation
and
HealthLink, Ltd.,
a Nevada limited liability company
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
DEFINITIONS......................................................2
1.1 Definitions................................................2
ARTICLE 2
SALE OF FIFTY PERCENT (50%) UNDIVIDED
INTEREST IN ASSETS AND TRANSFER OF SELLER
AND BUYER'S INTEREST IN SUCH ASSETS..............................6
2.1 Purchase and Sale of Purchased Interest
by Buyer...................................................6
2.2 Purchase Price.............................................6
2.3 Transfer of Purchased Interest by Buyer
to the Company.............................................7
2.4 Transfer of Seller's Remaining Interest to
the Company................................................7
2.5 Liabilities Not Being Assumed..............................7
2.6 Post-Closing Adjustment to Response
Shares.....................................................7
ARTICLE 3
CLOSING..........................................................8
3.1 Closing Date...............................................8
3.2 Documents to be Delivered at the Closing
by Seller..................................................8
3.3 Documents to be Delivered at the Closing
by Buyer...................................................8
3.4 Contributions of Purchased and
Remaining Interest.........................................8
3.5 Delivery of HealthLink Memberships.........................8
3.6 Delivery of Response Warrant...............................8
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
................................................................9
4.1 Organization and Related Matters...........................9
4.2 Authorization..............................................9
4.3 No Conflicts...............................................9
4.4 No Brokers or Finders......................................9
4.5 Capital Structure..........................................9
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<PAGE>
4.6 Disclosure Package........................................10
4.7 Validity of Shares........................................10
4.8 Absence of Litigation.....................................11
4.9 Eligibility for Use of Form S-3...........................11
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF
SELLER..........................................................11
5.1 Seller Organization and Related Matters...................11
5.2 Authorization of Seller...................................11
5.3 No Other Liabilities or Contingencies.....................11
5.4 Absence of Certain Developments...........................12
5.5 Material Contracts........................................12
5.6 Title to Properties.......................................12
5.7 Intangible Property.......................................13
5.8 Tax Matters...............................................13
5.9 Accounting Records........................................13
5.10 No Defaults or Conflicts..................................14
5.11 Legal Proceedings.........................................14
5.12 Permits; No Violation of Law..............................14
5.13 Compliance with Law.......................................15
5.14 No Brokers or Finders.....................................15
5.15 Environmental Compliance..................................15
5.16 Acquisition for Investment................................15
5.17 Material Facts............................................16
5.18 Accuracy..................................................16
ARTICLE 6
COVENANTS WITH RESPECT TO CONDUCT OF
SELLER AND BUYER BEFORE AND AFTER
CLOSING.........................................................16
6.1 Conduct of Business.......................................16
6.2 Access; Books and Records.................................17
6.3 Notification of Certain Matter............................17
6.4 Permits and Approvals.....................................17
6.5 Cooperation...............................................18
6.6 Administration of Accounts................................18
6.7 Registration of Response Shares...........................18
ARTICLE 7
CONDITIONS OF PURCHASE..........................................22
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<PAGE>
7.1 Conditions Precedent to the Obligation of
the Buyer to Close........................................22
7.2 Conditions Precedent to the Obligation of
the Seller to Close.......................................23
ARTICLE 8
TERMINATION OF OBLIGATIONS;
SURVIVAL OF COVENANTS...........................................24
8.1 Termination of Agreement..................................24
8.2 Effect of Termination.....................................25
ARTICLE 9
INDEMNIFICATION.................................................25
9.1 Obligations of the Seller.................................25
9.2 Obligations of Buyer......................................26
9.3 Procedure.................................................26
9.4 Exclusive Remedy; Survival................................28
ARTICLE 10
GENERAL.........................................................28
10.1 Amendments; Waivers.......................................28
10.2 Exhibits; Integration.....................................29
10.3 Best Efforts; Further Assurances..........................29
10.4 Choice of Law.............................................29
10.5 Arbitration...............................................29
10.6 No Assignment.............................................29
10.7 Headings..................................................29
10.8 Counterparts..............................................30
10.9 Publicity and Reports.....................................30
10.10 Confidentiality...........................................30
10.11 Notices...................................................30
10.12 Expenses..................................................31
10.13 Waiver....................................................31
10.14 Representation By Counsel;
Interpretation............................................31
10.15 Specific Performance......................................31
10.16 Severability..............................................31
Signatures............................................32, 33
iii
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (the "Agreement") is entered into as of March ,
__, 1997, among BKR, Inc., a Nevada corporation ("Seller"), Response USA, Inc.,
a Delaware corporation ("Buyer"), and HealthLink, Ltd., a Nevada limited
liability company ("the "Company"), with respect to the following facts:
A. Seller is engaged in the manufacture, sale and monitoring of
Personal Emergency Response Systems ("PERS") to the general public;
and
B. The parties have agreed to: (i) the purchase by Buyer of a fifty
percent (50%) undivided interest in Seller's Assets; (ii) the
contribution of Seller's remaining fifty percent (50%) undivided
interest in the Assets to HealthLink; and (iii) the contribution of
Buyer's fifty percent (50%) undivided interest in the Assets to
HealthLink (the "Company");
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. As used in this Agreement and the Exhibits and Schedules
delivered pursuant to this Agreement, the following definitions shall apply:
(a) "Action" means any action, complaint, investigation, suit or other
proceeding, whether civil or criminal, in law or in equity, or before any
arbitrator or Governmental Entity.
(b) "Affiliate" means a legal or natural Person that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with a specified Person; or a legal or natural Person that
directly, or indirectly through one or more intermediaries, owns or holds any
financial interest in a specified legal Person or a specified legal Person's
constituent members or shareholders.
(c) "Agreement" means this Agreement by and among Buyer, Seller and
HealthLink as amended or supplemented as provided in this Agreement.
(d) "Approval" means any approval, authorization, consent, qualification
or registration, or any waiver of the foregoing, required to be obtained from,
or any notice, statement or other communication required to be filed with or
delivered to, any Governmental Entity or any other Person.
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<PAGE>
(e) "Business" means the ownership and operation of the manufacture, sale
and monitoring of Personal Emergency Response Systems ("PERS") and all
activities incidental or related thereto, including the ownership of
intellectual property and all other such activities so related, and shall be
deemed to include any of the following incidents of such business: income, cash
flow, operations, condition (financial or other), and assets of Seller.
(f) "Business Day" means any day except Saturday, Sunday or any day on
which banks in the State of Nevada are permitted to be closed.
(g) "Closing" means the consummation of the transaction contemplated by
this Agreement.
(h) "Closing Date" means the date of the Closing.
(i) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(j) "Contract" means any agreement, arrangement, bond, commitment,
franchise, indemnity, indenture, instrument, lease, license or understanding,
whether or not in writing.
(k) "Contribution Date" means the date upon which Seller transfers the
Assets to Buyer, which shall be the same date upon which Buyer contributes the
Assets to the Company.
(l) "Employment Contracts" means all oral, written and executed employment
Contracts relating to the Business, including written and executed Contracts
with executives and employees, if any, and all rights of Seller thereunder.
(m) "Encumbrance" means any claim, charge, easement, encumbrance, security
interest, lien, option, pledge, right of others or restriction (whether on
voting, sale, transfer, disposition or otherwise), whether imposed by agreement,
understanding, law, equity or otherwise, except for any restrictions on transfer
generally arising under any applicable federal or state securities law.
(n) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the related regulations and published interpretations.
(o) "ERISA Affiliate" means Seller and all trades or businesses (whether
or not incorporated) that are members of a group of which Seller is a member and
which are (i) a "controlled group" within the meaning of Section 414(b) of the
Code, (ii) a group "under common control" within the meaning of Section 414(c)
of the Code, or (iii) an "affiliated service group" within the meaning of
Section 414(m) or of the Code.
(p) "GAAP" means generally accepted accounting principles in the United
States, as in effect from time to time. Where more than one alternative
treatment is permitted by
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<PAGE>
GAAP as of any date, GAAP shall be deemed to refer, as of such date, to the
treatment actually utilized by Seller so long as such treatment is permitted by
GAAP.
(q) "Governmental Entity" means any government or any agency, bureau,
commission, court, department, official, political subdivision, tribunal or
other instrumentality of any government, whether federal, state or local,
domestic or foreign.
(r) "Hazardous Substance" includes (but shall not be limited to)
substances that are defined or listed in, or otherwise classified pursuant to,
any applicable Laws as "hazardous substances," "hazardous materials," "hazardous
wastes" or "toxic substances," or any other formulation intended to define, list
or classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity or reproductive toxicity, and petroleum
and drilling fluids, produced waters and other wastes associated with the
exploration, development, or production of crude oil, natural gas or geothermal
energy.
(s) "Indemnifiable Claim" means any Loss for or against which any party is
entitled to indemnification under this Agreement; "Claim" includes any claim of
right to indemnification.
(t) "Intangible Property" means any trade secret or other confidential
information or know-how and any and all Marks and goodwill.
(u) "IRS" means the Internal Revenue Service or any successor entity.
(v) "Knowledge" means matters that are to the best knowledge of a party
after diligent inquiry, including matters that would have been disclosed by an
accountant's audit.
(w) "Law" means any constitutional provision, statute or other law, rule,
regulation, or interpretation of any thereof and any Order.
(x) "Loss" means any cost, damage, disbursement, expense, liability, loss,
deficiency, diminution in value, obligation, penalty (except to the extent
incurred solely by reason of the act or omission of the specified Person) or
settlement of any kind or nature, whether foreseeable or unforeseeable,
including interest or other carrying costs, penalties (except to the extent
incurred solely by reason of the act or omission of the specified Person),
reasonable legal, accounting and other professional fees and expenses incurred
in the investigation, collection, prosecution and defense of claims and amounts
paid in settlement that may be imposed on or otherwise incurred or suffered by
the specified Person.
(y) "Material Contract" means any Contract to which Seller is a party or
by which any of its assets is in a material manner bound or affected that (a)
after the Balance Sheet Date could obligate Seller to pay an amount of Five
Hundred Dollars ($500.00) or more,
4
<PAGE>
(b) has a term beyond three (3) months after the Closing Date, (c) otherwise
could restrict Business activities, (d) provides for the extension of credit,
(e) limits the ability of the Buyer to conduct the Business, including as to
manner or place, (f) provides for a guaranty or indemnity, (g) grants a power of
attorney, agency or similar authority to another person or entity, (h) contains
a right of first refusal or right of consent, or (i) requires Seller or the
Company, upon transfer of the Assets, to buy or sell goods.
(z) "Order" means any decree, injunction, judgment, order, ruling or writ.
(aa) "Permit" means any license, permit, franchise, certificate of
authority or order, or any waiver of the foregoing, required to be issued by any
Governmental Entity.
(bb) "Person" means an association, a corporation, an individual, a
partnership, a limited liability company, a trust or any other entity or
organization, including a Governmental Entity.
(cc) "Purchased Interest" shall have the meaning set forth in Section 2.1
of this Agreement.
(dd) "Purchase Price" shall have the meaning set forth in Section 2.2 of
this Agreement.
(ee) "Remaining Interest" shall have the meaning set forth in Section 2.1
of this Agreement.
(ff) "Tax" means any foreign, federal, state, county or local income,
sales and use, excise, franchise, real and personal property, transfer, gross
receipt, capital stock, production, business and occupation, disability,
employment, payroll, severance or withholding tax or charge imposed by any
Governmental Entity, any interest and penalties (civil or criminal) related
thereto or to the nonpayment thereof, and any Loss in connection with the
determination, settlement or litigation of any Tax liability.
(gg) "Tax Return" means a report, return or other information required to
be supplied to a Governmental Entity with respect to Taxes including, where
permitted or required, combined or consolidated returns for any group of
entities that includes any Affiliate.
(hh) "Assets" are assets of the Seller described in Exhibit A.
(ii) "The Response Closing Price Per Share" means the average bid price
for the Response Shares on the NASDAQ stock exchange during the fifteen (15)
trading days immediately preceding March 4, 1997.
For all purposes of this Agreement, except as otherwise expressly provided:
5
<PAGE>
(i) the terms defined in this Article I have the meanings assigned to them
in this Article I and include the plural as well as the singular,
(ii) all accounting terms not otherwise defined herein have the meanings
assigned under GAAP,
(iii) all references in this Agreement to designated "Articles,"
"Sections" and other subdivisions are to the designated Articles, Sections and
other subdivisions of the body of this Agreement,
(iv) pronouns of either gender or neuter shall include, as appropriate,
the other pronoun forms,
(v) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision, and
(vi) the words "include," "including" and other words of similar import
mean "include, without limitation," or "including, without limitation,"
regardless of whether any reference to "without limitation" or words of similar
import is made.
ARTICLE 2
SALE OF FIFTY PERCENT (50%) UNDIVIDED INTEREST IN ASSETS
AND TRANSFER OF SELLER AND BUYER'S INTEREST IN SUCH ASSETS
2.1 Purchase and Sale of Purchased Interest by Buyer. In reliance upon the
representations, warranties and covenants contained herein, and subject to the
terms and conditions of this Agreement, on the Closing Date Seller shall sell,
convey, assign, transfer and deliver to the Buyer a fifty percent (50%)
undivided interest in the Assets set forth in Exhibit A. Such interest is
referred to as the "Purchased Interest." The remaining fifty percent (50%)
undivided interest in the Assets owned by Seller as set forth in Exhibit A,
shall be referred to as the "Remaining Interest."
2.2 Purchase Price. In reliance upon the representations, warranties and
covenants contained herein, and subject to the terms and conditions of this
Agreement, Buyer shall pay to Seller the Purchase Price of Three Million Three
Hundred Thousand Dollars ($3,300,000.00). The purchase price shall be payable by
the delivery of a number of shares of common stock of Buyer ("Response Shares")
having a value equal to the Purchase Price. The number of shares required to
attain the Three Million Three Hundred Thousand Dollars ($3,300,000.00) shall be
computed by averaging the closing bid price for the Response Shares on the
NASDAQ stock exchange during the fifteen (15) trading days immediately preceding
the Closing Date (the "Response Closing Price Per Share").
The Response Shares shall contain a restriction such that Seller may only sell
Five Thousand (5,000) shares per day for no more than one hundred thousand
(100,000) shares per month.
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Buyer shall undertake to immediately register such shares for the
benefit of Seller by the filing of a registration statement pursuant to the
provisions of Section 6.7 hereof.
2.3 Transfer of Purchased Interest by Buyer to the Company. In reliance upon the
representations, warranties and covenants contained herein, and subject to the
terms and conditions of this Agreement, on the Closing Date Buyer shall
contribute, convey, assign, transfer and deliver to HealthLink, Ltd. the
Purchased Interest.
2.4 Transfer of Seller's Remaining Interest to the Company. In reliance upon the
representations, warranties and covenants contained herein, and subject to the
terms and conditions of this Agreement, on the Closing Date Seller shall
contribute, convey, assign, transfer and deliver to the Company the Remaining
Interest. Seller shall receive a fifty percent (50%) membership interest in
exchange for the contribution of the Remaining Interest to the business of
HealthLink, Ltd. which shall be governed by the terms and conditions of an
Operating Agreement in substantially the form attached hereto as Exhibit O.
2.5 Liabilities Not Being Assumed. Buyer and HealthLink, Ltd. are not assuming
any liabilities of the Seller other than obligations arising from and after the
Closing Date under the contracts.
2.6 Post-Closing Adjustment to Response Shares. If Seller sells at least
1,000,000 Response Shares in open market transactions, and the average gross
sale price per share obtained by Seller is less than the Response Closing Price
per share (as evidenced by copies of appropriate brokerage account statements,
or any other manner reasonably acceptable to Buyer) (the "Shortfall Amount"),
then Buyer shall, at its option either:
(a) Pay to Seller within sixty (60) days after notice of such sale
an amount equal to the difference between the Response Closing Price per share
and Seller's gross sale price per share; or
(b) Deliver to such Seller additional shares of Common Stock with an
aggregate market value (based on the average closing bid price of the Common
Stock during the fifteen (15) trading days immediately preceding the date of
delivery) equal to such difference, which shares shall be registered and freely
transferable without restriction under the Securities Act, other than any
restriction arising from the holders status as an "affiliate," as defined in
Rule 144 under the Securities Act.
Upon the sale of the balance of Seller's Response Shares, the
foregoing procedure shall be followed such that Seller shall in no event receive
aggregate gross proceeds from the sale of the Response Shares of less than
$3,300,000. To the extent that Seller receives a Shortfall Amount form Purchaser
and receives gross proceeds from the sale of the Response Shares in excess of
$3,300,000 (the "Excess"), Seller shall pay to
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Purchaser within sixty (60) days of the last sale of the Response Shares, an
amount equal to the Excess, but not to exceed the Shortfall Amount.
ARTICLE 3
CLOSING
3.1 Closing Date. The Closing of the transaction shall take place at the office
of BKR at 7944 E. Beck Lane, Suite 210, Scottsdale, Arizona, 85260, on or before
the close of business March , 1997.
3.2 Documents to be Delivered at the Closing by Seller. At the Closing, Seller
shall deliver or cause to be delivered to Buyer certificates and such other
instruments of transfer necessary or appropriate to transfer to and vest in the
Buyer and thereafter in HealthLink, Ltd. all of Seller's right, title and
interest in and to fifty percent (50%) of the Assets.
3.3 Documents to be Delivered at the Closing by Buyer. Within forty-eight (48)
hours after the Closing, Buyer shall deliver or cause to be delivered to Seller,
the shares representing the Purchase Price .
3.4 Contributions of Purchased and Remaining Interest. At the Closing Seller and
Buyer shall deliver or cause to be delivered to HealthLink certificates or such
other instruments of transfer necessary or appropriate to transfer and vest in
HealthLink, Ltd. all of Buyer's and Seller's interests in the Purchased and
Remaining Interests. Seller shall deliver an Optional Advance Note substantially
in the form attached hereto marked Exhibit N for the benefit of the Company.
3.5 Delivery of HealthLink Memberships. Subject to the successful and completed
contributions and transfers set forth in Section 3.4 above HealthLink, Ltd.
shall cause membership certificates to be issued and delivered to Seller and
Buyer representing the membership interest of each in HealthLink, Ltd.
3.6 Delivery of Response Warrant. Within forty-eight (48) hours after the
Closing, Buyer shall deliver or cause to be delivered to Seller a Warrant, in
the form attached hereto as Exhibit W, whereby Buyer grants to Seller the right
to purchase 30,000 Response Shares for each 10,000 personal emergency response
systems placed on line by HealthLink, Ltd. following the Closing Date, up to an
aggregate maximum of 450,000 Response Shares. The purchase price for such shares
shall be $3.00 per share. The shares covered by such warrant shall be registered
by Buyer pursuant to Section 6.7 below.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents, warrants and agrees as follows:
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4.1 Organization and Related Matters. Buyer is a corporation duly organized and
validly existing under the laws of the State of Delaware and has all necessary
power and authority to operate, own and lease its properties and assets, to
carry on its business as now conducted, and to perform its obligations under
this Agreement.
4.2 Authorization. Buyer has all required power and authority and has taken all
actions necessary to enter into this Agreement, to consummate all other
transactions contemplated hereby, and to perform its obligations hereunder. This
Agreement and any other agreements, instruments or documents entered into by
Buyer pursuant to this Agreement have been duly executed and delivered by Buyer
and constitute the legal, valid and, assuming due execution and delivery by the
other parties hereto and thereto, binding obligations of Buyer, enforceable in
accordance with their terms, except as to the effect, if any, of (a) applicable
bankruptcy and other similar laws affecting the rights of creditors generally
and (b) rules of law and equity governing specific performance, injunctive
relief and other equitable remedies. The execution, delivery and performance of
this Agreement and any other agreement, instrument or document entered into by
Buyer pursuant to this Agreement and the Operating Agreement, have been duly
authorized by all necessary action of Buyer.
4.3 No Conflicts. The execution, delivery and performance of this Agreement by
Buyer will not (a) materially violate the provisions of, or constitute a
material breach or default (whether upon lapse of time and/or the occurrence of
any act or event, or otherwise) under, its charter documents or bylaws or any
Contract to which it is a party that is material to its financial condition,
results of operations or conduct of its business, or (b) violate any Law to
which Buyer is subject.
4.4 No Brokers or Finders. No agent, broker, finder or investment or commercial
banker, or other Person or firm engaged by or acting on behalf of Buyer or its
Affiliates in connection with the negotiation, execution or performance of this
Agreement or the transactions contemplated by this Agreement, is or will be
entitled to any broker's or finder's or similar fees or other commissions as a
result of this Agreement or such transactions. The Buyer agrees to pay any such
brokerage commissions, finders fees or similar compensation and to indemnify and
hold Seller harmless against any damages incurred as a result of any such claim.
4.5 Capital Structure.
(a) Stock and Options. The authorized capital stock of Buyer
consists of 4,130,908 shares of common stock, .008 par value, and 6,890
shares of Preferred Stock, 1996 Series A, 1,000 par value. At the close of
business on March 4, 1997, 4,130,908 shares of Buyer's common stock were
issued and outstanding, zero shares of Buyer's common stock were held by
Buyer in its Treasury and 1,233,381 Class A Warrants; 1,481,950 Class B
Warrants; 49,700 Class C Warrants; 175,000 Options at $4.50; 1,032,000
Options at $3.25 to Mellon Bank; and 2,868,400 Insider Options at $2.50 for
shares of Buyer's common stock were reserved for issuance upon the exercise
of the
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warrants or options to purchase Buyer's common stock. 6,890shares of Buyer's
Preferred Stock, 1996 Series A are issued and outstanding.
(b) No Other Commitments. Except for the Buyer options disclosed in
Section 4.5(a) above, and listed on Schedule 4.5 hereto, as of the date hereof,
there are no options, warrants, convertible, or other securities, calls,
commitments, conversion privileges or preemptive or other rights or agreements
of any character to which Buyer is a party or by which Buyer is bound obligating
Buyer or any of Buyer's subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, any shares of capital stock of Buyer to grant, extend
or enter into any such option, warrant, call, right, commitment, conversion
right or agreement.
4.6 Disclosure Package. Buyer has delivered to Seller the following documents:
(a) Buyer's Annual Report on Form 10-KSB for the fiscal year ended June 30,
1996; (b) Buyer's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996; (c) Buyer's Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1996; (d) all Current Reports on Form 8-K filed by Buyer
since July 1, 1996; and (e) all other documents filed by Buyer with the
Securities and Exchange Commission since July 1, 1996. The documents listed or
required to be listed in items (a) through (e) above are collectively referred
to as the "Buyer Disclosure Package." The financial statements of Buyer included
in the Buyer Disclosure Package complied as to form in all material respects
with the then applicable accounting requirements and published rules and
regulations of the Securities and Exchange Commission with respect thereto, were
prepared in accordance with generally accepted accounting principals applied on
a consistent basis during the periods involved (except as may have been
indicated in the notes thereto or, in the case of any unaudited statements, as
permitted by Form 10-Q as promulgated by the SEC) and fairly present (subject,
in the case of the unaudited statements, to normal, year-end, audit adjustments)
be consolidated financial position of Buyer and its consolidated subsidiaries as
at the respective dates thereof and the consolidated results of their operations
and cash flows. All of the documents contained in the Buyer Disclosure Package
are true, correct and complete in all material respects and do not contain any
untrue statements of material fact or omit to state any material fact necessary
in order to make such representations, warranties, or statements, in light of
the circumstances under which they were made, not misleading.
4.7 Validity of Shares. The Response Shares to be issued pursuant to this
Agreement will, when issued, (a) be duly authorized, validly issued, fully paid
and non-assessable, (b) be free and clear of any liens and encumbrances except
for applicable restrictions on transfer under applicable securities law, and (c)
not be subject to any preemptive rights created by statute, the certificate of
incorporation or the bylaws of Buyer.
4.8 Absence of Litigation. Except as set forth in Schedule 4.8, there is no
claim, action, proceeding or investigation pending or, to the best of knowledge
of Buyer, threatened against Buyer or any property or asset of Buyer, before any
court, arbitrator or administrative, governmental or regulatory or body,
domestic or foreign, which individually or in the aggregate would be a material
adverse affect on Buyer. Neither Buyer nor any
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property or asset of Buyer is subject to any order, writ, judgment, injunction,
decree, determination or award which would have, individually or in the
aggregate, a material adverse affect on Buyer.
4.9 Eligibility for Use of Form S-3. Buyer is eligible to use Form S-3 under the
Securities Act of 1933, as amended, to register the Response Shares as
contemplated by Section 6.7 hereof. Buyer shall use its best efforts to maintain
such eligibility until the sale of all of the Response Shares by Seller.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents, warrants and agrees, except as set forth in the schedules
attached to this Agreement, as follows:
5.1 Seller Organization and Related Matters. Seller is a corporation duly
organized and validly existing under the laws of the State of Nevada and has all
necessary power and authority to operate, own and lease its properties and
assets, to carry on its Business as now conducted, and to perform its
obligations under this Agreement.
5.2 Authorization of Seller. Seller has all required power and authority and has
taken all actions necessary to enter into this Agreement, to sell, assign,
contribute and deliver the Assets to Buyer and consummate all other transactions
contemplated hereby, and to perform its obligations hereunder. This Agreement
and any other agreements, instruments or documents entered into by Seller
pursuant to this Agreement have been duly executed and delivered by Seller and
constitute the legal, valid and, assuming due execution and delivery by the
other parties hereto and thereto, binding obligations of Seller, enforceable in
accordance with their terms, except as to the effect, if any, of (a) applicable
bankruptcy and other similar laws affecting the rights of creditors generally
and (b) rules of law and equity governing specific performance, injunctive
relief and other equitable remedies. The execution, delivery and performance of
this Agreement and any other agreement, instrument or document entered into by
Seller pursuant to this Agreement have been duly authorized by all necessary
action of Seller.
5.3 No Other Liabilities or Contingencies. To Seller's Knowledge, Seller does
not have any liabilities of any nature that relate to the Business except the
Liabilities set forth in Exhibit B. The financial statements disclosed by Seller
to Buyer as set forth in Exhibit B fairly represent the financial condition of
Seller as of the dates set forth therein. Upon Seller's transfer of the Assets
to Buyer, Buyer shall not assume and will not have any liabilities or
obligations material to the Business or its condition (financial or otherwise),
whether accrued, absolute, contingent or otherwise, and whether due or to become
due, except for obligations arising from and after the Closing Date under the
Material Contracts. Upon Seller's transfer of the Assets to Buyer, Buyer shall
own the Assets free and clear of any Encumbrances.
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(a) Except as set forth in this Agreement, upon Seller's transfer of
the Remaining Interest in the Assets to HealthLink, Ltd., HealthLink, Ltd. shall
not have any liabilities or obligations to the Business or its condition
(financial or otherwise), whether accrued, absolute, contingent or otherwise,
and whether due or to become due, except for obligations arising after the
Closing Date under the Material Contracts. Since the Balance Sheet Date, Seller
has not incurred any accrued or contingent liability other than in the ordinary
course of business.
5.4 Absence of Certain Developments. Since the Balance Sheet Date, there has
been no (a) adverse change in the condition, financial or otherwise, of Seller
or in the assets, liabilities, properties or business of Seller, or, in the
reasonable judgment of Seller, the prospects of any of them, (b) declaration,
setting aside or payment of any distribution with respect to Seller, (c) loss,
destruction or damage to any property of Seller, whether or not insured, which
loss would have an adverse effect on the Business taken as a whole, (d) labor
trouble involving Seller or the Assets or any change in any of its personnel or
the terms and conditions of employment, (e) waiver of any material right, (f)
loan or extension of credit to any officer or employee of Seller, or (g)
acquisition or disposition of any assets (or any contract or arrangement
therefor) or any other transaction by Seller other than for fair value in the
ordinary course of business.
5.5 Material Contracts. All Material Contracts being assigned to Buyer and the
Company that relate to the Business to which Seller or any Affiliate of Seller
is a party or assignee or to which Seller or any of its properties are subject
or by which any thereof are bound are listed in Exhibit B, and true copies of
the agreements appearing in such Exhibit, including all amendments and
supplements (and accurate descriptions of all oral agreements), have been made
available to Buyer. Each Material Contract is valid and in full force and effect
and enforceable in accordance with its terms; Seller has duly performed all its
obligations thereunder to the extent that such obligations to perform have
accrued; and no breach or default by Seller, or any other party or obligor with
respect thereto, has occurred or as a result of this Agreement or performance
will occur. Consummation of the transactions contemplated by this Agreement will
not (and will not give any person a right to) terminate or modify any rights of,
or accelerate or otherwise affect any obligation of Seller, Buyer or the Company
under any Material Contract.
5.6 Title to Properties. Seller has good and marketable title to all properties
and assets necessary to the Business as currently conducted and as presently
proposed to be conducted, and to all of its properties and assets, free and
clear of all Encumbrances except as disclosed in this Agreement. All tangible
property included in such properties that is reasonably necessary to the
Business is in good condition and repair, except for reasonable wear and tear;
and all leases of real or personal property, to which Seller is a party, are
fully effective and upon the transfer of Buyer's interest in the Assets to the
Company, will afford Buyer and the Company peaceful and undisturbed possession
of the subject matter of such leases. Seller is not in violation of any zoning,
building or safety ordinance, regulation or requirement or other law or
regulation applicable to the operation of owned or leased properties likely to
impede the normal operation of the Business, and Seller has not received any
written notice of violation with which Seller has not complied.
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5.7 Intangible Property. Exhibit C lists any and all Marks, Patents and other
material items of Intangible Property in which Seller has an interest and the
nature of such interest. Such assets include all Permits or other rights with
respect to any of the foregoing. Seller has complete rights to and ownership of
all Intangible Property required for use in connection with the Business,
including the right to use, free and clear of claims or rights of others, all
trade secrets, customer lists, processes, computer software, patents, copyrights
and trademarks required for, incident to or included in the Business. Seller
does not use any such Intangible Property by consent of any other person and is
not required to and does not make any payments to others with respect thereto.
Such Intangible Property of Seller is fully assignable free and clear of any
Encumbrances. Seller has performed all obligations required to be performed by
it, and is not in default under any Contract relating to any of the foregoing.
In the operation of the Business, Seller (i) does not, to its knowledge,
infringe any patent, copyright or trademark rights of others; (ii) represents
and warrants that all trade secrets, know-how, technical processes and
procedures developed and belonging to Seller that are material to the Business
of Seller and will be material to the Business upon transfer of the Assets to
Buyer and thereafter to the Company, and that have not been patented, have been
kept confidential; and (iii) is not using and has not used any confidential
information, trade secrets or computer software required for the Business of any
former employer of any of Seller's past or present employees.
5.8 Tax Matters. There are no Taxes due and payable by Seller related to the
Business that have not been paid or adequately reserved for. There have been no
examinations or audits of any Tax Returns or reports by any applicable
Governmental Entity. There have been no actions or failures to act that would
inappropriately (a) defer taxable income or gains that would otherwise properly
accrue or (b) accelerate taxable deductions or losses that would otherwise
properly accrue. Seller has duly filed all Tax Returns required to have been
filed by it, and such Tax Returns are accurate and complete in all material
respects. There are no waivers of applicable statutes of limitations with
respect to Taxes for any year.
5.9 Accounting Records. Seller has records that accurately and validly reflect
its transactions relating to the Business and accounting controls sufficient to
ensure that such transactions are (a) executed in accordance with management's
general or specific authorization and (b) recorded so as to maintain
accountability for such assets and transactions.
5.10 No Defaults or Conflicts. Seller is not in default (which default would
have a material adverse effect on Seller's, Buyer's or Company's properties or
assets or the business of Seller, Buyer or Company as currently conducted or
proposed to be conducted): (a) under its charter documents or its bylaws or any
note, indenture, mortgage, lease, agreement, contract, purchase order or other
instrument, document or agreement to which it is a party or by which it or any
of its property is bound or affected or (b) under any Order of any Governmental
Entity. There exists no condition, event or act which after notice, lapse of
time, or both, could constitute a default by Seller, Buyer or Company under any
of the foregoing. To Seller's Knowledge, no third party is in default under any
Contract
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to which Seller, Buyer or Company is a party or by which any of them or any of
their property is affected (which default would have an adverse effect on
Seller's, Buyer's or Company's properties or assets or the business of Seller,
Buyer or Company as currently conducted or proposed to be conducted). The
execution, delivery and performance of this Agreement by Seller and the
execution, delivery and performance of any related agreement or contemplated
transactions by Seller will not: (x) violate, or constitute a breach or default
(whether upon lapse of time and/or the occurrence of any act or event or
otherwise) under any Material Contract binding on Buyer or Company or its assets
following transfer of the Assets to Buyer and Company by Seller as described
herein, (y) result in the imposition of any Encumbrance against any of Seller's
or, following transfer of the Assets to Buyer or Company, Buyer's assets or
Company's assets or (z) violate any Law to which Seller, Buyer, Company or their
respective assets are subject.
5.11 Legal Proceedings. There is no Order or Action pending or threatened,
against or affecting the Business, the Assets, conditions (financial or
otherwise) or prospects of the Seller (a) that questions the validity of this
Agreement, or any other agreements, instruments or documents entered into by
Seller pursuant to this Agreement or the right of Seller to enter into them or
to consummate the transactions contemplated hereby or thereby, or (b) that
individually or, when aggregated with one or more other Orders or Actions, has
resulted or might reasonably be expected to result in an adverse circumstance or
has impaired or might reasonably be expected to impair Seller's ability to
perform this Agreement or the consummation of the transactions contemplated by
this Agreement. Neither Seller nor any of its officers or directors (as
applicable) are a party to, or subject to the provisions of, any Order or Action
of any Governmental Entity. There is no Action by the Seller currently pending
or that Seller currently intends to initiate. There is no matter relating to the
Business or the assets of Seller as to which Seller has received any notice,
claim or assertion against or affecting any employee, agent or representative of
the Seller or any other Person, in connection with which any such Person has or
may be expected to have any right to be indemnified by any of the Seller.
5.12 Permits; No Violation of Law. Seller holds all Permits that are required by
any Governmental Entity to permit Seller (upon transfer of the Assets to Buyer
and Company), Buyer and Company to conduct the Business and all such Permits are
valid and in full force and effect. Seller is not in violation of any Law of any
Governmental Entity relevant to the ownership of its properties or the carrying
on of the Business.
5.13 Compliance with Law. Seller has organized and has conducted the Business in
accordance with applicable Laws, and the forms, procedures and practices of
Seller are in compliance with any applicable law governing bulk transfers.
5.14 No Brokers or Finders. No agent, broker, finder or investment or commercial
banker, or other Person or firm engaged by or acting on behalf of the Seller in
connection with the negotiation, execution or performance of this Agreement, or
the transactions contemplated by this Agreement, will be entitled to any
brokerage or finder's or similar fee or other commission as a result of this
Agreement or such transactions. The Seller agrees to pay any such brokerage
commissions, finder's fees or similar
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compensation and to indemnify and hold Buyer harmless against any damages
incurred as a result of any such claim.
5.15 Environmental Compliance. To Seller's Knowledge: (a) Seller has not
generated, used, transported, treated, stored, released or disposed of, and has
not expressly permitted anyone else to generate, use, transport, treat, store,
release or dispose of, any Hazardous Substance in violation of any Law; (b) any
Hazardous Substance handled or dealt with in any way in connection with the
Business of Seller during Seller's ownership has been and is being handled or
dealt with in all respects in compliance with applicable Laws; and (c) there has
not been any generation, use, transportation, treatment, storage, release or
disposal of any Hazardous Substance in connection with the conduct of the
Business of Seller that, to the best of Seller's knowledge, information or
belief, has created any liability under any Laws or which would require
reporting to or notification of any Governmental Entity.
5.16 Acquisition for Investment. Seller has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of the investment in the Response Shares, and is able to bear the economic
risks of such investment. Seller is acquiring the Response Shares for its own
account, for investment and not with a view to distribution. Seller acknowledges
that:
(a) Seller has been given the opportunity to ask questions of
Buyer's management.
(b) Buyer has heretofore furnished Seller with copies of its June
30, 1996 Form 10-KSB, and subsequent Form 10-QSB.
(c) The offering of the Response Shares has not been registered
under the Securities Act of 1933 (the "Securities Act"); Buyer is relying on the
exemption from such registration provided by Section 4(2) of the Securities Act
as a transaction by an issuer not involving a public offering.
5.17 Material Facts. This Agreement, the Exhibits and the Schedules hereto and
furnished contemporaneously herewith, and each other agreement, document,
certificate or written statement furnished or to be furnished to Buyer through
the Closing Date by or on behalf of Seller in connection with the transactions
contemplated hereby do not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements contained herein
or therein in light of the circumstances in which they were made not misleading.
There is no fact known to Company that has not been disclosed herein or
otherwise by Seller to Buyer that may materially adversely affect the Business,
properties, assets or condition (financial or otherwise) of Buyer or the
Company.
5.18 Accuracy. The accuracy of the Exhibits and/or Schedules provided by Seller
in connection with this Agreement shall be the sole responsibility of Seller on
the one hand,
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and not Buyer, on the other hand, notwithstanding any involvement by any
employees or representatives of Buyer in the preparation and compilation of such
Exhibits and/or Schedules.
ARTICLE 6
COVENANTS WITH RESPECT TO CONDUCT OF SELLER
AND BUYER BEFORE AND AFTER CLOSING
From the date hereof each of Buyer and Seller will comply with the terms and
provisions of this Article 6 applicable to such Person.
6.1 Conduct of Business. With respect to the Business, Seller will not, without
the prior consent in writing of Buyer:
(a) conduct the Business except in the ordinary course consistent
with prudent industry practice; or
(b) except in accordance with their terms, terminate, allow to
expire, renew or renegotiate any Material Contract or default in any of its
obligations under any Material Contract or enter into any new Material Contract
that is not reflected in the Balance Sheet (it being understood that Seller
shall promptly notify Buyer of any such termination, expiration, renewal,
renegotiation or default and of any such new Material Contract); or
(c) terminate or fail to renew or preserve any Permits, or take any
action that would jeopardize the continuance of its material supplier or
customer relationships unless adequate replacement therefor is arranged; or
(d) incur or agree to incur any obligation or liability (absolute or
contingent) that individually calls for payment of any amount outside the normal
course of business; or
(e) sell, transfer, mortgage, encumber or otherwise dispose of any
of the assets of the Business except as contemplated by this Agreement; or
(f) dispose of or permit to lapse any rights to the use of any
Intangible Property relating to the Business or dispose of or disclose any such
Intangible Property not a matter of public knowledge; or
(g) introduce any material new method of management or operation in
respect of the Business; or
(h) take any action or inaction that would cause any of the
representations or warranties contained in this Agreement to be inaccurate; or
(i) extend any statutes of limitation.
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6.2 Access; Books and Records. Seller will authorize and permit Buyer and a
reasonable number of its representatives to have reasonable access during normal
business hours, and in such manner as will not unreasonably interfere with the
conduct of the Business, to all of its properties, books, records, operating
instructions and procedures, Tax Returns and all other information with respect
to the Business as Buyer may from time to time request, and at Buyer's expense
to make copies of such books, records and other documents and to discuss its
business with such third Persons, including its or their (as applicable)
directors, officers, employees, accountants, counsel, suppliers,
concessionaires, customers and creditors as Buyer considers necessary or
appropriate for the purposes of familiarizing itself with the Business of
Seller.
6.3 Notification of Certain Matters. Seller shall give prompt notice to Buyer,
and Buyer shall give prompt notice to Seller, of (i) the occurrence, or failure
to occur, of any event that would be likely to cause any representation or
warranty by such Person contained in this Agreement to be untrue or inaccurate
in any material respect and (ii) any failure of Buyer, Seller or the Company to
comply with or satisfy, in any material respect, any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement.
6.4 Permits and Approvals.
(a) Seller and Buyer each agree to cooperate and use their
reasonable efforts to obtain (and will promptly prepare all registrations,
filings and applications, requests and notices preliminary to) all Approvals and
Permits that may be necessary or that may be reasonably requested by Buyer, in
each case, necessary to consummate the transactions contemplated by this
Agreement and to conduct the Business thereafter.
(b) To the extent that the Approval of a third party with respect to
any Material Contract is required in connection with the transactions
contemplated by this Agreement, Seller and Buyer shall use their best efforts to
obtain such Approval prior to the Closing Date and, in the event that any such
Approval is not obtained, Seller shall cooperate with Buyer and use its best
efforts to provide Buyer with the benefits of each such Material Contract.
(c) From the date of this Agreement, Seller agrees to use its best
efforts to include in any material agreements entered into subsequent to the
date of this Agreement and relating in any way to the Business ("Subsequent
Contracts") a provision permitting the assignment of any such Subsequent
Contract to Buyer or the Company and providing that upon such assignment Buyer
or the Company shall succeed to all of Seller's rights, title and interests
thereunder subject to Buyer's or the Company's assumption of all Seller's
duties, powers and obligations under such Subsequent Contract.
6.5 Cooperation. After the Closing, Buyer and Seller each will afford to each
other, and to each other's accountants, counsel and other representatives,
reasonable
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access during normal business hours to the books and records of Seller. Each
party or its representatives may, at such party's own expense, make copies of
such books and records. Seller agrees to preserve the books and records that are
retained by Seller following transfer of the Assets to Buyer and Seller and
Buyer agree to preserve the books and records transferred by Seller to Buyer,
for at least three (3) full calendar years after the date such records were
prepared, and each party agrees to give at least thirty (30) days' advance
written notice to the other if at any time thereafter it intends to dispose of
such books and records in order to give the other party the right to collect and
keep them.
6.6 Administration of Accounts. After the Closing, Buyer and Seller agree to use
their best efforts to orderly transition the business to HealthLink, Ltd. and to
account for the day to day operation of the assets and the business.
6.7 Registration of Response Shares.
(a) Buyer shall use its best efforts to register for resale the
Response Shares issued to the Sellers, as well as any shares of Buyer's Common
Stock issuable to Seller pursuant to the Warrant, under the Securities Act of
1933, as amended (the "Securities Act"). With respect to the Response Shares to
be registered, Buyer shall take the following actions:
(i) Prepare, file by April 15, 1997, cause to become effective
as soon as possible and keep effective for a period of three (3) years following
the Closing, with the Commission, a registration statement or statements or
similar documents (the "Registration Statement"), and reasonable and necessary
amendments, to include such Response Shares;
(ii) Furnish to Seller or its permitted assignees such numbers
of copies of a prospectus, including a preliminary prospectus, and all
amendments and supplements thereto, in conformity with the requirements of the
Securities Act;
(iii) Register and qualify the securities covered by the
Registration Statement under such other securities or Blue Sky laws of such
jurisdictions deemed necessary by Seller, and prepare and file in those
jurisdictions such amendments (including post-effective amendments) and
supplements and to take such other actions as may be necessary to maintain such
registration and qualification as necessary;
(iv) Furnish to Seller an option of counsel to Buyer, dated as
of the effective date of the Registration Statement.
(v) Notify Seller at any time when a prospectus relating to
securities covered by the Registration Statement is required to be delivered
under the Securities Act, of the happening of any event as a result of which the
prospectus included in the Registration Statement, as then in effect, includes
an 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 in light of the circumstances then existing. Buyer will
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promptly amend or supplement the Registration Statement to correct any such
untrue statement or omission;
(vii) Notify Seller of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for the purpose; and
(viii) Do such other actions or make available to Seller such
documents as reasonably required under the Securities Act and as reasonably
requested in relation to the registration of securities covered by the
Registration Statement.
(b) Notwithstanding the foregoing, Buyer shall not be obligated to
take any action pursuant to this Section 6.7:
(i) In any particular jurisdiction in which Buyer would be
required to execute a general consent to service of process in affecting such
registration, qualification or compliance, unless Buyer is already subject to
service in such jurisdiction and except as may be required by the Securities
Act; or
(ii) If, at such time, the Response Shares held by the Seller
are freely tradeable without regard to any volume restrictions under Rule 144
promulgated under the Securities Act.
(c) All expenses incurred in connection with registrations pursuant
to this Section 6.7, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for Buyer, blue sky fees and expenses, the expense of
any special audits incident to or required by any such registration shall be
borne by Buyer. All underwriting discounts, selling commissions and stock
transfer taxes applicable to the Response Shares being registered by Seller
shall be borne by Seller.
(d) The obligations of Buyer to register the Response Shares, shall
not be transferable by the Sellers except in connection with (i) a distribution
of the Response Shares to the shareholders of Seller, or (ii) if the
Registration Statement is not effective by September 30, 1997, in connection
with a transfer of the Response Shares, prior to the effectiveness of the
Registration Statement, by a Seller to a Qualified Institutional Buyer as
defined in Rule 144A under the Securities Act. Sellers shall give prompt notice
of any such transfer.
(e) Buyer shall, without limitation as to time, indemnify and hold
harmless, to the fullest extent permitted by law, Seller and Seller's officers,
directors, shareholders, attorneys, accountants and other agents from and
against all losses, claims, damages, liabilities, costs (including, without
limitation, reasonable attorneys' fees) and expenses (collectively, "Losses"),
as incurred, arising out of or based upon any untrue or alleged
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untrue statement of a material fact contained in the Registration Statement,
Prospectus or form of Prospectus or in any amendment or supplement thereto or in
any preliminary prospectus, or arising out of or based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are based solely upon information furnished in writing to Buyer by
Seller or their counsel expressly for use therein; provided, that Buyer shall
not be liable to Seller to the extent that any such Losses arise out of or are
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any preliminary prospectus if either (A)(i) Seller
failed to send or deliver a copy of the Prospectus with or prior to the delivery
of written confirmation of the sale by Seller of a Response Share to the person
asserting the claim from which such Losses arise and (ii) the Prospectus would
have corrected such untrue statement or alleged untrue statement or such
omission or alleged omission; or (B)(x) such untrue statement or alleged untrue
statement, omission or alleged omission is corrected in an amendment or
supplement to the Prospectus and (y) having previously been furnished by or on
behalf of Buyer with copies of the Prospectus as so amended or supplemented,
Seller thereafter fails to deliver such Prospectus as so amended or
supplemented, prior to or concurrently with the sale of a Response Share to the
person asserting the claim from which such Losses arise.
(f) In connection with the Registration Statement, Seller shall
furnish to Buyer in writing such information as Buyer reasonably requests for
use in connection with the Registration Statement or Prospectus and hereby agree
to indemnify, to the fullest extent permitted by law, and without limitation as
to time, Buyer, its directors and officers, agents and employees, each person
who controls Buyer (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act), and the directors, officers, agents or
employees of such controlling persons, from and against all Losses arising out
of or based upon any untrue statement of a material fact contained in the
Registration Statement, Prospectus or preliminary prospectus or arising out of
or based upon any omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, that such untrue statement or omission is contained in any
information so furnished in writing by any of Seller or their counsel to Buyer
expressly for use in such Registration Statement or Prospectus and that such
information was relied upon by Buyer in preparation of such Registration
Statement, Prospectus or preliminary prospectus. In no event shall the liability
of Seller hereunder be greater in amount than the dollar amount of the proceeds
received by Seller upon the sale of the Response Shares giving rise to such
indemnification obligation.
(g) If any Person shall be entitled to indemnity hereunder (an
"indemnified party"), such indemnified party shall give prompt notice to the
party from which such indemnity is sought (the "indemnifying party") of any
claim or of the commencement of any proceeding ("Proceeding") with respect to
which such indemnified party seeks indemnification or contribution pursuant
hereto; provided, that the failure to so notify the indemnifying party shall not
relieve the indemnifying party from any obligation or liability except to the
extent that the indemnifying party shall demonstrate damage caused by such
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failure. After any such notice with respect to a matter instituted by a third
party, the indemnifying party may, or if so requested by the indemnified party,
the indemnifying party shall, participate in any such action, suit or other
proceeding or assume the defense thereof, with counsel reasonably satisfactory
to the indemnified party; provided however, that the indemnified party shall
have the right to participate at its own expense in the defense of any such
action, suit or other proceeding. Furthermore, should the indemnifying party not
assume the defense in a prompt manner or should there be a conflict of interest
in connection with the representation of both the indemnifying party and the
indemnified party, the indemnified party shall have the right to appoint its own
counsel, the reasonable fee and expenses of which shall be borne by the
indemnifying party. All such fees and expenses (including any fees and expenses
incurred in connection with investigation or preparing to defend such action or
proceeding) shall be paid to the indemnified party, as incurred, within five (5)
days of written notice thereof to the indemnifying party (regardless of whether
it is ultimately determined that an indemnified party is not entitled to
indemnification hereunder). The indemnifying party shall not consent to entry of
any judgment or enter into any settlement or otherwise seek to terminate any
proceeding in which any indemnified party is or could be a party under this
Section 2, unless such judgment, settlement or other termination includes as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release, in form and substance satisfactory to the
indemnified party, from all liability in respect of such claim or litigation for
which such indemnified party would be entitled to indemnification hereunder.
(h) If the indemnification provided for in this Section 6.7 is
unavailable to any indemnified party under paragraphs (e) or (f) hereof in
respect to any Losses or is insufficient to hold such indemnified party
harmless, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall, jointly and severally, contribute to the amount paid
or payable by such indemnified party as a result of such Losses, in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party or indemnifying parties, on the one hand, and such indemnified party, on
the other hand, in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party or indemnifying parties, on the
one hand, and such indemnified party, on the other hand, shall be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission of a material fact, has been taken or made by, or relates to
information supplied by, such indemnifying party or indemnified party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include any
legal or other fees or expenses incurred by such party in connection with any
Proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this paragraph (g) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provision of this paragraph (g), none of Seller shall be
required to contribute any amount in excess of the amount by
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which the total price at which the Responses Shares sold by Seller and
distributed to the public were offered to the public exceeds the amount of any
damages which Seller has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
ARTICLE 7
CONDITIONS OF PURCHASE
7.1 Conditions Precedent to the Obligation of the Buyer to Close. The
obligations of Buyer to effect the Closing shall be subject to the following
conditions except to the extent waived in writing by Buyer:
(a) Representations and Warranties and Covenants of Seller. The
representations and warranties of Seller herein contained shall be true in all
material respects at the Closing Date Seller shall have performed all
obligations and complied with all covenants and conditions required by this
Agreement to be performed or complied with by it at or prior to the Closing
Date, and Seller shall have delivered to Buyer a certificate of Seller in form
and substance reasonably satisfactory to Buyer, dated the Closing Date and
signed by its Chairman of the Board, President or its Vice-President to such
effect.
(b) No Adverse Fact. No fact, event, circumstance or condition that
would be expected to have a material adverse effect on the Business shall have
occurred following the date hereof and be continuing.
(c) No Orders: Legal Proceedings. No Law or Order shall have been
enacted, entered, issued, promulgated or enforced by any Governmental Entity
that prohibits or restricts or would (if successful) prohibit or restrict the
transactions contemplated by this Agreement. No Governmental Entity shall have
notified any party to this Agreement that consummation of the transactions
contemplated by this Agreement would constitute a violation of any Law of any
jurisdiction and/or that it intends to commence proceedings to restrain or
prohibit such transactions or force divestiture or rescission, unless such
Governmental Entity shall have withdrawn such notice and abandoned any such
proceedings prior to the time that otherwise would have been the Closing Date,
unless nationally recognized counsel known to have expertise as to such matters
on behalf of the party against whom such action or proceeding was or would be
instituted renders to the parties a favorable opinion that such action or
proceeding is or would be without merit.
(d) Legal Opinion. Buyer shall have received a legal opinion from
counsel for Seller in form and substance satisfactory to Buyer.
(e) Due Diligence. Buyer shall not have discovered any information
during the course of its due diligence investigation that could have a material
adverse effect
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on the Business or which is at material variance with the information previously
provided to Buyer by Seller.
(f) Employment Agreement. HealthLink, Ltd. shall have entered into
an employment agreement with an individual to manage the operations of
HealthLink, Ltd., which agreement is reasonably satisfactory to Buyer.
(g) Financial Statements. Seller will provide, at Seller's sole cost
and expense, certified financial statements of Seller, if and as required by the
rules and regulations of the Securities Exchange Act of 1934 applicable to
Buyer. Buyer and Seller agree to share the cost and expense of such financial
statements which may be required for Guard-Tech, Inc., a Michigan corporation.
7.2 Conditions Precedent to the Obligation of the Seller to Close. The
obligations of Seller to effect the Closing shall be subject to the following
conditions, except to the extent waived in writing by Seller:
(a) Representations and Warranties and Covenants of Buyer. The
representations and warranties of Buyer herein contained shall be true in all
material respects at the Closing Date with the same effect as though made at
such time. Buyer shall have performed all obligations and complied with all
Covenants and conditions required by this Agreement to be performed or complied
with by it at or prior to the Closing Date.
(b) No Orders: Legal Proceedings. No Law or Order shall have been
enacted, entered, issued, promulgated or enforced by any Governmental Entity
that prohibits or restricts or would (if successful) prohibit or restrict the
transactions contemplated by this Agreement. No Governmental Entity shall have
notified any party to this Agreement that consummation of the transactions
contemplated by this Agreement would constitute a violation of any Law of any
jurisdiction and/or that it intends to commence proceedings to restrain or
prohibit such transactions or force divestiture or rescission, unless such
Governmental Entity shall have withdrawn such notice and abandoned any such
proceedings prior to the time that otherwise would have been the Closing Date,
unless nationally recognized counsel known to have expertise as to such matters
on behalf of the party against whom such action or proceeding was or would be
instituted renders to the parties a favorable opinion that such action or
proceeding is or would be without merit.
(c) Legal Opinion. Seller shall have received a legal opinion from
counsel to Buyer in form and substance satisfactory to Seller.
(d) No Adverse Fact. No fact, event, circumstance or condition that
would be expected to have a material adverse effect on Buyer shall have occurred
following the date hereof and be continuing.
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(e) Employment Agreement. HealthLink, Ltd. shall have entered into
an Employment Agreement with an individual to manage the operations of
HealthLink, which Agreement is reasonably satisfactory to Seller.
(f) Warrant Agreement. Buyer shall have executed and delivered to
Seller, within forty-eight (48) hours after the Closing, the Warrant Agreement.
ARTICLE 8
TERMINATION OF OBLIGATIONS;
SURVIVAL OF COVENANTS
8.1 Termination of Agreement. If all of the conditions to Closing have not been
satisfied, waived or otherwise extended, this Agreement and the transactions
contemplated by this Agreement shall terminate at the close of business on the
date (the "Termination Date") which is the later of: (i) following March 31,
1997, or (ii) such later date as shall be mutually agreed to in writing by Buyer
and Seller. Termination prior to the Closing may occur only by:
(a) Mutual Consent. By mutual consent in writing of Buyer and
Seller.
(b) Conditions to Buyer's Performance Not Met. By Buyer by written
notice to Seller if any event occurs that would render impossible the
satisfaction, on or before the day then reasonably estimated by Buyer and Seller
to be the Termination Date, of one or more conditions to the obligations of
Buyer to consummate the transactions contemplated by this Agreement.
(c) Conditions to Seller's Performance Not Met. By Seller by written
notice to Buyer if any event occurs that would render impossible the
satisfaction, on or before the day then reasonably estimated by Buyer and Seller
to be the Termination Date, of one or more conditions to the obligation of
Seller to consummate the transactions contemplated by this Agreement.
(d) Material Breach. By Buyer or Seller if there has been a material
misrepresentation or material breach on the part of the other party in its
representations, warranties and covenants set forth herein, which, if curable,
has not been cured within ten (10) business days after receipt of notice from
Buyer or Seller of its intention to terminate if such misrepresentation or
breach continues.
8.2 Effect of Termination. If this Agreement shall be terminated pursuant to
Article 8, all further obligations of the parties under this Agreement shall
terminate without further liability of any party to the other; provided however,
that the obligations of the parties contained in Section 10.10 shall survive any
such termination. Except as provided in this Section 8.2, a termination under
Section 8.1 shall not relieve any party of any liability for any intentional
breach of, or for any intentional misrepresentation under, this Agreement or be
deemed to constitute a waiver of any available remedy (including specific
performance if available) for any such intentional breach or misrepresentation.
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ARTICLE 9
INDEMNIFICATION
9.1 Obligations of the Seller. The Seller and Guard-Tech Industries, Inc., a
Michigan corporation, predecessor in interest to Seller, jointly and severally
agree to indemnify and hold harmless Buyer and its Affiliates and the respective
directors, managers, officers, employees, agents and assigns of each from and
against any and all Losses incurred directly or indirectly by them as a result
of, or directly or indirectly based upon or arising from:
(a) any inaccuracy in or breach or nonperformance of any of the
representations, warranties, covenants or agreements made by the Seller in or
pursuant to this Agreement, as qualified by the matters set forth in the
Schedules of this Agreement; or
(b) any Tax liabilities attributable to the transfer and
contribution of the Assets to Buyer or the Company.
(c) any claims, judgments, losses, liabilities, damages and expenses
(including attorney's fees) arising from or otherwise relating to employment or
other labor matters, including any unfair labor practice charges and/or union
grievances, whether currently pending or asserted in the future, arising out of
or otherwise relating to any action or breach of duty in connection with the
operation of the Business on or before the Contribution Date or with the
consummation of the transactions contemplated by this Agreement (collectively,
"Labor Matters");
(d) any liabilities, losses, payments, sureties, guaranties, bonds
or escrows arising with respect to any of Seller's benefit plans, agreements,
arrangements or practices (collectively, "ERISA Matters"); or
(e) any loss arising from the operation of the Assets or the
Business for the period up to and including the Closing Date.
9.2 Obligations of Buyer. Buyer agrees to indemnify and hold harmless the
Seller, their Affiliates and their respective partners, directors, officers,
employees, agents and assigns from and against any and all Losses incurred
directly or indirectly by them as a result of, or directly or indirectly based
upon or arising from, any inaccuracy in or breach or nonperformance of any of
the representations, warranties, covenants or agreements made by Buyer in or
pursuant to this Agreement.
9.3 Procedure.
(a) Notice. If any party becomes aware of any fact, circumstance or
event (including without limitation any Action asserted or threatened by a third
party or any request to waive any applicable statute of limitations) that might
reasonably be expected to result in an Indemnifiable Claim with respect to that
party (an "Indemnified Party"), such
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Indemnified Party shall give prompt written notice to the party that would be
required to provide indemnification (the "Indemnifying Party") of the nature of
the fact, circumstance or event and the amount believed to be involved.
Notwithstanding the foregoing, the rights of any Indemnified Party to be
indemnified in respect of any Indemnifiable Claim resulting from the assertion
of liability by any third party shall not be adversely affected by the
Indemnified Party's failure to give or delay in giving notice unless such
failure or delay was intentional or unless (and then only to the extent that)
the Indemnifying Party is materially prejudiced thereby.
(b) Defense. If any Action that might reasonably be expected to
result in an Indemnifiable Claim is asserted or threatened by a third party
against any Indemnified Party, the Indemnifying Party may elect to control the
defense thereof with experienced counsel reasonably satisfactory to the
Indemnified Party. Notwithstanding the foregoing, if the Indemnifying Party,
within fifteen (15) days after receipt of a notice of such Action fails to give
written notice to the Indemnified Party that the Indemnifying Party shall
undertake the defense thereof or thereafter fails to timely assume such defense,
then the Indemnified Party shall have the right to defend, compromise or settle
the Action for the account of the Indemnifying Party. An assertion by the
Indemnifying Party of a reservation of rights with respect to such Action shall
not constitute a failure to give written notice that it shall undertake such
defense. If, after the Indemnifying Party has undertaken the defense of the
Action, the Indemnified Party reasonably believes (and gives notice thereof to
the Indemnifying Party) that an Indemnifiable Claim may materially adversely
affect the business or operations of the Indemnified Party, then the Indemnified
Party shall have the right to participate in the defense of the Action at its
own expense, subject to the reasonable direction of the other party. Each of the
Indemnifying Party and the Indemnified Party shall give all reasonable
assistance to the other party in connection therewith. In any case, the
Indemnified Party shall, subject to Section 10.10, make available to the
Indemnifying Party and its attorneys, accountants, employees, agents, advisors
and consultants, at reasonable times during normal business hours, all books,
records, documents, employees, agents, advisors and consultants under its
control and relating to such Action or such other matter as to which the
Indemnified Party is or was required to give notice. The party having control of
the defense of an Action shall notify the other party of every proposal, oral or
written, for settlement, which it receives or makes.
(c) Settlement Limitations. Notwithstanding anything in this Article
9 to the contrary, the Indemnifying Party shall not, without the written consent
of the Indemnified Party, settle or compromise any threatened or pending Action
on behalf of the Indemnified Party or permit a default or consent to entry of
any judgment in respect thereof unless such settlement, compromise or consent
includes, as an unconditional term thereof, the giving by the claimant to the
Indemnified Party of a release from all liability in respect of such Action.
Except in the circumstances described in the preceding sentence, if a settlement
offer is made by the applicable third-party claimant, the Indemnifying Party
notifies the Indemnified Party in writing of the Indemnifying Party's
willingness to unconditionally accept the settlement offer and pay the amount
called for by such offer, and the Indemnified Party declines to accept such
offer, the Indemnified Party may continue to contest such Action, free of any
participation by the Indemnifying Party, and the amount of any ultimate
liability
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with respect to any Indemnifiable Claim arising therefrom that the Indemnifying
Party has an obligation to pay hereunder shall be limited to the amount of the
settlement offer that the Indemnified Party declined to accept plus the fees and
expenses, including legal, accounting and other professional fees and expenses,
of the Indemnified Party relating to such Indemnifiable Claim incurred through
the date of its rejection of the settlement offer and to which the Indemnified
Party would otherwise be entitled hereunder. If a settlement offer solely for
money damages is made by the applicable third-party claimant, the Indemnified
Party notifies the Indemnifying Party in writing of its willingness to
unconditionally accept the settlement offer, the Indemnifying Party has not
reserved its rights to assert that any Loss of the Indemnified Party resulting
from such Action is not an Indemnifiable Claim, and the Indemnifying Party
declines to accept and pay the amount called for by such offer, the Indemnifying
Party may continue to contest such Action at its own expense. The provisions of
this Article 9 are subject to the rights of any Indemnified Party's insurer that
may be defending any such claim. If the Indemnifying Party makes any payment
hereunder, the Indemnifying Party shall be subrogated, to the extent of such
payment, to all rights and remedies of the Indemnified Party to any insurance
benefits or other claims of the Indemnified Party with respect to such Claim.
Nothing in this Article 9 shall be deemed to obligate any person to maintain any
insurance or to pursue any claim against any insurer or third party.
(d) Fees and Expenses. Provided that the Indemnifying Party has
timely and properly undertaken its duties of defense and indemnity, the fees and
expenses of the Indemnified Party relating to such Indemnifiable Claim,
including legal, accounting, consultant, expert, witness, employee, officer and
director fees and expenses shall be borne by the Indemnified Party.
(e) Limitations on Indemnification. Notwithstanding anything
herein to the contrary, no claim for indemnification hereunder may be
asserted by any indemnified third party unless such claim is first asserted
on or before the first (1st) anniversary of the Closing Date. The
indemnification provided for in this Section 9 shall not apply unless and
until the aggregate Indemnifiable Claims for which one or more of the
Indemnified Parties seeks indemnification hereunder exceeds an aggregate of
$50,000.00 (the "Basket"), in which event the indemnification shall include
all Indemnifiable Claims in excess of the Basket. In addition, the maximum
liability of Seller to Indemnified Parties under this Section 9 for all
claims of indemnification shall not exceed $3,300,000.00.
9.4 Exclusive Remedy; Survival. The indemnification provided in this Article 9
shall constitute the exclusive remedy (except for equitable remedies) of the
parties hereto and their respective directors, officers, employees, Affiliates,
agents and assigns from and against any and all Losses asserted against,
resulting to, imposed upon or incurred or suffered by, any of them, directly or
indirectly, as a result of, or based upon or arising from, the breach of any
representation or warranty or the nonfulfillment of any agreement or covenant in
or pursuant to this Agreement or any other agreement, document or instrument
required hereunder or pursuant to any applicable statute, rule or regulation.
The provisions of this Article 9 shall survive indefinitely.
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ARTICLE 10
GENERAL
10.1 Amendments; Waivers. This Agreement and any Exhibits attached hereto may be
amended only by agreement in writing of all parties. No waiver of any provision
or consent to any exception to the terms of this Agreement shall be effective
unless in writing and signed by the party to be bound and then only to the
specific purpose, extent and instance so provided.
10.2 Exhibits; Integration. Each Exhibit delivered pursuant to the terms of this
Agreement shall be in writing and shall constitute a part of the Agreement,
although Exhibits may be delivered separately to each party (after being
initialed by the delivering party) in addition to being attached to this
Agreement. This Agreement, together with such Exhibits, constitutes the entire
agreement among the parties pertaining to the subject matter hereof and
supersedes all prior agreements and understandings of the parties in connection
therewith.
10.3 Best Efforts; Further Assurances. Each party will use its best efforts to
cause all conditions to its obligations hereunder to be timely satisfied and to
perform and fulfill all obligations on its part to be performed and fulfilled
under this Agreement, to the end that the transactions contemplated by this
Agreement shall be effectuated substantially in accordance with its terms as
reasonably practicable. Each party shall execute and deliver both before and
after the Closing such further certificates, agreements and other documents and
take such other actions as the other party may reasonably request to consummate
or implement the transactions contemplated hereby or to evidence such events or
matters. As used in this Agreement, the term "best efforts" shall not include
efforts that require the performing party (a) to do any act that is unreasonable
under the circumstances, (b) to amend or waive any rights under this Agreement,
or (c) to incur or expend any funds other than reasonable out-of-pocket expenses
incurred in satisfying its obligations hereunder, including the fees, expenses
and disbursements of its accountants, actuaries, counsel and other
professionals.
10.4 Choice of Law. This Agreement and the legal relations between the parties
shall be governed by and construed in accordance with the laws of the State of
Nevada without regard to conflicts of law doctrines, except to the extent that
certain matters are preempted by federal law or are governed by the law of the
jurisdiction of organization of the respective parties.
10.5 Arbitration. Any dispute arising out of or relating to this Agreement that
cannot be settled by good faith negotiation between the parties will be
submitted to final and binding arbitration before a retired judge pursuant to
the commercial rules of the American Arbitration Association.
28
<PAGE>
10.6 No Assignment. Neither this Agreement nor any rights or obligations under
it are assignable without the prior written consent of Buyer and Seller.
10.7 Headings. The descriptive headings of the Articles, Sections and
subsections of this Agreement are for convenience only and do not constitute a
part of this Agreement.
10.8 Counterparts. This Agreement and any other agreement (or document)
delivered pursuant hereto may be executed in one or more counterparts and by
different parties in separate counterparts. All of such counterparts shall
constitute one and the same agreement (or other document) and shall become
effective when one or more counterparts of this Agreement have been signed by
each party and delivered to the other party.
10.9 Publicity and Reports. Seller and Buyer shall coordinate all publicity
relating to the transactions contemplated by this Agreement, and no party shall
issue any press release, publicity statement or other public notice relating to
this Agreement, or the transactions contemplated by this Agreement, without
obtaining the prior consent of the other party.
10.10 Confidentiality. All information disclosed by any party (or its
representatives) whether before or after the date hereof, in connection with the
transactions contemplated by, or the discussions and negotiations preceding,
this Agreement to any other party (or its representatives) shall be kept in
confidence by such other party and its representatives and shall not be
disclosed to or used by any Person. If this Agreement is terminated, each party
shall use all reasonable efforts to return upon written request from the other
party all documents received by it or its representatives from such other party
and not retain any copies.
10.11 Notices. Any notice or other communication hereunder must be given in
writing and either (a) delivered in person, (b) transmitted by telex, telefax or
telecopy mechanism, provided that any notice so given is also mailed as provided
in clause (c), or (c) mailed, postage prepaid, receipt requested, as follows:
If to Seller, addressed to:
BKR, Inc.
7944 East Beck Lane, Suite 210
Scottsdale, Arizona 85260
With copies to:
Loyd E. Wright, Esq.
29
<PAGE>
19200 Von Karman Avenue, Suite 870
Irvine, CA 92715
If to Buyer, addressed to:
Richard M. Brooks
Response USA, Inc.
11-H Princess Road
Lawrenceville, New Jersey 08648
and to:
Tom Rose, Esq.
Schneck, Weltman, Hashmall & Mischel, LLP
1285 Avenue of Americas, 3rd Floor
New York, NY 10019
or to such other address or to such other person as either party shall have last
designated by such notice to the other party. Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted to the applicable number and an appropriate answer back is received,
(ii) if given by mail, three days after such communication is deposited in the
mails with first class postage prepaid, addressed as aforesaid, or (iii) if
given by any other means, when actually received at such address.
10.12 Expenses. Seller and Buyer shall each pay their own expenses incident to
the negotiation, preparation and performance of this Agreement and the
transactions contemplated hereby, including the fees, expenses and disbursements
of their respective accountants and attorneys.
10.13 Waiver. No failure to exercise or delay in exercising any right hereunder
on the part of any party shall be deemed a waiver thereof, nor shall any single
or partial exercise preclude any further or other exercise of such or any other
right.
10.14 Representation By Counsel; Interpretation. Seller and Buyer each
acknowledge that each party to this Agreement has been represented by counsel in
connection with this Agreement and the transactions contemplated by this
Agreement. Accordingly, any rule of Law, or any legal decision that would
require interpretation of any claimed ambiguities in this Agreement against the
party that drafted it has no application and is expressly waived. The provisions
of this Agreement shall be interpreted in a reasonable manner to effect the
intent of Buyer and Seller.
10.15 Specific Performance. Seller acknowledges that, in view of the uniqueness
of the Business and the transactions contemplated by this Agreement, Buyer would
not have an adequate remedy at law for money damages in the event that this
Agreement has not been performed in accordance with its terms and therefore
agrees that Buyer shall be
30
<PAGE>
entitled to specific performance of the terms hereof in addition to any other
remedy to which it may be entitled, at law or in equity.
10.16 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of final jurisdiction, it is the intent of the
parties that all remaining provisions of this Agreement be construed to remain
fully valid, enforceable and binding on the parties.
[SIGNATURES CONTAINED ON PAGE 32]
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed by its duly authorized officers, if any, all as of the day and year
first written above.
"SELLER" "BUYER"
BKR, INC., RESPONSE USA, INC.,
a Nevada corporation a Delaware corporation
By: By:
--------------------------- ---------------------------
BERT BEDROSIAN, RICHARD M. BROOKS,
President President
By: By:
--------------------------- ---------------------------
ROBIN BEDROSIAN, RONALD FELDMAN,
Secretary Chief Operating Officer
HEALTHLINK, LTD.,
a Nevada limited liability company
By:
---------------------------
BERT BEDROSIAN,
President
By:
---------------------------
KENNETH W. STICKNEY,
Chairman
By:
---------------------------
RICHARD M. BROOKS,
Chief Executive Officer
31
<PAGE>
By:
---------------------------
RONALD FELDMAN,
Vice Chairman
[SIGNATURES CONTINUED ON PAGE 33]
GUARD-TECH INDUSTRIES, INC.,
a Michigan Corporation
By:
---------------------------
BERT BEDROSIAN
President
32
<PAGE>
EXHIBIT 10(j)
OPERATING AGREEMENT
OF
HEALTHLINK, LTD.
a Nevada limited liability company
dated as of
March 4, 1997
among the Members of Healthlink, Ltd.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I.
DEFINITIONS........................................................-2-
1.1 Affiliate...................................................-2-
1.2 Affiliate's Interest........................................-2-
1.3 Articles of Organization....................................-2-
1.4 Bankruptcy..................................................-2-
1.5 Bills of Sale and Assignment................................-2-
1.6 Business Day................................................-2-
1.7 Capital Account.............................................-2-
1.8 Capital Contribution........................................-3-
1.9 Cash Reserves...............................................-3-
1.10 Code........................................................-4-
1.11 Communications Equipment....................................-4-
1.12 Deadlock....................................................-4-
1.13 Distributable Cash..........................................-4-
1.14 Executive Committee.........................................-4-
1.15 Fiscal Year.................................................-4-
1.16 Interest....................................................-4-
1.17 Member......................................................-4-
1.18 Member Nonrecourse Debt.....................................-4-
1.19 Member Nonrecourse Deductions...............................-5-
1.20 Net Profits and Net Losses..................................-5-
1.21 Nonrecourse Deductions......................................-5-
1.22 Participation Percentage....................................-5-
1.23 Company Minimum Gain........................................-5-
1.24 Regulations.................................................-5-
1.25 Transfer....................................................-5-
ARTICLE II.
FORMATION OF LIMITED LIABILITY COMPANY.............................-6-
2.1 Formation...................................................-6-
ARTICLE III.
OFFICES............................................................-6-
3.1 Principal Office............................................-6-
ARTICLE IV.
PURPOSE............................................................-6-
4.1 Purpose.....................................................-6-
ARTICLE V.
CAPITAL....................................................................-6-
-i-
<PAGE>
Page
----
5.1 Initial Capital.............................................-6-
5.2 Federal Income Tax Elections................................-6-
ARTICLE VI.
MEMBERS............................................................-7-
6.1 Powers......................................................-7-
6.2 Appointment of Executive Committee..........................-7-
6.3 Delegation of All Power and Authority to Executive
Committee...................................................-8-
6.4 Salaries to Members.........................................-8-
6.5 Bank Accounts...............................................-8-
6.6 Annual Meetings.............................................-8-
6.7 Annual Meetings, Notice.....................................-8-
6.8 Adjourned Meetings and Notice Thereof.......................-9-
6.9 Admission of New Members....................................-9-
ARTICLE VII.
TRANSFER OF MEMBERS AND AFFILIATES' INTERESTS......................-9-
7.1 General.....................................................-9-
7.2 No Right to Transfer Member's Interest Without
Unanimous Consent...........................................-9-
7.3 Restricted Transfer of Affiliate's Interest.................-9-
7.4 No Transfer Permitted Under Certain Circumstances..........-10-
7.5 No Transfer Permitted for Three (3) Years..................-10-
7.6 Right of First Refusal.....................................-10-
7.7 Representations and Warranties of the Members..............-11-
7.8 Transferee's Participation Percentage......................-12-
ARTICLE VIII.
MANAGEMENT........................................................-12-
8.1 Executive Committee........................................-12-
8.2 Unanimity Required for Action..............................-12-
8.3 Officers...................................................-13-
8.4 President..................................................-13-
8.5 Chief Financial Officer....................................-13-
8.6 Chairman...................................................-13-
8.7 Vice-Chairman..............................................-13-
8.8 Removal, Resignation and Vacancies.........................-13-
8.9 Executive Committee Meetings...............................-14-
8.10 Action by Written Consent..................................-14-
8.11 Deadlock; President Authorized to Break Deadlock...........-14-
8.12 President Not Authorized to Break Deadlock.................-14-
ARTICLE IX.
PROFITS AND LOSSES.........................................-15-
9.1 Allocation of Net Profits..................................-15-
9.2 Allocation of Net Losses...................................-15-
-ii-
<PAGE>
Page
----
9.3 Allocation of Nonrecourse Deductions.......................-15-
9.4 Allocation of Tax Credits..................................-15-
9.5 Qualified Income Offset....................................-15-
9.6 Minimum Gain Chargeback....................................-15-
9.7 Member Nonrecourse Deductions..............................-15-
9.8 Allocations of Book Items..................................-16-
ARTICLE X.
DISTRIBUTIONS.....................................................-16-
10.1 Distribution of Distributable Cash.........................-16-
10.2 To Whom Distributions Are Made.............................-16-
ARTICLE XI.
ACCOUNTING AND RECORDS............................................-16-
11.1 Records and Accounting.....................................-16-
11.2 Access to Accounting Records...............................-16-
ARTICLE XII.
DISSOLUTION AND WINDING UP........................................-17-
12.1 Conditions of Dissolution..................................-17-
12.2 Winding Up.................................................-17-
12.3 Order of Payment of Liabilities Upon Dissolution...........-17-
12.4 Limitations on Payments Made in Dissolution................-17-
12.5 Certificates...............................................-17-
ARTICLE XIII.
INDEMNIFICATION...................................................-17-
13.1 Indemnity..................................................-18-
13.2 Indemnity for Actions By or In the Right of The
Company....................................................-18-
13.3 Indemnity If Successful....................................-18-
13.4 Expenses...................................................-19-
13.5 Advance Payment of Expenses................................-19-
ARTICLE XIV.
MISCELLANEOUS PROVISIONS..........................................-19-
14.1 Complete Agreement........................................-19-
14.2 Amendments.................................................-19-
14.3 Applicable Law.............................................-19-
14.4 Headings...................................................-19-
14.5 Severability...............................................-19-
14.6 Expenses...................................................-20-
14.7 Heirs, Successors and Assigns..............................-20-
14.8 Arbitration................................................-20-
14.9 Execution..................................................-20-
-iii-
<PAGE>
Page
----
Signatures.................................................-20-
Exhibit "C"................................................-21-
-iv-
<PAGE>
OPERATING AGREEMENT
OF
HEALTHLINK, LTD.
a Nevada limited liability company
THIS LIMITED LIABILITY COMPANY OPERATING AGREEMENT ("Agreement") is
made and entered into as of March ____, 1997, by and between Response U.S.A.,
Inc., a Delaware Corporation ("Response") and BKR, Inc., a Nevada Corporation
("BKR") (collectively referred to as the "Members" or individually as a
"Member"), with reference to the following facts:
A. The Articles of Organization (the "Articles") for Healthlink,
Ltd. (the "Company"), a limited liability company under the laws of the State of
Nevada, were filed with the Nevada Secretary of State on February 13, 1997, (the
"Effective Date").
B. Response and BKR have entered into a Purchase Agreement of even
date herewith (the "Purchase Agreement").
C. Such Purchase Agreement provides for the purchase by Response of
a fifty percent (50%) undivided interest in the assets of BKR.
D. The remaining fifty percent (50%) undivided interest in the
assets of BKR (exclusive of the consideration received by BKR pursuant to the
Purchase Agreement) will be contributed to Healthlink by BKR.
E. As provided for in separate Bills of Sale and Assignment attached
as Exhibit A, Response is contributing its fifty percent (50%) undivided
interest and BKR is contributing its remaining fifty percent (50%) undivided
interest (exclusive of the consideration received by BKR pursuant to the
Purchase Agreement) in the assets to the capital of the Company in exchange for
equal membership interests. Additionally, BKR has agreed to loan to the Company
up to Five Hundred Thousand Dollars ($500,000.00) on commercially reasonable
terms pursuant to the terms and conditions of an Optional Advance Note, a copy
of which is attached hereto.
F. Response and BKR agree that the Company shall function by
centralized command and control of all Company-wide issues and by local
management of the operations of the manufacturing and distribution of the
Company products.
ARTICLE I.
-1-
<PAGE>
DEFINITIONS
When used in this Agreement, the following terms shall have the
meanings set forth below:
1.1 Affiliate. "Affiliate" means a legal or natural Person
that directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with a Member or a Member's
constituent members, shareholders or partners; or a legal or natural Person that
directly, or indirectly through one or more intermediaries, owns or holds any
financial interest in a Member or a Member's constituent members, shareholders,
or partners.
1.2 Affiliate's Interest. "Affiliate's Interest" means the
interest of any Affiliate in a Member.
1.3 Articles of Organization. "Articles of Organization" means
the articles of organization filed with the Nevada Secretary of State on
February 13, 1997 for the purpose of forming the Company.
1.4 Bankruptcy. "Bankruptcy" means:
1.4.1 The commencement of any voluntary proceedings
under federal or state bankruptcy laws;
1.4.2 The failure to terminate any involuntary
proceeding under federal or state bankruptcy laws within thirty (30) days after
the commencement thereof;
1.4.3 A general assignment for the benefit of creditors;
or
1.4.4 The issuance of a charging order against the
interest of any person without the removal thereof within thirty (30) days after
issuance.
1.5 Bills of Sale and Assignment. "Bills of Sale and
Assignment" means bills of sale and assignment documenting the contribution of
certain assets by Response and BKR as capital to the Company, as attached as
Exhibit A.
1.6 Business Day. "Business Day" means Monday through Friday,
excluding Saturdays, Sundays, and any federal holidays.
1.7 Capital Account. "Capital Account" means each Member's
initial Capital Contribution. In addition, each Member's Capital Account shall
be:
-2-
<PAGE>
1.7.1 Increased by:
1.7.1.1 The amount of any additional Capital
Contributions by such Member, including the amount of Company liabilities
assumed by such Member or secured by any Company property distributed by the
Company to such Member;
1.7.1.2 The fair market value of any property
contributed by such Member to the Company (net of liabilities secured by such
property which are considered to be assumed or taken "subject to" by the
Company); and
1.7.1.3 Items of book income and gain which are
allocated to such Member; and
1.7.2 Decreased by:
1.7.2.1 The amount of cash distributed to such
Member by the Company, including the amount of liabilities of such Member
assumed by the Company or secured by any property contributed by such Member to
the Company;
1.7.2.2 The fair market value of any property
distributed by the Company to such Member (net of liabilities secured by such
property which are considered to be assumed or taken "subject to" by such
Member);
1.7.2.3 Items of expense described in Section
705(a)(2)(B) of the Code allocated to such Member; and
1.7.2.4 Items of book loss and deduction which are
allocated to such Member.
1.7.3 The foregoing provisions are intended to comply
with Section 1.704-1(b) of the Regulations and shall be applied and interpreted
accordingly. The Capital Accounts shall be adjusted in order to reflect
allocations of depreciation, amortization, and gain and loss as computed for
book purposes. Upon the permitted transfer of any Member's interest in the
Company, the Capital Account of the transferor Member shall carry over to the
transferee Member.
1.8 Capital Contribution. "Capital Contribution" means any
money or property, or a promissory note or other binding obligation to
contribute money or property, including assets set forth in separate Bills of
Sale and Assignment attached as Exhibit A, or to render services as permitted by
law, which a Member contributes to the Company as capital in that Member's
capacity as a Member pursuant this Agreement, including an agreement as to
value.
1.9 Cash Reserves. "Cash Reserves" means such amounts as may
be reasonably estimated by the Executive Committee as defined in Section 6.2 of
this
-3-
<PAGE>
Agreement for payment of costs, expenses and liabilities incident to the
business of the Company and for which the cash to make such payments will not,
in the reasonable opinion of the Executive Committee, be expected to be
available to the Company at or about the time such payments are required to be
made, and which therefore, in the reasonable opinion of the Executive Committee,
require that cash be set aside periodically to make such payments.
1.10 Code. "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
1.11 Communications Equipment. "Communications Equipment"
means conference telephones or similar communications equipment which enable all
users of such equipment to hear one another for the purposes of conducting a
telephonic meeting.
1.12 Deadlock. "Deadlock" means a tie vote of the Executive
Committee of the Company, as set forth in Section 6.2.
1.13 Distributable Cash. "Distributable Cash" means for any
period such portion of the cash in the Company's bank accounts that, in the
reasonable exercise of discretion by the Executive Committee, is available for
distribution to the Members after a reasonable provision has been made for Cash
Reserves.
1.14 Executive Committee. "Executive Committee" shall be those
persons who are appointed as members of the Executive Committee pursuant to
Section 6.2 of this Agreement. Members of the Executive Committee shall not be
compensated for their actions as members of the Executive Committee. Such
committee is the Manager of the Company as defined in Section 8.1 of this
Agreement.
1.15 Fiscal Year. "Fiscal Year" means the calendar year.
1.16 Interest. "Interest" shall mean an interest of a Member
in the Company.
1.17 Member. "Member" means any person or entity admitted to
the Company as a Member in accordance with this Agreement, or a person or entity
who has been admitted as a Member pursuant to applicable law. The initial
Members are Response and BKR. Additional Members may subsequently be admitted
upon terms deemed reasonable by the Executive Committee.
1.18 Member Nonrecourse Debt. "Member Nonrecourse Debt" shall
have the meaning ascribed to the term "Partner Nonrecourse Debt" in Treasury
Regulations Section 1.704-2(b)(4).
-4-
<PAGE>
1.19 Member Nonrecourse Deductions. "Member Nonrecourse
Deductions" shall mean items of Company loss, deduction, or Code Section
705(a)(1)(B) expenditures which are attributed to Member Nonrecourse Debt.
1.20 Net Profits and Net Losses. "Net Profits" and "Net
Losses" mean the net profits and net losses, respectively, of the Company as
determined by the Company's accountants on the basis of the accounting method
selected by the Executive Committee at the close of the Company's Fiscal Year
and in accordance with federal income tax principles consistently applied, and
as set forth on the information return filed by the Company for federal income
tax purposes. Net Profits and Net Losses shall not include Nonrecourse
Deductions or Member Nonrecourse Deductions.
1.21 Nonrecourse Deductions. "Nonrecourse Deductions" shall
have the meaning set forth in Treasury Regulations Section 1.704-2(b)(1).
1.22 Participation Percentage. "Participation Percentage" of a
Member means the following percentages, as may be adjusted from time to time,
pursuant to this Agreement:
Response 50%
BKR 50%
The Participation Percentage of a Member shall be equal to the amount of a
Member's Capital Contribution divided by the total of all Members' Capital
Contributions.
1.23 Company Minimum Gain. "Company Minimum Gain" means
"partnership minimum gain," as defined in the Regulations promulgated under
Section 704(b) of the Code.
1.24 Regulations. "Regulations" shall mean the Income Tax
Regulations promulgated under the Code, including Temporary and Proposed
Regulations, as such Regulations may be amended from time to time, including
corresponding provisions of succeeding Regulations.
1.25 Transfer. "Transfer" means any gift, sale, transfer,
assignment, hypothecation, pledge, encumbrance or any other disposition, whether
voluntary or involuntary, by operation of law or otherwise, including, without
limitation, any Transfer occurring upon or by virtue of the bankruptcy or
insolvency of a Member or Affiliate; the appointment of a receiver, trustee or
conservator or guardian for a Member or its property or an Affiliate or its
property; or pursuant to the will of a Member or Affiliate or the laws of
descent and distribution in the event of a Member's death or Affiliate's death;
or pursuant to court order in the event of divorce, marital dissolution, legal
separation or similar proceedings; or pursuant to any loan or security agreement
under which any of the Member's Interests or Affiliate's Interests are pledged
or otherwise serve as collateral, as well as the Transfer of any such Member's
Interest or Affiliate's Interest in the event recourse is made to such
collateral. The term "Transfer" shall include any transfer by any
-5-
<PAGE>
constituent member of any Member such that the individuals who are the ultimate
beneficial owners of the Member and Affiliates shall not be changed without
consent of the Members. "Transfer" shall not include any transfer of interests
in a Member or Affiliate to another owner of the same legal entity, nor the
transfer of an individual's interest in a Member or Affiliate to a grantor trust
of which such individual is a settlor and a beneficiary who maintains a
controlling interest.
ARTICLE II.
FORMATION OF LIMITED LIABILITY COMPANY
2.1 Formation. The Members formed Healthlink, Ltd., a Nevada limited
liability company, by filing of Articles of Organization with the Nevada
Secretary of State as of the Effective Date. The Members hereby adopt this
Agreement as their Operating Agreement.
ARTICLE III.
OFFICES
3.1 Principal Office. The principal office Healthlink, Ltd. (the
"Company") shall be at 3800 Howard Hughes Parkway, 7th Floor, Las Vegas, Nevada,
89101. The Members may change said principal office at any time from one
location to another in the State of Nevada.
ARTICLE IV.
PURPOSE
4.1 Purpose. The purpose of the Company shall be to engage in the
manufacture, sale and monitoring of personal emergency response systems and any
lawful business activity except banking, insurance or trust.
ARTICLE V.
CAPITAL
5.1 Initial Capital. Response and BKR hereby contribute, pursuant to
the Bills of Sale and Assignments attached as Exhibit A, all of their respective
interests in the assets. The initial capital of the Company shall be the sums of
cash or the agreed fair market value of the property (or combination of cash and
property) contributed to the Company by the Members in such amounts or value as
is set out opposite the name of each of the Members on Exhibit C, attached
hereto and incorporated herein by this reference, which shall be amended from
time to time by the Executive Committee to reflect a current list of the names
and addresses of each current Member. A permitted Transfer of any membership
Interests shall not be effective until it has been recorded in the records of
the Company.
5.2 Federal Income Tax Elections. The Company and its subsidiaries
shall make all elections for federal income tax purposes, including but not
limited to an election,
-6-
<PAGE>
pursuant to Code Section 754, to adjust the basis of the Company's assets under
Code Sections 734 or 743. In the event an election pursuant to Code Section 754
is made by the Company, upon the adjustment to the basis of the Company's
assets, the Members' Capital Accounts shall be adjusted in accordance with the
requirements of Regulation Section 1.704-1(b)(2)(iv)(m).
ARTICLE VI.
MEMBERS
6.1 Powers. Subject to the provisions of the Articles of
Organization, this Operating Agreement and the provisions of the Act, all powers
shall be exercised by or under the authority of, and the business and affairs of
the Company shall be controlled by, the Members. All actions of the Members are
taken by the Members in proportion to their Participation Percentage at the time
of the action taken. Except as otherwise provided in this Agreement, an action
by the Members shall require a vote of the Members at a meeting, in person or by
proxy, or an action by written consent. Without prejudice to such general
powers, but subject to the same limitations, it is hereby expressly declared
that the Members shall have the following powers only upon unanimous vote or
consent (as applicable):
6.1.1 To select and remove all members of the Executive
Committee (which is the Manager of the Company), of the Company; prescribe such
powers and duties for them as may be consistent with law, with the Articles of
Organization or this Operating Agreement; fix their compensation; and require
from them security for faithful service.
6.1.2 To conduct, manage and control the affairs and business
of the Company, and to make such rules and regulations therefor consistent with
the law, with the Articles of Organization or this Operating Agreement.
6.1.3 To change the principal office of this Company from one
location to another within Nevada; to fix and locate from time to time one or
more subsidiary offices of the Company; and to designate any place within or
without the State of Nevada for the holding of any Members meeting or meetings.
6.1.4 To borrow money and incur indebtedness for the purpose
of the Company, and to cause to be executed and delivered therefor, in the
Company name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations or other evidence of debt and securities.
6.1.5 To appoint an Executive Committee and other committees,
and to delegate to the Executive Committee any of the powers and authority of
the Members in the management of the business and affairs of the Company.
6.2 Appointment of Executive Committee. The Members hereby appoint
an Executive Committee. The initial Executive Committee shall consist of the
following four
-7-
<PAGE>
(4) individuals, two (2) selected by Response and two selected by BKR, who shall
serve until their resignation or replacement. The two (2) members of the
Executive Committee selected by Response shall be Richard M. Brooks and Ronald
Feldman. The two (2) members of the Executive Committee selected by BKR shall be
Bert Bedrosian and Kenneth W. Stickney. The designation of any other individual
to serve as a member of the Executive Committee shall require consent of all
Members, which consent shall not be unreasonably withheld. Pending filling of a
vacancy, the remaining individual serving on the Executive Committee at the
request of a Member shall have the right to cast two (2) votes.
6.3 Delegation of All Power and Authority to Executive Committee.
The Members agree to delegate to the Executive Committee all powers and
authority of the Members in the management of the business and affairs of the
Company.
6.4 Salaries to Members. The Company shall not have the authority to
pay to any Member a salary for said Member's services to the Company except by
unanimous written consent or vote of the Executive Committee. It is understood
that should a salary be authorized by the Executive Committee, such salary paid
to any Member under the provisions of this Section 6.4 shall be considered as an
operating expense of the Company and shall be deducted as an expense item in
determining the net profits and net losses of the Company.
6.5 Bank Accounts. From time to time, the Executive Committee may
designate a person or persons, whether such persons be Members or not, to open
and maintain one or more bank accounts; rent safety deposit boxes or vaults;
sign checks, written directions or other instruments to withdraw all or any part
of the funds belonging to the Company and on deposit in any savings account or
checking account; negotiate and purchase certificates of deposit, obtain access
to the company safety deposit box or boxes; and, generally, sign such forms on
behalf of the Company as may be required to conduct the banking activities of
the Company.
6.6 Annual Meetings. The annual meeting of the Members shall be held
on the first Tuesday in February, beginning with the year 1998 or on such other
date and time as the Members shall specify in writing. Annual meetings may be
conducted by use of Communications Equipment. Should said day fall on a legal
holiday, then any such annual meeting of Members shall be held at the same time
and place on the next day which is not a legal holiday.
6.7 Annual Meetings, Notice. Written notice of each annual meeting
signed by the Members, or by such other person or persons as the Members shall
designate, shall be given to each Member entitled to vote at the meeting, either
personally or by mail or other means of written communication, charges prepaid,
addressed to such Member at his address appearing on the books of the Company or
given by him to the Company for the purpose of notice. If a Member gives no
address, notice shall be deemed to have been given him if sent by mail or other
means of written communication addressed to the place where the principal office
of the Company is situated. All such notices shall be sent to each Member
entitled thereto not less than ten (10) nor more than sixty (60)
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calendar days before each annual meeting, and shall specify the place, the day
and the hour of such meeting.
6.8 Adjourned Meetings and Notice Thereof. Any Members meeting may
be adjourned from time to time by unanimous vote, by those present in person or
represented by proxy, but in the absence of a quorum no other business may be
transacted at any such meeting. Other than by announcement at the meeting at
which such adjournment is taken, it shall not be necessary to give any notice of
an adjournment or of the business to be transacted at an adjourned meeting.
6.9 Admission of New Members. New Members may be admitted to
membership in the Company with the unanimous vote or consent of the existing
Members. A new Member must agree to be bound by the terms and provisions of the
Articles of Organization and this Operating Agreement, as amended, and upon
admission the new Member shall have all rights and duties of a Member of this
Company.
ARTICLE VII.
TRANSFER OF MEMBERS AND AFFILIATES' INTERESTS
7.1 General. Each Member's Interest and Affiliate's Interest in the
Member is personal property. Except as otherwise provided in this Operating
Agreement, the Transfer of a Member's Interest or Affiliate's Interest in the
Member is prohibited unless expressly permitted herein.
7.2 No Right to Transfer Member's Interest Without Unanimous
Consent. In the event that the prohibition on transfer as set forth in Section
7.5 is violated, or at any other time all of the members of the Executive
Committee do not approve of a proposed Transfer or assignment by unanimous
written consent, the transferee of the Member's Interest has no right to
participate in the management of the business and affairs of the Company or to
become a Member.
The transferee shall be only entitled to receive the share of
profits or other compensation by way of income and the return of Capital
Contributions, to which the transferring Member would otherwise be entitled. If
the Transfer is approved by all the members of the Executive Committee by
unanimous written consent, the transferee has all the rights and powers and is
subject to all the restrictions and liabilities of his assignor, and has the
right to participate in the management of the business and affairs of the
Company and becomes a substituted Member.
7.3 Restricted Transfer of Affiliate's Interest. At any time after
the execution of this Agreement, each Member shall ensure that any Affiliate's
interests in any Affiliate of any Member listed in Schedule 7.3 shall not be
transferred to any other person, natural or legal, who is not listed in Schedule
7.3 without the prior written consent of the Executive Committee.
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7.3.1 The Members shall enter into separate agreements,
attached as Exhibit E, with their respective Affiliates as listed in Schedule
7.3, prohibiting the Transfer of all Affiliate's interest to any other person,
natural or legal, who is not listed in Schedule 7.3 without the prior written
consent of the Executive Committee. Such Agreements shall provide that the
transferee of the Affiliate's interest has no right to participate in the
management of the business and affairs of the Member or to become a Member
without the prior written consent of the Executive Committee.
7.3.2 No offering of any interest pursuant to any provision of
Section 7.3 shall be made without the prior written opinion of Company counsel
that such offering or transfer is in accordance with this Agreement and all
applicable laws.
7.4 No Transfer Permitted Under Certain Circumstances. A Member
shall not Transfer all or any part of its Interest, if such Transfer would cause
the termination of the Company for federal income tax purposes or would violate
any applicable federal or state securities laws.
7.5 No Transfer Permitted for Three (3) Years. Except as otherwise
permitted under Section 7.3, no Member shall, until three (3) years following
the execution of this Agreement, Transfer all or any part of its Interest to a
person, natural or legal, who is not a Member of the Company at the time of
transfer. However, in the event that Response USA, Inc. shall receive a public
tender offer for its shares of stock the prohibition on transfer shall be waived
so as to allow the successful conclusion of such public tender offer.
7.6 Right of First Refusal. After the three (3) year prohibition on
Transfer as set forth in Section 7.5 has expired, notwithstanding any provision
in this Agreement, no Member shall Transfer all or any portion of its Interest,
or any right therein, to any person in any manner whatsoever, whether
voluntarily or by operation of law or otherwise, unless that Member shall have
first given written notice to the Executive Committee of its intent to do so in
accordance with Section 7.6.2 hereof. Said notice (the "Refusal Notice") shall
name the proposed transferee and specify the Interest to be transferred, the
requested cash price for the Interest and all other material terms of the
proposed Transfer.
7.6.1 Following the receipt of the Refusal Notice, the
Executive Committee shall determine the Interest specified therein to be
purchased by the Company in accordance with this Section 7.6, if any. Unless the
Executive Committee intends for the Company to purchase all of the Interest
specified in the Refusal Notice, by written notice to the non-transferring
Members (which shall be given seven (7) Business Days after the receipt of the
Refusal Notice by the Executive Committee), the Executive Committee shall offer
the non-transferring Members the opportunity to purchase any of the Interest
which the Executive Committee does not intend for the Company to purchase.
Within seven (7) Business Days following that notice from the Executive
Committee, each non-transferring Member who so desires shall give an election
notice ("Election Notice") to the Executive Committee. To exercise the option
under this Section 7.6, the Executive Committee shall, within fourteen (14)
Business Days after the giving of the Refusal Notice, give written notice
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to the transferring Member stating that all, but not less than all, of the
Interest specified in the Refusal Notice is being purchased by the Company
and/or non-transferring Members.
7.6.2 Upon expiration of the period specified above for
exercise of the right of first refusal by the Company and the non-transferring
Members, or if the total Interest specified by the Company and the
non-transferring Members is less than the Interest specified in the Refusal
Notice, then all, but not a portion, of such Interest may be Transferred at any
time within twenty-eight (28) Business Days following the expiration of the
period specified in Section 7.6 to the proposed transferee, at a price and on
terms no more favorable to the transferee than those specified in the Refusal
Notice. Any later proposed Transfer may be made (if otherwise permissible) only
by again following the procedures specified in this Section 7.6.
7.6.3 In the case of any purchase by the Company or the non-
transferring Members pursuant to this Section 7.6, the purchase price and terms
for the Interest shall be the cash price and terms for the Interest specified in
the Refusal Notice. The closing of any purchase of any Interest by the Company
or the non-transferring Members shall be held at a time specified by the
Executive Committee.
7.7 Representations and Warranties of the Members. Each of the
Members represents and warrants to the Company and the other Members with
respect to itself as follows:
7.7.1 Such Member is the lawful owner of and has the full
right, power and authority to sell, transfer, and deliver the separate assets,
as set forth next to its name in Exhibit C to the Company. The sale, transfer
and delivery of such separate assets in accordance therewith will transfer good
and marketable title thereto, free and clear of all liens, encumbrances, claims
or rights of third parties of every kind and nature whatsoever, subject only to
the provisions of this Agreement and the Purchase Agreement.
7.7.2 There are no existing options, warrants, calls, liens or
commitments on the part of any of the assets set forth in Exhibit C, that will
not be terminated concurrently with the execution of this Agreement.
7.7.3 Such Member has the right and power to enter into this
Agreement, and when this Agreement has been fully executed and delivered, it
constitutes the valid and binding obligation of such Member. No consent of any
person not a party to this Agreement, and no consent of any governmental
authority, is required to be obtained on the part of such Member in connection
with or resulting from the execution or performance of this Agreement.
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7.8 Transferee's Participation Percentage. In the event a transferee
acquires all or part of the Interest of an existing Member or Members, the
transferee's Participation Percentage shall be adjusted, as set forth in Section
1.25 of this Agreement.
ARTICLE VIII.
MANAGEMENT
8.1 Executive Committee. The Members agree that the business of the
Company shall be managed by an Executive Committee composed of the two (2)
persons appointed by Response and the two (2) persons appointed by BKR, as
specified in Section 6.2. The Executive Committee is the "Manager" of the
Company. Except as otherwise provided in this Agreement, the Executive Committee
shall act by majority vote or by written consent of a majority of the members of
the Executive Committee who are voting or acting by written consent.
8.2 Unanimity Required for Action. Only upon unanimous vote or by
unanimous written consent of those Members entitled to vote and voting, the
Executive Committee shall have the right, power or authority to do any act,
including but not limited to, the following:
8.2.1 expend or use any Company money or property except upon
the account of and for the benefit of the Company;
8.2.2 mortgage or lease the entire property comprising the
Company's operations, pledge, or otherwise dispose of all, or substantially all,
of the assets of the Company, other than in the ordinary course of business;
8.2.3 pledge any of the Company's credit or property for other
than Company purposes;
8.2.4 compromise, settle or release any debt due the Company
except upon full payment thereof or except in the ordinary course of business;
8.2.5 assign the Company's property in trust for creditors or
on the assignee's promise to pay the debts of the Company;
8.2.6 confess a judgment against the Company, the Company's
property, or any of the Members;
8.2.7 dispose of any of the goodwill of the Company business;
8.2.8 submit a Company claim or liability to arbitration;
8.2.9 admit new Members to the Company;
8.2.10 determine the amount, if any of distributable cash;
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8.2.11 make a call for additional Capital Contributions; or
8.2.12 appoint any "Senior Officer" of the Company, which is
any officer listed in Section 8.3.1, a Chief Operating Officer, a Chief
Financial Officer, a President or any other officer the Executive Committee so
unanimously designates.
8.2.13 do any other act which would make it impossible to
carry on the ordinary business of the Company.
8.3 Officers. The Executive Committee may, from time to time, elect
a Chief Executive Officer, a Managing Director, a Chairman, a Vice-Chairman, a
President, a Chief Operating Officer, a Chief Financial Officer, a Secretary,
Vice-Presidents and such other officers and confer upon them such duties,
authority and titles as the business of the Company may require.
8.3.1 The Executive Committee hereby appoints the following
individuals to hold Senior Officer positions until such individual shall resign
or shall be removed or otherwise disqualified to serve:
8.3.1.1 As President of the Company, Bert Bedrosian;
8.3.1.2 As Chief Executive Officer of the Company,
Richard M. Brooks;
8.3.1.3 As Chairman of the Company, Kenneth W. Stickney;
and
8.3.1.4 As Vice-Chairman of the Company, Ronald Feldman.
8.4 President. The President shall report to the Executive Committee
and shall have ultimate responsibility for the management of the Company,
including hiring and firing of employees, day to day operations, and the
manufacture and sale of the Company's products and such other duties as the
Executive Committee may determine.
8.5 Chief Executive Officer. The Chief Executive Officer shall
report to the Executive Committee and have such duties as the Executive
Committee shall direct.
8.6 Chairman. The Chairman shall have the responsibility of
presiding over all Scheduled Meetings, Annual Meetings and Executive Committee
Meetings and other responsibilities as the Executive Committee may determine
from time to time.
8.7 Vice-Chairman. The Vice-Chairman shall have the responsibilities
as the Executive Committee may determine from time to time.
8.8 Removal, Resignation and Vacancies. By unanimous vote, the
Executive Committee may remove any Officer, either with or without cause, in
accordance
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with the terms of this Agreement. Any member of the Executive Committee or
Officer may resign at any time by giving written notice to the Executive
Committee. Any such resignation shall take effect at the date of the receipt of
such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
8.9 Executive Committee Meetings. Any member of the Executive
Committee may call an Executive Committee meeting ("Executive Committee
Meeting") for any purpose by giving written notice (by mail or by facsimile) to
all members of the Executive Committee ten (10) Business Days prior to the date
of the meeting ("Meeting Date"). Notice of an Executive Committee Meeting shall
specify, in addition to the place, day and hour of such Executive Committee
Meeting, the purpose or purposes for which the Executive Committee Meeting is
called. Executive Committee Meetings may also be conducted by Communications
Equipment.
8.9.1 At any time up to the convening of the Executive
Committee Meeting, any member of the Executive Committee may postpone the date
of the meeting one time for up to ten (10) Business Days from the originally
scheduled Executive Committee Meeting Date, provided that written notice is
given to all members of the Executive Committee.
8.9.2 For any convened Executive Committee Meeting, the
presence of one (1) Executive Committee member holding the written proxy of
another member of the Executive Committee shall constitute a quorum for the
transaction of business.
8.9.3 A Member not present at an Executive Committee Meeting
may cast its vote by proxy provided that the proxy holder attends the Executive
Committee Meeting.
8.10 Action by Written Consent. Any action may be taken by the
members of the Executive Committee without a meeting, if authorized by the
unanimous written consent of the members of the Executive Committee. In no
instance where action is authorized by written consent, need a meeting of the
Executive Committee be called or noticed. However, a copy of the action taken by
written consent must be immediately sent to all members of the Executive
Committee and placed in the Company's records.
8.11 Deadlock; President Authorized to Break Deadlock. In the event
of a Deadlock, the President shall be authorized to cast the deciding vote to
break the deadlock on all operational issues listed in Schedule 8.12 and such
other issues as the Executive Committee may unanimously determine from time to
time.
8.12 President Not Authorized to Break Deadlock. Notwithstanding any
of the foregoing, in no event shall the President be authorized to cast the
deciding vote in the
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event of Deadlock, unless the Executive Committee expressly authorizes the
President to do so by unanimous vote or consent; or if the issue is expressly
listed in Schedule 8.12.
ARTICLE IX.
PROFITS AND LOSSES
9.1 Allocation of Net Profits. Net Profits for each Fiscal Year
shall be allocated to the Members in accordance with their respective
Participation Percentages.
9.2 Allocation of Net Losses. Net Losses for each Fiscal Year shall
be allocated to the Members in accordance with their respective Participation
Percentages.
9.3 Allocation of Nonrecourse Deductions. Nonrecourse Deductions for
each Fiscal Year shall be allocated to the Members in accordance with their
respective Participation Percentages.
9.4 Allocation of Tax Credits. Except as may otherwise be required
by law, any tax credits to which the Company may be entitled shall be allocated
to the Members in accordance with their respective Participation Percentages.
9.5 Qualified Income Offset. If any Member unexpectedly receives an
adjustment, allocation or distribution described in Regulations Sections 1.704-
1(b)(2)(ii)(d)(4), (5) or (6), items of income and gain shall be specially
allocated to each such Member in an amount and manner sufficient to eliminate,
to the extent required by the Regulations, any deficit in said Member's Capital
Account as quickly as possible. The Member's Capital Account, as of the end of
the relevant Fiscal Year, shall take into account the adjustments described in
Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6), any amount of any
deficit Capital Account balance which the Member is obligated to restore and any
amount of any deficit Capital Account balance which the Member is deemed
obligated to restore pursuant to the Regulations promulgated under Section
704(b) of the Code.
9.6 Minimum Gain Chargeback. Prior to any allocation hereunder, if
there is a net decrease in the Company Minimum Gain during a Company taxable
year, each Member shall be allocated items of income and gain in accordance with
the Regulations promulgated under Section 704(b) of the Code and its
requirements for a "minimum gain chargeback." If there is a net decrease in
minimum gain attributable to debt associated with Member Nonrecourse Deductions,
income and gain shall be allocated to the Members in accordance with the
Regulations.
9.7 Member Nonrecourse Deductions. Those items of Company loss,
deduction or Code Section 705(a)(2)(B) expenditures which are attributable to
Member Nonrecourse Debt for any fiscal year or other period shall be specially
allocated to the Member who bears the economic risk of loss with respect to the
Member Nonrecourse Debt to which such items are attributable in accordance with
Treasury Regulations Section 1.704-2(I).
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9.8 Allocations of Book Items. All items of book income, gain, loss
and deduction shall be allocated among the Members in the same percentage that
Net Profits and Net Losses are allocated for the same Fiscal Year, or as
otherwise provided by the Regulations promulgated under Section 704(b) of the
Code.
ARTICLE X.
DISTRIBUTIONS
10.1 Distribution of Distributable Cash. Distributable Cash shall be
distributed to the Members within ninety (90) days after the end of each Fiscal
Year in proportion to their respective Participation Percentages only upon the
unanimous written consent or vote of the Executive Committee. Notwithstanding
the foregoing, Distributable Cash in an amount equal to fifty percent (50%) of
the net taxable income allocated among the Members shall be distributed to the
Members in proportion to their respective Participation Percentages, but only if
all known and anticipated operating expenses have been provided for.
10.2 To Whom Distributions Are Made. Unless named in this Agreement
or unless admitted as a Member as provided in this Agreement, no person or
entity shall be considered a Member in the Company. Any distribution by the
Company to the person shown on the Company records as a Member, or to such
Member's legal representatives, or to a named assignee of the right to receive
distributions, shall acquit the Company and the Members of all liability to any
other person who may be interested in such distribution by reason of an
assignment by a Member or for any other reason.
ARTICLE XI.
ACCOUNTING AND RECORDS
11.1 Records and Accounting. The books and records of the Company
shall be kept, and the financial position and the results of it operations
recorded, in accordance with the accounting methods elected to be followed by
the Company for federal income tax purposes. The books and records of the
Company shall reflect all Company transactions and shall be appropriate and
adequate for the Company's business. The fiscal year of the Company for
financial reporting and for federal income tax purposes shall be the calendar
year.
11.2 Access to Accounting Records. All books and records of the
Company shall be maintained at any office of the Company or at the Company's
principal place of business, or as determined from time to time by the Company.
Each Member, and the Member's duly authorized representative, shall have access
to them at such office of the Company, and the right to inspect and copy them at
reasonable times.
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ARTICLE XII.
DISSOLUTION AND WINDING UP
12.1 Conditions of Dissolution. The Company shall dissolve upon the
occurrence of any of the following events:
12.1.1 Upon the happening of any event of dissolution
specified in the Articles of Organization of the Company;
12.1.2 Upon the entry of a decree of judicial dissolution;
12.1.3 Upon the unanimous vote of the Executive Committee;
12.1.4 Upon the occurrence of the death, withdrawal,
resignation, retirement, insanity, Bankruptcy or dissolution of any member of
the Executive Committee, unless by majority vote the remaining members of the
Executive Committee agree to continue the business of the Company within ninety
(90) days after such event; or
12.1.5 Upon the sale of all or substantially all of the assets
of Company.
12.2 Winding Up. Upon the dissolution of the Company, the Company's
assets shall be disposed of and its affairs wound up. The Company shall give
written notice of the commencement of the dissolution to all of its known
creditors.
12.3 Order of Payment of Liabilities Upon Dissolution. After
determining that all the known debts and liabilities of the Company have been
paid or adequately provided for, the remaining assets shall be distributed to
the Members in accordance with their positive Capital Account balances, after
taking into account income and loss allocations for the Company's taxable year
during which liquidation occurs.
12.4 Limitations on Payments Made in Dissolution. Except as
otherwise specifically provided in this Agreement, each Member shall be entitled
to look only to the assets of the Company for the return of that Member's
positive Capital Account balance, and shall have no recourse for that Member's
Capital Contribution and/or share of Net Profits against any other Member.
12.5 Certificates. The Company shall file with the Nevada Secretary
of State a Certificate of Dissolution upon the dissolution of the Company, and a
Certificate of Cancellation upon the completion of the winding up of the
Company's affairs.
ARTICLE XIII.
INDEMNIFICATION
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13.1 Indemnity. This Company does hereby indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, except an action by or in the right of the Company, by reason
of the fact that the person is or was a Member, member of the Executive
Committee, an officer, employee or agent of this Company, or is or was serving
at the request of this Company as a member, Member of the Executive Committee,
officer, employee or agent of another limited liability company or corporation,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
the action, suit or proceeding if the person acted in good faith and in a manner
which the person reasonably believed to be in or not opposed to the best
interests of this Company, and, with respect to a criminal action or proceeding,
had no reasonable cause to believe the person's conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in or not opposed to the best
interest of this Company, and that, with respect to any criminal action or
proceeding, the person had reasonable cause to believe that the person's conduct
was unlawful.
13.2 Indemnity for Actions By or In the Right of The Company. This
Company does hereby indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of this Company to procure a judgment in its favor by reason of the
fact that the person is or was a Member, member of the Executive Committee, an
officer, employee or agent of this Company, or is or was serving at the request
of this Company as a Member, member of the Executive Committee, officer,
employee or agent of another limited liability company, corporation,
partnership, joint venture, trust or other enterprise against expenses,
including amounts paid in settlement and attorneys' fees actually and reasonably
incurred by the person in connection with the defense or settlement of the
actions or suit if the person acted in good faith and in a manner which the
person reasonably believed to be in or not opposed to the best interests of this
Company. Indemnification may not be made for any claim, issue or matter as to
which such a person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to this Company or for
amounts paid in settlement to this Company, unless and only to the extent that
the court in which the action or suit was brought, or other court of competent
jurisdiction, determines upon application that in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
13.3 Indemnity If Successful. To the extent that a Member, a member
of the Executive Committee, officer, employee or agent of this Company has been
successful on the merits or otherwise in defense of any action, suit or
proceeding, or in defense of any claim, issue or matter therein, this Company
does hereby indemnify such person or entity against expenses, including
attorneys' fees, actually and reasonably incurred by the person in connection
with the defense.
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13.4 Expenses. Any indemnification must be made by this Company only
as authorized in the specific case upon a determination that indemnification of
the Member, the member of the Executive Committee, officer, employee or agent is
proper in the circumstances. The determination must be made:
13.4.1 By the Executive Committee unanimously; or
13.4.2 If a unanimous decision cannot be obtained, by written
opinion of independent legal counsel.
13.5 Advance Payment of Expenses. The expenses of Members and the
Executive Committee incurred in defending a civil or criminal action, suit or
proceeding shall be paid by this Company as they are incurred and in advance of
the final disposition of the action, suit or proceeding, upon receipt of an
undertaking by or on behalf of the Member or a member of the Executive Committee
to repay the amount, if it is ultimately determined by a court of competent
jurisdiction that the person is not entitled to be indemnified by this Company.
The provisions of this subsection do not affect any rights to advancement of
expenses to which personnel other than Members or members of the Executive
Committee may be entitled under any contract or otherwise by law.
ARTICLE XIV.
MISCELLANEOUS PROVISIONS
14.1 Complete Agreement. This Operating Agreement, and the Articles
of Organization, constitute the complete and exclusive statement of the
Agreement among the Members with respect to the subject matter contained
therein. This Agreement and the Articles replace and supersede all prior
agreements by and among the Members or any of them. This Agreement and the
Articles supersede all prior written and oral statements, and no representation,
statement, or condition or warranty not contained in this Agreement or the
Articles will be binding on the Members or of any force and effect whatsoever.
14.2 Amendments. This Operating Agreement may be amended by the
Members only at a special or annual meeting of the Members, not by written
consent, and only if the notice of the intention to amend the Operating
Agreement was contained in the notice of the meeting, or such notice of a
meeting is waived by all Members.
14.3 Applicable Law. This Operating Agreement, and its application,
shall be governed exclusively by its terms and by the laws of the State of
Nevada.
14.4 Headings. The headings in this Operating Agreement are inserted
for convenience only and are in no way intended to describe, interpret, define
or limit the scope, extent or intent of this Operating Agreement or any
provisions contained herein.
14.5 Severability. If any provision of this Operating Agreement or
the application thereof to any person or circumstance shall be deemed invalid,
illegal or
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unenforceable to any extent, the remainder of this Operating Agreement and the
application thereof shall not be affected and shall be enforceable to the
fullest extent permitted by law.
14.6 Expenses. If any litigation or other proceeding is commenced in
connection with or related to this Agreement, the prevailing party shall be
entitled to recover from the losing party all of the incidental costs and
reasonable attorneys' fees, whether or not a final judgment is rendered.
14.7 Heirs, Successors and Assigns. Each and all of the covenants,
terms, provisions and agreements contained in this Operating Agreement shall be
binding upon and inure to the benefit of the existing Members, all new and
substituted Members, and their respective heirs, legal representatives,
successors and assigns.
14.8 Arbitration. Any dispute arising out of or relating to this
Agreement that cannot be settled by good faith negotiation between the parties
will be submitted to final and binding arbitration before a retired Judge
pursuant to the Commercial Rules of the American Arbitration Association. This
dispute resolution shall not be construed to permit an arbitrator to make any
business decisions which are the responsibility or under the authority of the
Executive Committee.
14.9 Execution. This Agreement may be executed in counterparts, and
by facsimile signatures when so executed each counterpart shall be deemed to be
an original, and said counterparts together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, this Operating Agreement was adopted by a
unanimous vote of all the Members of this Company at the organizational meeting
thereof held as of March _____, 1997.
"MEMBERS"
RESPONSE U.S.A., INC., BKR, INC.,
a Delaware Corporation a Nevada Corporation
By: By:
- ------------------------------ ---------------------
Name: Richard M. Brooks Name: Bert Bedrosian
Title: President Title: President
By: By:
- ------------------------------ ---------------------
Name: Ronald Feldman Name: Robin Bedrosian
Title: Chief Operating Officer Title: Secretary
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EXHIBIT "C"
NAME PERCENTAGE
Response USA, Inc. 50%
BKR, Inc. 50%
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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 21
Subsidiaries of the Company
1. Response Ability Systems, Inc.; incorporated in New Jersey.
2. United Security Systems, Inc.; incorporated in New Jersey.
3. Emergency Response Systems, Inc.; incorporated in Delaware; also does
business in the state of California under the name Personnel Emergency
Response Systems, Inc.
4. MSG Security Systems, Inc.; incorporated in Pennsylvania.
5. Shelton Security, Inc.; incorporated in New Jersey.
<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>
