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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
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(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
/ / 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.
(Exact name of registrant as specified in its charter)
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DELAWARE 22-3088639
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11-H PRINCESS ROAD, LAWRENCEVILLE, NEW JERSEY 08648
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (609)896-4500
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------------------------------------------- --------------------------------------------------------
None Not Applicable
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.008 PAR VALUE AND COMMON STOCK PURCHASE WARRANTS
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (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 32.
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RESPONSE USA, INC.
1997 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
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Item 1. Business...................................................................... 3
Item 2. Properties.................................................................... 16
Item 3. Legal Proceedings............................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders........................... 17
Item 5. Market for the Registrant's Common Stock and Related Security Holder 18
Matters.......................................................................
Item 6. Management's Discussion and Analysis of Financial Condition and Results of 18
Operations....................................................................
Item 7. Financial Statements.......................................................... 24
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial 24
Disclosure....................................................................
Item 9. Directors and Executive Officers of the Registrant............................ 25
Item 10. Executive Compensation........................................................ 27
Item 11. Security Ownership of Certain Beneficial Owners and Management................ 30
Item 12. Certain Relationships and Related Transactions................................ 31
Item 13. Exhibits and Reports on Form 8-K.............................................. 32
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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.
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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 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 (See Note 15--Subsequent Events of Notes to Consolidated Financial
Statements). 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 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%.
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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"). (See Note 15--Subsequent Events of Notes to
Consolidated Financial Statements). 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 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
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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 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.
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COMMERCIAL SYSTEMS. The Company also provides electronic security services
and products to commercial businesses and facilities. These systems and products
are tailored to customers' specific needs and include electronic monitoring
services that provide intrusion and fire detection, as well as card or keypad
activated access control systems and closed circuit television systems. The
Company also markets standard security packages for specific types of commercial
customers. Certain commercial customers require more complex electronic security
systems. To meet this demand, the Company also sells integrated electronic
security systems that combine a variety of electronic security services and
products. These systems are integrated by the Company to provide a single
computer-controlled security system.
PRODUCTS
The Company sells products offered by several different manufacturers.
Systems are generally purchased by the customers, although the Company does
lease a limited number of systems. When the system is sold, the customer pays
the Company the purchase price. When the system is leased, only an 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.
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
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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.
PENDING ACQUISITIONS
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
$13,000,000, including $10,000,000 payable in cash, approximately $2,250,000
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 financial statements for Triple A have been
included herewith.
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, for aggregate
consideration of approximately $1,045,000 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. The closing
of the acquisition is conditional on the closing of the anticipated offering.
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. The financial
statements for Jupiter have been included herewith.
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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.
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.
10
<PAGE>
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 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
11
<PAGE>
provided by the Company. The consumer acquires the PERS from the home health
care agency, and the Company's obligations are limited to providing monitoring
services. Additional markets for the Company's home health care division include
state and local welfare agencies. The Company is also actively soliciting
agreements with municipalities to provide the Company's PERS services as part of
the municipalities' total health and other assistance programs. The Company has
entered into agreements with the Philadelphia Corporation on Aging and the
municipality of Los Angeles, Department of Aging, pursuant to which the Company
provides PERS and monitoring services to clients of such entities.
PRIVATE LABEL PROGRAMS. The Company also supplies PERS products for vendors
under product names owned by the vendors. Currently, sales under these programs
are limited. Currently, all of the Company's private label vendors provide their
own monitoring services. The Company's gross profit margins on sales in its
private label programs are significantly lower than margins on its direct and
franchisee sales programs.
PRODUCTION
The principal materials utilized in the production of PERS products consist
of electronic components which are obtained from several suppliers. The
sub-contractor also purchases molded plastic, printed circuit boards and
miscellaneous hardware from several sources. The Company believes that the
required electronic components are not unique to a particular vendor and that
other sources could be obtained, although some delay in production might result
if it were necessary to find new sources for electronic components.
HEALTHLINK
HealthLink is a 50% joint venture between the Company and BKR, Inc.
HealthLink was formed in March 1997 to distribute the HealthLink System through
retail pharmacies. In connection with its investment in HealthLink, the Company
issued 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 placed on line
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.
12
<PAGE>
WANDERWATCH-TM-
On November 22, 1996, the Company entered into a two-year agreement with
Sloan Electronics, Incorporated 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.
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
13
<PAGE>
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
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.
14
<PAGE>
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.
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.
15
<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.
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
16
<PAGE>
ITEM 2. PROPERTIES (CONTINUED)
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.
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.
17
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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
------------
FOR FISCAL YEAR ENDING JUNE 30, 1996 HIGH LOW
--- ---
<S> <C> <C> <C> <C>
First Quarter.......................................................................... 7 3/16 3 3/4
Second Quarter......................................................................... 6 4 1/4
Third Quarter.......................................................................... 6 1/8 4 3/4
Fourth Quarter......................................................................... 8 1/2 5 1/8
<CAPTION>
BID
------------
FOR FISCAL YEAR ENDING JUNE 30, 1997 HIGH LOW
--- ---
<S> <C> <C> <C> <C>
First Quarter.......................................................................... 8 7/8 3 1/8
Second Quarter......................................................................... 5 1/8 2 3/8
Third Quarter.......................................................................... 5 3/8 2 11/16
Fourth Quarter......................................................................... 3 1 7/16
<CAPTION>
ASK
------------
FOR FISCAL YEAR ENDING JUNE 30, 1996 HIGH LOW
----- ---
<S> <C> <C> <C> <C>
First Quarter.......................................................................... 7 13/16 4 3/8
Second Quarter......................................................................... 6 1/4 4 5/8
Third Quarter.......................................................................... 6 1/4 5
Fourth Quarter......................................................................... 8 3/4 5 1/4
ASK
------------
FOR FISCAL YEAR ENDING JUNE 30, 1997 HIGH LOW
----- ---
<S> <C> <C> <C> <C>
First Quarter.......................................................................... 9 1/8 3 1/4
Second Quarter......................................................................... 5 3/8 2 5/8
Third Quarter.......................................................................... 5 5/8 2 7/8
Fourth Quarter......................................................................... 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.
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
18
<PAGE>
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).
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
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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,
--------------------------------------------------
<S> <C> <C> <C> <C>
1996 1997
------------------------ ------------------------
Operating revenues:
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 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
20
<PAGE>
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 $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 $953,031 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.
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.
21
<PAGE>
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%.
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
22
<PAGE>
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. In connection
with the aquisition of accounts, the Company incurred cash expenditures for
previously accrued transition costs (costs associated with the transfer of
acquired customers to the Company's central monitoring station, notification of
change in the service provider, and service calls to customer premises), of
$91,047 for fiscal 1996 and $11,178 for fiscal 1997. 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 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.
23
<PAGE>
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.
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.
24
<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........................... 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.
25
<PAGE>
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. ("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 October 1, 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 October 1, 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.
26
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------------------
------------------------------------------ SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING
NAME AND PRINCIPAL BONUS COMPENSATION STOCK OPTIONS/
POSITION YEAR SALARY ($) ($) ($)(1) AWARD(S) SARS (#)
- ---------------------------- --------- ---------- ----------- ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Brooks,.......... 1997 $ 220,673 -- -- -- 708,333(2)
President, Chief Executive 1996 $ 217,980 -- -- -- --
Officer and Chief 1995 $ 175,003 -- -- -- --
Financial Officer
Ronald A. Feldman,.......... 1997 $ 137,307 -- -- -- 260,067(2)
Chief Operating Officer, 1996 $ 135,654 -- -- -- --
Vice President, Secretary 1995 $ 106,495 -- -- -- --
and Treasurer
<CAPTION>
LONG-TERM ALL OTHER
NAME AND PRINCIPAL INCENTIVE PLAN COMPENSATION
POSITION PAYOUTS ($)
- ---------------------------- ------------------- -----------------
<S> <C> <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 $0.01 per share. See
"Management--Reduction of Exercise Price of Certain Stock Options."
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted to or
held by the Named Executive Officers during the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- ------------------------------------------- ------------------- --------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Richard M. Brooks.......................... 708,333(1) 42.7% $ .01 11/14/04
Ronald A. Feldman.......................... 260,067(1) 15.4% $ .01 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 $0.01 per share. See
"Management--Reduction of Exercise Price of Certain Stock Options."
27
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER VALUE OF
OF SECURITIES UNEXERCISED IN-
UNDERLYING THE-MONEY
UNEXERCISED OPTIONS/SARS
SHARES VALUE SARS AT FY-END AT FY-END
ACQUIRED ON REALIZED EXERCISEABLE/ EXERCISEABLE/
NAME EXERCISE # ($) UEXERCISEABLE UNEXERCISEABLE(1)
- ------------------------------------------------------ ----------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Richard Brooks, President, Chief Executive and
Financial Officer................................... -- -- 708,333/0 $ 1,586,666/0
Ronald A. Feldman, Chief Operating Officer, Vice
President, Secretary and Treasurer.................. -- -- 260,067/0 $ 582,550/0
</TABLE>
- ------------------------
(1) The value of unexercised options is determined by multiplying the number of
options held by the difference between the closing price of the Common Stock
of $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 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.
28
<PAGE>
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 84,208 shares of
Common Stock and converted subordinated debentures in the amount of $101,329
into 67,553 shares of Common Stock. See "Management" and "Principal
Stockholders."
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 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.
29
<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.
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
SHARES OWNED PERCENTAGE OF
BENEFICIALLY SHARES
NAME AND ADDRESS* (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 group (seven persons) (8).............................. 1,822,163 26.4%
</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 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."
30
<PAGE>
(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
31
<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*
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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*
27 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously filed with the Company's Annual Report on Form 10-KSB on October
10, 1997.
(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.
33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
RESPONSE USA, INC. AND SUBSIDIARIES
Independent Auditors' Report for the Fiscal Year Ended June 30, 1997....................................... F-2
Independent Auditors' Report for the Fiscal Year Ended June 30, 1996....................................... F-3
Consolidated Balance Sheet at June 30, 1997................................................................ F-4
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 1996 and
June 30, 1997............................................................................................ F-5
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 1996 and June 30,
1997..................................................................................................... F-6
Consolidated Statement of Cash Flows for the Fiscal Years Ended June 30, 1996 and
June 30, 1997............................................................................................ F-7
Notes to Consolidated Financial Statements................................................................. F-10
TRIPLE A SECURITY SYSTEMS, INC.
Independent Auditors' Report............................................................................... F-28
Balance Sheets at September 30, 1997, December 31, 1996 and December 31, 1995.............................. F-29
Statements of Income and Retained Earnings for the Nine Months Ended September 30, 1997 and September 30,
1996 and for the Years Ended December 31, 1996 and December 31, 1995..................................... F-30
Statements of Cash Flows for the Nine Months Ended September 30, 1997 and September 30, 1996 and for the
Years Ended December 31, 1996 and December 31, 1995...................................................... F-31
Notes to Financial Statements.............................................................................. F-32
THE JUPITER GROUP, INC.
Independent Auditors' Report............................................................................... F-40
Balance Sheets at December 31, 1995, December 31, 1996 and September 30, 1997.............................. F-41
Statements of Income and Retained Earnings for the Nine Months Ended September 30, 1997 and September 30,
1996 and for the Years Ended December 31, 1996 and December 31, 1995..................................... F-42
Statements of Cash Flow for the Nine Months Ended September 30, 1997 and September 30, 1996 and for the
Years Ended December 31, 1996 and December 31, 1995...................................................... F-43
Notes to Financial Statements.............................................................................. F-44
RESPONSE USA, INC. AND SUBSIDIARIES
Unaudited Pro Forma Financial Statements................................................................... F-48
Unaudited Pro Forma Condensed Consolidated Balance Sheet at September 30, 1997............................. F-49
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Three Months Ended September 30,
1997..................................................................................................... F-50
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Fiscal Year Ended June 30,
1997..................................................................................................... F-51
Notes to Unaudited Pro Forma Financial Statements.......................................................... F-52
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS OF RESPONSE USA, INC.:
We have audited the accompanying consolidated balance sheet of Response USA,
Inc. as of June 30, 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement presents fairly, in all material
respects, the financial position of the Company as of June 30, 1997 and the
results of its operations and cash flows for the year then ended in conformity
with generally accepted accounting principles.
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
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
---------------
---------------
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
---------------
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-4
<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-5
<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 ACCUMULATED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL SECURITIES DEFICIT TOTAL
----------- --------- ----------- ----------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--June 30, 1995.... 798,520 $ 6,388 $11,438,358 $ (68,343) $(8,975,907) $2,400,496
Exercise of stock options
and warrants............ 1,455,300 11,643 4,421,100 4,432,743
Conversion of convertible
subordinated promissory
notes--Net of related
costs of $383,088....... 1,116,986 8,936 2,842,976 2,851,912
Acquisitions.............. 309,043 2,472 818,086 820,558
Issuance of common stock
for consulting
services................ 2,000 16 8,109 8,125
Issuance of common stock
as payment of notes
payable................. 173,095 1,385 665,736 667,121
Sale of preferred stock... 7,500 $1,605,000 4,756,875 6,361,875
Unrealized holding losses
on available-for-sale
securities.............. (125,000) (125,000)
Net loss.................. (4,411,898) (4,411,898)
----- --------- ----------- ----------- ---------- ----------- ------------ ----------
Balance--June 30, 1996.... 7,500 1,605,000 3,854,944 30,840 24,951,240 (193,343) (13,387,805) 13,005,932
Accretion on preferred
stock due to intrinsic
value of conversion
feature................. 5,895,000 (5,895,000) 0
Discount on and deemed
dividends on preferred
stock................... 876,521 (876,521) 0
Exercise of stock options
and warrants............ 166,950 1,336 406,617 407,953
Issuance of warrants to
consultants............. 689,000 689,000
Repricing of stock
purchase warrants....... 2,848,765 2,848,765
Conversion of convertible
subordinated promissory
notes--Net of related
costs of $5,068......... 11,110 89 44,843 44,932
Acquisitions.............. 41,700 334 74,666 75,000
Issuance of stock
options................. 2,032,200 2,032,200
Investment in joint
venture................. 1,094,164 8,753 3,291,247 3,300,000
Conversion of preferred
stock................... (610) (618,738) 190,338 1,522 617,216 0
Issuance of warrants to
preferred
shareholders............ 105,000 (105,000) 0
Issuance of warrants in
connection with
obtaining Lines of
Credit.................. 350,000 350,000
Cancellation of common
stock held in escrow.... (50,000) (400) 400 0
Unrealized holding losses
on available-for-sale
securities recognized in
1997.................... 193,343 193,343
Net loss.................. (11,177,623) (11,177,623)
----- --------- ----------- ----------- ---------- ----------- ------------ ----------
Balance--June 30, 1997.... 6,890 $7,757,783 5,309,206 $ 42,474 $35,411,194 $ 0 ($31,441,949) $11,769,502
----- --------- ----------- ----------- ---------- ----------- ------------ ----------
----- --------- ----------- ----------- ---------- ----------- ------------ ----------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
<S> <C> <C>
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)
---------- -----------
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-7
<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.
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.
F-8
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS (CONTINUED)
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 accounts
receivable-trade and accounts receivable--net investment in sales-type leases in
the amount of $28,088 and $126,482, respectively, and recorded monitoring
contract costs of $154,570, in connection with the purchase of monitoring
accounts.
During the year ended June 30, 1997, the Company recorded consulting fees in
the amount of $689,000 in connection with the exercise of warrants.
During the year ended June 30, 1996, the Company issued 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-9
<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.
CONCENTRATION OF CREDIT RISK
The Company's products are sold directly and through distributors in the
United States to hospitals, home healthcare agencies and individual consumers.
The Company performs ongoing credit evaluations of its customers and, in the
case of sales-type leases, the leased equipment serves as collateral in the
transactions. The Company maintains reserves for potential credit losses.
F-10
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
The Company's investments in marketable securities have been categorized as
available-for-sale and are stated at fair value. Realized gains and losses,
determined using the specific identification method, are included in operations;
unrealized holding gains and losses are reported as a separate component of
stockholders' equity.
Marketable securities consist of an investment in the common stock of one
company. During 1997, management concluded that a decline in the fair value of
this common stock was not temporary and recorded a writedown of $218,343 which
is included in selling, general and administrative expenses.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is provided by the Company based on
historical collection experience and a review of the current status of existing
receivables.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
MONITORING CONTRACT COSTS AND AMORTIZATION
Monitoring contracts acquired are stated at cost. The costs of acquired
monitoring contracts includes the costs of accounts purchased and any
contractual rights to related monitoring revenues purchased from alarm system
dealers and emergency response system dealers, and the estimated fair value of
the accounts acquired in business acquisitions, including an accrual for
estimated acquisition transition costs of $162,703 and $68,645 for Fiscal 1996
and 1997, respectively. The estimated transition costs include costs associated
with transferring the customers to the Company's central monitoring station,
notification of change in service provider, and service calls to customer
premises. Costs related to sales, marketing and installation of systems for
accounts internally generated are charged to expense as incurred.
The Company records purchase holdbacks, in connection with its acquisitions
of monitoring contracts, as a liability for delinquent accounts and for future
cancellations within an agreed upon time period. Monitoring contract costs and
the corresponding purchase holdback liabilities are reduced for delinquent
accounts and cancellations as specified in each agreement.
The costs of acquired monitoring contracts purchased from emergency response
system dealers and alarm system dealers are amortized using the straight-line
method over estimated lives ranging from five to ten years. It is the Company's
policy to periodically review actual account attrition and, if necessary, to
adjust downward the remaining estimated lives of acquired account pools to
reflect their anticipated future revenue streams.
PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Expenditures for additions,
renewals and betterments are capitalized; expenditures for maintenance and
repairs are charged to expense as incurred. Upon retirement or disposal of
assets, the cost and accumulated depreciation or amortization are eliminated
from the accounts and any resulting gain or loss is credited or charged to
operations. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets.
F-11
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS AND AMORTIZATION
Costs incurred in connection with various financing have been deferred;
amortization is provided using the straight-line method over the terms of the
financing, and is included in interest expense.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long lived assets and intangbles for impairment whenever
events or changes in circumstances indicate that the carrying value of the asset
may not be recoverable. The Company determines the value of subscriber accounts
based on the cash flows from the monthly recurring revenue (MRR) stream using
the most recent historical attrition rate.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for transactions in which goods or services are
received in return for the issuance of equity instruments based on the fair
value of the equity instruments or the goods or services received, whichever is
more reliably measured.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1996, the Financial Accounting Standards Board ("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-12
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Also, the tax benefits resulting from the
utilization of net operating loss carryforwards are recorded as ordinary income.
A valuation allowance is established for deferred tax assets not expected to be
realized.
Principal differences between the Company's financial reporting and tax
bases include accounts receivable reserves, inventory reserves, depreciation and
amortization of property and equipment, amortization of capitalized costs, and
deferred revenue.
LOSS PER COMMON SHARE
Loss per common share is computed based on the weighted average number of
common shares outstanding during each period after deducting dividends and
accretion on preferred stock. The effect of common stock equivalents on loss per
share is not applicable for loss periods.
2. ACQUISITIONS
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.
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:
<TABLE>
<S> <C>
Assets
Monitoring Contracts.......................................... $1,707,781
Acquisition costs (assigned to monitoring contracts).......... 35,400
---------
Total Purchase Price.......................................... $1,743,181
---------
---------
</TABLE>
During the year ended June 30, 1997, the Company purchased additional
monitoring contracts for an aggregate of $2,425,344. As consideration, the
Company paid $1,955,209 in cash, reduced amounts receivable by $154,570,
incurred acquisition costs of $69,541, and recorded purchase holdbacks of
$246,024
F-13
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
(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.
The Company's investment in Healthlink at June 30, 1997 is summarized as
follows:
<TABLE>
<S> <C>
Initial Investment.............................................. $3,312,809
Cumulative equity in net losses of Healthlink................... (123,325)
Cumulative authorization of Goodwill............................ (50,000)
---------
Total........................................................... $3,139,484
---------
---------
</TABLE>
The Company accounts for its investment in HL under the equity method.
BKR, as part of the purchase agreement, is entitled to exercise warrants to
purchase shares of the Company's common stock subject to the following
provisions: (i) for each 10,000 PERS placed on-line by HL, 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.
F-14
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT IN JOINT VENTURE (CONTINUED)
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:
<TABLE>
<S> <C>
Operating Revenues.............................................. $ 305,750
Cost of Revenues................................................ 192,059
---------
Gross Profit.................................................... 113,691
Selling, general and administrative expense..................... 355,962
Interest expense................................................ 4,380
---------
Net Loss........................................................ $(246,651)
---------
---------
Current Assets.................................................. $ 117,870
Working capital (deficiency).................................... (117,391)
Total Assets.................................................... 3,568,176
Current Liabilities............................................. 235,621
Stockholders' equity............................................ 3,332,915
</TABLE>
4. NET INVESTMENT IN SALES-TYPE LEASES
Information pertaining to the Company's net investment in sales-type leases
is as follows:
<TABLE>
<S> <C>
Minimum lease payments receivable................................. $ 363,052
Less: Unearned Interest--Finance revenue.......................... (65,976)
Allowance for doubtful accounts.............................. (28,200)
---------
Net Investment in sales-type leases............................... $ 268,876
---------
---------
</TABLE>
At June 30, 1997, minimum lease payments are receivable as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- ----------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 127,683
1999.............................................................................. 93,413
2000.............................................................................. 76,776
2001.............................................................................. 55,083
2002.............................................................................. 10,097
----------
$ 363,052
----------
----------
</TABLE>
F-15
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORY
<TABLE>
<S> <C>
Parts Inventory................................................... $ 613,646
Finished Goods.................................................... 185,168
---------
$ 798,814
---------
---------
</TABLE>
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-16
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM NOTES PAYABLE
<TABLE>
<S> <C>
LINE OF CREDIT AGREEMENT
Note payable with interest only due through June 30, 2000 at prime Plus
1 3/4% on the outstanding loan balance; a commitment fee of .5% is payable
on the average daily unused credit; collateralized by all assets of the
Company.................................................................... $12,235,000
EQUIPMENT FINANCING
Payable in monthly installments aggregating $4,557 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 March 31, 1997 and 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.
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).
F-17
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM NOTES PAYABLE (CONTINUED)
On June 24, 1997, the Company, in return for the holder of the Warrant
forgiving the put obligation feature, reduced the exercise price of the Warrant
to $1.50. This resulted in the Company recording deferred financing costs for
the 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.
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.
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- --------------------------------------------------------------------------------------------------------
<S> <C>
1998.................................................................................................... $ 70,069
1999.................................................................................................... 51,061
2000.................................................................................................... 43,933
2001.................................................................................................... --
2002.................................................................................................... --
----------
Total minimum lease payments............................................................................ 165,063
Less amount representing interest....................................................................... 22,175
----------
Present value of net minimum lease payments............................................................. $ 142,888
----------
----------
</TABLE>
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
F-18
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PREFERRED STOCK (CONTINUED)
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
as a 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.
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.
F-19
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 10,359 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.
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
AVERAGE
OPTION PRICE EXERCISE
NUMBER OF SHARES PER SHARE 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>
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,
F-20
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)
"Accounting for Stock--Based Compensation" (SFAS #123), the Company's pro forma
net loss and loss per share for June 30, 1997 and 1996 would have been as
follows:
<TABLE>
<CAPTION>
REPORTED PRO-FORMA
------------- -------------
<S> <C> <C>
1997 Net Loss...................................................................... $ 11,177,623 $ 11,368,594
1997 Net Loss applicable to Common Shareholders.................................... 18,054,144 18,245,115
1997 Net Loss per Common Share..................................................... 4.05 4.09
1996 Net Loss...................................................................... 4,411,898 8,558,764
1996 Net Loss per Share............................................................ 2.87 5.57
</TABLE>
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.
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.
F-21
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)
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.
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>
EXERCISE
NUMBER OF 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-22
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
The differences between the provision for income taxes and income taxes
computed using the federal income statutory tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
Amount computed using the statutory rate............................................ ($ 1,500,050) ($ 3,800,392)
Increase (decrease) in taxes resulting from:
Nondeductible expenses.............................................................. 24,400 12,626
State taxes, net of federal taxes................................................... (216,900) -0-
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:
<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable reserves................................................... $ 186,163
Inventory reserves............................................................. 8,366
Property....................................................................... 1,069,849
Warranty reserve............................................................... 55,792
Accrued vacation accrual....................................................... 45,564
Uncollected Interest Revenue................................................... 100,453
Deferred Expenses.............................................................. 973,600
Other.......................................................................... 49,330
Net operating loss carryforwards............................................... 6,752,044
---------
9,241,161
Less valuation allowance......................................................... 9,241,161
---------
$ -0-
---------
---------
</TABLE>
F-23
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, FEDERAL STATE
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
2000......................................................................... -- $ 1,191,025
2001......................................................................... -- 3,253,300
2002......................................................................... -- 3,206,000
2003......................................................................... $ 254,200 3,491,200
2004......................................................................... 23,100 2,433,632
2005
2006......................................................................... 15,000
2007
2008......................................................................... 136,300
2009......................................................................... 3,605,100 390,100
2010......................................................................... 2,997,000 147,800
2011......................................................................... 3,504,400 160,100
2012......................................................................... 6,897,226 260,490
------------- -------------
$ 17,296,026 $ 14,669,947
------------- -------------
------------- -------------
</TABLE>
The utilization of the federal net operating loss carryforwards aggregating
$277,300 expiring June 30, 2003, and 2004, are subject to an annual limitation
of $23,110 per year through June, 2004, in accordance with the provisions of the
Internal Revenue Code. This annual limitation may be adjusted due to ownership
changes in future years.
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.
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
F-24
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$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 1997, 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 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.
If the Company elects to continue its monitoring with its current monitoring
facility, the minimum estimated monitoring costs for the following three years
will be:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
- --------------------------------------------------------------------------------
<S> <C>
June 30, 1998................................................................... $ 828,000
June 30, 1999................................................................... 856,500
June 30, 2000................................................................... 856,500
------------
$ 2,541,000
------------
------------
</TABLE>
LEASE COMMITMENTS
The Company leases its facilities and various equipment under operating
leases expiring at various dates through December 2000. The following is a
schedule of future minimum rental payments required under these leases:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- ----------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $321,074
1999.............................................................................. 256,564
2000.............................................................................. 40,038
2001.............................................................................. 12,944
2002.............................................................................. --
----------
$630,620
----------
----------
</TABLE>
F-25
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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
$13,000,000, consisting of $10,000,000 in cash and $2,250,000 million in shares
of its common stock; additionally the Company will assume certain liabilities
totaling $750,000.
In October 1997, the Company entered into an agreement to acquire all of the
outstanding stock of Jupiter, a patrol service company. In consideration of the
acquisition of approximately 2,000 subscriber accounts, the Company will pay
Jupiter approximately $1,045,000 in the Company's common stock. 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
F-26
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (CONTINUED)
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.
Summarized combined financial data of Triple A and Jupiter for the years
ending December 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revenues.......................................................... $ 6,459,965 $ 6,731,592
Cost of Revenues.................................................. 3,422,221 3,930,233
------------ ------------
Gross Profit...................................................... 3,037,744 2,801,359
Operating Expenses................................................ 2,679,924 2,497,764
Interest Expense (net)............................................ 120,332 130,632
------------ ------------
Net Income........................................................ $ 237,488 $ 172,963
------------ ------------
------------ ------------
</TABLE>
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
was in compliance with the terms of the amended debt covenants at June 30, 1997
and believes it will continue to be in compliance with the amended debt
covenants during fiscal--1998.
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-27
<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
West Hazleton, PA
March 27, 1997
F-28
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
30, DECEMBER 31,
----------- --------------------
1997 1996 1995
----------- --------- ---------
(UNAUDITED) (AUDITED) (AUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash..................................................... $ 69,328 $ 126,941 $ 235,963
Marketable securities.................................... 114,853 110,176 108,583
Accounts receivable, net of allowance for doubtful
accounts of $30,000, $50,000 and $29,000,
respectively........................................... 307,024 551,432 343,589
Employee advance......................................... 2,803 6,871 5,658
Inventory and work-in-progress........................... 523,383 483,875 384,553
Prepaid expenses......................................... 58,882 14,981 8,693
Deposits................................................. 31,845 7,950 7,370
Due from stockholder..................................... 8,562 9,857 14,068
Due from affiliate....................................... 76,465 84,169 103,135
Other current assets..................................... 11,405 5,951 --
----------- --------- ---------
Total Current Assets............................... 1,204,550 1,402,203 1,211,612
----------- --------- ---------
PROPERTY AND EQUIPMENT:
Property and equipment, net of accumulated
depreciation........................................... 1,133,561 1,185,326 821,916
Property and equipment held for lease, net of accumulated
depreciation........................................... 720,479 611,251 542,624
----------- --------- ---------
1,854,040 1,796,577 1,364,540
----------- --------- ---------
INTANGIBLE ASSETS, net................................... 230,312 210,980 281,304
----------- --------- ---------
$3,288,902 $3,409,760 $2,857,456
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Demand notes payable..................................... $ 55,000 $ 65,000 $ --
Current portion of long-term............................. 356,452 344,224 259,582
Accounts payable......................................... 408,285 583,504 188,031
Deferred revenue......................................... 769,345 683,338 702,992
Accrued expenses......................................... 144,851 118,912 209,319
Payroll taxes withheld and accrued....................... 11,402 10,635 16,741
Sales and use tax payable................................ 3,456 2,555 2,881
----------- --------- ---------
Total Current Liabilities.......................... 1,748,791 1,808,168 1,379,546
LONG-TERM DEBT, net of current portion................... 1,105,149 1,215,348 1,121,678
----------- --------- ---------
Total Liabilities.................................. 2,853,940 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................................. 125,000 125,000 125,000
Additional paid-in capital............................... 215,814 215,814 215,814
Net unrealized loss on marketable securities............. 391 (4,286) (5,696)
Retained earnings........................................ 93,757 49,716 21,114
----------- --------- ---------
Total Stockholder's Equity......................... 434,962 386,244 356,232
----------- --------- ---------
3,288,902 $3,409,760 $2,857,456
----------- --------- ---------
----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS
ENDED SEPTEMBER 30, ENDED DECEMBER 31,
-------------------- --------------------
1997 1996 1996 1995
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED)
<S> <C> <C> <C> <C>
REVENUES..................................... $3,906,544 $3,637,204 $5,041,574 $5,158,440
COST OF REVENUES............................. 1,776,496 1,721,048 2,319,741 2,652,662
--------- --------- --------- ---------
Gross Profit............................. 2,130,048 1,916,156 2,721,833 2,505,778
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling expenses............................. 526,550 461,389 644,213 761,250
General and administrative expenses.......... 1,042,489 937,512 1,312,056 1,106,715
--------- --------- --------- ---------
Total Operating Expenses................. 1,569,039 1,398,901 1,956,269 1,867,965
--------- --------- --------- ---------
Income Before Depreciation and
Amortization............................... 561,009 517,255 765,564 637,813
--------- --------- --------- ---------
DEPRECIATION AND AMORTIZATION:
Depreciation of property and equipment....... 325,109 252,338 380,375 325,230
Amortization of intangibles.................. 41,576 60,302 70,323 77,204
--------- --------- --------- ---------
Total Depreciation and Amortization...... 366,685 312,640 450,698 402,434
--------- --------- --------- ---------
Income From Operations....................... 194,324 204,615 314,866 235,379
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Finance and service charge income............ 5,416 46,968 65,930 31,134
Miscellaneous income......................... 22,720 14,104 31,028 17,034
Interest income.............................. 3,650 10,471 14,303 22,310
Gain on sale of assets....................... -- -- 4,890 207
Dividend income.............................. 2,851 2,453 3,957 4,335
Interest expense............................. (92,475) (83,906) (120,219) (140,007)
Loss on abandonment.......................... -- -- (55,783) --
Conversion costs............................. -- -- (41,214) (45,352)
Relocation expense........................... (5,255) -- (29,130) --
--------- --------- --------- ---------
Other Expense, Net....................... (63,093) (9,910) (126,238) (110,339)
--------- --------- --------- ---------
NET INCOME................................... 131,231 194,705 188,628 125,040
RETAINED EARNINGS:
Beginning of year............................ 49,716 21,114 21,114 39,724
Distributions................................ (87,190) (136,800) (160,026) (143,650)
--------- --------- --------- ---------
End of year.................................. $ 93,757 $ 79,019 $ 49,716 $ 21,114
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-30
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------------ ------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 131,231 $ 194,705 $ 188,628 $ 125,040
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 325,105 252,338 380,375 325,230
Amortization of intangible assets......................... 41,576 60,302 70,323 77,204
Other amortization........................................ -- -- (182) (231)
Gain on sale of assets.................................... (2,800) -- (4,890) (207)
Loss on abandonment....................................... -- -- 55,783 --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable................................... 244,408 (84,511) (207,843) 100,408
Employee advances..................................... 4,068 3,175 (1,213) 12,566
Inventory and work-in-progress........................ (39,508) (74,254) (99,322) 100,591
Prepaid expenses...................................... (43,902) (7,692) (14,551) 52,563
Deposits.............................................. (23,895) (3,080) (580) 1,347
Due from affiliate.................................... 7,704 18,940 27,246 17,701
Other current assets.................................. (5,454) (20,785) (5,951) --
Increase (decrease) in liabilities:
Accounts payable...................................... (175,219) 273,935 395,473 (108,596)
Deferred revenue...................................... 85,907 19,913 (19,654) (47,954)
Accrued expenses...................................... 23,733 (151,901) (90,407) 88,898
Payroll taxes withheld and accrued.................... 767 (1,561) (6,106) 2,043
Sales and use tax payable............................. 900 47 (326) (793)
----------- ----------- ----------- -----------
Net Cash Provided by Operating Activities................... 574,625 479,571 666,803 745,810
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities......................... -- -- -- (3,200)
Proceeds from sale of equipment........................... 2,800 -- 4,890 2,900
Capital expenditures...................................... (443,481) (489,565) (652,452) (354,199)
Advances to stockholder................................... 1,295 (42,306) (52,216) (19,657)
----------- ----------- ----------- -----------
Net Cash Used in Investing Activities....................... 439,386 (531,871) (699,788) (374,156)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on demand notes................................ (10,000) -- 65,000 --
Proceeds from long-term debt.............................. 198,495 141,900 292,650 105,274
Payments on long-term debt................................ (294,157) (221,035) (330,097) (233,846)
Distributions to stockholder.............................. (87,190) (95,800) (103,600) (70,900)
----------- ----------- ----------- -----------
Net Cash used in Financing Activities....................... (192,852) (174,935) (76,047) (199,472)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH............................. (57,613) (227,235) (109,022) 172,182
CASH--BEGINNING............................................. 126,941 235,963 235,963 63,781
----------- ----------- ----------- -----------
CASH--ENDING................................................ $ 69,328 $ 8,728 $ 126,941 $ 235,963
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 98,558 $ 83,906 $ 118,567 $ 140,076
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Fair value of property and equipment acquired and
liabilities assumed..................................... -- $ 215,750 $ 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-31
<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 by economic fluctuations within the
geographic area.
REVENUE RECOGNITIONS
Rental, monitoring and service fees related to operating leases, monitoring
and service contracts are recorded as income when earned. All contracts contain
an initial noncancellable three or five year term with subsequent annual
renewals cancellable within sixty days of the anniversary date. Advance billings
are reflected as deferred revenue in the accompanying balance sheet.
Installation fees are recognized when the leased equipment is installed.
At December 31, 1996, the retail monthly recurring revenues were
approximately $245,576 and the wholesale monthly recurring revenues were
approximately $13,567.
INVENTORY AND WORK-IN-PROGRESS
Inventory consisting of equipment held for sale or lease and related repair
parts is valued at the lower of cost or market determined on a first-in,
first-out basis. Work-in-progress inventory is valued at cost.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed
primarily using the straight-line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Monitoring equipment.................................................................. 10-12
Other equipment....................................................................... 3-12
Office furniture and fixtures......................................................... 5-12
Vehicles.............................................................................. 5
Leasehold improvements................................................................ 7-40
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred. Cost of replacement and renewals are capitalized.
Upon sale or other disposition, the asset account and related deprecation
account are relieved, and any gain or loss is included in operations.
MARKETABLE SECURITIES
Effective January 1, 1995, the company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The company's investment securities are classified
as available-for-sale. Accordingly, unrealized gains and losses are
F-32
<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)
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-33
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 2: MARKETABLE SECURITIES
The following tables reflect the amortized cost and estimated fair values of
marketable debt and equity securities held at December 31, 1996 and 1995. All
investments held by the company are classified as available-for-sale.
<TABLE>
<CAPTION>
1996
-----------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Equity securities................................................ $ 7,805 $ 1,525 $ 16 $ 9,314
U.S. government obligations...................................... 12,292 2,873 -- 15,165
Mortgage-backed securities....................................... 40,664 -- 2,927 37,737
Mutual funds..................................................... 53,700 -- 5,740 47,960
---------- ----------- ----------- ----------
$ 114,461 $ 4,398 $ 8,683 $ 110,176
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
1995
-----------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Equity securities................................................ $ 7,805 $ 588 $ 279 $ 8,114
U.S. government obligations...................................... 12,086 2,644 -- 14,730
Mortgage-backed securities....................................... 40,688 -- 3,266 37,422
Mutual funds..................................................... 53,700 -- 5,383 48,317
---------- ----------- ----------- ----------
$ 114,279 $ 3,232 $ 8,928 $ 108,583
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
U.S. government obligations mature in 2024 and mortgage-backed securities
mature in 2023. The change in net unrealized holding losses on marketable debt
and equity securities in the amount of $1,359 and $11,632 has been charged to
stockholder's equity for the years ended December 31, 1996 and 1995,
respectively.
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
F-34
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 4: RELATED PARTY TRANSACTIONS (CONTINUED)
company which is substantially owned by the stockholder of Triple A Security
Systems, Inc. Interest has been accrued on the 1996 and 1995 average balance at
prime plus 1%. Interest accrued for the years ended December 31, 1996 and 1995
was $8,280 and $9,341, respectively.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Monitoring equipment............................................... $ 686,851 $ 686,851
Other equipment.................................................... 1,266,810 1,378,284
Office furniture & fixtures........................................ 267,595 402,975
Vehicles........................................................... 470,447 355,615
Leasehold improvements............................................. 328,746 123,781
----------- -----------
3,020,449 2,947,506
Less accumulated depreciation...................................... (1,835,123) (2,125,590)
----------- -----------
$ 1,185,326 $ 821,916
----------- -----------
----------- -----------
</TABLE>
NOTE 6: OPERATING LEASES
LESSOR TRANSACTIONS
The company is the lessor of security monitoring equipment under operating
leases expiring in various years through 2001.
Property on or held for lease consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Monitoring equipment.............................................. $ 1,480,778 $ 1,303,611
Less accumulated depreciation..................................... (869,527) (760,987)
------------ ------------
$ 611,251 $ 542,624
------------ ------------
------------ ------------
</TABLE>
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
F-35
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 6: OPERATING LEASES (CONTINUED)
is a month-to-month lease at $1,070 per month. Rent expense for the year ended
December 31, 1996 was $69,533.
At December 31, 1996, minimum future lease payments under the noncancellable
lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING LEASE
DECEMBER 31 OBLIGATION
- -------------------------------------------------------------------------------- ------------
<S> <C>
1997............................................................................ $ 97,067
1998............................................................................ 109,867
1999............................................................................ 122,667
2000............................................................................ 128,000
2001............................................................................ 128,000
Thereafter...................................................................... 1,845,000
------------
$ 2,430,601
------------
------------
</TABLE>
NOTE 7: INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization consist of the following
at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Monitoring contracts.................................................. $ 82,051 $ 112,507
Goodwill.............................................................. 605 1,815
Noncompete agreements................................................. 114,824 132,642
Loan origination fees................................................. 4,147 6,280
Deferred acquisition costs............................................ 9,353 28,060
---------- ----------
$ 210,980 $ 281,304
---------- ----------
---------- ----------
</TABLE>
F-36
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
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 $158,000 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.
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-37
<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
Note payable in monthly installments of $6,252, including interest at 8.75%, maturing
June, 2000. Interest of $1,640 was payable monthly through December, 1996. Pledged
as collateral are vehicles with a book value of $193,934............................ 225,000 --
Lake Ariel Bank:
Installment note payable matured November, 1996....................................... -- 4,679
------------ ------------
1,559,572 1,381,260
Less current portion.............................................................. 344,224 259,582
------------ ------------
$ 1,215,348 $ 1,121,678
------------ ------------
------------ ------------
</TABLE>
F-38
<PAGE>
TRIPLE A SECURITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 9: LONG-TERM DEBT (CONTINUED)
The aggregate principal payments required on the long-term debt obligations
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1997............................................................................ $ 344,224
1998............................................................................ 332,404
1999............................................................................ 465,758
2000............................................................................ 282,587
2001............................................................................ 61,433
Thereafter...................................................................... 73,166
------------
$ 1,559,572
------------
------------
</TABLE>
NOTE 10: COMMITMENT AND CONTINGENCY
COMMITMENT--SUMMIT BANK LOAN COVENANTS
Under the terms of the company's loan agreements with Summit Bank there are
various covenants including minimum debt coverage ratio requirements, maximum
officer salary, limitations on distributions to the stockholder, and limitations
on acquisitions of other companies. The company must also maintain a primary
depository relationship with Summit Bank. The company was in compliance with all
covenants at December 31, 1996 and 1995.
CONTINGENCY
A customer, to which the company provides installation, repair and alarm
monitoring service, incurred a loss of approximately $817,008, due to a burglary
at its warehouse in October, 1993. Counsel for the company's customer has
advised the company that it has considered the possibility of seeking
contribution or indemnity from the company to the extent of its loss.
Counsel for the company has advised that there is no litigation with regard
to this matter at the time of the release of these financial statements. The
company believes that any potential claim would be without merit and will defend
its position vigorously. The company maintains $10 million of commercial general
liability/errors and omissions insurance.
NOTE 11: PROFIT SHARING PLAN
The company maintains a voluntary 401K profit-sharing plan that covers
substantially all of the employees. Contributions to the plan are at the
discretion of the Board of Directors. For the years ended December 31, 1996 and
1995, contributions of $8,792 and $5,772 have been made to the plan.
NOTE 12: SUBSEQUENT EVENT
The company borrowed $50,000 from Summit Bank in February, 1997. The note
requires monthly payments of $1,019, including interest at 8.22% through
February, 2002. The note is cross-collateralized and has cross-default
provisions with the other Summit Bank notes.
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
The Jupiter Group, Inc.:
We have audited the accompanying balance sheets of The Jupiter Group, 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide 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 The Jupiter Group, Inc. as
of December 31, 1996 and 1995 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Terry H. Jones, CPA
West Hazleton, PA
November 21, 1997
F-40
<PAGE>
THE JUPITER GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
SEPT. 30, ---------- ----------
-----------
1997 (AUDITED) (AUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................................... $ 163,879 $ 70,010 $ 64,911
Accounts receivable, net of allowance for doubtful accounts of $9,000,
$5,390, and $5,390, respectively:
Trade................................................................... 149,426 132,716 129,497
Affiliate............................................................... 5,024 3,790
Prepaid expenses.......................................................... 13,333 16,398 16,939
----------- ---------- ----------
Total Current Assets.................................................. 326,638 224,148 215,137
EQUIPMENT, net of accumulated depreciation.................................. 108,678 60,904 86,390
OTHER ASSETS:
Intangible assets, net of amortization.................................... 23,769 33,727 47,006
Deposits.................................................................. 300 300 300
----------- ---------- ----------
$ 459,385 $ 319,079 $ 348,833
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................................... $ 77,494 $ 46,074 $ 51,577
Accounts payable.......................................................... 10,679 13,294 11,338
Accrued expenses.......................................................... 29,270 19,097 38,495
Payroll taxes withheld and accrued........................................ 13,788 12,175 7,452
Due to affiliate.......................................................... 76,465 84,169 103,135
----------- ---------- ----------
Total Current Liabilities............................................. 207,686 174,809 211,997
LONG-TERM DEBT, net of current portion...................................... 59,444 52,746 68,235
----------- ---------- ----------
Total Liabilities..................................................... 267,140 227,555 280,232
----------- ---------- ----------
STOCKHOLDERS' EQUITY
Common stock, $1 par, 10,000 shares authorized, 625 shares issued and
outstanding............................................................. 625 625 625
Additional paid-in capital................................................ 22,375 22,375 22,375
Retained earnings......................................................... 169,245 68,524 45,601
----------- ---------- ----------
Total Stockholders' Equity............................................ 192,245 91,524 68,601
----------- ---------- ----------
$ 459,385 $ 319,079 $ 348,833
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE>
THE JUPITER GROUP, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT.
30, YEARS ENDED DECEMBER 31,
-------------------------- --------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED)
REVENUES................................................. 1,339,872 1,153,108 $ 1,524,984 $ 1,321,433
COST OF REVENUES......................................... 1,080,798 940,442 1,277,571 1,102,480
------------ ------------ ------------ ------------
Gross Profit........................................... 259,074 212,666 247,413 218,953
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling................................................ 5,095 5,178 8,068 4,948
General and administrative............................. 123,519 134,852 173,002 148,272
------------ ------------ ------------ ------------
Total Operating Expenses............................. 128,614 140,030 181,070 153,220
------------ ------------ ------------ ------------
Income From Operations............................... 130,460 72,636 66,343 65,733
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income........................................ 1,338 1,067 1,379 1,351
Gain (loss) on sale of asset........................... 1,800 (1,150) (1,150) 1,500
Interest expense....................................... (7,881) (14,707) (18,649) (19,724)
------------ ------------ ------------ ------------
Other Expense, Net................................... (4,743) (14,790) (18,420) (16,873)
------------ ------------ ------------ ------------
NET INCOME............................................... 125,717 57,846 47,923 48,860
RETAINED EARNINGS (DEFICIT):
Beginning of year...................................... 68,526 45,601 45,601 (3,259)
Distributions.......................................... (25,000) (25,000) (25,000) --
------------ ------------ ------------ ------------
End of year............................................ 169,243 78,447 $ 68,524 $ 45,601
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE>
THE JUPITER GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED DECEMBER
SEPTEMBER 30, 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... 125,719 57,847 $ 47,923 $ 48,860
Adjustments to reconcile net income to net cash provided by
operating activities.......................................
Depreciation............................................... 49,752 52,838 70,451 60,837
Amortization............................................... 9,959 9,959 13,279 13,279
Gain (loss) on sale of assets.............................. 1,800 1,150 1,150 (1,500)
Change in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable.................................... (11,686) 2,542 (4,453) (44,774)
Prepaid expenses....................................... 3,065 (12,548) 541 (4,236)
Deposits............................................... -- (300)
Increase (decrease) in liabilities:
Accounts payable....................................... (2,615) 2,812 1,956 664
Accrued expenses....................................... 10,173 (17,692) (19,398) 29,088
Payroll taxes withheld and accrued..................... 1,614 3,412 4,723 4,473
Due to affiliate....................................... (7,704) (18,940) (18,966) (17,701)
---------- ---------- ---------- ----------
Net Cash Provided by Operating Activities.................. 180,077 81,380 97,206 88,690
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets................................. 1,800 10,850 10,850 1,500
Capital expenditures......................................... (97,526) (11,005) (11,005) (47,055)
---------- ---------- ---------- ----------
Net Cash Used by Investing Activities........................ (95,726) (155) (155) (45,555)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on long-term debt.................................. 93,326 -- -- 42,259
Payment on long-term debt.................................... (58,808) (61,611) (66,952) (61,874)
Distributions to stockholders................................ (25,000) (25,000) (25,000) --
---------- ---------- ---------- ----------
Net Cash Used by Financing Activities........................ 9,518 (86,611) (91,952) (19,615)
---------- ---------- ---------- ----------
NET INCREASE IN CASH........................................... 93,869 (5,386) 5,099 23,520
CASH -- BEGINNING.............................................. 70,010 64,911 64,911 41,391
---------- ---------- ---------- ----------
CASH -- ENDING................................................. $ 163,879 $ 59,525 $ 70,010 $ 64,911
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for interest........................... $ 7,881 $ 8,497 $ 10,369 $ 10,382
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING
ACTIVITIES:
Fair value of equipment acquired and liabilities assumed..... -- $ 46,758 $ 46,758 $ 27,851
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE>
THE JUPITER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
NATURE OF OPERATIONS
The company provides guard and patrol service to commercial and residential
customers. Operations are conducted from rented facilities in Hamlin,
Pennsylvania. The company grants credit to commercial and residential customers
throughout Northeastern Pennsylvania. Consequently, the company's ability to
collect the amounts due from customers is affected by economic fluctuations
within the geographic area.
EQUIPMENT
Equipment is carried at cost with depreciation computed primarily using the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Vehicles.............................................................................. 2
Office equipment...................................................................... 3 - 7
Guard and patrol equipment............................................................ 5 - 7
</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 accumulated
depreciation account are relieved, and any gain or loss is included in
operations.
INTANGIBLE ASSETS
Costs incurred in connection with the organization of the company and the
purchase of the predecessor entity are being amortized on a straight-line basis
over the following lives:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Goodwill............................................................................. 5
Noncompete agreements................................................................ 5 - 11
Organization 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.
F-44
<PAGE>
THE JUPITER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
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.
NOTE 2: EQUIPMENT
Equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Vehicles.............................................................. $ 184,244 $ 214,475
Office equipment...................................................... 23,063 12,308
Guard and patrol equipment............................................ 5,200 5,200
---------- ----------
212,507 231,983
---------- ----------
Less accumulated depreciation......................................... 151,603 145,593
---------- ----------
$ 60,904 $ 86,390
---------- ----------
---------- ----------
</TABLE>
NOTE 3: INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, consist of the following
at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Goodwill................................................................ $ 349 $ 973
Noncompete agreements................................................... 30,310 37,674
Organization costs...................................................... 3,068 8,359
--------- ---------
$ 33,727 $ 47,006
--------- ---------
--------- ---------
</TABLE>
F-45
<PAGE>
THE JUPITER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 4: LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Former owner:
Promissory note payable in monthly installments of $822, including interest at 8%, maturing
December, 2002. Pledged as collateral is equipment with book value of $2,836, customer
accounts and customer contracts. $ 51,313 $ 56,829
Bank:
Installment notes payable in monthly installments of $2,592, including interest at prime
plus .5%, maturing February through June, 1997. The notes contain a floor of 7% and a
ceiling of 12%. Vehicles with a book value of $8,990 are pledged as collateral. 9,774 38,547
Installment note payable in monthly installments of $629, including interest at prime plus
.5%, maturing December, 1997. The note contains a floor of 6.75% and a ceiling of 11.75%. A
vehicle with a book value of $6,494 is pledged as collateral. 7,131 13,732
Installment note payable in monthly installments of $632, including interest at prime plus
.5%, maturing March, 1998. The note contains a floor of 6.25% and a ceiling of 11.25%. A
vehicle with a book value of $8,298 is pledged as collateral. 8,938 --
Installment note payable in monthly installments of $1,442, including interest at 8.25%,
maturing April, 1998. Vehicles with a book value of $20,656 are pledged as collateral. 21,664 --
Installment note payable, matured December, 1996............................................ -- 5,554
Installment note payable, matured April, 1996............................................... -- 5,150
--------- ---------
98,820 119,812
Less current portion.................................................................... 46,074 51,577
--------- ---------
$ 52,746 $ 68,235
--------- ---------
--------- ---------
</TABLE>
F-46
<PAGE>
THE JUPITER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 4: LONG-TERM DEBT (CONTINUED)
The aggregate principal payments required on the long-term debt obligations
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ----------------------------------------------------------------------------------- ---------
<S> <C>
1997............................................................................... $ 46,074
1998............................................................................... 13,875
1999............................................................................... 7,007
2000............................................................................... 7,588
2001............................................................................... 8,218
Thereafter......................................................................... 16,058
---------
$ 98,820
---------
---------
</TABLE>
NOTE 5: DUE TO AFFILIATE
At December 31, 1996 and 1995, the balance due to affiliate of $84,169 and
$103,135, respectively, represents money advanced from a company which is wholly
owned by the majority stockholder of the Jupiter Group, 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 6: OPERATING LEASES
For the years ended December 31, 1996 and 1995, total rental expense under a
vehicle operating lease was $3,863 and $1,783, respectively. At December 31,
1996, the company was obligated under the noncancellable lease as follows:
<TABLE>
<CAPTION>
YEAR ENDING LEASE
DECEMBER 31, OBLIGATIONS
- --------------------------------------------------------------------------------- -----------
<S> <C>
1997............................................................................. $ 1,783
-----------
-----------
</TABLE>
TRANSACTIONS WITH RELATED PARTIES
The company leases its offices from an affiliated company which is owned by
the majority stockholder of The Jupiter Group, Inc. The lease is classified as a
month-to-month operating lease and provides for rental of $500 per month.
F-47
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements as of
September 30, 1997 and for the three months and year ended September 30, 1997,
and June 30, 1997, respectively, gives effect for 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, (iii) the Company's acquisition of Triple A Security Systems, Inc.
(Triple A), and (iv) the Company's acquisition of The Jupiter Group, Inc.
(Jupiter) as if such events had been completed at July 1, 1996 for purposes of
the pro forma statements of operations and as of September 30, 1997 for purposes
of the pro forma balance sheet. The pro forma information is based on the
historical financial statements of the Company, Triple A, and Jupiter, 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 statements. In the preparation of the pro forma combined
balance sheet, the columns pertaining to Triple A and Jupiter contain
information as to the assets and the liabilities acquired as of its date of
acquisition.
These pro forma statements of operations may not be indicative of the
results that actually would have occurred if the acquisition had occurred on
July 1, 1996.
F-48
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------------- ------------------------------
RESPONSE TRIPLE A JUPITER ADJUSTMENTS COMBINED
----------- ---------- -------- ---------------- -----------
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets
Cash........................................................ $ 682,813 $ 69,328 $163,879 $15,300,000(a) $ 916,020
(10,000,000)(b)
(5,300,000)(d)
Marketable securities....................................... 56,250 114,853 171,103
Accounts receivable (net)................................... 1,669,234 307,024 149,426 2,125,684
Inventory................................................... 829,453 523,382 1,352,835
Prepaid expenses and other current assets................... 446,524 158,118 13,333 (85,027)(b) 532,948
----------- ---------- -------- ---------------- -----------
Total current assets.................................. 3,684,274 1,172,705 326,638 (85,027) 5,098,590
----------- ---------- -------- ---------------- -----------
Monitoring Contract Costs (net)............................. 18,045,284 230,312 (230,312)(b) 28,872,112
10,026,828(b)
800,000(c)
----------- ---------- -------- ---------------- -----------
Property and Equipment (net).................................. 1,522,023 1,854,040 108,678 3,484,741
----------- ---------- -------- ---------------- -----------
Other Assets
Accounts receivable (net)................................... 202,073 202,073
Deposits.................................................... 45,935 31,845 300 78,080
Investment in joint venture................................. 2,963,096 2,963,096
Intangible assets, net of amortization...................... 23,769 (23,769)(c)
Deferred compensation expense............................... 517,500 517,500
Deferred financing costs (net).............................. 3,316,249 3,316,249
----------- ---------- -------- ---------------- -----------
7,044,853 31,845 24,069 (23,769) 7,076,998
----------- ---------- -------- ---------------- -----------
$30,296,434 $3,288,902 $459,385 $10,487,720 $44,532,441
----------- ---------- -------- ---------------- -----------
----------- ---------- -------- ---------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt........................... $ 157,815 $ 411,452 $ 77,494 ($ 411,452)(b) $ 235,309
Accounts payable-Trade...................................... 738,909 408,285 10,679 (408,285)(b) 749,588
Purchase holdbacks.......................................... 571,120 571,120
Accrued expenses and other current liabilities.............. 1,076,485 159,809 43,058 (159,809)(b) 1,119,543
Due to affiliate............................................ 76,465 (76,465)(c)
Deferred revenue 1,981,698 769,245 2,750,943
----------- ---------- -------- ---------------- -----------
4,526,027 1,748,791 207,696 (1,056,011) 5,426,503
----------- ---------- -------- ---------------- -----------
Long term Liabilities
Long-term debt.............................................. 12,944,996 1,105,149 59,444 (1,105,149)(b) 16,179,440
(5,300,000)(d)
8,475,000(e)
Deferred compensation expense............................... 1,725,000 1,725,000
----------- ---------- -------- ---------------- -----------
14,669,996 1,105,149 59,444 2,069,851 17,904,440
----------- ---------- -------- ---------------- -----------
Stockholders' Equity
Preferred stock-Series A.................................... 6,818,055 (6,818,055)(e)
Preferred stock-Series B.................................... 31 31
Common stock................................................ 17,514 125,000 625 (125,000)(b) 40,208
2,379(b)
19,200(a)
(625)(c)
1,115(c)
Additional paid-in capital.................................. 36,755,463 215,814 22,375 (215,814)(b) 53,651,520
2,228,376(b)
15,280,800(a)
(1,656,945)(e)
(22,375)(c)
1,043,826(c)
Unrealized holding losses................................... (18,750) 391 (18,359)
Accumulated Deficit......................................... (32,471,902) 93,757 169,245 (93,757)(b) (32,471,902)
(169,245)(c)
----------- ---------- -------- ---------------- -----------
11,100,411 434,962 192,245 9,473,880 21,201,498
----------- ---------- -------- ---------------- -----------
$30,296,434 $3,288,902 $459,385 $10,487,720 $44,532,441
----------- ---------- -------- ---------------- -----------
----------- ---------- -------- ---------------- -----------
</TABLE>
F-49
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------------- -------------------------------
RESPONSE TRIPLE A JUPITER ADJUSTMENTS COMBINED
----------- --------- -------- ------------ --------------
Operating Revenues
<S> <C> <C> <C> <C> <C>
Product Sales............................................. $ 662,846 $ 408,596 $ 1,071,442
Monitoring and service.................................... 2,585,038 911,076 $535,949 4,032,063
----------- --------- -------- ------------ --------------
3,247,884 1,319,672 535,949 5,103,505
Cost of Revenues............................................ 1,167,181 560,273 432,319 2,159,773
----------- --------- -------- ------------ --------------
Gross Profit................................................ 2,080,703 759,399 103,630 2,943,732
----------- --------- -------- ------------ --------------
Operating Expenses
Selling, general and administrative....................... 1,165,635 568,617 22,143 1,756,395
Depreciation and amortization............................. 837,539 128,120 19,705 ($17,199)(f) 1,238,836
270,671(g)
Interest.................................................. 643,780 24,011 2,601 (24,011)(h) 727,740
81,359(i)
----------- --------- -------- ------------ --------------
2,646,954 720,748 44,449 310,820 3,722,971
----------- --------- -------- ------------ --------------
Income/(Loss) From Operations............................... (566,251) 38,651 59,181 (310,820) (779,239)
----------- --------- -------- ------------ --------------
Other Income/(Expense)
Interest income........................................... 1,708 1,876 442 4,026
Joint venture loss........................................ (130,138) (130,138)
----------- --------- -------- ------------ --------------
(128,430) 1,876 442 0 (126,112)
----------- --------- -------- ------------ --------------
Net Income/(Loss)........................................... (694,681) 40,527 59,623 (310,820) (905,351)
Dividends and accretion on preferred stock.................. (335,272) 335,272(j) 0
----------- --------- -------- ------------ --------------
Net Loss Applicable to Common Shareholders.................. ($1,029,953) $ 40,527 $ 59,623 $ 24,452 ($ 905,351)
----------- --------- -------- ------------ --------------
----------- --------- -------- ------------ --------------
Loss per common share
Loss before extraordinary item............................ ($0.33) ($0.18)
Extraordinary item........................................ $ 0.00 $ 0.00
----------- --------------
Net loss ($0.33) ($0.18)
----------- --------------
----------- --------------
Net loss applicable to common shareholders.................. ($0.48) ($0.18)
----------- --------------
----------- --------------
Weighted average number of shares outstanding............... 2,132,533 2,836,859(k) 4,969,392
----------- ------------ --------------
----------- ------------ --------------
</TABLE>
RESPONSE USA INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
F-51
<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
------------------------------------------ ------------------------------
RESPONSE TRIPLE A JUPITER(L) ADJUSTMENTS COMBINED
-------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Revenues
Product Sales...................... $ 2,938,618 $ 1,787,897 $ 4,726,515
Monitoring and service............. 9,784,285 3,345,642 $ 1,646,808 14,776,735
-------------- ------------ ------------ -------------- --------------
12,722,903 5,133,539 1,646,808 19,503,2502
Cost of Revenues..................... 4,097,415 2,353,190 1,352,105 7,802,710
-------------- ------------ ------------ -------------- --------------
Gross Profit......................... 8,625,488 2,780,349 294,703 11,700,540
-------------- ------------ ------------ -------------- --------------
Operating Expenses
Selling, general and
administrative..................... 9,126,641 2,044,430 95,914 11,266,985
Compensation--Options/ Employment
contracts.......................... 3,689,700 3,689,700
Depreciation and amortization...... 2,976,433 463,914 81,274 (68,812 (f) 4,535,493
1,082,684(g)
Interest........................... 1,349,480 128,574 14,525 (128,574 (h) 1,689,441
325,436(i)
-------------- ------------ ------------ -------------- --------------
17,142,254 2,636,918 191,713 1,210,734 21,181,619
-------------- ------------ ------------ -------------- --------------
Income/(Loss) From Operations........ (8,516,766) 143,431 102,990 (1,210,734) (9,481,079)
-------------- ------------ ------------ -------------- --------------
Other Income/(Expense)
Interest Income.................... 12,176 13,755 1,573 27,504
Joint Venture Loss................. (123,325) (123,325)
-------------- ------------ ------------ -------------- --------------
(111,149) 13,755 1,573 0 (95,821)
-------------- ------------ ------------ -------------- --------------
Income/Loss Before Extraordinary
Item............................... (8,627,915) 157,186 104,563 (1,210,734) (9,576,900)
Extraordinary Item
Loss on debt extinguishment........ 2,549,708 2,549,708
-------------- ------------ ------------ -------------- --------------
Net Income/(Loss).................... (11,177,623) 157,186 104,563 (1,210,734) (12,126,608)
Dividends and accretion on preferred
stock.............................. (6,876,521) 6,876,521(j) 0
-------------- ------------ ------------ -------------- --------------
Net Loss Applicable to Common
Shareholders....................... ($ 18,054,144) $ 157,186 $ 104,563 $ 5,665,787 $ (12,126,608)
-------------- ------------ ------------ -------------- --------------
-------------- ------------ ------------ -------------- --------------
Loss per common share
Loss before extraordinary item..... ($ 5.80) ($ 2.21)
Extraordinary item................. ($ 1.71) ($ 0.59)
-------------- --------------
Net loss........................... ($ 7.51) ($ 2.80)
-------------- --------------
-------------- --------------
Net loss applicable to common
shareholders....................... ($ 12.14) ($ 2.80)
-------------- --------------
-------------- --------------
Weighted average number of shares
outstanding........................ 1,487,574 2,836,859 (k) 4,324,433
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-52
<PAGE>
RESPONSE USA INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
UNAUDITED PRO FORMA BALANCE SHEET
(a) To reflect the net proceeds from the Secondary Offering as if it
occurred on September 30, 1997 of $15,300,000
(b) To record the acquisition of Triple A. The purchase price of $13,000,000
(payable in cash of $10,000,000, stock valued at $2,230,755, and assumption of
$769,245 in liabilities) which was allocated to the assets acquired and
liabilities assumed based on their fair value with the remainder, $10,026,828,
classified as Monitoring Contract Costs.
(c) To record the acquisition of Jupiter. The purchase price of $1,044,941
(payable in stock) which was allocated to the assets acquired and liabilities
assumed based on their fair value with the remainder, $800,000, classified as
Monitoring Contract Costs.
(d) To record principal paid on the line of credit from the remaining
proceeds from the Secondary Offering of $5,300,000.
(e) To record the redemption of the preferred stock for $8,475,000.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(f) To eliminate amortization of monitoring contracts purchased from Triple
A and amortization of intangible assets not acquired from Jupiter previously
recorded in Triple A's and Jupiter's historical financial statements.
(g) To provide amortization on the net increase of purchased monitoring
contracts. Monitoring contracts purchased from Triple A and Jupiter are
amortized using the straight-line method over a ten-year estimated life.
(h) To eliminate interest expense on debt not acquired from Triple A.
(i) To record additional interest expense on the net increase in long-term
debt as a result of additional borrowings needed to redeem the preferred stock
after the acquisition of Triple A with the proceeds from the offering.
(j) To eliminate dividends and accretion on preferred stock recorded during
the quarter ended September 30, 1997, since this preferred stock is presumed to
have been retired in these pro forma financial statements.
(k) In calculating earnings per share, effect has been given to the shares
issued in the acquisitions of Triple A (297,434 shares) and Jupiter (139,425
shares), and the Secondary Offering (2,4000,000) shares).
(l) The historical information for Jupiter used in preparing the unaudited
pro-forma condensed consolidated statement of operations for the fiscal year
ended June 30, 1997 is derived from the audited statement of operations for the
year ended December 31, 1996 and the unaudited statement of operations for the
nine months ended September 30, 1997.
F-52
<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/A 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: December 1, 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
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ RICHARD M. BROOKS and Financial Officer and
- ------------------------------ a Director (Principal December 1, 1997
Richard M. Brooks Executive, Financial and
Accounting Officer)
Chief Operating Officer,
/s/ RONALD A. FELDMAN Vice President,
- ------------------------------ Secretary, Treasurer and December 1, 1997
Ronald A. Feldman a Director
Director
- ------------------------------
Robert M. Rubin
Director
- ------------------------------
Bruce H. Luehrs
/s/ STUART R. CHALFIN Director
- ------------------------------ December 1, 1997
Stuart R. Chalfin
/s/ TODD HERMAN Director
- ------------------------------ December 1, 1997
Todd Herman
/s/ STUART LEVIN Director
- ------------------------------ December 1, 1997
Stuart Levin
