<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
Date of Report (Date of Earliest Event Reported):
October 1, 1998
RESPONSE USA, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-20770 52-1441922
--------------- ----------- ------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
11-H Princess Road
Lawrenceville, New Jersey 08648
---------------------------------------
(Address of principal executive offices)
Registrant's Telephone Number, including
area code: (609) 896-4500
Not Applicable
--------------------------------------------
(Former Address, if changed since last report)
<PAGE>
By Current Report on Form 8-K, dated October 1, 1998 and filed with the
Securities Exchange Commission on October 8, 1998 (the "Original Form 8-K"),
Response USA, Inc (the "Company"), reported the acquisition of Health Watch,
Inc. ("Health Watch"), and, under the caption "Item 7. FINANCIAL STATEMENTS,
PRO FORMA FINANCIAL INFORMATION AND EXHIBITS", incorporated by reference
certain financial statements and information. Item 7 is hereby amended and
restated in its entirety as follows:
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired: In accordance with Item
7(a)(4) of Form 8-K, attached hereto as Exhibits are the financial statements
of Health Watch prepared pursuant to Regulation S-X.
(b) Pro Forma Financial Information: In accordance with Item 7(b) of
Form 8-K, attached hereto are pro forma financial statements of the Company
which reflect the discussed acquisition.
(c) Exhibits:
1. Audited Financial Statements of Health Watch, Inc. for and as of the
fiscal year ended May 31, 1998.
2. Unaudited Interim Financial Statements of Health Watch, Inc. for and as
of the three months ended August 31, 1998.
3. Pro Forma Financial Statements of the Company.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
December 14, 1998
RESPONSE USA, INC.
By: /s/ Richard M. Brooks
----------------------------
Richard M. Brooks, President
3
<PAGE>
INDEX TO FINANCIAL STATEMENTS
HEALTH WATCH, INC.
EXHIBIT 1. AUDITED FINANCIAL STATEMENTS OF HEALTH WATCH, INC. FOR AND AS
OF THE FISCAL YEAR END
Independent Auditors' Report for the Fiscal Year Ended May 31, 1998
Balance Sheet at May 31, 1998
Statement of Operations for the Fiscal Year Ended May 31, 1998
Statement of Stockholders' Deficit for the Fiscal Year Ended May 31, 1998
Statement of Cash Flows for the Fiscal Year Ended May 31, 1998
Notes to the Financial Statements
EXHIBIT 2. INTERIM UNAUDITED FINANCIAL STATEMENTS FOR AND AS OF THE
THREE MONTHS ENDED AUGUST 31, 1998
Balance Sheet at August 31, 1998
Statement of Operations for the Three Months Ended August 31, 1998 and 1997
Statement of Stockholders' Deficit for the Three Months Ended August 31,
1997 and 1998
Statement of Cash Flows for the Three Months Ended August 31, 1998 and 1997
Notes to the Financial Statements
RESPONSE USA, INC. AND SUBSIDIARIES
EXHIBIT 3. PRO FORMA FINANCIAL INFORMATION
Introduction - Unaudited Pro Forma Financial Statements
Unaudited Pro Forma Condensed Consolidated Balance Sheet at September 30,
1998
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Three Months Ended September 30, 1998
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Fiscal Year Ended June 30, 1998
Notes to Unaudited Pro Forma Financial Statements
<PAGE>
EXHIBIT 1.
----------
HEALTH WATCH, INC.
Financial Statements
May 31, 1998
<PAGE>
HEALTH WATCH, INC.
TABLE OF CONTENTS
MAY 31, 1998
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS:
Balance Sheet 2
Statement of Operations 3
Statement of Stockholders' Deficit 4
Statement of Cash Flows 5-6
Notes to the Financial Statements 7-13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Health Watch, Inc.
Boca Raton, Florida
We have audited the accompanying balance sheet of Health Watch, Inc. as of
May 31, 1998, and the related statements of operations, stockholders'
deficit, 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 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 Health Watch, Inc. as of May
31, 1998, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
GOLDSTEIN LEWIN & CO.
Boca Raton, Florida
November 18, 1998
<PAGE>
HEALTH WATCH, INC.
BALANCE SHEET
MAY 31, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $ 287
Accounts Receivable, Net of Allowance
for Doubtful Accounts of $25,000 353,232
Prepaid Expenses 42,543
----------
Total Current Assets 396,062
----------
PROPERTY AND EQUIPMENT, NET 1,599,333
----------
OTHER ASSETS
Intangible Assets, Net 453,712
Deposits 7,362
----------
461,074
----------
$2,456,469
----------
----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current Portion of Notes Payable $1,545,863
Accounts Payable and Accrued Liabilities 520,878
Accrued Interest Payable 565,133
----------
Total Current Liabilities 2,631,874
----------
LONG-TERM LIABILITIES
Notes Payable, Net of Current Portion 2,655,645
----------
COMMITMENTS
STOCKHOLDERS' DEFICIT
Preferred Stock, Par Value, $0.01 Per
Share; Authorized 1,000,000 Shares;
Issued and Outstanding -0- Shares -
Common Stock, Par Value $0.01 Per Share;
Authorized 5,000,000 Shares; Issued
and Outstanding 840,000 Shares 8,400
Additional Paid in Capital 146,266
Accumulated Deficit (2,985,716)
----------
(2,831,050)
----------
$ 2,456,469
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of
These Financial Statements
2
<PAGE>
HEALTH WATCH, INC.
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1998
<TABLE>
<S> <C>
REVENUES, NET $ 2,399,868
-----------
OPERATING EXPENSES
Selling, General and Administrative Expenses 1,857,190
Depreciation and Amortization 346,055
-----------
Total Operating Expenses 2,203,245
-----------
Income From Operations 196,623
-----------
OTHER INCOME (EXPENSE)
Interest Expense (545,543)
Miscellaneous Income 7,032
-----------
Total Other Income (Expense) (538,511)
-----------
Net Loss Before Income Taxes (341,888)
INCOME TAXES -
-----------
Net Loss $ (341,888)
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of
These Financial Statements
3
<PAGE>
HEALTH WATCH, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
PREFERRED COMMON PAID IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
--------- ------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, Beginning $ - $ 8,400 $ 126,267 $(2,643,828) $(2,509,161)
Additional Capital
Contributions 19,999 19,999
Net Loss (341,888) (341,888)
--------- ------- --------- ----------- -----------
Balance, Ending $ - $ 8,400 $ 146,266 $(2,985,716) $(2,831,050)
--------- ------- --------- ----------- -----------
--------- ------- --------- ----------- -----------
</TABLE>
The Accompanying Notes are an Integral Part of
These Financial Statements
4
<PAGE>
HEALTH WATCH, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED MAY 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (341,888)
Adjustments to Reconcile Net
Loss to Net Cash Used in
Operating Activities:
Depreciation 290,594
Amortization 55,461
Change in Assets and Liabilities:
(Increase) in:
Accounts Receivables (186,892)
Prepaid Expenses (13,588)
Deposits (7,362)
Increase (Decrease) in:
Accounts Payable and Accrued Liabilities (142,070)
Accrued Interest Payable 121,100
------------
Net Cash Used in Operating
Activities (224,645)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (588,713)
Purchase of Intangible Assets (101,645)
------------
Net Cash Used in Investing
Activities (690,358)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Borrowings 917,075
Repayments on Borrowings (27,998)
Repayments of Loans from Shareholders (24,241)
Additional Capital Contributions 19,999
------------
Net Cash Provided by Financing
Activities 884,835
------------
Decrease in Cash (30,168)
Cash:
Beginning 30,455
------------
Ending $ 287
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of
These Financial Statements
5
<PAGE>
HEALTH WATCH, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED MAY 31, 1998
<TABLE>
<S> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash Paid During the Year for Interest $ 430,976
----------
----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCIAL ACTIVITIES
Acquisition of Intangibles Through Notes
Payable $ 400,000
----------
----------
Acquisition of Equipment Through Notes
Payable $ 452,000
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of
These Financial Statements
6
<PAGE>
HEALTH WATCH, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Health Watch, Inc. (the "Company"), a Florida corporation, incorporated in
March, 1992, provides personal response monitoring services to the healthcare
market place, primarily individuals with medical or age-related conditions as
well as physically challenged individuals. The Company markets to institutional
customers, principally home healthcare providers and hospitals across the United
States, whose subscribers are monitored by the Company through products designed
and manufactured by the Company. These monitoring products consist principally
of a communicator which connects to the telephone line in the subscriber's home
and a personal help button, which is worn or carried by the individual
subscriber and which, when activated, initiates a telephone call from the
subscriber's communicator to the Company's central monitoring facilities. The
Company believes it is a major provider of such services.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight line method over the estimated useful lives of the related assets.
GOODWILL
Goodwill is recorded at cost and amortized on a straight-line basis over its
estimated useful life.
COVENANT NOT TO COMPETE
Covenant not to compete is recorded at cost and amortized on a straight-line
basis.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent
7
<PAGE>
HEALTH WATCH, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. To date, no such
impairment has been recorded.
NOTE 2: ACQUISITION
On September 24, 1997, the Company acquired the assets of DFH, Inc. for
$852,000. The acquisition (accounted for utilizing the purchase method) included
approximately 2,300 monitoring units and furniture and equipment. The purchase
price exceeded the fair value of the net assets acquired by approximately
$400,000 which has been assigned to goodwill and a covenant not to compete.
Goodwill included all customer lists, subscriber lists and trademarks. The
Company financed the acquisition with additional debt from Financial Security
Services. The Company's financial statements include eight months of operations
of DFH, Inc.
The unaudited pro forma combined historical results, as if DFH, Inc. had been
acquired at the beginning of fiscal 1998 are estimated to be:
<TABLE>
<S> <C>
Net sales $ 2,631,000
Net loss $ 338,000
</TABLE>
NOTE 3: CONCENTRATION OF CREDIT RISK
Concentration of credit risk with respect to accounts receivable are limited due
to the large number of customers and their dispersion across many geographic
areas. The Company has historically incurred minimal credit losses.
8
<PAGE>
HEALTH WATCH, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
LIVES
(YEARS)
-------
<S> <C> <C>
Equipment $ 2,118,251 5
Furniture and Fixtures 107,879 5
-----------
2,226,130
Less: Accumulated Depreciation 626,797
-----------
$ 1,599,333
-----------
-----------
</TABLE>
NOTE 5: INTANGIBLE ASSETS
Intangible assets consist of:
<TABLE>
<CAPTION>
LIVES
(YEARS)
-------
<S> <C> <C>
Goodwill $ 200,000 15
Covenant Not to Compete 200,000 5
Capitalized Financing Costs 95,000 5
Certification Costs 14,145 5
-----------
509,145
Less: Accumulated Amortization 55,433
-----------
$453,712
-----------
-----------
</TABLE>
NOTE 6: INCOME TAXES
The Company has deferred tax assets relating to a net operating loss
carryforward, accrued salaries to shareholders and amortization of intangible
assets. The tax benefits of these carryforwards are dependent on the Company
achieving taxable income during the carryforward period. Management is unable
to determine that it is more likely than not that the carryforwards will be
utilized. Accordingly, the Company has recorded a valuation allowance of
approximately $1,120,000 with respect to any future tax benefits arising from
these items due to the uncertainty of their ultimate realization. The net
increase in the valuation allowance was $49,000 for the year ended May 31,
1998.
9
<PAGE>
HEALTH WATCH, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6: INCOME TAXES
The Company has net operating loss carryforwards as of May 31, 1998, of
approximately $2,743,000 for federal income tax purposes which expire as
follows:
<TABLE>
<CAPTION>
YEAR
ENDING AVAILABLE
MAY 31, LOSS CARRYFORWARD
------- -----------------
<S> <C>
2007 $ 43,000
2008 189,000
2009 644,000
2010 517,000
2011 426,000
2012 556,000
2013 368,000
----------
$2,743,000
----------
----------
</TABLE>
NOTE 7: NOTES PAYABLE
Notes payable as of May 31, 1998 consist of:
<TABLE>
<S> <C>
Note payable - Financial Security Services
(FSS) monthly principal and interest
payments of $6,957 including interest
at 15% per annum, maturing April 1,
2000. (1)(2) $ 133,090
Note payable - FSS, monthly principal and
interest payments of $21,917 including
interest at 15% per annum, maturing
December 1, 2000. (1)(2) 545,483
Notes payable - FSS, monthly principal
and interest payments of $29,222
commencing September, 1998, including
interest at 15% per annum, maturing
February 1, 2002 through
September 1, 2002. (1)(2) 1,050,000
</TABLE>
10
<PAGE>
HEALTH WATCH, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7: NOTES PAYABLE (Continued)
<TABLE>
<S> <C>
Note payable - FSS, monthly principal
and interest payments of $42,372,
commencing October, 1998, including
interest at prime plus 6 1/2% per annum,
(15% at May 31, 1998), maturing
October 1, 2002. (1)(2) 1,522,500
Convertible subordinated promissory notes
payable, convertible into common stock,
principal payments of $213,750
semi-annually, plus interest at 14%
per annum, matured December 1, 1997. (2) 865,000
Note payable - Individual, with monthly
principal and interest payments of $5,000,
with interest at 31.58% per annum,
maturing February 15, 2000,
collateralized by 780 Health Watch
response units. (2) 85,435
----------
4,201,508
LESS: CURRENT PORTION 1,545,863
----------
$2,655,645
----------
----------
</TABLE>
(1) Collateralized by equipment, contracts, files, records and loan
proceeds.
(2) Satisfied October 1, 1998 (Note 12).
NOTE 8: COMMITMENTS
The Company has several operating lease arrangements for its sales office,
office equipment and automobiles that expire through 2002.
Future minimum lease payments under operating leases with initial or
remaining terms of one year or more are as follows:
<TABLE>
<CAPTION>
MAY 31,
-------
<S> <C>
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
-------
<S> <C>
1999 $ 108,833
2000 107,357
2001 104,924
2002 35,130
----------
$ 356,244
----------
----------
</TABLE>
Total rent expense under all operating leases was $134,783 for the year
ending May 31, 1998.
11
<PAGE>
HEALTH WATCH, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9: RELATED PARTY TRANSACTIONS
Related party transactions included convertible subordinated promissory notes
for $250,000 payable to four stockholders and accrued interest on those notes
of $163,334.
NOTE 10: PREFERRED STOCK
The Company has authorized 1,000,000 shares of preferred stock with a par
value of $.01 per share. At May 31, 1998 none were outstanding. The Board of
Directors has the authority to determine all rights and preference with
respect to any series of the preferred stock, including but not limited to
liquidation, dividends and voting.
NOTE 11: STOCK WARRANTS
In conjunction with the borrowing of additional funds from FSS, the Company
issued warrants redeemable for a total of 100,000 shares of the Company's
stock at $6.25 per share. The warrants are exercisable immediately upon
issuance and expire five years from the issuance dates or 20 business days
after satisfaction of all debt owed to FSS. (Note 12)
NOTE 12: SUBSEQUENT EVENTS
Effective October 1, 1998, Response USA, Inc. ("Response") (a Delaware
corporation) purchased one-hundred percent of the stock of the Company for
cash and stock of approximately $7.5 million. In addition, Response assumed
all of the Company's liabilities, of which approximately $5.3 million of
notes payable was satisfied on October 1, 1998 (Note 7). The purchase
agreement includes a deferred purchase price equal to an aggregate of
$3,750,000, based on targeted increases to monthly recurring revenue within a
30 month period.
On October 1, 1998, the Company entered into a three year non-competition and
non-disclosure agreement with both the President and Chief Operating Officer.
On September 29, 1998, FSS assigned its warrants (Note 11) to the Company's
major shareholders. The shareholders subsequently relinquished the warrants
to the Company.
12
<PAGE>
HEALTH WATCH, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 12: SUBSEQUENT EVENTS (Continued)
Employment Contracts
Effective October 1, 1998, the Company entered into three year employment
contracts with the Chief Operating Officer and President. The contracts
provide for minimum annual compensation subject to an annual increase of not
less than 5% and other benefits. The contracts also include severance
agreements which create certain liabilities in the event of termination
without cause.
13
<PAGE>
EXHIBIT 2.
----------
HEALTH WATCH, INC.
BALANCE SHEET
AT AUGUST 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS
Cash $ 38,839
Accounts receivable - Net of allowance for doubtful
accounts of $25,000 410,611
Prepaid expenses and other current assets 37,688
-----------
Total current assets 487,138
-----------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $728,753 1,737,226
-----------
INTANGIBLE ASSETS - Net of accumulated
amortization of $75,128 438,247
-----------
$ 2,662,611
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Current portion of notes payable $ 865,000
Accounts payable - Trade 213,526
Accrued expenses and other current liabilities 729,456
-----------
Total current liabilities 1,807,982
-----------
LONG-TERM DEBT - Net of current portion 3,725,020
-----------
STOCKHOLDERS' DEFICIT
Preferred stock - Par value $.01
Authorized 1,000,000 shares
Issued and outstanding - None
Common stock - Par value $.01
Authorized 5,000,000 shares
Issued and outstanding 840,000 shares 8,400
Additional paid-in capital 258,615
Accumulated deficit (3,137,406)
-----------
(2,870,391)
-----------
$ 2,662,611
===========
</TABLE>
<PAGE>
HEALTH WATCH, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended August 31,
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING REVENUES
Product sales $ 45,808 $ 11,056
Monitoring and service 729,920 397,305
--------- ---------
775,728 408,361
--------- ---------
COST OF REVENUES
Product sales 26,248 7,059
Monitoring and service 146,645 107,696
--------- ---------
172,893 114,755
--------- ---------
GROSS PROFIT 602,835 293,606
--------- ---------
OPERATING EXPENSES
Selling, general and administrative 443,782 267,569
Depreciation and amortization 121,650 49,928
--------- ---------
565,432 317,497
--------- ---------
INCOME/(LOSS) FROM OPERATIONS 37,403 (23,891)
INTEREST EXPENSE 189,093 108,931
--------- ---------
NET LOSS $(151,690) $(132,822)
========= =========
</TABLE>
<PAGE>
HEALTH WATCH, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK Additional
Number Paid-In Accumulated
of Shares Amount Capital Deficit Total
--------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance - May 31, 1997 840,000 $8,400 $126,267 $(2,643,828) $(2,509,161)
Net loss (132,822) (132,822)
------- ------ -------- ----------- -----------
Balance - August 31, 1997 840,000 $8,400 $126,267 $(2,776,650) $(2,641,983)
======= ====== ======== =========== ===========
Balance - May 31, 1998 840,000 $8,400 $146,266 $(2,985,716) $(2,831,050)
Additional capital contributions 112,349 112,349
Net loss (151,690) (151,690)
------- ------ -------- ----------- -----------
Balance - August 31, 1998 840,000 $8,400 $258,615 $(3,137,406) $(2,870,391)
======= ====== ======== =========== ===========
</TABLE>
<PAGE>
HEALTH WATCH, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended August 31,
-----------------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(151,690) $(132,822)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 121,650 49,928
Increase in accounts receivable - Trade (57,379) (32,627)
Decrease in prepaid expenses and other
current assets 4,855 210
Decrease in deposits 7,362
Increase (decrease) in accounts payable - Trade 8,184 (13,610)
Increase (decrease) in accrued expenses and other
current liabilities (38,864) 45,887
--------- ---------
Net cash used in operating activities (105,882) (83,034)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of intangible assets (4,230)
Purchase of property and equipment (239,848) (83,559)
--------- ---------
Net cash used in investing activities (244,078) (83,559)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of long-term notes payable 487,436 210,000
Principal payments on long-term debt (98,924) (72,975)
--------- ---------
Net cash provided by financing activities 388,512 137,025
--------- ---------
NET INCREASE (DECREASE) IN CASH 38,552 (29,568)
CASH - BEGINNING 287 30,455
--------- ---------
CASH - ENDING $ 38,839 $ 887
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 140,875 $ 69,006
Cash paid during the year for income taxes - -
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
During the three months ended August 31, 1998, the Company recorded
additional paid-in capital and reduced accrued expenses and other current
liabilities in the amount of $112,349; as a result of certain officers of the
Company forgiving their accrued salaries.
<PAGE>
HEALTH WATCH, INC.
NOTES TO THE FINANCIAL STAEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim balance sheet as of August 31,1998, and
the related statements of operations, stockholders' equity and cash flows have
been prepared by management of the Company and are in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments,
comprising normal recurring accruals necessary for a fair presentation of the
results of the Company's operations, are included.
These financial statements should be read in conjunction with the
Company's annual financial statements.
2. STOCKHOLDERS' DEFICIT
During the three months ended August 31, 1998, the Company recorded
additional paid-in capital and reduced accrued expenses and other current
liabilities in the amount of $112,349; as a result of certain officers of the
Company forgiving their accrued salaries.
3. SUBSEQUENT EVENTS
On October 1, 1998, Response USA, Inc. acquired all of the issued and
outstanding stock (the "Stock") of the Company, pursuant to a Stock Purchase
Agreement dated as of September 16, 1998 (the "Stock Purchase Agreement"), by
and among Response USA, Inc. and Jeffrey Queen, Andrew Queen, and the Jeffrey
Queen and Andrew Queen Irrevocable Trust U/A January 2, 1998 (the "Sellers").
The purchase price for the Stock (the "Purchase Price") was
$12,789,476. Such amount may be adjusted based on the results of a certified
audit of the financial statements of Health Watch to be completed after the
closing date. The Purchase Price was paid as follows: $3,786,620 was paid in
cash at closing to the Sellers; $5,263,380 was paid to certain debt holders
of the Company; and 901,079 shares (the "Payment Shares") of Response USA,
Inc.'s common stock, having a value of approximately $3,739,476 was issued to
the Sellers, of which 60,240 Payment Shares will be held in escrow for a
period equal to the lesser of (i) the completion of the audit of the
financial statements of the Company or (ii) 120 days after the date of the
Stock Purchase Agreement. Response USA, Inc. has agreed to guarantee the
proceeds to be received by the Sellers in connection with the sale of the
Payment Shares.
In addition, the Sellers may be entitled to receive up to an aggregate
of $3,750,000 upon the achievement of certain milestones relating to additional
monthly recurring revenue achieved by the Company during the 30 month period
following the closing. Also, in connection with the acquisition, the Company
entered into employment agreements with each of Jeffrey Queen and Andrew Queen,
such employment agreements have been guaranteed by Response USA, Inc. The
employment agreements have a term of three years commencing on October 1, 1998
and are terminable by Response USA, Inc. under certain circumstances. In
addition, so long as either Jeffrey Queen or Andrew Queen is employed by
Response USA, Inc. or any of its affiliates, they are entitled to a single seat,
at their request, on the Board of Directors of Response USA, Inc.
<PAGE>
EXHIBIT 3.
----------
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements as of
September 30, 1998 and for the three months and year ended September 30,
1998, and June 30, 1998, respectively, give effect for the Company's
acquisition of Health Watch, Inc. ("Health Watch"), and the net proceeds
borrowed pursuant to a financing agreement between the Company's wholly owned
subsidiary, Response Acquisition Corp., and McGinn, Smith Capital Holdings
Corp. (the"MSCH Financing Agreement"), which were used for the acquisition of
Health Watch, Inc. ("Health Watch"), as if such events had been completed at
July 1, 1997 for purposes of the pro forma statements of operations and as of
September 30, 1998 for purposes of the pro forma balance sheet. The pro forma
information is based on the historical financial statements of the Company
and Health Watch, 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 condensed consolidated statement of operations,
the column pertaining to Health Watch contains historical financial
statements for the three months ended August 31, 1998, and for the year
ended May 31, 1998. In the preparation of the pro forma combined balance
sheet, the column pertaining to Health Watch contains information as to the
assets acquired and liabilities assumed as of August 31, 1998. Certain
amounts in the Health Watch historical financial statements have been
reclassified to conform with the Company's financial statement presentation.
The valuation of assets is preliminary and is subject to change based on the
final allocation of the purchase price.
The pro forma adjustments are based upon available information and upon
certain assumptions that management believes are reasonable under the
circumstances. The unaudited pro forma financial statements and accompanying
notes should be read in conjunction with the historical Consolidated
Financial Statements of the Company and Health Watch, including the notes
thereto, and other financial information pertaining to the Company. The
unaudited pro forma financial statements do not purport to represent what the
Company's actual results of operations or actual financial position would
have been if the Health Watch acquisition and the MSCH Financing Agreement
had, in fact, occurred on such dates or to project the Company's results of
operations or financial position for any future period or date. The
unaudited pro forma financial statements do not give effect to any
transactions other than the Health Watch acquisition and the MSCH Financing
Agreement, discussed in the notes to the unaudited pro forma financial
statements below.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
Historical Pro Forma
---------------------------- -------------------------------
Response Health Watch Adjustments Combined
==============================================================
ASSETS
<S> <C> <C> <C> <C>
Current Assets
Cash $ 4,403,135 $ 38,839 $ 8,752,928 (a) $ 4,394,902
$(8,800,000) (b)
Marketable securities 25,000 25,000
Accounts receivable (net) 2,483,123 410,611 2,893,734
Inventory 1,637,474 1,637,474
Prepaid expenses and
other current assets 787,197 37,688 (250,000) (b) 574,885
------------ ----------- ----------- ------------
Total current assets 9,335,929 487,138 (297,072) 9,525,995
------------ ----------- ----------- ------------
Monitoring Contract Costs (net) 33,409,574 - 10,913,036 (b) 44,322,610
------------ ----------- ----------- ------------
Property and Equipment (net) 3,395,674 1,737,226 5,132,900
------------ ----------- ----------- ------------
Other Assets
Deferred financing costs (net) 3,853,567 1,544,634 (a) 5,398,201
Intangible assets (net) 438,247 (438,247) (b) -
Other 263,451 263,451
------------ ----------- ----------- ------------
4,117,018 438,247 1,106,387 5,661,652
------------ ----------- ----------- ------------
$ 50,258,195 $ 2,662,611 $11,722,351 $ 64,643,157
============ =========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 714,718 $ 865,000 $ 296,718 (a) $ 1,011,436
(865,000) (b)
Accounts payable - Trade 734,106 213,526 947,632
Purchase holdbacks 648,503 648,503
Accrued expenses and other
current liabilities 1,811,405 729,456 (595,058) (b) 1,945,803
Deferred revenue 3,360,302 3,360,302
------------ ----------- ----------- ------------
7,269,034 1,807,982 (1,163,340) 7,913,676
------------ ----------- ----------- ------------
Long-term Liabilities
Long-term debt 26,720,717 3,725,020 10,000,844 (a) 36,721,561
(3,725,020) (b)
Deferred compensation expense 2,950,000 2,950,000
------------ ----------- ----------- ------------
29,670,717 3,725,020 6,275,824 39,671,561
------------ ----------- ----------- ------------
Stockholders' Equity
Common stock 53,773 8,400 7,209 (b) 60,982
(8,400) (b)
Additional paid-in capital 62,189,085 258,615 3,732,267 (b) 65,921,352
(258,615) (b)
Accumulated deficit (48,924,414) (3,137,406) 3,137,406 (b) (48,924,414)
------------ ----------- ----------- ------------
13,318,444 (2,870,391) 6,609,867 17,057,920
------------ ----------- ----------- ------------
$ 50,258,195 $ 2,662,611 $11,722,351 $ 64,643,157
============ =========== =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Historical Pro Forma
---------------------------- -------------------------------
Response Health Watch Adjustments Combined
==============================================================
Operating Revenues
<S> <C> <C> <C> <C>
Product sales $ 1,202,723 $ 45,808 $ 1,248,531
Monitoring and service 4,142,769 729,920 4,872,689
Security patrol 670,177 670,177
----------- --------- ----------- -----------
6,015,669 775,728 - 6,791,397
----------- --------- ----------- -----------
Cost of Revenues
Product sales 1,003,071 26,248 1,029,319
Monitoring and service 1,318,585 146,645 1,465,230
Security patrol 502,041 502,041
----------- --------- ----------- -----------
2,823,697 172,893 - 2,996,590
----------- --------- ----------- -----------
Gross Profit 3,191,972 602,835 - 3,794,807
----------- --------- ----------- -----------
Operating Expenses
Selling, general and administrative 2,416,721 443,782 2,860,503
Compensation - Employment contracts 387,500 387,500
Nonrecurring charges 309,631 309,631
Depreciation and amortization 1,395,998 121,650 (19,695) (c) 1,770,779
272,826 (d)
----------- --------- ----------- -----------
4,509,850 565,432 253,131 5,328,413
----------- --------- ----------- -----------
Income/(Loss) From Operations (1,317,878) 37,403 (253,131) (1,533,606)
Interest Expense, net 720,945 189,093 (189,093) (e) 998,181
203,017 (f)
74,219 (g)
----------- --------- ----------- -----------
Income/(Loss) Before Extraordinary Item (2,038,823) (151,690) (341,274) (2,531,787)
Extraordinary Item
Loss on debt extinguishment 2,567,806 2,567,806
----------- --------- ----------- -----------
Net Loss $(4,606,629) $(151,690) $ (341,274) $(5,099,593)
=========== ========= =========== ===========
Loss per common share - Basic and diluted
Loss before extraordinary item $ (0.31) $ (0.34)
Extraordinary item $ (0.40) $ (0.35)
----------- -----------
Net loss $ (0.71) $ (0.69)
=========== ===========
Weighted average number of shares
outstanding 6,472,049 901,079 (h) 7,373,128
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
Historical Pro Forma
---------------------------- -------------------------------
Response Health Watch Adjustments Combined
==============================================================
<S> <C> <C> <C> <C>
Operating Revenues
Product sales $ 3,310,876 $ 112,652 $ 3,423,528
Monitoring and service 12,358,368 2,287,216 14,645,584
Security patrol 850,884 850,884
------------ ---------- ----------- ------------
16,520,128 2,399,868 - 18,919,996
------------ ---------- ----------- ------------
Cost of Revenues
Product sales 2,374,095 66,994 2,441,089
Monitoring and service 3,631,796 483,636 4,115,432
Security patrol 672,247 672,247
------------ ---------- ----------- ------------
6,678,138 550,630 - 7,228,768
------------ ---------- ----------- ------------
Gross Profit 9,841,990 1,849,238 - 11,691,228
------------ ---------- ----------- ------------
Operating Expenses
Selling, general and administrative 7,912,072 1,306,560 9,218,632
Compensation - Employment contracts 537,541 537,541
Nonrecurring charges 838,581 838,581
Depreciation and amortization 4,334,381 346,055 (55,461) (c) 5,716,279
1,091,304 (d)
------------ ---------- ----------- ------------
13,622,575 1,652,615 1,035,843 16,311,033
------------ ---------- ----------- ------------
Income/(Loss) From Operations (3,780,585) 196,623 (1,035,843) (4,619,805)
------------ ---------- ----------- ------------
Other Expenses
Interest Expense, net 2,915,434 538,511 (538,511) (e) 4,024,377
812,068 (f)
296,875 (g)
Joint venture loss 2,969,484 2,969,484
------------ ---------- ----------- ------------
5,884,918 538,511 570,432 6,993,861
------------ ---------- ----------- ------------
Net Loss (9,665,503) (341,888) (1,606,275) (11,613,666)
Dividends and accretion on preferred stock 3,210,333 3,210,333
------------ ---------- ----------- ------------
Net Loss Applicable to Common Shareholders $(12,875,836) $ (341,888) $(1,606,275) $(14,823,999)
============ ========== =========== ============
Loss per common share - Basic and diluted
Net loss $ (2.61) $ (2.53)
============ ============
Net loss applicable to common shareholders $ (3.48) $ (3.22)
============ ============
Weighted average number of shares
outstanding 3,696,372 901,079 (h) 4,597,451
============ ============ ============
</TABLE>
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PROFORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Balance Sheet
(a) To reflect the net proceeds borrowed of $8,752,928, pursuant to a
financing agreement between the Company's wholly owned subsidiary,
Response Acquisition Corp., and McGinn, Smith Capital Holdings Corp.,
as if it occurred on September 30, 1998.
(b) To record the acquisition of Health Watch, which was consummated on
October 1, 1998. The purchase price of $12,789,476 consisted of cash
of $9,050,000 (of which $250,000 was disbursed prior to September 30,
1998 and was included as an other current asset on Response's Balance
Sheet), and stock valued at $3,739,476 which was allocated to the
assets acquired and liabilities assumed based on their fair value with
the remainder, $10,913,036, classified as Monitoring Contract Costs.
The valuation of assets is preliminary and is subject to change based
on the final allocation of the purchase price.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(c) To eliminate amortization of intangible assets not acquired from
Health Watch previously recorded in Health Watch's historical
financial statements.
(d) To provide amortization on the net increase of purchased monitoring
contracts. Monitoring contracts purchased from Health Watch are
amortized using the straight-line method over a ten-year estimated
life.
(e) To eliminate interest expense on debt not acquired from Health Watch.
(f) To record additional interest expense on the increase in long-term
debt resulting from the acquisition of Health Watch.
(g) To record amortization of deferred financing costs on the increase in
long-term debt resulting from the acquisition of Health Watch.
(h) In calculating earnings per share, effect has been given to the
901,079 shares issued in the acquisition of Health Watch.
