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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 0-20770
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RESPONSE USA, INC.
(Name of small business issuer in its charter)
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<S> <C>
DELAWARE 22-3088639
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
3 EXECUTIVE CAMPUS, 2(ND) FLOOR SOUTH,
CHERRY HILL, NEW JERSEY 08002
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number, including area code: (856) 661-0700
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Securities registered pursuant to Section 12(b) of the Exchange Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None Not Applicable
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Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.008 PAR VALUE PER SHARE.
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 / /
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B 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
$27,429,653.
The aggregate market value of the voting common equity held by
non-affiliates (based upon the closing bid price) on October 11, 1999, was
approximately $8,272,199.
As of October 12, 1999, there were 7,147,731 shares of Common Stock, $.008
par value per share (the "Common Stock"), outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be furnished to stockholders in
connection with the 1999 Annual Meeting of Stockholders are incorporated by
reference into Part III hereof. Such Proxy Statement is expected to be filed
with the Commission on or prior to October 28, 1999 (120 days after the end of
the issuer's fiscal year).
Certain exhibits listed in Item 13 of Part IV have been incorporated by
reference.
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RESPONSE USA, INC.
FORM 10-KSB ANNUAL REPORT
PART I
ITEM 1. BUSINESS
GENERAL
As more fully described under "Recent Developments" below, on August 11,
1999, Response USA, Inc. ("Response") entered into a Stock Purchase Agreement
pursuant to which the stock of two of its wholly-owned subsidiaries, United
Security Systems, Inc. ("USS") and The Jupiter Group, Inc. d/b/a Triple A Patrol
("Triple A Patrol") was sold to Vector Security, Inc. The closing of such
transaction (the "Sale Transaction") took place on September 30, 1999. Prior to
the closing of the Sale Transaction, Response was engaged in the residential and
commercial security business through USS and the patrol services business
through Triple A Patrol. Following September 30, 1999, Response was no longer
engaged in such businesses. Information regarding such businesses is included in
this Annual Report because the financial statements included herein include
financial information from such businesses.
As used herein, the term "Company" means, unless the context requires
otherwise, the Company and the following wholly-owned subsidiaries: Emergency
Response Systems, Inc., Response Ability Systems, Inc., Organization for
Enhanced Capability, Inc. ("OEC"), Health Watch, Inc. ("Health Watch"), In-Home
Health, Inc. ("In-Home Health"), Response Security Services, LLC ("RSS"),
Response Security Monitoring, LLC ("RSM"), HealthLink, Ltd. ("HealthLink"), an
entity in which the Company has a 50% equity interest and prior to the Sale
Transaction, USS, Triple A Patrol and Response Alarm Monitoring, LLC ("RAM").
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. SEE
"BUSINESS-RISK FACTORS-CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING
STATEMENTS."
Response USA, Inc. is a leading provider of personal response systems
("PRS") and services throughout the United States engaged in the marketing,
installation and monitoring of PRS. The Company markets its proprietary PRS to
consumers, home health care agencies, hospitals, health maintenance
organizations, durable medical equipment providers and government agencies. The
Company's PRS enables individual users, such as elderly or disabled persons, to
transmit a distress signal using a portable transmitter to the Company's central
monitoring station in Boca Raton, Florida (the "Monitoring Station"). The
Company currently monitors approximately 38,000 PRS subscribers generating
approximately $830,000 in monthly recurring revenue ("MRR"). The Company
believes it is currently the second largest provider of PRS in the United States
based on annual recurring revenue. The Company's revenues consist primarily of
recurring payments for the monitoring of PRS products. During the past twelve
months, the Company has focused significant capital and human resources on the
expansion of its PRS operations, increasing its subscriber base by approximately
16,000 customers generating approximately $470,000 in MRR, through acquisitions
and the expansion of the Company's PRS provider programs.
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The Company's PRS 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 PRS
unit, thereby avoiding any need for the user to access a telephone.
RECENT DEVELOPMENTS
On August 11, 1999, Response entered into a Stock Purchase Agreement with
Vector Security, Inc., pursuant to which Response agreed to sell the stock of
two of its wholly-owned subsidiaries, USS and Triple A Patrol. The closing of
the Sale Transaction occurred on September 30, 1999. The total consideration for
the Sale Transaction was approximately $50,300,000 in cash (of which
approximately $5,000,000 is being held by the buyer pending certain post-closing
adjustments) and is subject to adjustment under certain circumstances. The
Company paid a fee to Lehman Brothers Inc., which firm acted as financial
advisor in the transaction and rendered a fairness opinion to the Company
regarding the Sale Transaction.
The Company utilized approximately $31,000,000 of such proceeds to reduce
its outstanding indebtedness to $26,200,000. In addition, the Company utilized
approximately $5,400,000 to satisfy certain stock price guarantees and to redeem
certain shares issued in connection with past security company acquisitions and
utilized approximately $3,900,000 in satisfaction of certain severance and other
obligations and transaction expenses.
As a result of the Sale Transaction, the Company is no longer engaged in the
alarm or patrol businesses and is solely engaged in the PRS business.
Simultaneous with the Sale Transaction, the Company moved all of its PRS
monitoring to the Monitoring Station.
PERSONAL RESPONSE SYSTEMS AND SERVICES
PRS INDUSTRY
The personal 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 personal 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 personal 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 PRS 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 PRS 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.
PRS PRODUCTS AND MONITORING SERVICES
The Company's PRS is designed to monitor, identify and electronically report
emergencies requiring medical, fire and police assistance. The PRS 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 PRS also includes a smoke detector (in certain states) that
transmits a distress signal to the Monitoring Station in the event of fire,
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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 Electronic Testing Laboratory approved PRS has a number of
safety features, including a daily self-test, a supervised pendant, hands free
two way voice capability, 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 PRS "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 PRS is tested before shipment and is
re-tested immediately after installation in a user's home.
Users of the Company's PRS 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, 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 PRS unit, avoiding any need for the user to access a telephone. Monitoring
Station personnel verify the nature of the emergency by speaking with the
individual and, if necessary, notify the predetermined emergency authorities in
the user's area. If the monitoring personnel are unable to establish voice
communication with the user, emergency agencies are notified immediately. As of
September 30, 1999, the Company monitors approximately 38,000 PRS subscribers
throughout the United States. The Company's monitoring service is available only
to users of the Company's PRS; PRS products cannot be programmed to permit the
customer to utilize a competitor's monitoring service.
The Company provides all of its PRS users with a 24-hour-per-day, 365
days-per-year monitoring service. The Monitoring Station is accessible by PRS
users nationwide through toll-free emergency telephone lines. The Monitoring
Station contains telecommunications and computer equipment with the capacity to
monitor all of the Company's PRS users simultaneously, and to receive and act
upon a user's emergency signal. On average, the Company receives 1,500 calls per
day from its PRS users, of which approximately 60% are made by users for test
purposes. The Company maintains a duplicate set of all customer data at the
Monitoring Station.
SALES AND MARKETING
HOME HEALTH CARE DIVISION. The Company's Home Health Care Division markets
the Company's PRS products primarily to hospitals and home health care agencies.
These entities typically agree to sign an exclusive five-year agreement with the
Company. The subscriber acquires the PRS system from the provider, and the
Company's obligations are limited to providing monitoring services. As of June
30, 1999, the Company had under contract, approximately 650 providers of service
located throughout the United States. The Company supports its provider network
with a marketing plan designed to introduce the PRS concept to their
professional and family caregivers, along with ancillary materials to utilize at
the home of their patients. Additionally, the Company provides in-service
presentations to its provider network in order to facilitate subscriber
referrals to the individual provider.
GOVERNMENT PROGRAMS DIVISION. The Company's Government Programs Division
solicits the Company's PRS services to various state and local governmental
agencies. Additionally, it markets the
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Company's services to local area agencies on aging, and other public and private
organizations designed to help senior citizens remain independent. The Company
is currently the exclusive provider of PRS services for the Los Angeles
Department of Aging, the Philadelphia Corporation for Aging, and Duchess County,
New York and the Preferred Vendor of PRS for the Visiting Nurse Association of
America. Currently, approximately 45 states have instituted some type of
reimbursement for PRS services. The Company provides periodic in-service
presentations to social workers in the areas of geriatric care management in
order to solicit referrals for the Company's PRS services.
FRANCHISEES AND DISTRIBUTORSHIPS. 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,
1999, approximately 45 franchisees had paid their franchise renewal fee for the
2000 fiscal year.
Franchisees are independent contractors who purchase or lease their PRS
requirements from the Company in accordance with a schedule of prices
established by the Company, and resell PRS 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.
PRIVATE LABEL PROGRAMS. The Company also supplies PRS products for vendors
under product names owned by the vendors. Currently, sales under these programs
are limited and 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.
ELECTRONIC SECURITY INDUSTRY
As described in "Recent Developments" above, the Company was engaged in the
electronic security business until September 30, 1999. The following information
is included in this Annual Report because the financial statements included
herein include financial information from such business.
The Company's electronic security systems business utilized 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 were monitored either by a third-party
monitoring station located in Euclid, Ohio (the "Euclid Monitoring Station") or
the Underwriters Laboratory and Factory Mutual approved monitoring station
located in Wilkes Barre, Pennsylvania. 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 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 provided, and highly labor intensive manned guarding
and patrol services, which the Company provided on a limited basis through its
former subsidiary, Triple A Patrol. 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 and (iii) control of access
to properties. 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
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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.
ELECTRONIC SECURITY SERVICES
The Company's electronically-monitored security systems involved 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
a monitoring station where alarm and supervisory signals are received and
recorded. Systems may also incorporate an emergency "panic button," which when
pushed causes the 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.
RESIDENTIAL SYSTEMS. Residential security services consisted of the sale,
installation, monitoring and maintenance of electronically monitored security
systems to detect intrusion and fire.
COMMERCIAL SYSTEMS. The Company also provided 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 marketed standard security packages for specific types of
commercial customers. Certain commercial customers require more complex
electronic security systems.
PRODUCTS. The Company sold products offered by several different
manufacturers. 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.
GOVERNMENTAL REGULATION
The Company's operations are subject to a variety of federal, state, county
and municipal laws, regulations and licensing requirements. 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 Company's PRS business relies on the use of telephone lines and radio
frequencies to transmit signals to the Monitoring Station. 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 (the "FCC") and state public utilities commissions.
The Company's PRS products are also regulated by the Federal Food and Drug
Administration.
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The Company's PRS advertising and sales practices are regulated by both the
Federal Trade Commission (the "FTC") and state consumer protection laws which
include restrictions on the manner in which the Company promotes the sale of its
products.
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. 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.
Certain state and local authorities reimburse the Company for monitoring and
installation fees incurred by subscribers covered by Medicaid or similar
programs. The Company is required to register with, and be approved by, such
authorities in order to recover its reimbursable fees.
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 product liability. The product liability insurance
and the errors and omissions liability insurance have policy limits of
$1,000,000 per occurrence and $1,000,000 in the aggregate per year with a
deductible of $5,000 per occurrence payable by the Company. The Company also
maintains additional excess liability insurance in the amount of $9,000,000 in
the aggregate per year also with a deductible of $5,000 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 federal trademark registrations for the trade names "Health
Watch" and "Response Ability". The Company believes that its rights in these
trademarks are of unlimited duration and are 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 PRS
systems. 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
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from a third party and such license automatically renews on an annual basis upon
payment of the required license fee.
SUPPLIERS, MANUFACTURING AND ASSEMBLY
The Company currently has multiple sources of supply for the components used
in the PRS 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
employees of the Company. The Company believes that a variety of alternative
sources of supply are available on reasonable terms. However, the Company has no
guaranteed supply arrangements with its suppliers and purchases components
pursuant to purchase orders placed from time to time in the ordinary course of
business. There can be no assurance that shortages of components will not occur
in the future. Failure of sources of supply and the inability of the Company to
develop alternative sources of supply, if required in the future, could have a
material adverse effect on the Company's operations.
COMPETITION
The personal response industry is serviced by numerous companies that
provide PRS products and services, including monitoring services. A majority of
the personal response companies offer systems that are monitored through a
central monitoring facility. In some instances, companies which sell PRS 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
personal 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 personal
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., Lifeline
Systems, Inc. and Pioneer Medical Systems. Methods of competition in the PRS
industry consist of quality, service and price of the PRS products. While price
is a factor, the customer's primary consideration in choosing a PRS supplier is
the quality of monitoring service provided and the reliability of the PRS
products. The Company believes that it competes favorably as to all of these
factors.
EMPLOYEES
At October 1, 1999, the Company employed 160 full-time employees. Of this
number, 46 are engaged in sales, 9 in field service and installation, 11 in
customer service, 29 in central station monitoring, 53 in administration, 2 in
research and development and 10 in manufacturing. None of the Company's
employees are represented by a labor union, and the Company considers its
employee relations to be satisfactory.
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RISK FACTORS
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-KSB under the captions
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere in this Annual Report, as well as
statements made in press releases and oral statements that may be made by the
Company or by officers, directors or employees of the Company acting on the
Company's behalf, that are not statements of historical fact, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors, including those described in
this Annual Report on Form 10-KSB under the caption "Risk Factors," that could
cause the actual results of the Company to be materially different from the
historical results or from any future results expressed or implied by such
forward-looking statements. In addition to statements which explicitly describe
such risks and uncertainties, readers are urged to consider statements labeled
with the terms "believes," "belief," "expects," "plans," "anticipates," or
"intends," to be uncertain and forward-looking. All cautionary statements made
in this Annual Report on Form 10-KSB should be read as being applicable to all
related forward-looking statements wherever they appear. Investors should
consider the following risk factors as well as the risks described elsewhere in
this Annual Report on Form 10-KSB.
HISTORY OF LOSSES AND RISK OF FUTURE LOSSES
We had net losses of $12,875,836 for Fiscal 1998 and $14,830,642 for Fiscal
1999. We had an accumulated deficit of $59,148,427 at June 30, 1999. We expect
that such losses will continue for the foreseeable future. In addition, our
future plans are subject to risks and uncertainties that may cause us to
continue to suffer substantial losses from operations. We cannot assure you that
the Company's operations will ever become profitable. Even if we become
profitable, we cannot assure you that we will be able to maintain profitability.
HIGHLY LEVERAGED
As of October 1, 1999, the Company had approximately $26,200,000 of
indebtedness outstanding under its financing agreements, with an additional
$13,800,000 available for borrowing. This debt bears interest at an average rate
of 8 1/2% per year. Substantially all of the Company's receivables from
monitoring contracts are pledged as security for the repayment of debt incurred
under these financing agreements.
As a result of these arrangements, the Company is required to make
substantial interest payments on this debt. We cannot assure you that cash from
operations will continue to be sufficient to make these payments. If the Company
should ever become unable to meet its debts as they become due, all revenues
from monitoring contracts would become the property of the lender.
RISKS RELATED TO GROWTH THROUGH ACQUISITIONS
A substantial part of our growth since the end of fiscal year 1994 has been
through acquisitions. This remains one of our primary strategies. As we target
larger acquisitions, we expect them to require significant time and capital,
whether or not we consummate them. Such acquisitions may involve certain unknown
risks in addition to those identified below. In addition, the acquisition of PRS
companies may become more expensive. There can be no assurance that the Company
will be able to identify companies to acquire or successfully accomplish the
acquisitions. Even if acquired, we cannot assure you that we will be able to
profitably manage the companies or successfully integrate them into our
operations without substantial costs, delays or other problems.
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In addition, the Company cannot predict the size or frequency of any future
acquisitions. We cannot assure you that any businesses acquired will be
profitable at the time of their acquisition. These businesses may not achieve
sales and profitability that justify the investment. We cannot assure you that
the Company will be any more efficient as a result of the acquisitions.
Further, acquisitions may involve a number of special risks, including (i)
negative effects on our reported operating results, (ii) distracting our
management from other important issues, (iii) greater burdens on the Company's
resources, (iv) too much dependence on key personnel, (v) risks associated with
unanticipated problems or legal liabilities and (vi) negative effects resulting
from the accounting treatment of goodwill resulting from paying more to buy a
business than the book value of its assets, some or all of which could have a
negative effect on the Company's operations and financial performance.
When we make our acquisitions, we do not generally require audited financial
statements for the targeted companies. As a result, our estimate of the acquired
company's value may be higher than its actual worth. In addition, differences in
accounting policies and projections made from financial statements regarding our
subscriber accounts could lead us to pay more to purchase a company than it
turns out to be worth.
POSSIBLE NEED FOR ADDITIONAL FINANCING; POSSIBLE DILUTIVE EFFECT OF ACQUISITIONS
We expect to continue to require outside sources of financing for our
strategy of growth through acquisitions. We may offer stock as payment for such
acquisitions, or raise funds by selling common stock, preferred stock or debt
securities. We may also seek bank financing. We cannot assure you that the
Company will be able to obtain capital on a timely basis, on favorable terms, or
at all. If we are unable to obtain such financing, or generate funds from our
operations sufficient to meet our needs, we may be unable to expand and develop.
POTENTIAL NEGATIVE IMPACT OF GOVERNMENT REGULATIONS
Many aspects of the medical industry in the United States are presently
subject to extensive federal and state governmental regulation, including
reimbursement rates and policies imposed by Medicare and other third-party
reimbursement programs. Laws and regulations affecting our business include
federal and state "kickback laws," conflict of interest laws (such as the
federal "Stark" legislation), and licensing requirements. In addition, both the
Clinton Administration and the Congress have periodically asserted a need to
overhaul or reform the nation's healthcare system. Such legislative initiatives,
if enacted, could impose pressures on the pricing structures applicable to our
PERS services. Depending on the nature and extent of any new laws and/or
regulations, or possible changes in the interpretation of existing laws and/or
regulations, any such changes may affect our revenue operating margins and
profitability.
We derive a portion of our revenues from Medicaid, and from other
third-party payors. In January 1992, the federal government implemented, through
the Medicare program, a resource based relative value scale payment methodology.
Implementation of such scale could reduce reimbursement rates for our PERS
products and services.
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
Because the Company's business involves responding to personal emergencies,
failures of the Company's products or services carry a high risk of liability
claims. We try to manage this risk through contractual limits on liability and
damages, and by carrying insurance. However, the contractual limits may not be
enforceable in all jurisdictions or circumstances. In addition, a successful
claim may be made for damages which exceed the coverage under any insurance
policy. In the future, the Company's insurance costs may become more expensive,
and there can be no assurance that additional insurance will be available on
acceptable terms. If one or more of these occur, it could have an adverse effect
on the Company's financial condition and operations.
10
<PAGE>
COMPETITION
The PRS industry is highly competitive and fragmented. We compete with
national and regional companies, as well as smaller local companies, in all of
our operations. New competitors continue to enter the industry. Our main
competitors with respect to our personal response system are other national or
regional personal response providers and burglar alarm companies that offer
medical emergency features in addition to their home protection systems. Certain
of these companies have greater financial resources than we do. They also may
enjoy a competitive advantage due to their access to a larger client base. There
can be no assurance that we will be able to compete successfully in the PRS
industry.
DEPENDENCE ON SUPPLIERS AND MANUFACTURERS
We do not manufacture any of the equipment or components that we design and
install, and we have no guaranteed arrangements with our suppliers. We purchase
components through purchase orders placed in the ordinary course of business.
Although we believe these components are available from other sources at
reasonable prices, we cannot assure you that shortages of components will not
occur in the future.
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry, on which our business relies, is subject to
rapid and significant changes in technology. While we believe that, for the
foreseeable future, these changes will not materially impact our business, the
effect of technological changes, including changes relating to emerging wireline
and wireless transmission technologies, on our business cannot be predicted.
DEPENDENCE ON KEY PERSONNEL AND MANAGEMENT
Our success largely depends on the efforts of our senior management and
other key employees, particularly our two current executive officers, Richard M.
Brooks, the Chief Executive Officer, President, Chief Financial Officer and
Chairman of the Board, and Ronald A. Feldman, the Executive Vice President,
Secretary and Treasurer. The loss of either one of these officers might have a
negative impact on the Company's financial condition and operations. Although we
have employment agreements with Messrs. Brooks and Feldman and certain other
employees, there can be no assurance that we will be able to retain the services
of such individuals. Under our current financing arrangement, a default would
occur if Messrs. Brooks and Feldman are not employed in certain management
positions. We have key-man life insurance policies on the lives of Messrs.
Brooks and Feldman in the amount of $2,000,000 and $1,000,000, respectively.
SHARES ELIGIBLE FOR FUTURE SALE; EFFECT OF PREVIOUSLY ISSUED OPTIONS AND
WARRANTS
As of October 1, 1999, we have 7,147,731 shares of common stock outstanding,
all of which are freely tradable without restriction or further registration
under the Securities Act.
In addition to the shares now traded in the market, we have 1,643,392 shares
of common stock which are issuable upon the exercise of options and warrants. We
cannot predict the effect, if any, that sales of such securities, or their mere
availability, will have on the market prices for the common stock. However, the
possibility that a substantial number of our securities may, in the near future,
be sold in the public market may adversely affect market prices for the common
stock and could make it more difficult for the Company to raise capital through
the sale of additional equity securities.
POSSIBLE ADVERSE EFFECTS ASSOCIATED WITH THE ISSUANCE OF "BLANK CHECK" PREFERRED
STOCK
Our Certificate of Incorporation authorizes our Board of Directors to issue
up to 250,000 shares (of which 239,430 remain available) of "blank check"
preferred stock. The Board of Directors, without approval of the stockholders,
may fix all the rights and terms of the preferred stock. The issuance of such
11
<PAGE>
stock could, among other results, negatively affect the voting power of common
stock in the Company. Under certain circumstances, the issuance might make it
more difficult for a third party to gain control of the Company, and may
discourage bids for the common stock at a premium or otherwise bring down the
market price of the common stock.
YEAR 2000 COMPLIANCE
Year 2000 compliance relates to the ability of computer hardware and
software to respond to the problems posed by the fact that computer programs
have traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer programs and
systems will not be able to differentiate between the year 2000 and 1900. The
failure to address the problem could result in system failures and the
generation of erroneous data.
We are in the process of evaluating and addressing the impact of the Year
2000 Issue on our operations to ensure that our information technology and
business systems recognize calendar Year 2000. We are utilizing both internal
and external resources in implementing our Year 2000 program, which consists of
the following phases:
ASSESSMENT PHASE--Identify all IT and Non-IT issues and establish
priorities.
DETAILED PLANNING PHASE--Develop specific action steps to address the issues
identified in the Assessment Phase.
CONVERSION PHASE--Implement the necessary system modifications as outlined
in the Detailed Planning Phase.
TESTING PHASE--Verify that the modifications implemented in the Conversion
Phase will be successful in resolving the Year 2000 Issue so that all identified
IT and Non-IT issues will function properly, both individually and on an
integrated basis.
IMPLEMENTATION PHASE--Implement the fully tested modifications.
Based on an inventory conducted during Fiscal 1998, we have identified
computer systems that will require modifications or replacement so that they
will properly utilize dates beyond December 31, 1999. The majority of our
critical systems are new and are already Year 2000 compliant, such as the
central station monitoring hardware and software used at the Monitoring Station
and the Company's current accounts receivable and billing software. We installed
a general ledger and accounts payable program, which the manufacturer warrants
is Year 2000 compliant, during the fourth quarter of Fiscal 1999. We have not
incurred significant costs in regard to Year 2000 compliance thus far and we do
not expect to incur significant costs in future compliance efforts. In addition,
we have initiated communications with our significant suppliers, customers, and
financial institutions, to determine their plans for remediating the Year 2000
Issue in their software which the Company relies on. We are attempting to limit
the potential impact of the Year 2000 by monitoring the progress of our own Year
2000 project and those of our critical external relationships. Should the
Company be notified of any significant issues through our responses to our
inquiries of key third parties, we intend to develop and implement contingency
plans to minimize the impact on our operations. The Company believes that with
modifications to our existing software and conversions to new software, the Year
2000 Issue can be mitigated. However, if such modifications and conversions are
not made, or are not completed within an adequate time frame, the Year 2000
could have a material adverse impact on our operations.
ITEM 2. PROPERTIES
The Company leases approximately 10,000 square feet in Cherry Hill, New
Jersey, for its executive and administrative offices, at an annual rental of
$165,000. The lease expires in August, 2004, after which the Company has a
five-year renewal option. The Company also leases (i) 2,000 square feet in Los
12
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Angeles, California, for use as a sales and installation facility, at an annual
rental of $24,000, which lease expires in October, 2000; (ii) 4,600 square feet
in Fall River, Massachusetts for use as a sales and installation facility, at an
annual rental of $28,000, which lease expires in March, 2000, after which the
Company has a two-year renewal option on the same terms and conditions; (iii)
6,000 square feet in Boca Raton, Florida for the Monitoring Station and
administrative offices at an annual rental of $108,000, which lease expires in
September, 2001; (iv) 5,000 square feet in Boca Raton, Florida for use as an
assembly facility on a month to month lease basis at an annual rental of
$54,000; (v) 1,800 square feet in Cleveland, Ohio for a sales and installation
facility at an annual rental of $24,000, which lease expires in February, 2002;
and, (vi) 2,500 square feet in Seattle, Washington for a sales and installation
facility, at an annual rental of $31,360, which lease expires in March, 2002.
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 January and February 1997, certain holders of the Company's Preferred
Stock commenced litigation against the Company, challenging, among other things,
the Company's decision to suspend conversion rights of such holders and seeking,
among other things, specific performance under the Certificate of Designation to
convert their Preferred Stock to Common Stock of the Company. The Company has
entered into Settlement Agreements with such holders. (See Note 9 of Notes to
Consolidated Financial Statements of the Company.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
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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, for the quarters indicated, the high and low
bid and ask prices for the Company's Common Stock in the over-the-counter market
(as adjusted to reflect the one-for-three reverse stock split effective January
9, 1998). Such prices reflect interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW HIGH LOW
------- ------- ------- -------
ASK
BID ------------------
------------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDING JUNE 30, 1999:
First Quarter...................................................................... $ 7 3/16 $ 3 9/16 $ 7 1/4 $ 3 21/32
Second Quarter..................................................................... $ 4 7/8 $ 2 5/8 $ 5 $ 2 3/4
Third Quarter...................................................................... $ 3 11/16 $ 1 3/4 $ 3 13/16 $ 1 25/32
Fourth Quarter..................................................................... $ 2 7/8 $ 1 9/16 $ 3 $ 1 19/32
FISCAL YEAR ENDED JUNE 30, 1998:
First Quarter...................................................................... $12 $ 6 3/4 $12 3/4 $ 8 7/8
Second Quarter..................................................................... $11 7/16 $ 7 1/2 $12 $ 8 1/8
Third Quarter...................................................................... $ 6 3/16 $ 5 3/4 $ 6 1/4 $ 5 15/16
Fourth Quarter..................................................................... $ 6 3/4 $ 6 1/4 $ 6 13/16 $ 6 3/8
</TABLE>
On October 8, 1999, the closing bid price of the Company's Common Stock as
reported on the Nasdaq SmallCap Market was $1.1875 per share. As of October 6,
1999, there were 335 stockholders of record of the Common Stock. The total
monthly trading volume of the Common Stock on the Nasdaq SmallCap Market for the
month ended September 30, 1999 was 2,318,685 shares.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes thereto.
FORWARD LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Reform Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that would cause actual
results to differ materially from those discussed in the statement. The Company
desires to take advantage of the "safe harbor" provisions of the Reform Act.
Except for the historical information contained herein, the matters discussed in
this Form 10-KSB annual report are forward-looking statements, which involve
risks and uncertainties. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be achieved.
Important factors that can cause actual results to differ materially from the
Company's expectations are disclosed in conjunction with the forward-looking
statements or elsewhere herein.
14
<PAGE>
GENERAL OVERVIEW
The Company is a leading provider of PRS throughout the United States
engaged in the marketing, installation and monitoring of PRS. The Company
markets its proprietary PRS to consumers, home health care agencies, hospitals,
health maintenance organizations, durable medical equipment providers and
government agencies. The Company's PRS enables individual users, such as elderly
or disabled persons, to transmit a distress signal using a portable transmitter
to the Company's Monitoring Station. The Company currently monitors
approximately 38,000 PRS subscribers generating approximately $830,000 in MRR.
The Company believes it is currently the second largest provider of PRS in the
United States based on annual recurring revenue. The Company's revenues consist
primarily of recurring payments for the monitoring of PRS products. During the
past twelve months, the Company has focused significant capital and human
resources on the expansion of its PRS operations, increasing its subscriber base
by approximately 16,000 customers generating approximately $470,000 in MRR,
through acquisitions and the expansion of the Company's PRS provider programs.
The Company's PRS 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 PRS
unit, thereby avoiding any need for the user to access a telephone.
On August 11, 1999, Response entered into a Stock Purchase Agreement with
Vector Security, Inc., pursuant to which Response agreed to sell the stock of
two of its wholly-owned subsidiaries, USS and Triple A Patrol. The closing of
the Sale Transaction occurred on September 30, 1999. The total consideration for
the Sale Transaction was approximately $50,300,000 in cash (of which
approximately $5,000,000 is being held by the buyer pending certain post-closing
adjustments) and is subject to adjustment under certain circumstances.
As a result of the Sale Transaction, the Company is no longer engaged in the
alarm or patrol businesses and is solely engaged in the PRS business.
Simultaneous with the Sale Transaction, the Company moved all of its PRS
monitoring to the Monitoring Station. Information with respect to the alarm and
patrol businesses is included in this Annual Report because the financial
statements included herein include financial information from such businesses.
The Company's electronic security systems business utilized 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 were monitored either by the Euclid
Monitoring Station or the Underwriters Laboratory and Factory Mutual approved
monitoring station located in Wilkes Barre, Pennsylvania. 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 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 provided and highly labor intensive manned guarding
and patrol services, which the Company provided on a limited basis through its
former subsidiary, Triple A Patrol. 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 and (iii) control of access
to properties. Event detection
15
<PAGE>
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.
RESULTS OF OPERATIONS
FISCAL YEARS 1999 AND 1998
The following table sets forth certain operating data for the fiscal years
ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
CORPORATE &
SECURITY PRS OTHER TOTAL
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1999
Revenues:
Product Sales..................................... $ 3,859,335 $ 919,210 $ 4,778,545
Monitoring & service.............................. 12,123,521 7,663,017 19,786,538
Security Patrol................................... 2,864,570 0 2,864,570
------------- ------------- ------------- --------------
Total Revenues.................................. 18,847,426 8,582,227 0 27,429,653
------------- ------------- ------------- --------------
Cost of Revenues:
Product Sales..................................... 3,577,210 897,534 4,474,744
Monitoring & service.............................. 3,973,790 1,985,830 5,959,620
Security Patrol................................... 2,236,396 0 2,236,396
------------- ------------- ------------- --------------
Total Cost of Revenues.......................... 9,787,396 2,883,364 0 12,670,760
------------- ------------- ------------- --------------
Gross Profit:
Product Sales..................................... 282,125 21,676 303,801
Monitoring & service.............................. 8,149,731 5,677,187 13,826,918
Security Patrol................................... 628,174 0 628,174
------------- ------------- ------------- --------------
Total Gross Profit.............................. 9,060,030 5,698,863 0 14,758,893
------------- ------------- ------------- --------------
Selling, general and administrative................. 7,686,978 6,230,719 315,521 14,233,218
Compensation--Options/Contracts..................... 437,500 437,500
Depreciation and Amortization....................... 5,257,251 2,741,379 0 7,998,630
Non recurring charges............................... 9,780 198,721 208,501
------------- ------------- ------------- --------------
Loss from Operations............................ (3,893,979) (3,471,956) (753,021) (8,118,956)
------------- ------------- ------------- --------------
Interest expense.................................... 4,116,332
Joint venture loss.................................. 0
Income tax expense.................................. 27,548
Loss on extraordinary item.......................... 2,567,806
--------------
0
Net Loss............................................ $ (14,830,642)
--------------
--------------
Net Loss Applicable to Common Shareholders.......... $ (14,830,642)
--------------
--------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CORPORATE &
SECURITY PRS OTHER TOTAL
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1998
Revenues:
Product Sales..................................... $ 2,038,768 $ 1,272,108 $ 3,310,876
Monitoring & service.............................. 8,887,636 3,470,732 12,358,368
Security Patrol................................... 850,884 850,884
------------- ------------- ------------- --------------
Total Revenues.................................. 11,777,288 4,742,840 0 16,520,128
------------- ------------- ------------- --------------
Cost of Revenues:
Product Sales..................................... 1,703,672 670,423 2,374,095
Monitoring & service.............................. 2,529,628 1,102,168 3,631,796
Security Patrol................................... 672,247 0 672,247
------------- ------------- ------------- --------------
Total Cost of Revenues.......................... 4,905,547 1,772,591 0 6,678,138
------------- ------------- ------------- --------------
Gross Profit:
Product Sales..................................... 335,096 601,685 936,781
Monitoring & service.............................. 6,358,008 2,368,564 8,726,572
Security Patrol................................... 178,637 0 178,637
------------- ------------- ------------- --------------
Total Gross Profit.............................. 6,871,741 2,970,249 0 9,841,990
------------- ------------- ------------- --------------
Selling, general and administrative................. 4,711,603 3,005,924 194,545 7,912,072
Compensation--Options/Contracts..................... 537,541 537,541
Depreciation and Amortization....................... 3,227,019 937,362 170,000 4,334,381
Non recurring charges............................... 431,102 0 407,479 838,581
------------- ------------- ------------- --------------
Loss from Operations............................ (1,497,983) (973,037) (1,309,565) (3,780,585)
------------- ------------- ------------- --------------
Interest expense.................................... 2,915,434
Joint venture loss.................................. 2,969,484
Income tax expense.................................. 0
Loss on extraordinary item.......................... 0
--------------
Net Loss............................................ $ (9,665,503)
--------------
--------------
Net Loss Applicable to Common
Shareholders...................................... $ (12,875,836)
--------------
--------------
</TABLE>
RESULTS OF OPERATIONS
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 PRS, pursuant to contracts with initial terms of 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 PRS, and since the acquisition of Triple A Patrol in February 1998,
security patrol income. 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. Security patrol revenues are recognized as the
service is provided. Alarm monitoring and rental services generate significantly
higher gross margins than do the other services provided by the Company.
During Fiscal 1999, the Company has added approximately $560,000 of MRR
primarily through acquisitions. The Company has realized a growth rate of
approximately 22% or 14,000 subscribers during the past twelve months from
62,000 subscribers at June 30, 1998 to approximately 76,000 current
17
<PAGE>
subscribers. The Company's MRR increased by approximately $560,000 or 41% from
$1,360,000 at June 30, 1998 to $1,920,000 at June 30, 1999. The increases in MRR
for the past twelve months, by segment are as follows: (1) the PRS segment
increased by $470,000, or 142% from $330,000 to $800,000 and (2) the electronic
security services segment increased by $90,000, or 9% from $1,030,000 to
$1,120,000
Operating revenues increased by $10,909,525 or 66% from Fiscal 1998 to
Fiscal 1999. Operating revenues from the security division increased from
$11,777,288 to $18,847,426, an increase of $7,070,138 or 60%. The PRS division
contributed an increase in operating revenues of $3,839,387 or 81%.
Product sales accounted for an increase of $1,467,669 or 44% from Fiscal
1998 to Fiscal 1999. Product sales from the security division increased by
$1,820,567 or 89%, which is primarily related to the acquisition of Triple A
Protection ("Triple A") in February of 1998. Product sales from the PRS division
decreased by $352,898 or 28%. This decrease is the result of a decrease in sales
of PRS to private label wholesalers and home healthcare agencies, as the Company
has redirected its efforts to expand its MRR from rental programs through
providers.
Monitoring and service revenues accounted for an increase in operating
revenues of $7,428,170 or 60% from Fiscal 1998 to Fiscal 1999. Monitoring and
service revenues from the security division increased by $3,235,885 or 36%,
which is primarily due to the acquisition of Triple A. Monitoring and service
revenues from the PRS division increased by $4,192,285 or 121%. The acquisition
of Health Watch in October 1998 accounted for $2,788,883 or 67% of the PRS
increase.
The Company expanded its operating revenue base to include security patrol
revenue in February 1998 through the acquisition of Triple A Patrol. Security
patrol revenues totaled $850,884 in Fiscal 1998 and $2,864,570 in Fiscal 1999.
Gross profit increased by $4,916,903 or 50% from Fiscal 1998 to Fiscal 1999.
The gross profit from the security division represented an increase of
$2,188,289 or 32%. The gross profit from the PRS division increased by
$2,728,614 or 92%. This net increase includes an increase in the inventory
reserve of $332,030 or 11%, which included reserving for all finished goods and
raw materials related to specific discontinued PRS units. The acquisition of
Health Watch accounted for $2,363,636 or 87% of the increase.
The Gross Profit Margin ("GPM") as a percentage of sales decreased from 60%
in Fiscal 1998 to 54% in Fiscal 1999. The security division's GPM percentage
decreased from 58% to 49%, while the PRS GPM percentage increased from 63% to
66%.
Selling, general and administrative expenses increased by $6,321,146 or 80%
from Fiscal 1998 to Fiscal 1999.
The security division's selling, general and administrative expenses
increased by $2,975,377 or 63%, the PRS division increased by $3,224,793 or
107%, and the corporate selling, general and administrative expenses increased
by $120,976 or 62%. Included in these increases are restructuring expenses
associated with transferring the Company's subscriber base to the Wilkes Barre,
Pennsylvania central station and the consolidation of the Company's support
infrastructure. The security division incurred approximately $870,000 of such
expenses and the PRS division incurred approximately $200,000. The balance of
the increase in selling, general and administrative expenses for the security
division of approximately $2,100,000 is primarily due to the additional payroll
and overhead expenses associated with the acquisitions of Triple A and Triple A
Patrol. These entities were acquired in February 1998 and therefore less than a
half year of their expenses were included in the Company's Consolidated
Financial Statements for Fiscal 1998. The balance of the increase in selling,
general and administrative expenses for the PRS division of approximately
$3,000,000 is primarily due to the additional payroll and overhead expenses
associated with the acquisition of OEC, which was acquired in February 1998, and
the acquisitions of Health Watch, and In-Home Health which were acquired in the
current fiscal year. Excluding the restructuring expenses, selling, general and
administrative expenses as a percentage of total operating revenues remained
relatively constant at 48% for both Fiscal 1998 and Fiscal 1999.
18
<PAGE>
The Company recorded a deferred compensation expense of $537,541 in Fiscal
1998 and $437,500 in Fiscal 1999 in connection with two employment contracts
with former officers of USS.
Amortization and depreciation expense increased by $3,664,249 or 85% from
Fiscal 1998 to Fiscal 1999. The increase in amortization and depreciation
expense is the result of the Company's acquisitions over the past twelve months
of monitoring contracts totaling approximately $20.3 million and property and
equipment totaling approximately $5.8 million.
During Fiscal 1998 and 1999, the Company incurred nonrecurring charges of
$838,581 and $208,501, respectively. These charges were in connection with
management's plan to reduce costs and improve operating efficiencies for the
monitoring and servicing of its existing customer base. The plan involved the
transfer of its subscriber base to its Wilkes Barre, Pennsylvania monitoring
station and the consolidation of the support infrastructure. During Fiscal 1999,
nonrecurring charges consisted of employee severance and related costs and
abandoned fixed assets and inventory (see Note 4 of Notes to Consolidated
Financial Statements of the Company).
Net interest expense increased by $1,200,898 or 41% from Fiscal 1998 to
Fiscal 1999. The increase in interest expense is due to additional long-term
debt of approximately $37 million from Fiscal 1998 to Fiscal 1999 (see Note 7 of
Notes to Consolidated Financial Statements of the Company). The primary use of
such borrowings was for the acquisition of monitoring contracts of approximately
$20.3 million, and the acquisition of property and equipment of approximately
$5.8 million. Such additional borrowings were also used to fund the nonrecurring
charges of approximately $208,500 and $1,070,000 of restructuring charges
incurred to move the Company's subscriber base to its own central station and to
integrate the sales and marketing of PRS (see Note 4 of Notes to Consolidated
Financial Statements of the Company).
On March 4, 1997, the Company entered into a joint venture agreement with
BKR, Inc. to acquire a 50% interest in HealthLink. The equity losses of the
joint venture consisted of the Company's share, $436,712, of HealthLink's losses
for Fiscal 1998. In the fourth quarter of Fiscal 1998, the Company wrote off its
investment in the joint venture recording a non-cash impairment loss of
$2,532,772, including approximately $1,300,000 in goodwill. The Company
considered the continued operating losses of the joint venture, the inability to
find a media partner and the projected future cash flows from the joint venture
to be its primary indicators of an impairment loss. On February 9, 1999, the
Company acquired all of the existing monitoring contracts of HealthLink for
$125,000 and paid $250,000 to satisfy a stock guarantee. The stock guarantee
payment was recorded as a reduction to the Additional Paid-In Capital previously
recorded in connection with the Company's initial investment in HealthLink.
The net loss for Fiscal 1999, was $14,830,642 or ($2.01) per share, as
compared to a net loss of $9,665,503 or ($2.61) per share for Fiscal 1998. The
net loss for Fiscal 1999 is primarily attributable to non-cash charges totaling
$11,628,888, consisting of (i) depreciation and amortization of $7,998,630, (ii)
amortization of deferred financing costs of $1,062,452 and (iii) loss on debt
extinguishment of $2,567,806. The net loss applicable to common shareholders
(net loss adjusted for dividends and accretion on Preferred Stock) for Fiscal
1998 and Fiscal 1999 were $12,875,836 or ($3.48) per share based on 3,696,372
shares outstanding, and $14,830,642 or ($2.01) per share based on 7,382,618
shares outstanding, respectively.
ACCOUNTING DIFFERENCES FOR ACCOUNT PURCHASES AND NEW INSTALLATIONS
A difference between the accounting treatment of the purchase of subscriber
accounts and the accounting treatment of the generation of new accounts through
direct sales by the Company's sales force has a significant impact on the
Company's results of operations. The costs of monitoring contracts (acquired
either through the Company's dealer program or through acquisition of subscriber
account portfolios) are capitalized and amortized over estimated lives ranging
from 5 to 10 years, on a straight-line basis, for alarm and PRS accounts.
Included in capitalized costs are certain acquisition transition costs
associated with incorporating the purchased subscriber accounts into the
Company's operations, if
19
<PAGE>
necessary. 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.
ELECTRONIC SECURITY 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. 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, net of the number of
subscribers during such period (i) resulting from new installations, (ii)
resulting from reconnections from premises previously occupied by subscribers of
the Company or of prior subscribers of the Company, (iii) resulting from
conversions, and (iv) associated with cancelled accounts with respect to which
the Company obtained an account guarantee, and the denominator of which is the
average of the number of subscribers at each month end during such period. 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) resulting from new installations, (ii) resulting from upgrades of current
alarm systems, (iii) generated by increases in rates to existing subscribers,
(iv) resulting from the reconnection of premises previously occupied by
subscribers of the Company or of prior subscribers of the Company, (v) resulting
from conversions and (vi) 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 subscriber attrition and MRR attrition are similar
to those used by other security alarm companies, there can be no assurance that
subscriber attrition and MRR attrition, as presented by the Company, are
comparable to other similarly titled measures of other alarm monitoring
companies. During Fiscal 1999, the Company experienced subscriber attrition of
approximately 7% and MRR attrition of approximately 7%.
LIQUIDITY AND CAPITAL RESOURCES
On July 30, 1998, the Company completed a refinancing of its existing
indebtedness with Mellon Bank with a new long-term debt facility with McGinn,
Smith Capital Holdings Corp. ("MSCH"). In connection with the refinancing, the
Company incurred a charge for loss on debt extinguishment of $2,567,806 during
the year ended June 30, 1999. As part of such restructuring, USS sold certain of
its alarm monitoring contracts (the "Purchased Contracts") to its newly created,
wholly owned subsidiary, Response Acquisition Corp. ("RAC"), for aggregate
consideration of $26,000,000 pursuant to a Purchase Agreement dated July 30,
1998 (the "Purchase Agreement"), between USS and RAC. Also on July 30, 1998, in
a related transaction, RAC entered into a Receivable Financing Agreement dated
July 30, 1998 (the "Financing Agreement"), among RAC, USS and MSCH in the amount
of $26,000,000 (the "Initial Loan") and granted MSCH a first priority perfected
security interest in the receivables derived from the Purchased Contracts (the
"Receivables"). The Initial Loan has a term of five years and bears interest at
a rate of 8% per annum. Subsequent to the Initial Loan, RAC received additional
financing (the "Additional Financing") from MSCH in the amount of $26,163,833
and granted MSCH a first priority perfected security interest in the receivables
derived from the Purchased Contracts. The Additional Financing also has a term
of five years and bears interest at rates of 7.25%-8.0% per annum. The
Receivables are paid directly into a lockbox administered by USS as Collection
Agent under the Financing Agreement. Under the terms of the
20
<PAGE>
Financing Agreement, all funds derived from the Receivables will be paid to the
lockbox account and MSCH will be paid its monthly payment of principal and
interest under the loan out of such lockbox account prior to any payments to the
Company. Under the Financing Agreement, RAC has a total credit facility of
$70,000,000, of which $52,163,833 has been used and $17,836,167 remains
available for future borrowing. RAC may borrow additional funds from time to
time pursuant to the Financing Agreement by pledging additional Purchased
Contracts, which it may purchase from USS pursuant to the Purchase Agreement to
MSCH. A portion of the proceeds from the Financing Agreement was used to satisfy
existing indebtedness of the Company and the remaining amount has been and will
be used for acquisitions and general working capital.
Under the MSCH Financing Agreement, the Company is required to pay financing
fees of 15% to the lender for each additional borrowing at the time of the
financing. These financing fees are recorded as debt issuance costs and are
amortized over five years, the term of the notes, using the effective interest
method. Taking these debt issuance costs into consideration, the Company's
effective interest rates under the Financing Agreement range from 12.06% to
12.75%. In connection with the various borrowings under the Financing Agreement,
the Company recorded debt issuance costs of $8,322,504, of which $7,231,121 was
paid in cash and $780,000 was paid in 119,632 shares of Common Stock (the "Fee
Shares"). The Company has agreed that in the event the proceeds to be derived by
MSCH from the sale of the Fee Shares is less than $780,000, the Company is
obligated to, at its option, pay cash or issue additional shares equal to the
amount of the shortfall, if any (see Note 7 of Notes to Consolidated Financial
Statements of the Company). This guarantee was recorded as Additional Paid-In
Capital and deferred financing costs. In June 1999, the Company and MSCH entered
into an agreement whereby the Company would pay MSCH the total shortfall of
$505,649 in cash, which has been recorded as a reduction in Additional Paid-In
Capital.
The Financing Agreement contains certain provisions that significantly
restrict RAC's ability to make any loans, advances or other distributions to any
other entity. The borrowings under the Financing Agreement are secured by the
capitalized monitoring contracts held by RAC. At June 30, 1999 the net book
value of such monitoring contracts was $37,785,304.
On June 30, 1999, the Financing Agreement was modified. As of June 30, 1999,
RAC merged with and into USS, and USS was the surviving corporation. Also on
June 30, 1999, the following events occurred: Three Delaware limited liabilities
companies were formed: (i) RAM; (ii) RSM; and (iii) RSS. USS was the sole Member
of each LLC. Each of the LLC's then entered into Purchase Agreements with USS
(the "Second Purchase Agreements") pursuant to which each LLC purchased certain
contracts and receivables from USS, RSM purchased alarm receivables and
contracts from USS, RSS purchased PRS receivables and contracts from USS and RSS
was intended for future acquisitions. Each of the LLC's also entered into
Receivable Financing Agreements with MSCH (the "Second Receivable Agreements"),
under which MSCH provided financing to each LLC for its purchase of the
respective receivables and contracts from USS.
In contemplation of the Company's sale of USS to Vector Security, Inc., the
financing arrangement described above was further modified as follows: USS
assigned and transferred its Membership Interests in RSS and RSM to the
Company's wholly owned subsidiary, Response Ability Systems, Inc., a New Jersey
corporation and USS maintained its Membership Interest in RAM, which was sold to
Vector Security, Inc. as part of the Sale Transaction.
On September 30, 1999, the Company sold its stock in USS to Vector Security,
Inc. and paid off approximately $30,600,000, including accrued interest, of the
MSCH Financing Agreement in respect of RAM. As of October 1, 1999, approximately
$26,200,000 is outstanding to MSCH under the MSCH Financing Agreement in respect
of RSS and RSM and approximately $13,800,000 is available for future borrowing.
Substantially all of the Company's MRR of $830,000 has been pledged pursuant to
the MSCH
21
<PAGE>
Financing Agreement. As a result, in order to obtain additional borrowing under
the Financing Agreement, new collateral must be acquired or internally
generated.
The Company's working capital increased by $1,472,236 from a working capital
deficiency of $1,508,402 at June 30, 1998 to a working capital deficiency of
$36,166 at June 30, 1999. The Company believes that its cash flows from
operations as well as existing financial resources will be necessary to fund the
Company's principal and interest payments on its debt and capital expenditures,
which are the Company's principal uses of cash.
Net cash used in operating activities for Fiscal 1999 was $7,633,872, as
compared to net cash provided by operating activities of $1,164,746 for Fiscal
1998. In March 1999, the Company paid its deferred compensation expense
liability of $3,000,000 to two former key employees of USS. The remaining
increase in cash used in operating activities is primarily due to increases in
accounts receivable and inventory.
Net cash used in investing activities for Fiscal 1999 was $18,335,060.
Purchases of monitoring contracts, including purchase holdback payments,
accounted for $13,476,397 of the cash used in investing activities. Other
investing activities included the purchase of property and equipment of
$4,516,426 (including equipment used for rentals in the amount of $2,373,381).
Net cash provided by financing activities was $28,263,800 for Fiscal 1999.
Net proceeds received of $47,862,258 included $1,575,000 from a line of credit,
$45,787,258 from a receivables financing agreement, and $500,000 from equipment
financing notes payable. The proceeds were primarily used to satisfy the
Company's existing indebtedness at July 30, 1998 of $17,985,000, the acquisition
of monitoring contracts and related assets and working capital. The Company's
cash increased by $2,274,876 during Fiscal 1999, which will be used for working
capital.
YEAR 2000 COMPLIANCE
Year 2000 compliance relates to the ability of computer hardware and
software to respond to the problems posed by the fact that computer programs
have traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer programs and
systems will not be able to differentiate between the year 2000 and 1900. The
failure to address the problem could result in system failures and the
generation of erroneous data.
The Company is in the process of evaluating and addressing the impact of the
Year 2000 Issue on its operations to ensure that its information technology and
business systems recognize calendar Year 2000. The Company is utilizing both
internal and external resources in implementing its Year 2000 program, which
consists of the following phases:
ASSESSMENT PHASE--Identify all IT and Non-IT issues and establish
priorities.
DETAILED PLANNING PHASE--Development of specific action steps to address the
issues identified in the Assessment Phase.
CONVERSION PHASE--Implement the necessary system modifications as outlined
in the Detailed Planning Phase.
TESTING PHASE--Verification that the modifications implemented in the
Conversion Phase will be successful in resolving the Year 2000 Issue so that all
identified IT and Non-IT issues will function properly, both individually and on
an integrated basis.
IMPLEMENTATION PHASE--Final implementation of the fully tested
modifications.
Based on an inventory conducted during Fiscal 1998, the Company has
identified computer systems that will require modification or replacement so
that they will properly utilize dates beyond December 31, 1999. The majority of
the Company's critical systems are new and are already Year 2000 compliant, such
as the central station monitoring hardware and software used at our Monitoring
Station and the Company's
22
<PAGE>
current accounts receivable and billing software. The Company installed an
upgraded general ledger and accounts payable program, which the manufacturer
warrants is Year 2000 compliant during the fourth quarter of Fiscal 1999. The
Company has not incurred significant costs in regard to Year 2000 compliance
thus far and the Company does not expect to incur significant costs in its
future compliance efforts. In addition the Company has started communicating
with its significant suppliers, customers, and financial institutions, to
determine their plans for remediating the Year 2000 Issue in their software
which the Company relies on. The Company is attempting to limit the potential
impact of the Year 2000 by monitoring the progress of its own Year 2000 project
and those of its critical external relationships. Should the Company be notified
of any significant issues through responses to its inquiries of key third
parties, it intends to develop and implement contingency plans to minimize the
impact on its operations. The Company believes that with modifications to its
existing software and conversions to new software, the Year 2000 Issue can be
mitigated. However, if such modifications and conversions are not made, or are
not completed within an adequate time frame, the Year 2000 Issue could have a
material adverse impact on the operations of the Company.
INFLATION
The Company does not believe that inflation has a material effect on its
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
None.
23
<PAGE>
PART III
The information required by Part III (Items 9, 10, 11 and 12 of Form 10-KSB)
is incorporated herein by reference to the Company's Definite Proxy Statement to
be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, with
respect to the Company's next Annual Meeting of Stockholders which is expected
to be filed on or prior to October 28, 1999.
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.(1)
2(b) Plan and Agreement of Merger dated March 18, 1992 by and
between Response USA, Inc. (Delaware) and Lifecall America,
Inc.(1)
2(c) Delaware Certificate of Ownership and Merger, merging
Response USA, Inc., a Nevada Corporation with and into its
wholly-owned subsidiary Response USA, Inc., a Delaware
corporation(1)
2(d) Nevada Articles of Merger of Response USA, Inc. (formerly
Lifecall America, Inc.), a Nevada corporation, into Response
USA, Inc., a Delaware corporation(1)
3(a) Certificate of Incorporation of the Company(3)
3(b) Bylaws of the Company(1)
4(a) Form of Common Stock Certificate(1)
4(b) Form of Warrant Agreement(1)
4(c) Form of Class A Warrant Certificate(1)
4(d) Form of Class B Warrant Certificate(1)
4(e) Form of Class C Warrant Certificate(1)
4(f) Form of Preferred Warrant Certificate(2)
4(g) Incentive Stock Option Plan of the Company adopted by the
Company's Board on March 18, 1992, and approved by the
Company's stockholders on March 1992(1)
4(h) Restricted Stock Option Plan of the Company adopted by the
Company's Board on August 20, 1990, as amended August 30,
1991, January 2, 1992 and March 18, 1992(1)
4(i) 1997 Stock Option Plan of the Company adopted by the
Company's Board in September 1997(3)
4(j) 1999 Stock Option Plan of the Company adopted by the
Company's Board of Directors on March 31, 1999(5)
10(a) Lifecall Systems, Inc. Third Amended Plan of Reorganization
with Order Affirming Third Amended Plan of Reorganization
dated January 9, 1990(1)
10(b) Employment Agreement dated August 28, 1992, by and between
the Company and Richard M. Brooks, and Addendum thereto
dated October 1, 1992, as amended(2)
10(c) Employment Agreement dated August 28, 1992, by and between
the Company and Ronald A. Feldman, and Addendum thereto
dated October 1, 1992, as amended(2)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
10(d) Employment Agreement dated February 10, 1998, by and between
the Company and Robert L. May(6)
10(e) Agreement dated as of November 22, 1996 between Sloan
Electronics, Incorporated and the Company(2)
10(f) Asset Purchase Agreement dated October 1, 1997 between the
Company and Triple A Security Systems, Inc.(2)
10(g) Loan and Security Agreement dated as of June 30, 1996
between Mellon Bank, N.A. and the Company(2)
10(h) Purchase Agreement dated as of March 4, 1997, among BKR,
Inc., the Company and HealthLink, Ltd.(2)
10(i) Operating Agreement of HealthLink, Ltd. dated as of March 4,
1997(2)
10(j) Agreement dated as of June 18, 1997, by and among the
Company and the holders of the Preferred Stock who are
signatories thereto and Amendment No. 1 thereto.(3)
10(k) Purchase Agreement dated as of July 30, 1998, between
Response Acquisition Corp. and United Security Systems, Inc.
(excluding all exhibits and schedules)(4)
10(l) Receivable Financing Agreement dated as of July 30, 1998,
among McGinn, Smith Capital Holdings Corp., Response
Acquisition Corp. and United Security Systems, Inc.
(excluding all exhibits and schedules)(4)
10(m) Stock Purchase Agreement among Response USA, Inc., United
Security Systems, Inc., The Jupiter Group, Inc. d/b/a Triple
A Patrol and Vector Security, Inc., dated August 11, 1999
(excluding all exhibits and schedules)
11 Statement re: computation of earnings (loss) per share
21 Subsidiaries of the registrant
27 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (registration number 33-47589).
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1997.
(3) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (registration number 333-37595).
(4) Incorporated by reference to a Report filed by the Company on Form 8-K
dated August 6, 1998.
(5) Incorporated by reference to the Company's Proxy Statement in connection
with the Company's Annual Meeting held in March 1999.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1998.
(b) Reports on Form 8-K. On August 6, 1998, the Company filed a Report on Form
8-K reporting information under "Item 5--Other Events." On October 6, 1998,
the Company filed a Report on Form 8-K reporting information under "Item
2--Acquisition or Disposition of Assets." The Company amended this Report by
filing an 8-K/A on December 14, 1998.
25
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
RESPONSE USA, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheet at June 30, 1999................................................................ F-3
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 1998 and June 30, 1999........... F-4
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 1998 and June 30,
1999..................................................................................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1998 and June 30, 1999........... F-7
Notes to Consolidated Financial Statements................................................................. F-10
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Response USA, Inc.
We have audited the accompanying consolidated balance sheet of Response USA,
Inc. and subsidiaries as of June 30, 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 1999 and 1998. 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 audits.
We conducted our audits 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 audits provide 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, 1999 and the
results of its operations and cash flows for the years ended June 30, 1999 and
1998 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
October 1, 1999
F-2
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................................................... $ 3,241,016
Marketable securities................................................................... 15,000
Accounts receivable--
Trade, net of allowance for doubtful accounts of $761,631............................. 3,834,499
Inventory............................................................................... 2,621,052
Prepaid expenses and other current assets............................................... 562,072
-------------
Total current assets.............................................................. 10,273,639
-------------
MONITORING CONTRACT COSTS--
Net of accumulated amortization of $15,509,288.......................................... 44,662,593
-------------
PROPERTY AND EQUIPMENT--
Net of accumulated depreciation and amortization of $5,896,462.......................... 5,889,409
-------------
OTHER ASSETS:
Deferred financing costs, net of accumulated amortization of $950,812................... 7,371,692
Other noncurrent assets................................................................. 244,659
-------------
Total other assets................................................................ 7,616,351
-------------
TOTAL ASSETS.............................................................................. $ 68,441,992
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt:
Notes payable......................................................................... 2,004,600
Capitalized lease obligations......................................................... 161,833
Accounts payable, trade................................................................. 996,304
Purchase holdbacks...................................................................... 673,122
Accrued expenses and other current liabilities.......................................... 3,102,125
Deferred revenue........................................................................ 3,371,821
-------------
Total current liabilities......................................................... 10,309,805
-------------
LONG-TERM LIABILITIES--Net of current portion:
Long-term debt:
Notes payable......................................................................... 51,676,232
Capitalized lease obligations......................................................... 274,888
Purchase holdbacks...................................................................... 64,483
-------------
Total long-term liabilities....................................................... 52,015,603
-------------
COMMITMENTS AND CONTINGENCIES (see Note 13)
STOCKHOLDERS' EQUITY:
Common stock, par value $.008, authorized 37,500,000 shares, issued and outstanding
8,351,012 shares...................................................................... 66,809
Additional paid-in capital.............................................................. 65,708,202
Collateral shares in escrow............................................................. (500,000)
Accumulated deficit..................................................................... (59,148,427)
Accumulated other comprehensive loss.................................................... (10,000)
-------------
Total stockholders' equity........................................................ 6,116,584
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................ $ 68,441,992
-------------
-------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
OPERATING REVENUES:
Product sales................................................................... $ 4,778,545 $ 3,310,876
Monitoring and service.......................................................... 19,786,538 12,358,368
Security patrol................................................................. 2,864,570 850,884
-------------- --------------
27,429,653 16,520,128
-------------- --------------
COST OF REVENUES:
Product sales................................................................... 4,474,744 2,374,095
Monitoring and service.......................................................... 5,959,620 3,631,796
Security patrol................................................................. 2,236,396 672,247
-------------- --------------
12,670,760 6,678,138
-------------- --------------
GROSS PROFIT...................................................................... 14,758,893 9,841,990
-------------- --------------
OPERATING EXPENSES:
Selling, general and administrative............................................. 14,233,218 7,912,072
Compensation--options/employment contracts...................................... 437,500 537,541
Depreciation and amortization................................................... 7,998,630 4,334,381
Nonrecurring charges (see Note 4)............................................... 208,501 838,581
-------------- --------------
22,877,849 13,622,575
-------------- --------------
LOSS FROM OPERATIONS.............................................................. (8,118,956) (3,780,585)
-------------- --------------
OTHER INCOME (EXPENSE):
Interest expense, net........................................................... (4,116,332) (2,915,434)
Joint venture loss (see Note 3)................................................. (2,969,484)
-------------- --------------
(4,116,332) (5,884,918)
-------------- --------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM................................... (12,235,288) (9,665,503)
INCOME TAXES...................................................................... (27,548)
-------------- --------------
LOSS BEFORE EXTRAORDINARY ITEM.................................................... (12,262,836)
EXTRAORDINARY ITEM--Loss on debt extinguishment................................... (2,567,806)
-------------- --------------
NET LOSS.......................................................................... (14,830,642) (9,665,503)
DIVIDENDS AND ACCRETION ON PREFERRED STOCK........................................ (3,210,333)
-------------- --------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS........................................ $ (14,830,642) $ (12,875,836)
-------------- --------------
LOSS PER COMMON SHARE, Basic and diluted:
Loss before extraordinary item.................................................. (1.66) $ (2.61)
Extraordinary item.............................................................. (0.35)
-------------- --------------
NET LOSS.......................................................................... $ (2.01) $ (2.61)
-------------- --------------
-------------- --------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS........................................ $ (2.01) $ (3.48)
-------------- --------------
-------------- --------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING..................................... 7,382,618 3,696,372
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B COMMON STOCK
-------------------- --------------------- --------------------- ADDITIONAL COLLATERAL
NUMBER NUMBER NUMBER PAID-IN SHARES
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL IN ESCROW
--------- --------- --------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997....... 6,890 $7,757,783 1,769,736 $ 14,158 $35,439,510
Secondary offering........... 3,268,800 26,150 17,968,176
Exercise of stock options.... 19,972 160 135,132
Exercise of warrants by
lender..................... 3,070 $ 31 107,263 858
Issuance of common stock to
lender..................... 40,000 320 267,180
Issuance of common stock to
consultant................. 15,000 120 89,880
Discount on and deemed
dividends on preferred
stock...................... 2,044,152
Conversion of preferred
stock-- Series A........... (1,000) (1,125,000) 300,000 2,400 1,272,600
Conversion of preferred
stock-- Series B........... (3,070) (31) 102,319 819 (788)
Redemption of preferred
stock...................... (5,890) (8,676,935)
Issuance of warrants to
preferred shareholders..... 1,016,181
Issuance costs incurred in
connection with the
preferred stock
settlement................. (16,081)
Acquisitions................. 686,898 5,496 4,483,623
Employee bonus............... 1,334 11 9,989
Other........................ 5,701 45 (45)
Comprehensive loss:
Net loss................... (9,665,503)
Other comprehensive loss...
---------
Total comprehensive loss... (9,665,503)
--------- --------- --------- ---------- --------- ---------- ---------- ---------
---------
BALANCE, JUNE 30, 1998....... $ $ $6,317,023 $ 50,537 $60,664,468
--------- --------- --------- ---------- --------- ---------- ----------
--------- --------- --------- ---------- --------- ---------- ----------
<CAPTION>
ACCUMULATED
OTHER
----------------------------------------------
COMPREHENSIVE COMPREHENSIVE ACCUMULATED
LOSS LOSS DEFICIT TOTAL
-------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997....... $(31,441,949) $11,769,502
Secondary offering........... 17,994,326
Exercise of stock options.... 135,292
Exercise of warrants by
lender..................... (889)
Issuance of common stock to
lender..................... 267,500
Issuance of common stock to
consultant................. 90,000
Discount on and deemed
dividends on preferred
stock...................... (2,044,152)
Conversion of preferred
stock-- Series A........... (150,000)
Conversion of preferred
stock-- Series B...........
Redemption of preferred
stock...................... (8,676,935)
Issuance of warrants to
preferred shareholders..... (1,016,181)
Issuance costs incurred in
connection with the
preferred stock
settlement................. (16,081)
Acquisitions................. 4,489,119
Employee bonus............... 10,000
Other........................
Comprehensive loss:
Net loss................... (9,665,503) (9,665,503)
Other comprehensive loss...
Total comprehensive loss...
-------------- -------------- -------------- ----------
BALANCE, JUNE 30, 1998....... $ $ $(44,317,785) $16,397,220
-------------- -------------- -------------- ----------
-------------- -------------- -------------- ----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B COMMON STOCK
-------------------- --------------------- --------------------- ADDITIONAL COLLATERAL
NUMBER NUMBER NUMBER PAID-IN SHARES
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL IN ESCROW
--------- --------- --------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1998......... 6,317,023 $ 50,537 $60,664,468
Acquisitions, including
payments of stock
guarantees................... 1,037,335 8,299 4,005,123
Issuance of shares in escrow to
guarantee acquisition note
(see Note 2)................. 454,222 3,634 496,366
Exercise of stock options and
warrants..................... 422,800 3,382 9,302
Issuance of shares of common
stock in connection with
refinancing (see Note 7)..... 119,632 957 779,043
Issuance of stock guarantee
(put warrant) in connection
with refinancing (see Note
7)........................... 311,383
Payment of stock guarantee
related to refinancing (see
Note 7)...................... (505,679)
Net issuance costs incurred in
connection with the issuance
of common stock.............. (51,804)
Comprehensive loss:
Net loss.....................
Other comprehensive loss:
Unrealized holding losses
on available-for-sale
stock....................
Total comprehensive loss.....
--------- --------- --------- ---------- --------- ---------- ---------- ---------
BALANCE, JUNE 30, 1999......... $ $ $8,351,012 $ 66,809 $65,708,202 $(500,000)
--------- --------- --------- ---------- --------- ---------- ---------- ---------
--------- --------- --------- ---------- --------- ---------- ---------- ---------
<CAPTION>
ACCUMULATED
OTHER
--------------------------------------------
COMPREHENSIVE COMPREHENSIVE ACCUMULATED
LOSS LOSS DEFICIT TOTAL
-------------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1998......... ($44,317,785) $16,397,220
Acquisitions, including
payments of stock
guarantees................... 4,013,422
Issuance of shares in escrow to
guarantee acquisition note
(see Note 2)................. (500,000)
Exercise of stock options and
warrants..................... 12,684
Issuance of shares of common
stock in connection with
refinancing (see Note 7)..... 780,000
Issuance of stock guarantee
(put warrant) in connection
with refinancing (see Note
7)........................... 311,383
Payment of stock guarantee
related to refinancing (see
Note 7)...................... (505,679)
Net issuance costs incurred in
connection with the issuance
of common stock.............. (51,804)
Comprehensive loss:
Net loss..................... $(14,830,642) (14,830,642) (14,830,642)
Other comprehensive loss:
Unrealized holding losses
on available-for-sale
stock.................... (10,000) (10,000) (10,000)
--------------
Total comprehensive loss..... $(14,840,642)
-------------- -------------- ------------ ----------
BALANCE, JUNE 30, 1999......... $ (10,000) ($59,148,427) $6,116,584
-------------- -------------- ------------ ----------
-------------- -------------- ------------ ----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss....................................................... $ (14,830,642) $ (9,665,503)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization................................ 7,998,630 4,334,380
Amortization of deferred financing costs and debt discount... 3,630,258 1,339,724
Gain on sale of property and equipment....................... (4,651) (3,657)
Loss on sale of marketable securities........................ 3,777
Loss recognized on available-for-sale securities............. 50,000
Loss on joint venture (see Note 3)........................... 2,969,484
Changes in assets and liabilities which (used) provided cash:
Increase in accounts receivable--Trade..................... (1,567,459) (158,140)
Increase in inventory...................................... (943,509) (425,094)
(Increase) decrease in prepaid expenses and other current
assets.................................................... (121,956) 10,021
(Increase) decrease in deposits............................ (7,153) (19,327)
Increase in accounts payable--Trade........................ 25,734 324,657
Increase in accrued expenses and other current
liabilities............................................... 777,566 429,870
(Decrease) increase in accrued deferred compensation....... (2,562,500) 905,000
(Decrease) increase in deferred revenues................... (28,190) 1,069,554
------------- ------------
Net cash provided by (used in) operating activities.... (7,633,872) 1,164,746
------------- ------------
INVESTING ACTIVITIES:
Proceeds from the sale of marketable securities................ 113,138
Purchase of monitoring contracts (net of purchase holdbacks)... (13,476,397) (12,562,817)
Purchase of noncompete covenants related to acquisitions....... (20,000)
Proceeds from the sale of property and equipment............... 21,095 2,900
Purchase of property and equipment............................. (4,516,426) (1,812,030)
Payment of stock guarantees related to acquisition and
investment in joint venture.................................. (383,332)
------------- ------------
Net cash used in investing activities.................. (18,355,060) (14,278,809)
------------- ------------
FINANCING ACTIVITIES:
Payment of stock guarantee on debt issuance.................... (350,000)
Proceeds from the secondary offering........................... 21,247,200
Costs incurred in connection with the secondary offering....... (3,252,874)
Redemption of preferred stock.................................. (8,676,935)
Costs incurred in connection with the preferred stock
issuance..................................................... (16,081)
Deferred financing costs incurred.............................. (7,231,121) (48,948)
Proceeds of long-term notes payable............................ 55,006,729 6,094,673
Principal payments on long-term debt:
Notes payable................................................ (18,974,379) (2,035,553)
Capitalized lease obligations................................ (148,302) (65,121)
Net costs incurred in connection with Common Stock issuances... (51,803)
Net proceeds from the exercise of stock options and warrants... 12,684 135,291
------------- ------------
Net cash provided by financing activities.............. 28,263,808 13,381,652
------------- ------------
NET INCREASE IN CASH............................................. 2,274,876 267,589
CASH, BEGINNING OF YEAR.......................................... 966,140 698,551
------------- ------------
CASH, END OF YEAR................................................ $ 3,241,016 $ 966,140
------------- ------------
------------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest......................... $ 2,990,156 $ 1,568,093
Cash paid during the year for income taxes..................... $ 27,548
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
During Fiscal 1998, long-term notes payable of $182,230 were incurred for
the purchase of property and equipment. Capitalized lease obligations of $31,623
and $336,635 were incurred for the acquisition of property and equipment for the
years ended June 30, 1998 and 1999, respectively.
During Fiscal 1998, the Company recorded deemed dividends and accretion on
such deemed dividends totaling $2,044,152, in connection with the Preferred
Stock issuance, with a corresponding charge to accumulated deficit.
During Fiscal 1998, $1,000,000 of Preferred Stock, and $125,000 in deemed
dividends and accretion on such deemed dividends were converted into 300,000
shares of Common Stock.
During Fiscal 1998, the Company recorded additional paid-in capital of
$1,016,181, with a corresponding charge to accumulated deficit, to reflect the
fair value of the additional warrants issued to the preferred shareholders (see
Note 9 of Notes to Consolidated Financial Statements of the Company).
During Fiscal 1999, the Company issued 119,632 shares of its Common Stock to
a lender in connection with the refinancing of the Company's indebtedness. As a
result, the Company recorded deferred financing costs in the amount of $780,000,
Common Stock of $957 and additional paid-in capital of $779,043. In addition,
the Company recorded deferred financing costs of $311,383 with a corresponding
entry to additional paid-in capital related to a stock price guarantee on these
shares (see Note 7 of Notes to Consolidated Financial Statements of the
Company).
During Fiscal 1998, the holder of stock purchase warrants exercised the
warrants and received 107,263 shares of Common Stock and shares of Series B
Preferred Stock convertible into 102,319 shares of Common Stock. During Fiscal
1998, the holder converted the Series B Preferred Stock into Common Stock.
On February 13, 1998, the Company entered into an amended and restated Loan
and Security Agreement with Mellon increasing the Credit Line to $18,000,000. In
connection with the Company's amended and restated Loan and Security Agreement,
the Company issued 40,000 shares of Common Stock, valued at $267,500, to APT
Holdings Corporation (an affiliate of Mellon), and 15,000 shares of Common
Stock, valued at $90,000, to a consultant.
During Fiscal 1998, the Company increased monitoring contract costs and the
corresponding transition costs liability (included in accrued expenses and other
current liabilities) in the amount of $90,164.
During Fiscal 1998 and Fiscal 1999, the Company issued 686,664 and 1,024,835
shares of Common Stock, valued at $4,489,119 and $4,013,422, respectively, in
connection with acquisitions (see Note 2 of Notes to Consolidated Financial
Statements of the Company). During Fiscal 1998 and Fiscal 1999, the Company
issued 2,900 and 15,166 shares of Common Stock, respectively, pursuant to
guarantees of stock valuations, in connection with past acquisitions of
monitoring contracts. The Company also canceled 2,666 shares of Common Stock
pursuant to guarantees of stock valuations, during both Fiscal 1998 and Fiscal
1999.
During Fiscal 1998, the Company reduced amounts receivable and recorded
monitoring contract costs in the amount of $4,326 in connection with the
purchase of monitoring contracts.
During Fiscal 1998 and Fiscal 1999, long term notes payable in the amounts
of $200,000 and $650,000, respectively were incurred for the acquisition of
monitoring contracts.
F-8
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
(CONTINUED)
During Fiscal 1998, the Company issued 1,334 shares of Common Stock, valued
at $10,000, as an employee bonus.
See notes to consolidated financial statements.
F-9
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of Response USA, Inc., its wholly owned
subsidiaries Response Ability Systems, Inc., United Security Systems, Inc.
("USS), d/b/a Triple A Protection ("Triple A"), Response Acquisition Corp.,
Emergency Response Systems, Inc., Organization for Enhanced Capability, Inc.,
The Jupiter Group, Inc., d/b/a Triple A Security Patrol ("Triple A Patrol"), In
Home Health, Inc. and Health Watch, Inc. All significant intercompany
transactions and balances have been eliminated.
Subsequent to June 30, 1999, the Company sold two of its wholly owned
subsidiaries, United Security Systems, Inc. and The Jupiter Group, Inc. to
Vector Security, Inc. (the "Security Sale"). The sale took place on September
30, 1999. See Note 16 to the consolidated financial statements for further
discussion. The financial statements do not include any adjustments as a result
of the Security Sale.
NATURE OF BUSINESS AND REVENUE RECOGNITION--The Company is a fully
integrated security systems provider engaged in the monitoring, sale,
installation and maintenance of residential and commercial security systems and
personal response systems ("PRS"). 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, Maryland and Connecticut. The Company provides security patrol
services in the northeast region of Pennsylvania as a supplement to its alarm
monitoring services. The Company performs it security and patrol services
through United Security Systems, Inc. and The Jupiter Group, Inc. The Company is
also a nationwide provider of PRS products which enable individual users, such
as elderly or disabled persons, to transmit a distress signal using a portable
transmitter. The Company performs its PRS services through Response Ability
Systems, Inc., Emergency Response Systems, Inc., Organization for Enhanced
Capability, Inc., In Home Health, Inc. and Health Watch, Inc. Revenues from the
sale of PRS 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 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. 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.
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
F-10
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS (CONTINUED)
identification method are included in operations; temporary unrealized holding
gains and losses are reported as a separate component of stockholders' equity.
INVENTORY--Inventory is stated at the lower of cost (first-in, first-out
method) or market. The Company periodically evaluates the need to record
adjustments for impairment of inventory. The Company's policy is to evaluate all
inventory, including parts inventory and finished units on hand. Inventory in
excess of the Company's estimated usage requirements is written down to its
estimated net realizable value. Inherent in the estimates of net realizable
value are management estimates related to the Company's future sales levels,
customer demand and possible alternative uses of potentially excess inventory.
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 costs, if
necessary. 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.
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 is eliminated from the accounts and
any resulting gain or loss is credited or charged to operations. Depreciation
and amortization are provided using the straight-line method over the estimated
useful lives of the assets.
DEFERRED FINANCING COSTS AND AMORTIZATION--Costs incurred in connection with
various financing have been deferred; amortization is provided using the
effective interest 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
intangibles 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--Effective July 1, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME. This statement establishes standards for reporting and
disclosure of comprehensive income. Reclassification of financial information
F-11
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS (CONTINUED)
for earlier periods presented for comparative purposes are required under SFAS
No. 130. As this statement only requires additional disclosures in the Company's
financial statements, its adoption did not have any impact on the Company's
financial position or results of operations.
Effective July 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement establishes
standards for the reporting of information about operating segments and requires
the reporting of selected information about operating segments in financial
statements. Reclassification of segment information for earlier periods
presented for comparative purposes are required under SFAS No. 131. As this
statement only requires additional disclosures in the Company's financial
statements, its adoption did not have any impact on the Company's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement, which was amended in June 1999, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities, and is effective for
all interim and annual periods beginning after June 15, 2000. The Company will
adopt SFAS 133 for the year beginning July 1, 2000. The Company has not yet
determined the impact SFAS No. 133 will have on its consolidated financial
position or results of operations.
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.
In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE, which
was adopted by the Company effective for the year ended June 30, 1998, as
required by the statement. For the years ended June 30, 1998 and 1999, the
potential common shares have an antidilutive effect on the computation of
diluted loss per common share, and have, therefore, been excluded. Accordingly,
diluted loss per common share has not been presented.
F-12
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS (CONTINUED)
The following table summarizes those securities that could potentially
dilute loss (earnings) per common share for common shareholders in the future
that were not included in determining loss per common share, as the effect is
antidilutive.
<TABLE>
<CAPTION>
JUNE 30,
----------------------
<S> <C> <C>
1999 1998
---------- ----------
Potential Common Shares resulting from:
Stock options....................................................... 697,242 1,159,681
Warrants............................................................ 946,150 2,008,760
---------- ----------
1,643,392 3,168,441
---------- ----------
---------- ----------
</TABLE>
2. ACQUISITIONS
On February 11, 1998, the Company acquired substantially all of the assets
of Triple A. Triple A 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 paid Triple A an aggregate
of $13,056,650, consisting of $10,061,577 in cash (including acquisition costs
incurred of $61,577) and 460,780 shares of its common stock, valued at
$2,995,073; additionally the Company assumed certain liabilities totaling
$1,142,664. The purchase price was allocated based on the fair market value of
the assets acquired and liabilities assumed.
On February 11, 1998, the Company acquired all of the outstanding stock of
Triple A Patrol, a patrol service company. Robert L. May, the sole stockholder
of Triple A, was an 80% shareholder of Triple A Patrol. Triple A Patrol's
services are principally supplied in areas in which the Company 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 activation's and "special
watch" services, such as increased surveillance when the customer is on
vacation. In consideration of the acquisition, the Company issued 161,050 shares
of Common Stock, valued at $1,040,107, subject to adjustment. The purchase price
was allocated based on the fair market value of the assets acquired and
liabilities assumed.
On October 1, 1998, the Company acquired all of the issued and outstanding
stock (the "Stock") of Health Watch, Inc., a Florida Corporation ("Health Watch"
or "the Sellers"), pursuant to a Stock Purchase Agreement dated as of September
16, 1998 (the "Stock Purchase Agreement"). Health Watch is in the business of
marketing and monitoring personal response systems ("PRS"), which are designed
to summon help in a medical emergency when activated by the subscriber. In
consideration of the acquisition of approximately 10,000 subscriber accounts,
the Company paid an aggregate of $13,024,134 (including acquisition costs
incurred of $253,354), consisting of $9,360,188 in cash and 901,077 shares (the
"Payment Shares") of the Company's common stock valued at $3,663,946. The
Company was holding 60,240 of these shares in escrow pending final purchase
price adjustments. Subsequent to June 30, 1999, 42,041 of these shares were
released from escrow and the remaining 18,199 shares were canceled. The purchase
price was allocated based on the fair market value of the assets acquired and
liabilities assumed. The Company has agreed to guarantee the proceeds to be
received by the Sellers in connection with the sale of the Payment Shares (see
Note 12).
F-13
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
2. ACQUISITIONS (CONTINUED)
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 Health Watch during the 30 month period
following the closing as well as in the event of other transactions, such as the
sale of significant accounts (see Note 16). Also, in connection with the Health
Watch acquisition, the Company entered into employment agreements with each of
former owners of Health Watch. The employment agreements have a term of three
years commencing on October 1, 1998 and are terminable by the Company under
certain circumstances. In addition, so long as either of the former owners of
Health Watch is employed by the Company or any of its affiliates, they are
entitled to a single seat, at their request, on the Board of Directors of the
Company. As of June 30, 1999, they have not requested such appointment to the
Board of Directors.
The following unaudited proforma combined operating information for the
years ended June 30, 1999 and 1998, gives effect for the following: (i) the
Company's acquisitions of Triple A, Triple A Patrol and Health Watch, (ii) the
issuance of common stock for the acquisitions of Triple A and Triple A Patrol
and the conversion and redemption of Preferred Stock (see Note 9), and (iii) 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, as if all such events had been completed at July 1,
1997. The operations of Triple A and Triple A Patrol are included in the
Company's historical results for the year ended June 30, 1999. The pro forma
information is based on the historical financial statements of the Company,
Triple A, Triple A Patrol and Health Watch, giving effect to the transactions
under the purchase method of accounting.
The unaudited pro forma combined operating information may not be indicative
of the results that actually would have occurred if the transactions had
occurred on July 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
<S> <C> <C>
1999 1998
-------------- --------------
Operating revenues............................................ $ 28,205,380 $ 23,810,433
Loss before extraordinary item................................ (12,693,770) (11,855,719)
Net loss...................................................... (15,261,576) (11,855,719)
Net loss applicable to common shareholders.................... (15,261,576) (11,855,719)
Net loss per common share applicable to common shareholders... $ (2.00) $ (1.68)
Weighted average number of shares outstanding................. 7,622,082 7,048,905
</TABLE>
During the year ended June 30, 1998, the Company acquired additional
monitoring contracts for an aggregate purchase price of $3,723,189. As
consideration, the Company paid $2,695,331 in cash, including acquisition and
assimilation costs of $172,653, a note payable in the amount of $200,000 payable
over two years, issued 64,834 shares of the Company's common stock valued at
$453,939, recorded purchase holdbacks of $279,429 (which are payable over
periods of up to two years based on performance guarantees of the seller),
accrued transition costs of $90,164, and reduced accounts receivable in the
amount of $4,326. The purchase price was allocated based on the fair market
value of the assets acquired and liabilities assumed. The pro forma effects of
these acquisitions are not considered material.
During the year ended June 30, 1999, the Company acquired additional
monitoring contracts for an aggregate purchase price of $7,620,416. As
consideration, the Company paid $5,953,801 in cash (including
F-14
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
2. ACQUISITIONS (CONTINUED)
acquisition and assimilation costs of $349,377), incurred notes payable of
$650,000 payable over five years, issued 123,758 shares of the Company's common
stock valued at $732,777, and increased purchase holdbacks in the amount of
$283,838. As part of one such acquisition, the Company issued 163,043 shares of
its common stock valued at $975,000, to be held in escrow to guarantee a note
payable of $500,000, (the "Acquisition Note"), and a purchase holdback of
$100,000. The Acquisition Note agreement required 146,321 shares, valued at 175%
of the original note amount to be placed in escrow. The agreement also requires
the Company to place additional shares into escrow if the value of the escrow
shares falls to below 150% of the original note. The Company has recorded the
shares issued in connection with the guarantee of the Acquisition Note at the
original Acquisition Note balance, $500,000, and recorded a corresponding amount
to Collateral Shares in Escrow in Stockholder's Equity. The shares in escrow
related to the remaining 75% of the Acquisition Note value and the purchase
holdback were recorded at par value. The Company has placed an additional
291,179 shares in escrow in accordance with the Acquisition Note Agreement. Such
shares have been recorded at their par value. The purchase price was allocated
based on the fair market value of the assets acquired and liabilities assumed.
The pro forma effects of these acquisitions are not considered material.
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. 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 HealthLink, and the
contribution of the Company's 50% interest in BKR's assets to HealthLink.
HealthLink is engaged in the sale and monitoring of PRS to the general public
primarily through national retail and pharmacy chains. In consideration of the
Joint Venture, the Company issued 364,721 shares of Common Stock, valued at
$3,300,000, to BKR for their 50% interest in HealthLink.
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 was being amortized by the straight-line method over 10
years.
In the fourth quarter of Fiscal 1998, the Company recorded a non-cash
impairment loss of $2,532,772, related to the write-down of its investment in
the joint venture, including approximately $1,300,000 in goodwill. The Company
considered the continued operating losses of the joint venture, the inability to
find a media partner, and the projected future cash flows from the joint venture
to be its primary indicators of an impairment loss.
BKR, as part of the purchase agreement, was granted 150,000 warrants to
purchase shares of the Company's common stock subject to certain provisions. On
February 9, 1999, the Company acquired all of the existing monitoring contracts
of HealthLink for $125,000 and paid $250,000 to satisfy a stock price guarantee.
On this date, all warrants issued to BKR were canceled.
F-15
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
3. INVESTMENT IN JOINT VENTURE (CONTINUED)
The following summary of financial data has been derived from the unaudited
financial statements of HealthLink for the year ended June 30, 1998:
<TABLE>
<S> <C>
Operating revenues.............................................. $ 106,830
Cost of revenues................................................ 76,446
---------
Gross profit.................................................... 30,384
Selling, general and administrative expenses.................... 865,604
Interest expense................................................ 38,203
---------
Net loss........................................................ $(873,423)
---------
---------
Current Assets.................................................. $ 7,012
Working capital (deficiency).................................... (600,719)
Total Assets.................................................... 3,067,223
Current Liabilities............................................. 607,731
Stockholders' Equity............................................ 2,459,492
</TABLE>
4. NONRECURRING CHARGES
During the fourth quarter of Fiscal 1998 and the year ended June 30, 1999,
the Company recorded nonrecurring charges totaling $838,581 and $208,501,
respectively. The majority of these charges related to employee severance costs
and were incurred in connection with management's plan to reduce costs and
improve operating efficiencies for the monitoring and servicing of its existing
customer base. The plan involved the transfer of its subscriber base to its own
central stations and the consolidation of its support infrastructure. All of
these charges were expensed as incurred. As such, none of these charges are
accrued for at June 30, 1999.
Nonrecurring charges consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
<S> <C> <C>
1999 1998
---------- ----------
Employee severance and related costs.................................. $ 198,721 $ 693,504
Abandoned fixed assets and inventory.................................. 9,780
Abandoned leases...................................................... 60,000
Other................................................................. 85,077
---------- ----------
$ 208,501 $ 838,581
---------- ----------
---------- ----------
</TABLE>
5. INVENTORY
As of June 30, 1999, inventory consisted of the following:
<TABLE>
<S> <C> <C>
Parts inventory...................................... $1,995,524
Finished goods....................................... 1,057,238
---------
3,052,762
Reserve for obsolescence............................. (431,710)
---------
$2,621,052
---------
---------
</TABLE>
F-16
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
6. PROPERTY AND EQUIPMENT
As of June 30, 1999, property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
------------
<S> <C> <C>
Office furniture and equipment................................... 5 years $ 4,998,823
Equipment held for lease......................................... 5 years 5,056,542
Automotive equipment............................................. 3 years 1,223,063
Leasehold improvements........................................... 5 years 507,443
11,785,871
Less accumulated depreciation and amortization (Includes
$2,558,505 for equipment held for lease)....................... (5,896,462)
-------------
$ 5,889,409
-------------
-------------
</TABLE>
7. LONG-TERM NOTES PAYABLE
<TABLE>
<S> <C>
RECEIVABLE FINANCING AGREEMENT
Principal payments payable as follows: $1,493,302--fiscal year 2000,
$4,122,649--fiscal year 2001, $6,501,105--fiscal year 2002,
$8,558,736--fiscal year 2003, and $31,005,233-- fiscal year 2004; plus
interest of 7.25%--8.0% on the outstanding loan balance; collateralized by
related monitoring contracts. $51,681,025
EQUIPMENT FINANCING
Payable in monthly installments aggregating $41,005 including interest at rates
ranging from 2.94% to 11.83%; final payments due July 1999 through February,
2004; collateralized by related equipment 648,662
OTHER
Note payable in monthly installments of $10,258 including interest at 8.5%;
final payment due July, 2003 422,335
Note payable in monthly installments of 2,086 including interest at 10.0%;
final payment due February, 2002 60,059
Notes payable in monthly installments aggregating $6,750 including interest at
8.0%; final payment due January, 2001 120,864
Notes payable in monthly installments of $9,046 including interest at 8.0%;
final payments due March, 2000 70,240
Notes payable in monthly installments of $6,234 including interest at 8.0%
final payment due July 2004 677,647
----------
53,680,832
Less current portion 2,004,600
----------
$51,676,232
----------
----------
</TABLE>
F-17
<PAGE>
Principal payments on long-term notes payable for the next five years are
due as follows: years ending June 30, 2000--$2,004,600; 2001--$4,441,937;
2002--$6,798,413; 2003--$8,876,343; 2004--$31,207,880 and thereafter--$351,659.
The Company's total debt outstanding at June 30, 1999 includes $31,646,445
(including current debt of $871,632) related to its security operations that
were sold on September 30, 1999 (see Note 16).
On July 30, 1998, the Company completed a refinancing of its existing
indebtedness with Mellon Bank with a new long-term debt facility with McGinn,
Smith Capital Holdings Corp. ("MSCH"). In connection with the refinancing, the
Company incurred a charge for loss on debt extinguishment of $2,567,806 during
the year ended June 30, 1999. As part of such restructuring, United Security
Systems, Inc. ("USS") a subsidiary of the Company, sold certain of its alarm
monitoring contracts (the "Purchased Contracts") to its newly created, wholly
owned subsidiary, Response Acquisition Corp. ("RAC"), for aggregate
consideration of $26,000,000 pursuant to a Purchase Agreement dated July 30,
1998 (the "Purchase Agreement"), between USS and RAC. Also on July 30, 1998, in
a related transaction, RAC entered into a Receivable Financing Agreement dated
July 30, 1998 (the "Financing Agreement"), among RAC, USS and MSCH in the amount
of $26,000,000 (the "Initial Loan") and granted MSCH a first priority perfected
security interest in the receivables derived from the Purchased Contracts (the
"Receivables"). The Initial Loan has a term of five years and bears interest at
a rate of 8% per annum. Subsequent to the Initial Loan, RAC received additional
financing (the "Additional Financing") from MSCH in the amount of $26,163,833
and granted MSCH a first priority perfected security interest in the receivables
derived from the Purchased Contracts. The Additional Financing also has a term
of five years and bears interest at rates of 7.25%-- 8.0% per annum. The
Receivables are paid directly into a lockbox administered by USS as Collection
agent under the Financing Agreement. Under the terms of the Financing Agreement,
all funds derived from the Receivables will be paid to the lockbox account and
MSCH will be paid its monthly payment of principal and interest under the Loan
out of such lockbox account prior to any payments to the Company. Under the
Financing Agreement, RAC has a total credit facility of $70,000,000, of which
$52,163,833 has been used and $17,836,167 remains available for future
borrowing. RAC may borrow additional funds from time to time pursuant to the
Financing Agreement by pledging additional Purchased Contracts, which it may
purchase from USS pursuant to the Purchase Agreement to MSCH. A portion of the
proceeds from the Financing Agreement was used to satisfy existing indebtedness
of the Company and the remaining amount has been and will be used for
acquisitions and general working capital.
Under the MSCH Financing Agreement, the Company is required to pay financing
fees of 15% to the lender for each additional borrowing at the time of the
financing. These financing fees are recorded as debt issuance costs and are
amortized over five years, the term of the notes, using the effective interest
method. Taking these debt issuance costs into consideration, the Company's
effective interest rates under the Financing Agreement range from 12.06% to
12.75%. In connection with the various borrowings under the Financing Agreement,
the Company recorded debt issuance costs of $8,322,504, of which $7,231,121 was
paid in cash and $780,000 was paid in 119,632 shares of Common Stock (the "Fee
Shares"). The Company has agreed that in the event the proceeds to be derived by
MSCH from the sale of the Fee Shares is less than $780,000, the Company is
obligated to, at its option pay cash or issue additional shares equal to the
amount of the shortfall, if any. This guarantee was recorded as additional
paid-in capital and deferred financing costs. In June 1999, the Company and MSCH
entered into an agreement whereby the Company would pay MSCH the total shortfall
of $505,649 in cash, which has been recorded as a reduction in additional
paid-in capital.
On June 30, 1999, the Financing Agreement was modified. As of June 30, 1999,
RAC merged into USS, and USS was the surviving corporation. Also on June 30,
1999, the following events occurred: Three Delaware limited liability companies
were formed: (i) Response Alarm Monitoring, LLC ("RAM"); (ii) Response Security
Monitoring, LLC ("RSM"); and (iii) Response Security Systems, LLC ("RSS")
(collectively, referred to as the "LLCs"). USS was the sole Member of each LLC.
Each of the LLCs then entered into Purchase Agreements with USS (the "Second
Purchase Agreements") pursuant to which each
F-18
<PAGE>
LLC purchased certain contracts and receivables from USS. RAM purchased alarm
receivables and contracts from USS, RSM purchased PRS receivables and contracts
from USS, and RSS was intended for future contract acquisitions. Each of the
LLCs also entered into Receivable Financing Agreements with MSCH (the "Second
Receivable Agreements"), under which MSCH provided financing to each LLC for its
purchase of the respective receivables and contracts from USS.
The Financing Agreement contains certain provisions that significantly
restrict the LLCs' ability to make any loans, advances or other distributions to
any other entity. The borrowings under the Financing Agreement are secured by
the capitalized monitoring contracts held by RAC. At June 30, 1999 the net book
value of such monitoring contracts was $37,785,304.
In contemplation of the Company's sale of USS to Vector Security, Inc., the
financing arrangement described was further modifed as follows: USS assigned and
transferred its Membership Interests in RSS and RSM to the Company's wholly
owned subsidiary, Response Ability Systems, Inc., a New Jersey Corporation. USS
maintained its Membership Interest in RAM, which was sold to Vector Security,
Inc. as part of the Security Sale (see Note 16).
On September 30, 1999, the Company sold its stock in USS to Vector Security,
Inc. and paid off approximately $30,628,000, including accrued interest, of the
MSCH Financing Agreement in respect of RAM. As of the closing of the Security
Sale, approximately $26,200,000 is outstanding to MSCH under the MSCH Financing
Agreement in respect of RSS and RSM and approximately $13,800,000 is available
for future borrowings. Substantially all of the Company's $830,000 in MRR has
been pledged pursuant to the MSCH financing Agreement.
8. CAPITALIZED LEASE OBLIGATIONS
The Company leases office furniture and equipment with a cost of $700,434
and a net book value of $459,701 at June 30, 1999, 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, 1999.
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- ----------------------------------------------------------------------------------
<S> <C>
2000.............................................................................. $ 192,715
2001.............................................................................. 138,411
2002.............................................................................. 122,421
2003.............................................................................. 48,391
2004..............................................................................
----------
Total minimum lease payments...................................................... 501,938
Less amount representing interest................................................. (65,217)
----------
Present value of net minimum lease payments....................................... $ 436,721
----------
----------
</TABLE>
The Company's total obligation under capitalized leases at June 30, 1999
includes $424,958 (including short-term obligations of $159,273) related to its
security operations that were sold on September 30, 1999 (see Note 16).
9. STOCKHOLDERS' EQUITY
In May 1996, the Company authorized the issuance of 7,500 shares of 1996
Series A Convertible Preferred Stock. During the year ended June 30, 1997, the
Company suspended conversion of its Preferred Stock. Subsequent to the
suspension of the conversion of the Preferred Stock, the Company reached two
separate settlement agreements with the preferred shareholders, whereby some of
the shareholders received an aggregate of 98,166 warrants (the "Preferred
Warrants") and others received an aggregate of 147,250 additional warrants (the
"Additional Warrants"). The Preferred Warrants entitle the holders to
F-19
<PAGE>
9. STOCKHOLDERS' EQUITY (CONTINUED)
purchase Common Stock of the Company for $6.00 per share and are fifty percent
exercisable after June 27, 1998 and fifty percent exercisable after June 27,
1999. The Additional Warrants, which are redeemable by the Company, are
exercisable at a price per share of $10.125 and entitle the holder thereof to
purchase one share of Common Stock per Additional Warrant. The value of these
Additional Warrants, $1,016,181, was recorded as a dividend to the preferred
shareholders. Of such Additional Warrants, fifty percent are exercisable after
December 1, 1998 and fifty percent are exercisable after December 1, 1999. The
Additional Warrants expire after November 30, 2007.
In consideration of the issuance of the Preferred Warrants as amended, and
subject to the terms and conditions set forth in the Settlement Agreement, each
Holder agreed (i) to give its proxy and its consent in favor of the Amendment
and (ii) to refrain from any and all conversions of such Holder's Preferred
Stock, pursuant to the terms of the original Certificate of Designation, until
the earlier of February 12, 1998 or upon the occurrence of defaults on certain
dates. On February 10, 1998, all outstanding shares of Preferred Stock were
redeemed for cash of $8,676,935.
During the year ended June 30, 1998, deemed convertible preferred stock
dividends totaling $1,970,528, respectively, were recorded relating to the
Preferred Stock. As a result of the beneficial conversion feature contained
within the preferred stock dividend, the Company recorded a discount on
Preferred Stock in the amount of $73,624 in the year ended June 30, 1998.
On February 10, 1998, the Company completed a public offering whereby it
issued 3,000,000 shares of its Common Stock, at $6.50 per share. The
underwriters exercised their overallotment option to purchase an additional
268,800 shares of the Company's Common Stock on March 31, 1998. As a result, the
Company received net proceeds from such offering of approximately $18,000,000,
after giving effect to underwriting discounts and commissions and other expenses
of the offering. The net proceeds from the sale of Common Stock were used for
the acquisition of Triple A (see Note 2), and the reduction of amounts
outstanding under the Credit Line, which amounts were subsequently borrowed to
fund the redemption of the Company's Preferred Stock (see Note 9). In connection
with the offering, the Underwriters received warrants to purchase up to an
aggregate of 300,000 shares of Common Stock at an exercise price of $9.10.
The Company has a 1997 Stock Option Plan which provides for the grant of
stock options to key employees of the Company to purchase a maximum of 600,000
shares of Common Stock. On January 6, 1998, and effective February 5, 1998, the
Board of Directors granted incentive stock options to Directors and Officers of
the Company to purchase 500,000 shares of Common Stock at an exercise price
equal to the average of the closing bid and ask prices as quoted on the NASDAQ
Small Cap Market on the effective date of the Company's secondary public
offering, or $6.03, expiring on February 8, 2003. The vesting schedule for the
incentive stock options are as follows: (i) 225,000 options vested as of
February 5, 1998; (ii) 195,000 options will vest at one-third annually on each
anniversary date of grant; and (iii) the remaining 80,000 options vest ratably
over a period of one year from the date of grant. In the event of a change in
control of the Company, all options will vest immediately (see Note 16). In
October 1998, the Board of Directors granted incentive stock options to various
employees to purchase 93,875 shares of the Company's Common Stock at an exercise
price equal to the market value of the Company's Common Stock on the grant date.
The options vest immediately.
In November 1998, the Company extended the exercise period on 112,500
options issued to former directors in connection with their resignations. The
amendments extended the exercise period, which was to have expired within three
months after their resignations, to six months and two years from the directors'
normal service period. This revision constituted a new measurement date and,
accordingly, the effect of the change in fair value has been included in the pro
forma figures below.
F-20
<PAGE>
9. STOCKHOLDERS' EQUITY (CONTINUED)
In Fiscal 1999, the shareholders of the Company approved the 1999 Stock
Option Plan, which provides for the grant of stock options to employees,
officers, directors or outside consultants of the Company to purchase up to
750,000 shares of the Company's Common Stock. In March 1999, the Board of
Directors granted incentive stock options to Directors of the Company to
purchase 90,000 shares of the Company's Common Stock at an exercise price equal
to the market value of the Company's stock on the grant date, under the 1999
Stock Option Plan. The options vest immediately.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
OPTION WEIGHTED
PRICE AVERAGE
NUMBER PER SHARE EXERCISE
OF SHARES (RANGE) PRICE
---------- -------------- -----------
<S> <C> <C> <C>
Options outstanding at June 30, 1997...................................... 679,653 $ .03--$13.35 $ 2.061
Options granted......................................................... 500,000 6.03 6.03
Options exercised....................................................... (19,972) .30--7.875 6.775
---------- -------------- -----------
Options outstanding at June 30, 1998...................................... 1,159,681 .03--13.35 3.691
---------- -------------- -----------
Options granted........................................................... 183,875 2.06--4.063 3.09
Options exercised......................................................... (422,800) 0.03 0.03
Options canceled or expired............................................... (223,514) .30--7.875 4.64
---------- -------------- -----------
Options outstanding at June 30, 1999...................................... 697,242 $ .30--13.35 $ 5.45
---------- -------------- -----------
---------- -------------- -----------
Options exercisable at June 30, 1999...................................... 567,242 $ .30--13.35 $ 5.31
---------- -------------- -----------
---------- -------------- -----------
</TABLE>
The following table summarizes information about the Company's stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED
OUTSTANDING REMAINING AVERAGE
JUNE 30, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICE 1999 LIFE PRICE
- ------------------------------------------------------ ----------- ------------- -----------
<S> <C> <C> <C>
$0.30................................................. 633 28 months $ 0.30
$2.06--4.063.......................................... 173,525 114 months 3.02
$6.03................................................. 500,000 103 months 6.03
$7.875................................................ 9,334 28 months 7.875
$13.35................................................ 13,750 73 months 13.35
</TABLE>
The Company accounts for its stock options plans in accordance with
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized for stock option awards, since the exercise price of all options
granted was at or above, the market value of the Company's common stock. Had
compensation cost for the Plans been determined consistent with SFAS No. 123,
ACCOUNTING FOR STOCK
F-21
<PAGE>
9. STOCKHOLDERS' EQUITY (CONTINUED)
BASED COMPENSATION, the Company's pro forma net loss and loss per share for June
30, 1999 and 1998 would have been as follows:
<TABLE>
<CAPTION>
REPORTED PRO FORMA
------------- -------------
<S> <C> <C>
1999 Net loss...................................................................... $ 14,830,642 $ 15,753,780
1999 Net loss applicable to common shareholders.................................... 14,830,642 15,753,780
1999 Net loss per share, basic and diluted......................................... $ 2.01 $ 2.13
1998 Net loss...................................................................... $ 9,665,503 $ 10,715,390
1998 Net loss applicable to common shareholders.................................... 12,875,836 13,925,723
1998 Net loss per share, basic and diluted......................................... $ 3.48 $ 3.77
</TABLE>
The fair value of the stock options issued during the fiscal years ended
June 30, 1998 and 1999 were $3.68 and from $1.23 to $2.43, respectively.
The fair value of options granted under its stock option plans during Fiscal
1998 and Fiscal 1999 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 79% and 75% for 1998 and 1999, respectively
(iii) risk free interest rate of between 5.44% and 6.00%
(iv) expected lives of 4 years
The following is a summary of warrant activity:
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE
OF SHARES PER SHARE
----------- -------------
<S> <C> <C>
Warrants outstanding, June 30, 1997.............................. 1,905,555 $ 4.50-24.00
Warrants granted to underwriter.................................. 300,000 9.10
Warrants issued to preferred shareholders........................ 147,250 10.13
Warrants exercised in connection with refinancing................ (209,582) 4.50
Warrants canceled in connection with refinancing................. (134,463) 4.50
----------- -------------
Warrants outstanding, June 30, 1998.............................. 2,008,760 $ 6.00-24.00
----------- -------------
----------- -------------
Warrants canceled or expired..................................... (1,062,610) 7.50-9.75
----------- -------------
Warrants outstanding, June 30, 1999.............................. 946,150 $ 6.00-24.00
----------- -------------
----------- -------------
</TABLE>
F-22
<PAGE>
10. 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>
1999 1998
------------- -------------
Amount computed using the statutory rate........................ $ (5,042,418) $ (3,286,271)
Increase (decrease) in taxes resulting from:
Nondeductible expenses.......................................... 198,465 13,478
State taxes, net of federal taxes............................... 18,183
Federal tax valuation allowance................................. 4,853,318 3,272,793
------------- -------------
Income taxes.................................................... $ 27,548 $
------------- -------------
------------- -------------
</TABLE>
At June 30, 1999, the cumulative temporary differences resulted in net
deferred tax assets or liabilities consisting primarily of:
<TABLE>
<S> <C>
Deferred tax assets:
Capital loss carryover...................................... $ 17,362
Deferred restructuring costs................................ 43,200
Deferred consulting......................................... 380,600
Other....................................................... (6,521)
Accounts receivable reserves................................ 247,240
Inventory reserves.......................................... 2,330
Property.................................................... 3,018,518
Warranty reserves........................................... 113,305
Accrued vacation accrual.................................... 142,268
Uncollected interest revenue................................ 117,435
Charitable contributions.................................... 5,763
Net operating loss carryforwards............................ 12,850,270
------------
Less valuation allowance.................................... 16,931,770
(16,931,770)
------------
$ --
------------
------------
</TABLE>
F-23
<PAGE>
10. 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>
2001........................................................... 1,340,521
2002........................................................... 3,600,764
2003........................................................... $ 254,200 3,540,941
2004........................................................... 23,100 2,502,248
2005........................................................... 929,026
2006........................................................... 15,000 420,974
2007...........................................................
2008........................................................... 136,300
2009........................................................... 3,605,100 390,100
2010........................................................... 2,997,000 147,800
2011........................................................... 3,504,400 160,100
2012........................................................... 4,925,067 217,357
2013........................................................... 3,760,602 138,301
2014........................................................... 15,910,109 2,504,410
------------- -------------
$ 34,994,578 $ 16,028,842
------------- -------------
------------- -------------
</TABLE>
The Company's ability to utilize the net operating loss carryforward amounts
disclosed above may be significantly limited under Internal Revenue Code ("IRC")
Section 382 as a result of various changes affecting the Company's capital
structure during 1999 and prior years.
11. PROFIT SHARING PLAN
Effective June 1, 1995, the Company established a qualified profit sharing
plan under section 401(k) of the IRC, covering certain of its salaried
employees. The Company contributes 75% of each participant's elective deferral
up to maximum Company contributions of 3.75% of eligible salaries. Contributions
to the plan by the Company for Fiscal 1998 and Fiscal 1999 were $92,950 and
165,897, respectively.
12. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS--The Company has employment contracts with certain key
personnel for terms expiring through February 2001. At June 30, 1999, these
contracts provide for annual base salaries aggregating $1,441,000. Subsequent to
June 30, 1999, in connection with the Security Sale (see Note 16), the Company
made aggregate payments under these employment contracts of $1,672,360.
Subsequent to the Security Sale, the Company is no longer obligated to pay
annual salaries totaling $391,000.
CONSULTING AGREEMENT--The Company has a yearly renewable consulting
agreement with a director of the Company, in which the director of the Company
will receive $4,000 per month in consideration for providing certain consulting
services to the Company.
F-24
<PAGE>
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS--The Company leases its facilities and various equipment
under operating leases expiring at various dates through February 2008. The
following is a schedule of future minimum rental payments required under these
leases:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- --------------------------------------------------------------------------------
<S> <C>
2000............................................................................ $ 456,900
2001............................................................................ 347,315
2002............................................................................ 227,878
2003............................................................................ 108,364
2004............................................................................ 12,300
------------
$ 1,152,757
------------
------------
</TABLE>
The leases provide that the Company pay as additional rent taxes, insurance
and other operating expenses applicable to the leased premises. Total rent
expense under all operating leases aggregated $431,662 and $665,416 for Fiscal
1998 and Fiscal 1999, respectively.
OTHER COMMITMENTS--The Company anticipates transferring all of its PRS
subscriber accounts from the Triple A Monitoring Station to the Boca Raton
Monitoring Station during Fiscal 2000 at an estimated cost of $400,000,
including capital expenditures.
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, the Company has guaranteed the value of its
common stock at various prices ranging from $4.15 to $6.75 for periods expiring
at various dates through October 2003. As of June 30, 1999, the Company's
contingent liabilities under these agreements aggregated $5,651,129, which may
be settled in cash or by the issuance of common stock. Based on a June 30, 1999
market price of $1.84, the Company would be required to issue approximately
3,064,600 shares of its common stock to satisfy this contingent liability.
Subsequent to June 30, 1999, the Company made payments totaling $4,312,672
related to these guarantees (see Note 16).
13. 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 Financing Agreement approximates its fair value
because the interest rates on this obligation approximate market rates.
The carrying amount of equipment financing and capitalized lease obligations
approximates its fair value because the interest rates on these obligations
approximate market rates.
14. INDUSTRY SEGMENT INFORMATION
Upon the adoption of SFAS 131 in 1999, the Company's operations fall into
two industry segments: Security and PRS. Previously, the Company's operations
were considered to be one segment. The Company's Security segment 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. Such services are provided through the use of an
electronic device installed at a customer's location that is monitored by the
Company at its central monitoring station. The Security segment also includes
the
F-25
<PAGE>
14. INDUSTRY SEGMENT INFORMATION (CONTINUED)
Company's security patrol operations. The PRS segment includes monitoring
services designed to monitor, identify and electronically report emergencies
requiring medical, fire or police assistance. Such services are provided through
the use of a transmitter worn by the customer and a receiving base located at
the customer's home which communicates with the Company's central monitoring
station.
These segments are separate strategic business units that offer different
services and are managed separately due to the different technology and
marketing strategies required for each segment. The Security segment includes
the operations of United Security Systems, Inc. and The Jupiter Group, Inc. and
the PRS segment includes the operations of Response Ability Systems, Inc.,
Emergency Response Systems, Inc., Organization for Enhanced Capability, Inc., In
Home Health, Inc., and Health Watch, Inc.
The following table summarizes the Company's financial information by
industry segment. The components of net income (loss) below operating income
(loss) are not separately evaluated by the Company's management on a segment
basis.
<TABLE>
<CAPTION>
CORPORATE AND
SECURITY PRS OTHER TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FISCAL 1999:
Revenues:
Product Sales..................................... $ 3,859,335 $ 919,210 $ 4,778,545
Monitoring and service............................ 12,123,521 7,663,017 19,786,538
Security Patrol................................... 2,864,570 2,864,570
------------- ------------- -------------
Total revenues.................................. 18,847,426 8,582,227 27,429,653
Gross profit........................................ 9,060,030 5,698,863 14,758,893
Depreciation and amortization expense............... 5,257,251 2,741,379 7,998,630
Net loss from operations............................ (3,893,979) (3,471,956) $ (753,021) (8,118,956)
Total assets........................................ $ 39,444,085 $ 27,660,289 $ 1,337,618 $ 68,441,992
FISCAL 1998:
Revenues:
Product sales..................................... $ 2,038,768 $ 1,272,108 $ 3,310,876
Monitoring and service............................ 8,887,636 3,470,732 12,358,368
Security patrol................................... 850,884 850,884
------------- ------------- -------------
Total revenues.................................. 11,777,288 4,742,840 16,520,128
Gross profit........................................ 6,871,741 2,970,249 9,841,990
Depreciation and amortization expense............... 3,227,019 937,362 $ 170,000 4,334,381
Net loss from operations............................ (1,497,983) (973,037) (1,309,565) (3,780,585)
Total assets........................................ $ 33,648,713 $ 6,290,871 $ 2,747,312 $ 42,686,896
</TABLE>
15. FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
During the fourth quarter of 1999, the Company recorded additional aggregate
inventory obsolescence reserves of approximately $414,000. These reserves were
recorded as a result of the discontinuation of certain products. The reserves,
of which approximately $332,000 was made to the PRS segment and approximately
$82,000 was made to the Security segment, were recorded as cost of goods sold.
F-26
<PAGE>
15. FOURTH QUARTER ADJUSTMENTS (UNAUDITED) (CONTINUED)
Also in the fourth quarter of 1999, the Company recorded additional
depreciation expense of approximately $480,000, relating to the writedown of
various Security segment assets to their estimated net realizable values.
16. SUBSEQUENT EVENTS
On September 30, 1999, the Company sold its electronic security and patrol
subsidiaries, United Security Systems, Inc. and the Jupiter Group, Inc. to
Vector Security, Inc. for approximately $50,300,000. Simultaneous with the
Security Sale, the Company paid off $30,628,277 of MSCH financing, including
accrued interest, paid stock guarantees of $4,312,672, acquired and subsequently
retired 747,582 shares of treasury stock for $1,098,200, released from escrow
and subsequently canceled 437,500 shares of Common Stock related to previous
acquisitions and paid approximately $3,900,000 in satisfaction of certain
severance and transaction expenses.
The final sales agreement provides for aggregate holdbacks of approximately
$5,000,000, which are to be paid after holdback periods ranging from 150 days to
one year. Such holdbacks are being held by the buyer pending finalization of
certain post-closing adjustments.
* * * * * *
F-27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
RESPONSE USA, INC.
By: /s/ RICHARD M. BROOKS
-----------------------------------------
Richard M. Brooks
PRESIDENT, CHIEF EXECUTIVE AND FINANCIAL
OFFICER AND A DIRECTOR
</TABLE>
Dated: October 13, 1999
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:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive October 13, 1999
and Financial
/s/ RICHARD M. BROOKS Officer and a Director
- ------------------------------ (Principal Executive,
Richard M. Brooks Financial and Accounting
Officer)
Chief Operating Officer, October 13, 1999
/s/ RONALD A. FELDMAN Vice President,
- ------------------------------ Secretary, Treasurer and a
Ronald A. Feldman Director
/s/ RICHARD B. DEWOLFE Director October 13, 1999
- ------------------------------
Richard B. DeWolfe
/s/ A. CLINTON ALLEN Director October 13, 1999
- ------------------------------
A. Clinton Allen
/s/ STUART R. CHALFIN Director October 13, 1999
- ------------------------------
Stuart R. Chalfin
</TABLE>
II-1
<PAGE>
EXHIBIT INDEX
<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.(1)
2(b) Plan and Agreement of Merger dated March 18, 1992 by and
between Response USA, Inc. (Delaware) and Lifecall America,
Inc.(1)
2(c) Delaware Certificate of Ownership and Merger, merging
Response USA, Inc., a Nevada Corporation with and into its
wholly-owned subsidiary Response USA, Inc., a Delaware
corporation(1)
2(d) Nevada Articles of Merger of Response USA, Inc. (formerly
Lifecall America, Inc.), a Nevada corporation, into Response
USA, Inc., a Delaware corporation(1)
3(a) Certificate of Incorporation of the Company(3)
3(b) Bylaws of the Company(1)
4(a) Form of Common Stock Certificate(1)
4(b) Form of Warrant Agreement(1)
4(c) Form of Class A Warrant Certificate(1)
4(d) Form of Class B Warrant Certificate(1)
4(e) Form of Class C Warrant Certificate(1)
4(f) Form of Preferred Warrant Certificate(2)
4(g) Incentive Stock Option Plan of the Company adopted by the
Company's Board on March 18, 1992, and approved by the
Company's stockholders on March 1992(1)
4(h) Restricted Stock Option Plan of the Company adopted by the
Company's Board on August 20, 1990, as amended August 30,
1991, January 2, 1992 and March 18, 1992(1)
4(i) 1997 Stock Option Plan of the Company adopted by the
Company's Board in September 1997(3)
4(j) 1999 Stock Option Plan of the Company adopted by the
Company's Board of Directors on March 30, 1999(5)
10(a) Lifecall Systems, Inc. Third Amended Plan of Reorganization
with Order Affirming Third Amended Plan of Reorganization
dated January 9, 1990(1)
10(b) Employment Agreement dated August 28, 1992, by and between
the Company and Richard M. Brooks, and Addendum thereto
dated October 1, 1992, as amended(2)
10(c) Employment Agreement dated August 28, 1992, by and between
the Company and Ronald A. Feldman, and Addendum thereto
dated October 1, 1992, as amended(2)
10(d) Employment Agreement dated February 10, 1998, by and between
the Company and Robert L. May(6)
10(e) Agreement dated as of November 22, 1996 between Sloan
Electronics, Incorporated and the Company(2)
10(f) Asset Purchase Agreement dated October 1, 1997 between the
Company and Triple A Security Systems, Inc.(2)
10(g) Loan and Security Agreement dated as of June 30, 1996
between Mellon Bank, N.A. and the Company(2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
10(h) Purchase Agreement dated as of March 4, 1997, among BKR,
Inc., the Company and HealthLink, Ltd.(2)
10(i) Operating Agreement of HealthLink, Ltd. dated as of March 4,
1997(2)
10(j) Agreement dated as of June 18, 1997, by and among the
Company and the holders of the Preferred Stock who are
signatories thereto and Amendment No. 1 thereto(3)
10(k) Purchase Agreement dated as of July 30, 1998, between
Response Acquisition Corp. and United Security Systems, Inc.
(excluding all exhibits and schedules)(4)
10(l) Receivable Financing Agreement dated as of July 30, 1998,
among McGinn, Smith Capital Holdings Corp., Response
Acquisition Corp. and United Security Systems, Inc.
(excluding all exhibits and schedules)(4)
10(m) Stock Purchase Agreement among Response USA, Inc., United
Security Systems, Inc., The Jupiter Group, Inc. d/b/a Triple
A Patrol and Vector Security, Inc. dated August 11, 1999
(excluding all exhibits and schedules)
11 Statement re: computation of earnings (loss) per share
21 Subsidiaries of the registrant
27 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (registration number 33-47589).
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1997.
(3) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (registration number 333-37595).
(4) Incorporated by reference to a Report filed by the Company on Form 8-K dated
August 6, 1998.
(5) Incorporated by reference to the Company's Proxy Statement in connection
with the Company's Annual Meeting held in March 1999.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1998.
II-3
<PAGE>
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
BY AND AMONG
UNITED SECURITY SYSTEMS, INC.,
THE JUPITER GROUP, INC.,
RESPONSE USA, INC.
AND
VECTOR SECURITY, INC.
August 11, 1999
- --------------------------------------------------------------------------------
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I.........................................................................................................1
PURCHASE AND SALE; CLOSING.....................................................................................1
1.1. STOCK PURCHASE........................................................................................1
1.2 PURCHASE PRICE; PAYMENT OF MCGINN DEBT................................................................1
1.3 PURCHASE PRICE ADJUSTMENT.............................................................................1
1.4 THE CLOSING...........................................................................................3
1.5 CONDITIONS TO THE BUYER'S OBLIGATIONS.................................................................3
1.6 CONDITIONS TO THE SELLER'S OBLIGATIONS................................................................5
ARTICLE II........................................................................................................6
PRE-CLOSING COVENANTS.........................................................................................6
2.1 OPERATIONS AND MAINTENANCE OF THE BUSINESS............................................................6
2.2 INFORMATION...........................................................................................7
2.3 CONSENTS..............................................................................................8
2.4 SCHEDULES SUPPLEMENT AND COOPERATION GENERALLY........................................................9
2.5 INTERCOMPANY DEBT.....................................................................................9
ARTICLE III.......................................................................................................9
REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY.........................................................................................9
3.1 ORGANIZATION AND POWER................................................................................9
3.2 AUTHORIZATION OF TRANSACTIONS........................................................................10
3.3 CAPITAL STOCK AND RELATED MATTERS....................................................................10
3.4 ABSENCE OF CONFLICTS.................................................................................10
3.5 FINANCIAL STATEMENTS.................................................................................11
3.6 ABSENCE OF CERTAIN CHANGES...........................................................................11
3.7 TITLE TO, CONDITION AND SUFFICIENCY OF ASSETS........................................................12
3.8 TAXES................................................................................................13
3.9 CONTRACTS AND COMMITMENTS............................................................................14
3.10 PROPRIETARY RIGHTS...................................................................................15
3.11 LITIGATION; PROCEEDINGS.............................................................................16
3.12 BROKERAGE............................................................................................16
3.13 EMPLOYEES............................................................................................16
3.14 EMPLOYEE BENEFIT PLANS...............................................................................16
3.15 AFFILIATE TRANSACTIONS...............................................................................17
3.16 COMPLIANCE WITH LAWS.................................................................................17
3.17 CUSTOMERS AND SYSTEMS................................................................................18
3.18 ENVIRONMENTAL MATTERS................................................................................18
3.19 GUARANTIES...........................................................................................19
3.20 UNDISCLOSED LIABILITIES..............................................................................19
3.21 RESTRICTIONS ON BUSINESS ACTIVITIES..................................................................20
i
<PAGE>
3.22 UNDERWRITERS' LABORATORY.............................................................................20
3.23 ACCOUNTS RECEIVABLE..................................................................................20
3.24 STANDARD FORM CONTRACTS..............................................................................20
3.25 INSURANCE............................................................................................21
3.26 NO OTHER REPRESENTATIONS AND WARRANTIES..............................................................21
3.27 INVENTORY............................................................................................21
3.28 DISCLOSURE...........................................................................................21
3.29 PERS ACCOUNTS........................................................................................22
3.30 YEAR 2000 COMPLIANCE.................................................................................22
ARTICLE IV.......................................................................................................22
REPRESENTATIONS AND WARRANTIES OF THE SELLER..................................................................22
4.1 ORGANIZATION.........................................................................................22
4.2 AUTHORIZATION OF TRANSACTIONS........................................................................22
4.3 TITLE TO SHARES......................................................................................23
4.4 ABSENCE OF CONFLICTS.................................................................................23
4.5 BROKERAGE............................................................................................23
4.6 LITIGATION; PROCEEDINGS..............................................................................23
ARTICLE V........................................................................................................23
REPRESENTATIONS AND WARRANTIES OF THE BUYER...................................................................23
5.1 ORGANIZATION AND POWER...............................................................................24
5.2 AUTHORIZATION OF TRANSACTIONS........................................................................24
5.3 ABSENCE OF CONFLICTS.................................................................................24
5.4 BROKERAGE............................................................................................25
5.5 LITIGATION; PROCEEDINGS..............................................................................25
5.6 ACQUISITION OF SHARES FOR INVESTMENT.................................................................25
5.7 FINANCING............................................................................................25
ARTICLE VI.......................................................................................................25
TERMINATION...................................................................................................25
6.1 TERMINATION..........................................................................................25
6.2 EFFECT OF TERMINATION................................................................................26
6.3 TERMINATION FEE......................................................................................26
ARTICLE VII......................................................................................................27
INDEMNIFICATION AND RELATED MATTERS...........................................................................27
7.1 SURVIVAL; ABSENCE OF OTHER REPRESENTATIONS...........................................................27
7.2 INDEMNIFICATION......................................................................................27
7.3 INDEMNIFICATION PROCEDURES...........................................................................30
7.4 TREATMENT OF INDEMNIFICATION PAYMENTS................................................................31
ARTICLE VIII.....................................................................................................32
ADDITIONAL AGREEMENTS.........................................................................................32
8.1 THE BUYER'S RETENTION OF RECORDS; CONTINUING ASSISTANCE..............................................32
ii
<PAGE>
8.2 PRESS RELEASES AND ANNOUNCEMENTS.....................................................................32
8.3 FURTHER ASSURANCES...................................................................................33
8.4 EXPENSES.............................................................................................33
8.5 NON-SOLICITATION.....................................................................................33
8.6 NON-COMPETE COVENANT.................................................................................34
8.7 HSR ACT COMPLIANCE...................................................................................35
8.8 EMPLOYEE MATTERS.....................................................................................35
8.9 TAX MATTERS..........................................................................................36
8.10 STANDARD COLLECTION PROCEDURES.......................................................................38
8.11 OVERDUE ACCOUNTS.....................................................................................38
8.12 INDEPENDENT INVESTIGATION............................................................................39
8.13 I.R.C. Sections 338(H)(10) ELECTION..................................................................39
8.14 PERS MONITORING......................................................................................39
8.15 CENTRAL STATION OPERATORS............................................................................39
8.16 TELEPHONE SWITCH.....................................................................................39
ARTICLE IX.......................................................................................................40
MISCELLANEOUS.................................................................................................40
9.1 AMENDMENT AND WAIVER.................................................................................40
9.2 NOTICES..............................................................................................40
9.3 BINDING AGREEMENT; ASSIGNMENT........................................................................41
9.4 SEVERABILITY.........................................................................................41
9.5 NO STRICT CONSTRUCTION...............................................................................42
9.6 CAPTIONS.............................................................................................42
9.7 ENTIRE AGREEMENT.....................................................................................42
9.8 COUNTERPARTS.........................................................................................42
9.9 GOVERNING LAW........................................................................................42
9.10 JURISDICTION AND VENUE...............................................................................42
9.11 WAIVER OF RIGHT TO JURY TRIAL........................................................................43
9.12 PARTIES IN INTEREST..................................................................................43
9.13 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.............................................................43
9.14 OTHER DEFINITIONAL PROVISIONS........................................................................43
</TABLE>
EXHIBITS
Exhibit A - Definitions
Exhibit B - Seller's Release
SCHEDULES
Schedule 1.3 - Net Enterprise Value
Schedule 3.3A - Capital Stock
Schedule 3.3B - Subsidiaries; Investments
iii
<PAGE>
Schedule 3.4 - Conflicts
Schedule 3.5 - Financial Statements
Schedule 3.6 - Absence of Certain Changes
Schedule 3.7A - Leased Realty
Schedule 3.7B - Liens
Schedule 3.8 - Taxes
Schedule 3.9 - Contracts and Commitments
Schedule 3.10 - Proprietary Rights
Schedule 3.11 - Litigation; Proceedings
Schedule 3.12 - Brokerage
Schedule 3.13 - Petition of Brotherhood of Electrical
Workers
Schedule 3.14 - Employee Benefit Plans
Schedule 3.15 - Affiliate Transactions
Schedule 3.21 - Restrictions on Business Activities
Schedule 3.22 - Underwriters' Laboratory
Schedule 3.24 - Standard Form Contracts
Schedule 3.25 - Insured Claims
Schedule 3.30 - Year 2000 Compliance
Schedule 5.3 - Buyer's Consents
Schedule 5.4 - Buyer's Brokerage
Schedule 8.8 - Management Employees
iv
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "AGREEMENT") is entered into as of
August 11, 1999, by and among United Security Systems, Inc., a New Jersey
corporation ("USS"), The Jupiter Group, Inc. d/b/a Triple A Security Patrol, a
Pennsylvania corporation ("TRIPLE A") and Response USA, Inc., a Delaware
corporation (the "SELLER") and Vector Security, Inc., a Pennsylvania corporation
(the "BUYER"). Other capitalized terms used and not otherwise defined in this
Agreement are defined in EXHIBIT A.
The Seller owns all of the outstanding capital stock of the Company
(the "SHARES"). The Seller desires to sell to the Buyer, and the Buyer desires
to purchase from the Seller, the Shares, subject to the terms and conditions set
forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE; CLOSING
1.1. STOCK PURCHASE. Upon the terms and subject to the conditions of
this Agreement, at the Closing, the Seller shall sell, and the Buyer shall
purchase, the Shares.
1.2 PURCHASE PRICE; PAYMENT OF MCGINN DEBT. In consideration for the
sale and transfer of the Shares, on the Closing Date, the Buyer shall pay to the
Seller by wire transfer in immediately available funds an aggregate amount equal
to the Estimated Purchase Price (as defined below) less a holdback of six and
one-half percent (6 1/2%) of the Estimated Purchase Price to be paid on the
Settlement Date pursuant to the terms of this Agreement. On the Closing Date,
the Seller shall pay or cause to be paid all outstanding amounts under the
McGinn Facility.
1.3 PURCHASE PRICE ADJUSTMENT.
(a) At least five (5) days prior to the Closing Date, the Seller shall deliver
to the Buyer a good faith estimate of what the Net Enterprise Value will be as
of the close of business on the Closing Date (the "ESTIMATED PURCHASE PRICE"),
together with supporting documentation (including an estimated consolidated
closing balance sheet for the Company as of the Closing (the "INITIAL BALANCE
SHEET") and a schedule setting forth the calculation of the Company's RMR
1
<PAGE>
as of the close of business on the Closing Date, which will be prepared in
accordance with the definition of "RMR" contained herein), including advice on
accounting methods, policies, practices, assumptions and procedures used by
Seller in its calculation of the Net Enterprise Value, RMR, Initial Balance
Sheet and Working Capital. The Seller shall prepare the Initial Balance Sheet in
accordance with GAAP (to the extent practicable given that it is an estimate)
and with the Company's past practices consistently applied. The Net Enterprise
Value shall be calculated pursuant to SCHEDULE 1.3 attached hereto (the "Net
Enterprise Value Schedule").
(b) Within a period of 150 days following the Closing Date (the
"SETTLEMENT DATE"), the Buyer will prepare and deliver to the Seller in writing
a calculation of the Net Enterprise Value as of the Closing Date (the "TENTATIVE
FINAL PURCHASE PRICE"), together with such supporting documentation as the
Seller reasonably requests (including a final consolidated balance sheet for the
Company calculated as of the close of business on the Closing Date, which will
be prepared in accordance with GAAP and with the Company's past practices
consistently applied (the "FINAL BALANCE SHEET"), and a schedule setting forth
the calculation of the Company's consolidated RMR as of the close of business on
the Closing Date, which will be prepared in accordance with the definition of
"RMR" contained herein and shall be prepared using the same accounting methods,
policies, practices, assumptions, and procedures as used by the Seller in its
calculation of the Net Enterprise Value, RMR, Initial Balance Sheet and Working
Capital). Unless the Seller gives written notice to the Buyer of any objection
to the Final Balance Sheet or the calculation of the Tentative Final Purchase
Price within 30 days of the Seller's receipt of the Final Balance Sheet, the
Seller will be deemed to have accepted the Final Balance Sheet and such
calculation of the Tentative Final Purchase Price (and the Tentative Final
Purchase Price shall be the Final Purchase Price (as defined below)). Any
objection to the Final Balance Sheet or the calculation of the Tentative Final
Purchase Price will be set forth in writing in reasonable detail. If Seller
makes a timely objection to the Final Balance Sheet or the calculation of the
Tentative Final Purchase Price and if, after good faith negotiations, within 30
days of the Buyer's receipt of such objection, the Buyer and the Seller are
unable to agree on the final purchase price to be paid for the Shares (the
"FINAL PURCHASE PRICE"), the parties agree to engage an accounting firm mutually
acceptable to the Seller and the Buyer or, in the absence of agreement, by an
accounting firm of national reputation selected by lot after eliminating the
Seller's and the Buyer's principal outside accountants and not more than two
additional firms designated as objectionable, one by the Seller and one by the
Buyer (the "INDEPENDENT ACCOUNTANTS"), to resolve the specific issues in dispute
within 30 days after such engagement. The Independent Accountants will be
instructed to make their determination on a basis consistent with the provisions
of this Agreement and their determination will be final and binding on the
parties. No later than 5 business days after the later of: (i) the Settlement
Date (if the parties agree on the amount of the Final Purchase Price on or prior
to such date), (ii) the resolution of any dispute between the parties regarding
the Final Purchase Price, or (iii) the receipt of the Independent Accountants'
determination of the Final Purchase Price, as the case may be, the difference
between the Estimated Purchase Price and the Final Purchase Price will be paid
in cash as follows: (x) if the Estimated Purchase Price is greater than the
Final Purchase Price, the Seller shall pay to the Buyer the amount of such
difference; or (y) if the Estimated Purchase Price is less than the Final
Purchase Price, then the Buyer shall pay to the Seller the amount of such
difference. All payments made pursuant to the preceding sentence shall be made
by wire transfer of immediately available funds to an account specified by
2
<PAGE>
the Person entitled to receive such payment. All fees and costs of the
Independent Accountants will be shared equally by the Buyer and the Seller.
1.4 THE CLOSING. The closing of the purchase and sale of the Shares
(the "CLOSING") shall take place at the offices of Burns & Levinson LLP, 125
Summer Street, Boston, MA 02110 or at such other place as may be mutually
agreeable to each of the parties, at 10:00 a.m. local time on September 17, 1999
or, if any of the conditions to Closing set forth in Section 1.5 and Section 1.6
below have not been satisfied or waived by the party entitled to the benefit
thereof on or prior to such date, on the fifth business day following
satisfaction or waiver of such conditions the ("Closing Date") or such later
date as the parties may mutually agree. At the Closing, the Seller shall deliver
to the Buyer stock certificates evidencing the Shares (endorsed in blank) to be
purchased by the Buyer pursuant to the Closing, upon payment of the Estimated
Purchase Price thereof by wire transfer of immediately available funds to the
Seller's account.
1.5 CONDITIONS TO THE BUYER'S OBLIGATIONS. The obligation of the Buyer
to consummate the transactions to be performed by it in connection with the
Closing is subject to the satisfaction (or waiver by the Buyer, in whole or in
part, in writing) of the following conditions as of the time of the Closing:
(a) All of the representations and warranties (considered
collectively) and each representation and warranty (considered individually) set
forth in Article III and Article IV will be true and correct in all material
respects at and as of the time of the Closing as though then made, except for
changes expressly required by this Agreement and except for any representation
or warranty that expressly relates to a specific prior date;
(b) The Seller and the Company will have performed and complied in
all material respects with all of the covenants and agreements (considered
collectively), and each of the covenants and agreements (considered
individually), required to be performed by the Seller and the Company under this
Agreement at or prior to the Closing;
(c) There shall be no proceeding commenced or threatened against
Buyer involving this Agreement or the transactions contemplated herein or any
judgment, decree, injunction or order which prohibits the consummation of the
transactions contemplated by this Agreement;
(d) All applicable waiting periods under the HSR Act, if any,
shall have expired or been terminated;
(e) The Company and the Buyer shall have received the resignation
of each director of each of USS and Triple A and each officer of each of USS and
Triple A, effective as of the Closing Date;
(f) On or prior to the Closing Date, the Seller will have delivered
to the Buyer all of the following (dated as of the Closing Date, except as
otherwise indicated):
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(1) With respect to each of USS and Triple A, certificates,
dated not earlier than the tenth (10th) day prior to the Closing Date, of the
Secretary of State of the State of New Jersey and the Commonwealth of
Pennsylvania, respectively, stating that such entities are validly existing or
have comparable active status;
(2) A certificate of an executive officer of the Seller
certifying that each of the conditions set forth in Sections 1.5(a) and 1.5(b)
has been satisfied as of the time of the Closing; and
(3) a certificate of the Secretary or Assistant Secretary of
each of the Seller, USS and Triple A certifying as to the resolutions of the
board of directors of each of such entities, the certificate of incorporation
and by-laws of such entities and incumbency of the officers of such entities
executing this Agreement or any Transaction Document, respectively.
(g) The Seller shall have delivered the Shares to the Buyer,
accompanied by stock powers duly endorsed in blank;
(h) Burns & Levinson LLP, counsel to the Seller and the Company,
shall have delivered its opinion to the Buyer in form and substance reasonably
acceptable to the Buyer and its counsel;
(i) The Seller shall have delivered to the Buyer a release in the
form of Exhibit B executed by Seller ("Seller's Release");
(j) The Seller and the Company shall have delivered to Buyer such
documents as Buyer may reasonably request including, without limitation or
example, all of the Company's written customer contracts;
(k) The Seller shall have paid or caused to be paid all outstanding
amounts under the McGinn Facility.
(l) The Seller shall have delivered to Buyer a certificate of an
executive officer of the Seller certifying that all powers of attorney
authorizing any Person to represent the Company have been terminated.
(m) There shall be no condition to or inability of Buyer to conduct
the business and operations of the Company in the ordinary course of business
as, of and on the Closing Date including, without limitation or example,
telephone Switch operations, software performance and performing monitoring
services required by Company's customer contracts from premises known as 23
Casey Avenue, Wilkes Barre, Pennsylvania;
(n) The Seller and Company shall have caused the satisfaction of
any and all debt or other obligations existing between the Company on the one
hand and any direct or indirect parent of the Company or any Affiliate of the
Company, on the other hand; and
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(o) The Company is not (i) subject to any then current petition to
the National Labor Relations Board ("NLRB") for recognition of any union by or
on behalf of any of the Company's employees, and (ii) the petition of the
International Brotherhood of Electrical Workers, referenced in SCHEDULE 3.13
hereto, to be the representative of any bargaining unit(s) at the Company has
been rejected or defeated by a vote of the Company's employees entitled to so
vote pursuant to NLRB Rules and the result has been certified by the NLRB and
any objections filed by any union have been denied or have been resolved in
favor of the Company by a decision of the NLRB Regional Director and an appeal
has not been filed from any decision of the NRLB Regional Director within 60
days after such vote.
1.6 CONDITIONS TO THE SELLER'S OBLIGATIONS. The obligation of the
Seller to consummate the transactions to be performed by it in connection with
the Closing is subject to the satisfaction (or waiver by the Seller in writing)
of the following conditions as of the Closing Date:
(a) Each of the representations and warranties set forth in Article
V will be true and correct in all material respects at and as of the time of the
Closing as though then made, except for changes expressly required by this
Agreement and except for any representation or warranty that expressly relates
to a specific prior date;
(b) The Buyer will have performed and complied in all material
respects with all of the covenants and agreements required to be performed by
the Buyer under this Agreement at or prior to the Closing;
(c) There shall be no judgment, decree, injunction or order, which
prohibits the consummation of the transactions contemplated by this Agreement;
(d) All applicable waiting periods under the HSR Act , if any,
shall have expired or been terminated;
(e) On or prior to the Closing Date, the Buyer will have delivered
to the Seller all of the following:
(1) A certificate, dated not earlier than the tenth (10th)
business day prior to the Closing Date, of the Secretary of State of the
Commonwealth of Pennsylvania to the effect that the Buyer is validly existing or
has comparable active status in such state;
(2) A certificate of an executive officer of the Buyer
certifying that each of the conditions set forth in Sections 1.6(a) and 1.6(b)
has been satisfied as of the time of the Closing; and
(3) A certificate of the Secretary or Assistant Secretary of
the Buyer certifying as to the resolutions of the board of directors of Buyer
and the incumbency of the officers of the Buyer executing this Agreement or any
Transaction Document.
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(f) The Buyer shall have paid to the Seller the Estimated Purchase
Price in accordance with Section 1.2; and
(g) Tannenbaum & Chanin, LLP, counsel to the Buyer, shall have
delivered its opinion to the Seller in form and substance reasonably acceptable
to the Seller and its counsel.
ARTICLE II
PRE-CLOSING COVENANTS
2.1 OPERATIONS AND MAINTENANCE OF THE BUSINESS. Prior to the Closing,
unless the Buyer otherwise consents in writing or except as set forth expressly
herein, the Company will, and the Seller will cause the Company to, (a) conduct
the business and operations of the Company only in the ordinary course of
business consistent with past practice. Furthermore, except as may otherwise be
required under this Agreement, the Company shall not, and the Seller shall cause
the Company, not to do any of the following, without the prior consent of the
Buyer:
(i) incur or permit to be incurred any obligation or other liabilities
(exclusive of existing health and property insurance premiums) in excess of
$150,000 in the aggregate except for inventory purchases and other liabilities
incurred in the normal and ordinary course of business consistent with past
practice;
(ii) voluntarily permit to be incurred any Lien or encumbrance on any
of the assets of the Company, other than Permitted Liens;
(iii) increase the compensation payable or to become payable to any of
the employees of the Company, except for increases in the ordinary course of
business consistent with past practice, or otherwise enter into or alter any
employment, consulting, or service agreement, outside the ordinary course of
business;
(iv) commence, enter into, or alter any profit sharing, deferred
compensation, bonus, stock option, stock purchase, pension, retirement, or
incentive plan or any fringe benefit plan for employees of the Company;
(v) sever or terminate the employment of any employees of the Company
except in the ordinary course of business;
(vi) to incur or permit to be incurred any cost, expense, liability or
obligation in connection with the Seller's personal emergency response business
or, with regard to the Company's security business, make or commit to any
individual capital expenditure in excess of $75,000 or make or commit to such
expenditures which would, in the aggregate, exceed $200,000;
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(vii) make any Tax election or settle or compromise any Tax liability,
provided that in the case of elections or compromises that solely affect periods
ending prior to the Closing Date, Buyer's consent shall not be unreasonably
withheld;
(viii) cancel or waive any claims or rights of Company outside the
ordinary course of business and consistent with past practice; or
(ix) change any accounting methods used by Company.
2.1.1 NO CHANGES TO ORGANIZATION DOCUMENTS. Prior to the Closing,
neither the Seller nor the Company shall make any changes to the organizational
documents of either USS or Triple A.
2.1.2 CHANGES TO CAPITAL STOCK. Prior to the Closing, no issuance,
sale, pledge, disposition, redemption, retirement or encumbrance of, or
authorization of the issuance, sale, pledge, disposition, redemption, retirement
or encumbrance of, any shares of capital stock of any class, or any options,
warrants, convertible securities or other rights of any kind to register or
acquire any shares of capital stock of, or any other ownership interest in
either USS or Triple A will be made by either the Seller, USS or Triple A.
2.1.3 DIVIDENDS. Prior to the Closing, no dividends or other
distributions or payments will be declared, set aside, made or paid in respect
of the capital stock of either USS or Triple A by the Seller, USS or Triple A.
2.2 INFORMATION.
(a) THE BUYER'S ACCESS. From time to time at the Buyer's request, upon
reasonable prior notice and at reasonable times, the Company will, and the
Seller shall cause the Company to, provide to representatives of the Buyer and
its agents, employees and accounting, tax, legal and other advisors
(collectively, including the Buyer, the "INVESTIGATING PARTIES"):
(1) access to the information regarding the assets and the
liabilities of the Company;
(2) access to all accounts, insurance policies, Tax Returns,
contracts, and other books and records concerning the Company and its operations
and properties, the Shares and such other relevant information and materials as
may be reasonably requested (including the right to make copies and abstracts
thereof); and
(3) opportunity to discuss the affairs, finances and accounts of
the Company with those directors (or equivalent officials), senior management
employees, key sales representatives and independent accountants of the Company
who would reasonably be presumed to have information which would be relevant for
the purposes of conducting the Investigating
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Parties' business, accounting, financial, environmental, legal and other due
diligence review regarding the Company and the Shares and preparing for the
financing and consummation of the transactions contemplated hereby, in each case
so long as such access does not unreasonably interfere with the business and
operations of the Company.
(b) EXCLUSIVITY. Until this Agreement is terminated by its terms, the
Seller will not (and will not cause or authorize any Affiliate, director,
officer, trustee, employee, or agent of it or the Company to, and will not cause
any stockholder of the Company to), directly or indirectly,
(1) solicit, initiate or encourage any inquiries or the submission
of any proposal or offer from any Person relating to any (A) liquidation,
dissolution or recapitalization of the Company, (B) merger or consolidation with
or into the Company, (C) acquisition or purchase of any material asset (or any
material portion of the assets) of, or any equity interest in, the Company or
(D) similar transaction or business combination involving the Company, other
than assets which are disposed of in the ordinary course of business ((A), (B),
(C) and (D) being a "SALE TRANSACTION");
(2) participate in any discussions or negotiations regarding, or
furnish any information (other than information which is traditionally provided
in the ordinary course of the Company's business to third parties where the
Seller has no reason to believe that such information may be used to evaluate a
possible Sale Transaction) with respect to, assist or participate in, or
facilitate in any other manner, any effort or attempt by any other Person to do
or seek, a Sale Transaction; or
(3) accept any offer or proposal for or enter into any Sale
Transaction;
Until this Agreement is terminated by its terms, the Seller and the Company will
promptly notify the Buyer if any Person makes any proposal or offer with respect
to any of the foregoing and will provide the Buyer with reasonable detail
regarding such proposal or offer including a summary of the terms, conditions
and price of any oral proposal or offer and a copy of any written proposal or
offer and the identity of the offeror.
2.3 CONSENTS. The Seller and the Company will use commercially
reasonable efforts (without being required to make any payment not specifically
required by the terms of any related contract or Legal Requirement or agree to
any material modification or waiver of any term of any contract or any other
right) to (a) obtain or cause to be obtained prior to the Closing Date all the
Consents listed on SCHEDULE 3.4 and (b) cause each Consent to be effective as of
the Closing Date (whether it is granted or entered into prior to or after the
Closing), and the Buyer will use commercially reasonable efforts to cooperate
with such efforts; provided, however, the failure to obtain any such Consent
which would not have a Material Adverse Effect (individually or collectively)
shall not be required to be obtained as a condition to the Buyer's obligation to
close pursuant to Section 1.5 hereof.
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2.4 SCHEDULES SUPPLEMENT AND COOPERATION GENERALLY.
(a) SCHEDULES SUPPLEMENT. If the Seller obtains knowledge that any of
its or Company's representations and warranties set forth in this Agreement are
inaccurate the Seller will promptly notify Buyer in writing and with specificity
and may, prior to the Closing, amend the Schedules hereto to account for such
inaccuracy; provided that the Buyer approves of such amendment, which approval
shall not be unreasonably withheld, provided that it shall not be deemed to be
unreasonable for the Buyer to withhold approval of amendments to the Schedules
which, among other things, would (individually or collectively) result in a
Material Adverse Effect.
(b) EFFORTS TO CLOSE. Each party will use commercially reasonable
efforts to cause the conditions to the Buyer's and the Seller's respective
obligations to consummate the transactions contemplated by this Agreement to be
satisfied including the preparation, execution and delivery of all agreements
and instruments contemplated hereunder to be executed and delivered by such
party in connection with or prior to the Closing.
2.5 INTERCOMPANY DEBT. Prior to or on the Closing, the Company and the
Seller shall cause the payment of all receivables and the satisfaction of any
and all debt existing between the Company on the one hand and any direct or
indirect parent of the Company or any Affiliate of the Company, on the other
hand. Such intercompany receivables and debt shall be of the same type and
nature as those included in the Latest Balance Sheet (as hereinafter defined).
Seller shall pay any and all Tax liability for any intercompany transactions
that result in a gain to the Company as a result of the Company not being
included in a consolidated return with the Seller.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY
As an inducement to the Buyer to enter into this Agreement, and subject
to the disclosures set forth on the Schedules to this Agreement, the Seller
hereby makes the representations and warranties set forth in this Article III as
of the date of this Agreement.
3.1 ORGANIZATION AND POWER. (a) Each of USS and Triple A is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and is qualified to do business in
every jurisdiction in which the nature of its business or its ownership of
property requires it to be so qualified other than those jurisdictions in which
the failure to so qualify would not have a Material Adverse Effect. Each of USS
and Triple A has full corporate power necessary to own and operate its
properties and carry on its respective business as now conducted.
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3.2 AUTHORIZATION OF TRANSACTIONS. The Company has full corporate power
and authority to own and operate its assets, to carry on its business, to
execute and deliver this Agreement and all other Transaction Documents to which
it is a party and to perform its obligations hereunder and thereunder. The board
of directors of each of USS and Triple A has or will have on or before the
Closing Date (the "APPROVAL DATE"), duly approved this Agreement and all other
Transaction Documents to which the Company is a party and has, or will have on
or before the Approval Date, duly authorized the Company's execution and
delivery of this Agreement and such Transaction Documents and the performance of
the Company's obligations hereunder and thereunder. This Agreement and all other
Transaction Documents to which the Company and, upon execution and delivery by
the Company, all other Transaction Documents to which the Company is a party
have been duly executed and delivered by the Company and constitute the legal,
valid and binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as the enforceability hereof or thereof may
be limited by bankruptcy or other laws affecting creditors' rights generally and
except for any limitations on the availability of equitable remedies.
3.3 CAPITAL STOCK AND RELATED MATTERS.
(a) CAPITAL STOCK. The authorized, issued and outstanding capital stock
of each of USS and Triple A is as set forth on the attached SCHEDULE 3.3A and
such stock is owned of record as set forth on the attached SCHEDULE 3.3A free
and clear of all Liens. No legend or other reference to any purported Lien
appears upon any certificate representing capital stock of any Company. All of
the issued and outstanding capital stock of each of USS and Triple A has been
duly authorized, and is validly issued, fully paid and non-assessable and was
not issued in violation of any preemptive rights of stockholders. There are no
outstanding or authorized options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights, or other contracts or commitments
that could require either USS or Triple A to issue, sell, or otherwise cause to
become outstanding any of its capital stock. There are no outstanding or
authorized stock appreciation, phantom stock, profit participation, or similar
rights with respect to either USS or Triple A nor is there any agreement or
understanding with respect to the voting of the Shares.
(b) SUBSIDIARIES; INVESTMENTS. Except as set forth on SCHEDULE 3.3B,
neither USS or Triple A owns any Equity Security of any other Person or any
right which is exercisable or exchangeable for or convertible into any capital
stock or other security, interest or investment in any other Person. USS is the
record and beneficial owner of all of the membership interests of Response Alarm
Monitoring, LLC, free and clear of all Liens.
3.4 ABSENCE OF CONFLICTS. Except as set forth on the attached SCHEDULE
3.4, neither the execution, delivery and performance of this Agreement or the
Transaction Documents by the Company nor the consummation by the Company of the
transactions contemplated hereby or thereby:
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(a) does or will (i) conflict with or result in any breach of any of
the provisions of, (ii) constitute a default under, (iii) result in a violation
of, (iv) give any third party the right to terminate or to accelerate any
obligation under, or (v) result in the creation of any Lien upon any of the
Shares or assets of the Company, in each case under the provisions of the
articles or certificate of incorporation, by-laws or similar organizational
document of the Company or any indenture, mortgage, lease, loan agreement or
other material agreement, instrument or contract or any material Legal
Requirement by which the Company or any property of the Company is affected, or
to which the Company or any property of the Company is subject, except where
such conflict, breach, default, violation, termination, acceleration or creation
(individually or collectively) would not have a Material Adverse Effect; or
(b) without limiting clause (a) above, requires any Consent of any
Governmental Entity or any other Person (other than compliance with the HSR
Act), other than as described on SCHEDULE 3.4, except for any Consents which the
failure to obtain could not reasonably be expected (individually or
collectively) to have a Material Adverse Effect.
3.5 FINANCIAL STATEMENTS. Attached hereto as SCHEDULE 3.5 are (i) the
unaudited consolidated balance sheet of Company as of April 30, 1999, and (ii)
the unaudited consolidated balance sheet of Company (the "LATEST BALANCE SHEET")
as of, and the related statement of income and cash flows for the year ending
June 30, 1999. Each of the foregoing financial statements (in each case
including the notes thereto, if any) has been prepared in accordance with GAAP,
consistently applied, fairly present the financial condition and the results of
operations and cash flow as at the respective dates of and for the periods
referred to in such financial statements, except that such financial statements
are subject to audit and normal recurring year end adjustments (the effect of
which will not, individually or in the aggregate, be materially adverse) and do
not contain any disclosure (that, if presented, would differ materially from
those included in the audited financial statements for the prior year). The
financial statements reflect the consistent application of such accounting
principles throughout the periods involved and have been prepared from the books
and records of the Company which have been maintained in accordance with sound
business practices and all Legal Requirements.
3.6 ABSENCE OF CERTAIN CHANGES. Except as set forth on the attached
SCHEDULE 3.6, since the Latest Balance Sheet, there has not been:
(i) any material adverse change in the condition (financial or
otherwise), results of operations, properties, assets, liabilities or business
of the Company, taken as a whole, and no event has occurred or circumstance
exists that may result in such a material adverse change;
(ii) any damage, destruction or loss (whether or not covered by
insurance) materially and adversely affecting the properties, assets, business
or financial condition of the Company;
(iii) any declaration or payment of any dividend or other
distribution or in respect of any capital stock of the Company, any direct or
indirect redemption, retirement,
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purchase or other acquisition of any capital stock of the Company, or any
issuance of shares of capital stock (whether of treasury shares or otherwise) or
option, or right, to purchase capital stock (whether treasury shares or
otherwise) of the Company;
(iv) any increase in the compensation or in the rate of
compensation or commissions payable or to become payable by the Company to any
of its directors, officers, employees, or agents other than in the ordinary
course of business consistent with past practice, any hiring of an employee at a
salary in excess of $50,000 per annum, any payment of, or commitment to pay, any
bonus, profit sharing, deferred compensation, severance or other extraordinary
compensation to any employee, or adoption of, or change in, any bonus, profit
sharing, pension, retirement, or other employee benefit plan, agreement or
arrangement, except pursuant to agreements set forth on SCHEDULE 3.9;
(v) any incurrence by the Company of any debt, obligation or
liability (whether absolute or contingent) not fully reserved against (whether
or not presently outstanding) other than incurrences in the ordinary course of
business;
(vi) any sale, lease, abandonment or other disposition by the
Company of any real property or any sale, lease, abandonment or other
disposition of any material (individually or collectively) machinery, equipment
or other properties or assets of the Company, in each case other than in the
ordinary course of business; or
(vii) any material change in the accounting methods used by
Company.
3.7 TITLE TO, CONDITION AND SUFFICIENCY OF ASSETS.
(a) OWNED PROPERTIES. The Company does not own any real property.
(b) LEASED PROPERTIES. The leases and subleases described on the
attached SCHEDULE 3.7A (the "LEASES") constitute all of the leases of real
property to which the Company is the tenant or subtenant. To the Knowledge of
the Company, each Lease is in full force and effect and the Company holds a
valid and existing leasehold or subleasehold interest thereunder in the real
property which is subject thereto (collectively, the "LEASED REALTY"). The
ownership or lease of real property by the Company or the use thereof does not
violate any local zoning or similar land use laws or governmental regulations,
except where such violation would not materially affect the use of such real
property. The Company is not in violation of or in noncompliance with any
covenant, condition, restriction, order or easement affecting the real property
owned or leased by the Company, except where such violation or noncompliance
would not have a Material Adverse Effect. There is no proceeding pending or, to
the Knowledge of the Company, threatened, affecting the real property owned or
leased by the Company.
(c) OWNERSHIP OF ASSETS. Except as set forth on the attached
SCHEDULE 3.7B, the Company owns good title to, or a valid leasehold in, all of
its assets, free and clear of all Liens, other than Permitted Liens.
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(d) CONDITION OF THE ASSETS. The assets of the Company are in a
condition, normal wear and tear excepted, which is reasonably sufficient for the
continued conduct of the business and operations of the Company in the ordinary
course of business after Closing in substantially the same manner as conducted
prior to Closing, and the Company has no Knowledge of any defects with respect
to any material assets of the Company.
3.8 TAXES.
(a) For purposes of this Agreement, (i) "Tax" means any of the
Taxes, and "Taxes" means (A) all net income, capital gains, gross income, gross
receipts, sales, use, ad valorem, franchise, capital, profits, license, and
other withholding, employment, payroll, transfer, conveyance, documentary,
stamp, property, value added, customs duties, minimum taxes, and, any other
taxes, fees, charges, levies, excises, duties or assessments of any kind
whatsoever, together with additions to tax or additional amounts, interest and
penalties relating thereto that may be imposed by the federal government or any
state, local, or foreign government, and including amounts paid pursuant to any
settlement or compromise of any controversy relating thereto, and (B) any
liability of the Company for the payment of any amount of any type described in
clause (A) as a result of the Company being a transferee or a member of an
affiliated or combined group, (ii) "Tax Returns" means all returns, reports,
statements, and forms required to be filed in respect of any Tax, and (iii)
"Code" means the Internal Revenue Code of 1986, as amended.
(b) Except as set forth on SCHEDULE 3.8 attached hereto:
(i) the Company has: (A) timely filed all federal, foreign,
state, and local Tax Returns required to be filed by or with respect to the
Company on or prior to the Closing Date and all such Tax Returns are true,
complete and correct in all material respects; and (B) paid in full or accrued
on the Latest Balance Sheet all Taxes due, or for which assessments have been
received, for all periods ending on or prior to the Closing Date, specifically
including the estimated potential liability of the New Jersey tax audit.
(ii) the Company is not a party to any pending action or
proceeding related to Taxes, nor, to the Knowledge of the Company, is any action
or proceeding threatened by any governmental authority for the assessment or
collection of any Taxes. No claim for the assessment or collection of any Taxes
has been asserted or proposed to be asserted against the Company, which has not
been settled with all amounts due having been paid or is being contested in good
faith and as to which adequate reserves (determined in accordance with GAAP)
have been provided in the Latest Balance Sheet. There are no matters under
discussion with any taxing authority which might result in the assessment of
additional Taxes against or relating to the Company.
(iii) The federal income Tax Returns of the Company have not
been audited by the IRS.
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(iv) There are no agreements, waivers, or other arrangements
providing for an extension of time with respect to the filing of any Tax Returns
or for the assessment of any Tax or deficiency against or relating to the
Company. There are no outstanding powers of attorney enabling any party to
represent the Company with respect to Tax matters.
(v) The Company has withheld prior to Closing, proper and
accurate amounts from employees of the Company substantially in compliance in
all material respects with all withholding and similar provisions of any and all
applicable federal, foreign, state, and local laws, statutes, codes, ordinances,
rules, and regulations. All such amounts have been timely remitted to the proper
governmental authority as prescribed by law.
(vi) All other Taxes required to have been withheld or
collected by the Company have been duly withheld and collected and have been
duly paid over to the proper governmental authority, or settled or adequately
reserved for on the Latest Balance Sheet, all as and to the extent prescribed by
law.
(vii) The reserves for Taxes on the Latest Balance Sheet and
the Final Balance Sheet are sufficient for the payment of all unpaid Taxes
through the dates of such statements and for all periods prior thereto,
including, without limitation, all Taxes, if any, imposed after such dates but
in respect of any period or periods prior to the dates of such statements.
(viii) Except as set forth on SCHEDULE 3.8, the Company is not
a party to any agreement, arrangement, or practice for the sharing of Taxes and
is not obligated to indemnify any other party for Taxes.
(ix) There are no liens for Taxes on any asset of the Company,
other than for Taxes not yet due and payable or which are being contested in
good faith.
(x) Neither the Company nor the Seller is a party to any
agreement, contract, arrangement, or plan that has resulted or would result,
separately or in the aggregate, in the payment of any "excess parachute payments
"within the meaning of Section 28OG of the Code.
(xi) The Company is not a United States real property holding
company within the meaning of Section 897(c) of the Code.
3.9 CONTRACTS AND COMMITMENTS. Except for the contracts described on
the attached SCHEDULE 3.9, the Company is not a party to or bound by, and no
assets of the Company are subject to, any:
(i) collective bargaining agreement or contract with any labor union or
any bonus, pension, profit sharing, retirement or any other form of deferred
compensation plan or any hospitalization insurance or similar plan or practice;
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(ii) contract for the employment or engagement of any individual
employee or other Person (including as an independent contractor or on a
consulting basis) other than at the will of the employing Person, or any
agreement to provide severance or similar benefits upon any termination of
employment or other engagement;
(iii) agreement, indenture or other contract placing a Lien on any
property of the Company other than capital leases entered into in the ordinary
course of business;
(iv) agreement with respect to the lending of funds by the Company and
other than minimal loans or advances made to employees;
(v) lease or agreement under which it is lessee of, or holds or
operates, any personal property owned by any other party calling for payments in
excess of $50,000 annually or entered into outside of the ordinary course of
business;
(vi) lease or agreement under which it is lessor of, or permits any
third party to hold or operate, any material personal property or any real
property owned or controlled by it; or outstanding contract with distributors,
sales agents or dealers of the Company other than contracts which by their terms
are cancelable by the Company with notice of not more than 30 days and without
cancellation penalties or severance payments in excess of $25,000.
3.10 PROPRIETARY RIGHTS.
(a) LISTING. The attached SCHEDULE 3.10 sets forth a complete and
correct list of all registered and patented Proprietary Rights and all pending
applications for registration of Proprietary Rights owned by the Company, and
(ii) all other licenses or similar agreements to which the Company is a party
either as licensee or licensor for Proprietary Rights, except for mass marketed
software.
(b) OWNERSHIP; INFRINGEMENT. Except as set forth on the attached
SCHEDULE 3.10, the Company owns and possesses all right, title and interest in
and to, or has a valid and enforceable right to use, its corporate and trade
names, trade marks and service marks, and the registered and patented
Proprietary Rights described on the attached SCHEDULE 3.10, free and clear of
all Liens (other than Permitted Liens), and no claim by any third party
contesting the validity, enforceability, use or ownership of any of the
foregoing has been made or, to the Knowledge of the Company, is threatened, (ii)
no loss or expiration of any material Proprietary Rights owned by the Company is
pending or, to the Knowledge of the Company, threatened, (iii) the Company has
received no notice of any infringement or misappropriation by any third party
with respect to any Proprietary Rights owned or used by the Company, including
any demand or request that the Company license rights from a third party, and
(iv) to the Knowledge of the Company, the Company has not infringed or
misappropriated any rights of any third party, and the Company is not aware of
any infringement or misappropriation which will occur as a result of the
continued operation of the Company's businesses as currently conducted.
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3.11 LITIGATION; PROCEEDINGS. Except as set forth on the attached
SCHEDULE 3.11, there are no complaints, charges, claims, actions, suits,
proceedings, orders, judgments, decrees or investigations pending or, to the
Knowledge of the Company, threatened against the Company or any asset of the
Company at law or in equity, or before or by any Governmental Entity, except for
actions, suits, proceedings, orders, judgments, decrees or investigations which
could not reasonably be expected (individually or collectively) to have a
Material Adverse Effect.
3.12 BROKERAGE. Except as set forth on SCHEDULE 3.12 attached hereto,
there are no claims for brokerage commissions, finders' fees or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of the Company, and
all of the obligations set forth on SCHEDULE 3.12 shall be paid in full at the
Closing by the Seller.
3.13 EMPLOYEES. To the Knowledge of the Company, no key executive
employee and no group of employees or independent contractors of the Company has
any plans to terminate his, her or its employment or relationship as an
independent contractor with the Company. The Company has not experienced any
strike, grievance, unfair labor practice claim or other material employee or
labor dispute. To the Knowledge of the Company, except as set forth on Schedule
3.13, there is no organizational effort presently being made or threatened by or
on behalf of any labor union with respect to employees of the Company. The
Company is in material compliance with all applicable laws respecting employment
and employment practices, terms and conditions of employment and wages and
hours, and is not engaged in any unfair labor practice.
3.14 EMPLOYEE BENEFIT PLANS.
(a) SCHEDULE 3.14 sets forth all of the Company's "employee pension benefit
plans" (as defined in Section 3(2) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")) or "employee welfare benefit plans" (as
defined in Section 3(l) of ERISA) (the "PLANS"). None of the Plans is subject to
Title IV of ERISA nor provides for medical or life insurance benefits to retired
or former employees of the Company (other than as required under Code Section
4980B, or similar state law). The Company is not a participating or contributing
employer in any "multi-employer plan" (as defined in Section 3(37) of ERISA)
with respect to employees of the Company or its subsidiaries nor has the Company
or its subsidiaries incurred any withdrawal liability with respect to any
multi-employer plan or any liability in connection with the termination or
reorganization of any multi-employer plan. The Company has no, and has never had
any, defined benefit pension plans.
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(b) Each Plan is in compliance with the applicable provisions of
ERISA and the Code and all other applicable laws, rules and regulations, and the
Company has performed all of its obligations under the Plans, except where the
failure to comply would not have (individually or collectively) a Material
Adverse Effect.
(c) Each Plan which is intended to be qualified under Section 401
(a) of the Code has been amended to reflect all requirements of the Tax Reform
Act of 1986 and all subsequent legislation which is required to be adopted prior
to the end of the applicable remedial amendment period. The Company has received
an IRS determination letter with respect to each Plan.
(d) The Company has not incurred any material liability to the
Pension Benefit Guaranty Corporation (other than premium payments) or otherwise
under Title IV of ERISA (including any withdrawal liability) or under the Code
with respect to any "employee pension benefit plan" (as defined under Section
3(2) of ERISA) that the Company or any member of its "controlled group" (within
the meaning of Code Section 414) maintains or ever has maintained or to which
any of them contributes, ever has contributed, or ever has been required to
contribute.
(e) Neither the Company, nor any of its employees or directors, nor
any Plan fiduciary of any of the Plans, has engaged in any transaction in
violation of Section 406(a) or (b) of ERISA or any "prohibited transaction" (as
defined in Section 4975(c)(1) of the Code) for which no exemption exists under
Section 4975(d) of the Code or other applicable law or guidance, and no
"reportable event" (as defined in Section 4043 of ERISA and the regulations
promulgated thereunder), other than such as may arise out of the consummation of
the transactions contemplated by this Agreement, has occurred in connection with
any Plan.
(f) Except as set forth on SCHEDULE 3.14, other than routine claims
for benefits made in the ordinary course of business, there are no pending
claims, investigations or causes of action ("CLAIMS") and to the Knowledge of
the Company, no such Claims are threatened against any Plan or fiduciary of any
such Plan by any participant, beneficiary or governmental agency with respect to
the qualification or administration of any such Plan and, to the Knowledge of
the Company, there is no basis to anticipate that any such claims will be made.
3.15 AFFILIATE TRANSACTIONS. Other than as described on the attached
SCHEDULE 3.15, no Insider (a) is a party to any agreement, contract, commitment
or transaction with the Company or which pertains to the business or operation
of the Company (other than in such Insider's capacity as an employee of the
Company), or (b) has any interest in any asset of the Company.
3.16 COMPLIANCE WITH LAWS. The Company has complied with all applicable
Legal Requirements which affect the business or operations of the Company and to
which the Company is subject, except where the failure to comply would not have
(individually or collectively) a Material Adverse Effect.
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3.17 CUSTOMERS AND SYSTEMS.
(a) The Company has no material obligations or liabilities to
customers or to other users of the Company's security services, except (i) with
respect to deposits made by such customers or such other users, if any, (ii) the
obligation to supply services to customers in the ordinary course of business,
and (iii) potential liabilities with respect to litigation which are set forth
on SCHEDULE 3.11. The Company has no material obligation or liability for the
refund of moneys to its customers other than obligations to refund deposits made
by customers in the ordinary course of business.
(b) Substantially all of the agreements pursuant to which third
party monitoring services are provided are terminable on thirty (30) days'
notice.
(c) To the extent required by law, the Company has provided its
residential customers (that the Company has procured directly rather than
through the purchase of another alarm business) with the three-day right of
rescission in material compliance with the provisions of 16 C.F.R. Part 429
(Cooling-Off Period for Door-to-Door Sales) and, to the Knowledge of the
Company, any similar applicable state laws.
(d) The alarm systems installed by the Company (i) are in working
order and condition in a manner consistent with the standards prevailing in the
security alarm industry, and (ii) have been installed and maintained in
accordance with good and workmanlike practices prevailing in the security alarm
industry and all Legal Requirements.
3.18 ENVIRONMENTAL MATTERS.
(a) For purposes of this Agreement, the capitalized terms defined
below shall have the meanings ascribed to them below.
(i) "Environmental Law(s)" means all federal, state or local
laws, statutes, ordinances, rules, regulations, codes, or other requirements
having the force and effect of law relating to the environment, natural
resources, or employee health and safety and includes, but is not limited to
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980 ("CERCLA"), 42 U.S.C. Section 9601, the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801, the Resource Conservation and
Recovery Act ("RCRA"), 42 U.S.C. Section 6901, the Clean Water Act, 33 U.S.C.
Section 1251, the Clean Air Act, 33 U.S.C. Section 2601, the Toxic Substance
Control Act, 15 U.S.C. Section 2601, the Oil Pollution Act of 1990, 33 U.S.C.
Section 2701, and the Occupational Safety and Health Act, 29 U.S.C. Section
651, as such laws have been amended or supplemented, and the regulations
promulgated pursuant thereto, and all analogous state or local statutes.
(ii) "Environmental Permits" means all approvals,
authorizations, consents, permits, licenses, registrations and certificates
required by any applicable Environmental Law.
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(iii) "Hazardous Substance(s)" means, without limitation, any
explosives, radioactive materials, urea formaldehyde foam insulation,
polychlorinated biphenyls, petroleum and petroleum products (including but not
limited to waste petroleum and petroleum products), methane, hazardous
materials, hazardous wastes, pollutants, contaminants and hazardous or toxic
substances, as, defined in or regulated under any applicable Environmental Law.
(iv) "Release" means any past or present spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping or disposing of a Hazardous Substance into the environment
whether intentional or unintentional.
(b) The Company has obtained all Environmental Permits that are
required for the operation of its business. The Company (i) is in material
compliance with all terms and conditions of its Environmental Permits and of any
applicable Environmental Law, (ii) has not received written notice of any
material violation by or material claim against the Company under any
Environmental Law, (iii) is not in violation of or liable under any
Environmental Law, and (iv) has no basis to expect any order, notice, claim or
other communication from any person concerning any actual or potential violation
or failure to comply with any Environmental Law.
(c) To the Company's Knowledge, there are no Hazardous Substances
and there have been no Releases, or threatened Releases, of any Hazardous
Substances into, on or under any of the properties owned, leased or operated (or
formerly owned, leased or operated) by the Company, in any case in such a way as
to create any material liability (including any costs of investigation and
remediation) under any applicable Environmental Law.
(d) The Company has not been identified as a potentially
responsible party at any hazardous waste site under enforcement or investigation
by the federal or state environmental authorities.
3.19 GUARANTIES. The Company is not a guarantor for any liability or
obligation (including Indebtedness) of any third party.
3.20 UNDISCLOSED LIABILITIES. The Company has no liabilities or
obligations, whether accrued, absolute, contingent or otherwise, which are
material to the Company, except (i) to the extent reflected or reserved for on
the Latest Balance Sheet, (ii) liabilities or obligations incurred in the normal
and ordinary course of business of the Company since the Latest Balance Sheet,
(iii) liabilities or obligations disclosed in the Schedules attached hereto, or
(iv) liabilities or obligations disclosed in this Agreement.
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3.21 RESTRICTIONS ON BUSINESS ACTIVITIES. Except as set forth on the
attached SCHEDULE 3.21, to the Knowledge of the Company, there is no agreement,
judgment, injunction, order or decree binding upon the Company and specifically
referring to the Company which has or could reasonably be expected to have the
effect of prohibiting or impairing any business practice of the Company,
acquisition of property by the Company, or the conduct of business by the
Company as currently conducted or as proposed to be conducted by the Company.
3.22 UNDERWRITERS' LABORATORY. The Company's central station located in
Wilkes Barre, Pennsylvania has been approved by Underwriters' Laboratory and
such approvals are not suspended or threatened to be suspended. The Company's
central station is operated in conformity with current Underwriters' Laboratory
standards and such other applicable insurance rating organizations' standards.
Except as set forth on SCHEDULE 3.22, no deficiency reports have been issued by
Underwriters' Laboratory, Factory Mutual Research Corporation or by any other
applicable insurance rating organizations relating to the operations of such
facilities and, as to any such reports which have been issued, all deficiencies
noted therein have been remedied to the satisfaction of the issuer of such
report. All required fire inspections with respect to each fire alarm system
installed at the premises of customers of the Company have been performed as
required in accordance with the obligations and commitments of the Company to
its customers, to Underwriters' Laboratory and to any other applicable insurance
rating organizations. All Underwriters' Laboratory or other applicable insurance
rating organization's certificates issued for alarm systems installed at the
premises of the Company's customers have been properly issued and the systems
for which such certificates have been issued comply in all material respects
with all of the Underwriters' Laboratory or other applicable insurance rating
organizations specifications and standards for such systems.
3.23 ACCOUNTS RECEIVABLE. All notes and accounts receivable of the
Company are reflected properly on the Latest Balance Sheet, and are valid,
collectable in accordance with their terms and existing receivables which arose
in the ordinary course of business, subject to allowances for doubtful accounts
set forth on the Company's Latest Balance Sheet.
3.24 STANDARD FORM CONTRACTS.
(a) All of the Company's contracts with its customers are
acceptable to and/or have been accepted by the Company's errors and omissions
insurer. Attached hereto as SCHEDULE 3.24 are true and correct copies of the
forms of "Standard Form Service Contract" (as hereinafter defined) which the
Company currently uses. For purposes of this Agreement, the term "Standard Form
Service Contract" shall mean all such attached forms and all written contracts
between the Company and its customers not on such attached forms but which
contain (i) a clause which limits the liability of the Company to a specified
sum as set forth in the contract, (ii) a clause providing that such contract is
freely assignable without the consent of any other party, and (iii) a clause
providing for third party indemnity. Each Standard Form Service Contract which
the Company has with its customers and each of the terms, provisions and
conditions thereof are
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valid, binding and in full force and effect provided, however, that
enforceability of such Standard Form Service Contracts may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws at the time in
effect affecting the rights of creditors generally and that a court of competent
jurisdiction may decline to grant specific performance and any other equitable
remedy with respect to the enforcement of any provision of such Standard Form
Service Contracts.
(b) Except as set forth on the Standard Form Service Contracts,
the Company has made no written warranties to any customer of the Company.
(c) The Company has no free, bartered or discounted service
liability to customers existing with respect to its business, other than as set
forth on the attached SCHEDULE 3.24, and nothing would prohibit the Buyer from
discontinuing any such free or bartered service after Closing upon giving
written notice to the customer. The Company has no obligation or liability for
the refund of monies to its customers, other than obligations to refund deposits
made by customers in the ordinary course of business.
(d) All Standard Form Service Contracts are duly executed and,
except for non compliance with 16 C.F.R. Part 429 (and any similar state laws),
comply with all Legal Requirements.
3.25 INSURANCE. The insurance coverage maintained by the Company is
customary for companies of similar size engaged in similar lines of business.
SCHEDULE 3.25contains a list and summary of all pending or, to Company's
Knowledge, threatened claims covered by Company's insurance coverage with or
without reservation and so identified.
3.26 NO OTHER REPRESENTATIONS AND WARRANTIES. EXCEPT FOR THE
REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE III AND ARTICLE IV, THE
SELLER AND THE COMPANY MAKE NO OTHER EXPRESS OR IMPLIED REPRESENTATIONS OR
WARRANTIES IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
HEREBY, AND SUCH REPRESENTATIONS AND WARRANTIES SUPERCEDE ANY AND ALL PREVIOUS
WRITTEN OR ORAL STATEMENTS MADE BY THE COMPANY OR THE SELLER TO BUYER.
3.27 INVENTORY. All inventory of the Company consists of a quality and
quantity usable and salable in the Company's ordinary course of business, except
for obsolete items and items of below-standard quality, all of which have been
properly and adequately reflected in the Latest Balance Sheet at the lesser of
Seller's cost or market, in accordance with GAAP. The quantities of each item of
inventory are not excessive, but are reasonable in the circumstances of the
Company as of Closing.
3.28 DISCLOSURE. No representation or warranty of Company or Seller in
this Agreement omits to state a material fact necessary to make the statements
herein, in light of the circumstances in which they were made, not misleading.
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3.29 PERS ACCOUNTS. All security alarm customers of the Company that
are monitored communicate with the Company's central station through telephone
lines or other communication devices or methods that are separate from the
telephone lines or devices or methods utilized to monitor personal emergency
response ("PERS") customers of Seller, and Company does not own or service any
PERS customers.
3.30 YEAR 2000 COMPLIANCE. Except as set forth on SCHEDULE 3.30
attached hereto, neither Seller nor the Company has Knowledge that its computer
hardware, software or firmware is not year 2000 compliant ("Year 2000
Compliance").
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE SELLER
As an inducement to the Buyer to enter into this Agreement, the Seller
hereby makes the representations and warranties set forth in this Article IV as
of the date of this Agreement.
4.1 ORGANIZATION. The Seller is a corporation validly existing and in
good standing under the laws of the jurisdiction of its incorporation and is
qualified to do business in every jurisdiction in which the execution, delivery
and performance of its obligations under this Agreement requires it to be so
qualified other than those jurisdictions in which the failure to so qualify
would not prohibit the consummation of the transactions contemplated hereby.
4.2 AUTHORIZATION OF TRANSACTIONS. The Seller has full corporate power
and authority to execute and deliver this Agreement and all other Transaction
Documents to which it is a party and to perform its obligations hereunder and
thereunder. The board of directors of the Seller has, or will have on or before
the Approval Date, duly approved this Agreement and all other Transaction
Documents to which the Seller is a party and has, or will have on or before the
Approval Date, duly authorized the Seller's execution and delivery of this
Agreement and such Transaction Documents and the performance of the Seller's
obligations hereunder and thereunder. This Agreement and, upon execution and
delivery by the Seller, all other Transaction Documents to which the Seller is a
party, have been duly executed and delivered by the Seller and constitute the
legal, valid and binding obligations of the Seller, enforceable against the
Seller in accordance with their terms, except as the enforceability hereof or
thereof may be limited by bankruptcy or other laws affecting creditors' rights
generally and except for any limitations on the availability of equitable
remedies.
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4.3 TITLE TO SHARES. The Seller is the record and beneficial owner of,
and has good and valid title to, the Shares free and clear of all Liens. No
legend or other reference to any purported Lien appears upon any certificate
representing the Shares. The delivery of certificates representing the Shares
pursuant to Section 1.4 will transfer to the Buyer good and valid title to the
Shares, free and clear of all Liens.
4.4 ABSENCE OF CONFLICTS. Neither the execution, delivery and
performance of this Agreement or any other Transaction Document by the Seller
nor the consummation by the Seller of the transactions contemplated hereby or
thereby:
(a) does or will (i) conflict with or result in any breach of any of
the provisions of, (ii) constitute a default under, (iii) result in a violation
of, (iv) give any third party the right to terminate or to accelerate any
obligation under, or (v) result in the creation of any Lien upon any of the
Shares or property of the Seller, in each case under the provisions of the
articles or certificate of incorporation, by-laws or similar organizational
document of the Seller or any indenture, mortgage, lease, loan agreement or
other material agreement, instrument or contract or any material Legal
Requirement by which the Seller or any property of the Seller is affected.
(b) without limiting clause (a) above, requires any Consent of any
Governmental Entity or any other Person (other than compliance with the HSR Act)
other than as described on SCHEDULE 4.4, except for any Consents which the
failure to obtain could not reasonably be expected (individually or
collectively) to have a Material Adverse Effect.
4.5 BROKERAGE. Except as set forth on SCHEDULE 3.12 attached hereto,
there are no claims for brokerage commissions, finders' fees or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of the Seller, and
all of the obligations set forth on SCHEDULE 3.12 shall be paid in full at the
Closing by the Seller.
4.6 LITIGATION; PROCEEDINGS. There are no actions, suits, proceedings,
orders, judgments, decrees or investigations pending or, to the Knowledge of the
Seller, threatened against or affecting the Seller, at law or in equity, or
before or by any Governmental Entity, in which it is sought to restrain or
prohibit the transactions contemplated hereby.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BUYER
As an inducement to the Seller to enter into this Agreement, the Buyer hereby
makes the representations and warranties set forth in this Article V as of the
date of this Agreement.
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5.1 ORGANIZATION AND POWER. The Buyer is a corporation validly existing
and in good standing under the laws of the jurisdiction of its organization and
is qualified to do business in every jurisdiction in which the execution,
delivery and performance of its obligations under this Agreement requires it to
be so qualified other than those jurisdictions in which the failure to so
quality would not prohibit the consummation of the transactions contemplated
hereby. The Buyer has full power and authority to execute and deliver this
Agreement and all other Transaction Documents to which it is a party and to
perform its obligations hereunder and thereunder.
5.2 AUTHORIZATION OF TRANSACTIONS. The Buyer has full corporate power
and authority to execute and deliver this Agreement and all other Transaction
Documents to which it is a party and to perform its obligations hereunder and
thereunder. The board of directors of the Buyer has, or will have on or before
the Approval Date, duly approved this Agreement and all other Transaction
Documents to which the Buyer is a party and has, or will have on or before the
Approval Date, duly authorized the Buyer's execution and delivery of this
Agreement and such Transaction Documents and the performance of the Buyer's
obligations hereunder and thereunder. This Agreement and, upon execution and
delivery by Buyer, all other Transaction Documents to which the Buyer is a
party, have been duly executed and delivered by the Buyer and constitute the
legal, valid and binding obligations of the Buyer, enforceable against the Buyer
in accordance with their terms, except as the enforceability hereof or thereof
may be limited by bankruptcy or other laws affecting creditors' rights generally
and except for any limitations on the availability of equitable remedies.
5.3 ABSENCE OF CONFLICTS. Except as set forth on the attached SCHEDULE
5.3, neither the execution, delivery and performance of this Agreement or any
other Transaction Document by the Buyer nor the consummation by the Buyer of the
transactions contemplated hereby or thereby:
(a) does or will (i) conflict with or result in a breach of any of the
provisions of, (ii) constitute a default under, (iii) result in the violation
of, (iv) give any third party the right to terminate or to accelerate any
obligation under, or (v) require any consent, order, approval, authorization or
other action of, or any filing with or notice to, any Governmental Entity or
other Person, in each case under the articles or certificate or incorporation,
by-laws or similar organizational documents of the Buyer or under the provisions
of any indenture, mortgage, lease, loan agreement or other agreement or
instrument to which the Buyer is bound or by which it or any of its assets are
affected, or any Legal Requirement to which the Buyer or any of its assets is
subject, or
(b) without limiting the foregoing, require any Consent of any
Governmental Entity or any other Person (other than compliance with the HSR Act)
other than as described on SCHEDULE 5.3., except for any Consents which the
failure to obtain could not reasonably be expected (individually or
collectively) to have a Material Adverse Effect.
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5.4 BROKERAGE. Except as set forth on SCHEDULE 5.4 attached hereto,
there are no claims for brokerage commission, finders' fees or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of the Buyer, and all
of the obligations set forth on SCHEDULE 5.4 shall be paid in full at the
Closing by the Buyer.
5.5 LITIGATION; PROCEEDINGS. There are no complaints, charges, claims,
actions, suits, proceedings, orders or investigations pending or, to the Buyer's
Knowledge, threatened against the Buyer at law or in equity, or before or by any
Governmental Entity, in which it is sought to restrain or prohibit the
transactions contemplated hereby.
5.6 ACQUISITION OF SHARES FOR INVESTMENT. The Buyer is acquiring the
Shares for investment and not with a view toward, or for sale in connection with
any distribution thereof, nor with any present intention of distributing or
selling the Shares. The Buyer agrees and understands that the Shares have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), and may not be sold, transferred, offered for sale, pledged, hypothecated
or otherwise disposed of (i) without registration under the Securities Act,
except pursuant to an exemption from such registration available under the
Securities Act, and (ii) except in accordance with applicable provisions of
state securities laws.
5.7 FINANCING. The Buyer has all funds necessary to consummate the
transactions contemplated by this Agreement.
ARTICLE VI
TERMINATION
6.1 TERMINATION. This Agreement may be terminated at any time prior to
the Closing:
(a) by mutual written agreement of the Seller and the Buyer;
(b) by the Seller, by written notice to the Buyer, on any date
determined for the Closing in accordance with Section 1.4 if each condition set
forth in Section 1.5 has been satisfied (or will be satisfied by the delivery of
documents by the parties at the Closing) or waived by the Buyer in writing on or
before such date, and the Buyer has nonetheless refused to consummate the
transactions contemplated by this Agreement and such failure to close shall not
have resulted from the Company's or the Seller's material breach of this
Agreement or failure to fulfill any obligation under this Agreement;
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(c) by the Buyer, by written notice to the Seller, on any date
determined for the Closing in accordance with Section 1.4 if each condition set
forth in Section 1.6 has been satisfied (or will be satisfied by the delivery of
documents by the parties at the Closing) or waived by the Seller in writing on
or before such date, and the Seller or the Company has nonetheless refused to
consummate the transactions contemplated by this Agreement and such failure to
close shall not have resulted from the Buyer's material breach of this Agreement
or failure to fulfill any obligation under this Agreement;
(d) by the Buyer or the Seller, by written notice to the other, after
the Termination Date, if the Closing has not occurred and the Person giving such
notice (and the Company, if such notice is given by the Seller) is not in breach
of this Agreement in any material respect and is in compliance with its
obligations under this Agreement;
(e) by the Buyer or the Seller if the condition set forth in Section
1.5(o) has not been satisfied or waived on or before sixty (60) days after the
vote contemplated by Section 1.5(o).
The "TERMINATION DATE" will be the 60th day following the date hereof. The Buyer
may not rely on the failure of any condition precedent set forth in Section 1.5
to be satisfied if such failure resulted from the Buyer's failure to act in good
faith or a breach of or failure to perform any of its representations,
warranties, covenants or other obligations in accordance with the terms of this
Agreement, and the Seller may not rely on the failure of any condition precedent
set forth in Section 1.6 to be satisfied if such failure resulted from the
Seller's or the Company's failure to act in good faith or a breach of or failure
to perform any of its representations, warranties, covenants or other
obligations in accordance with the terms of this Agreement.
6.2 EFFECT OF TERMINATION. If this Agreement is terminated as provided
in Section 6.1, then this Agreement will forthwith become void and there will be
no liability on the part of any party to any other party or any other Person in
respect thereof, provided that the obligations of the parties described in
Sections 6.3, 8.2 and 8.4 will survive any such termination.
6.3 TERMINATION FEE. In recognition of the considerable expense that
the parties have incurred in the transactions contemplated hereby and the
foregoing by the Seller and Buyer of other opportunities as a result of its
commitment to such transactions, if (a) this Agreement is terminated by the
Seller or the Buyer pursuant to Section 6.1(b) or 6.1(c), and (b) the other
party would not have had the right to terminate this Agreement pursuant to
Section 6.1 the party terminating shall be entitled, at its option, either: (i)
to terminate this Agreement upon written notice to the other party in accordance
with Section 6.1 and upon such termination, the other party shall pay to an
account designated by the terminating party, within three (3) business days
following notice, in immediately available funds, the sum of Two Million Five
Hundred Thousand Dollars ($2,500,000.00), as liquidated damages for all loss,
damage and exposure suffered by the terminating party and not as penalty, it
being agreed that damages will be impossible to ascertain and that such amount
is a reasonable sum considering all of the
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circumstances existing as of the date of this Agreement, including the sum of
the harm to the party's business, the anticipated use of proceeds from the sale
or income from the purchase of the Shares, and the fact that it would be
difficult to fix actual damages to the party, or (ii) to institute and prosecute
proceedings against the other party, either at law or in equity in any court of
competent jurisdiction, to enforce the specific performance of this Agreement it
being acknowledged that irreparable damage would occur in the event that the
provisions of this Agreement were not performed in accordance with their terms.
ARTICLE VII
INDEMNIFICATION AND RELATED MATTERS
7.1 SURVIVAL; ABSENCE OF OTHER REPRESENTATIONS. All representations,
warranties, covenants and agreements set forth in this Agreement or in any
writing or certificate delivered in connection with this Agreement will survive
the Closing Date. The right to indemnification or other remedies based on such
representations, warranties, covenants and agreements will not be affected by
the waiver of any condition or any knowledge or any investigation at any time
made by or on behalf of the Buyer, the Company or the Seller, or of any
information the Buyer, the Company, or the Seller may have in respect thereof,
and regardless of any dissolution of the Company after the Closing; provided
that all claims (other than claims of fraud) made in respect of any such
representations, warranties, covenants or agreements will be subject to any
applicable limitations set forth in this Article VII except as specifically
provided herein. No party has made or will make in connection with this
Agreement any representation or warranty, express or implied, other than as set
forth in this Agreement, the schedules hereto, and the certificates delivered
pursuant hereto.
7.2 INDEMNIFICATION.
(a) BY THE SELLER. Subject to the limitations set forth in this Section
7.2(a) and in Section 7.2(c), after the Closing, the Seller will indemnify the
Buyer, the Company and their respective Affiliates (and the Seller shall have no
right of contribution or other action against the Company arising out of any
breach of a representation, warranty, agreement or covenant by the Company),
shareholders, partners, officers, directors, employees, agents, representatives,
successors (collectively, the "BUYER INDEMNITEES") and hold the Buyer
Indemnitees harmless from and against any loss, liability, deficiency, damage or
expense (including reasonable legal expenses and costs and any cost or expense
arising from or incurred in connection with any action, suit, proceeding, claim
or judgment relating to any matter described in clause (i) or (ii) below, or in
enforcing the indemnity provided by this Section 7.2) (any such amount being
referred to as a "LOSS") which any Buyer Indemnitee may suffer, sustain or
become subject to, as a result of:
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(i) any breach by the Seller or the Company of any representation,
warranty or certification of the Seller or the Company set forth in this
Agreement or any certificate delivered by the Seller or the Company in
connection with the Closing;
(ii) any breach by the Seller at any time, or, by the Company prior to
the Closing of any covenant or agreement set forth in this Agreement;
(iii) any breach by the Seller at any time, or, by the Company prior to
the Closing of any Transaction Document; or
(iv) any Loss in connection with any action, suit, proceeding, claim or
judgment with any third party arising out of or from any act, error or omission
of the Seller or the Company prior to Closing; or
(v) any Loss in connection with any unfair labor practice claim against
the Seller or the Company relating to an unfair labor practice that occurred
prior to the Closing.
Provided that the Seller's liability pursuant to this Section 7.2(a) will be
subject to the following limitations:
(A) the Seller will not be liable for any Loss described in Section
7.2(a) above unless and until the aggregate amount of all Losses described in
Section 7.2(a) above exceeds One Million Dollars ($1,000,000.) (the "BASKET"),
in which event the Seller will be liable for all Losses described in Section
7.2(a) above, without regard to the Basket; provided that the Basket will not
apply to any Loss incurred as a result of fraud by the Seller or the Company, an
intentional breach of any Transaction Document by the Seller or the Company or
any inaccuracy or breach by the Company or the Seller of any representations and
warranties of which the Seller or the Company had Knowledge at any time prior to
Closing or set forth in Sections 3.3(a) (Capital Stock), 3.7(c) (Ownership of
Assets), 3.8 (Taxes), 3.12 (Brokerage), 3.14 (Employee Benefit Plans), 3.18
(Environmental Matters), 3.20 (Undisclosed Liabilities), and 4.3 (Title to
Shares), or any certification relating thereto, Section 7.2 (a)(v), Section 8.9
(Tax Matters), Section 8.13 (IRC ss.338 Election), or Section 8.14 (PERS
Monitoring), 8.16 (Telephone Switch), or any adjustment to the Estimated
Purchase Price pursuant to this Agreement.
(B) the Seller will not be liable for any Loss described in Section
7.2(a) above unless the Buyer gives the Seller written notice asserting the
misrepresentation, breach or other matter in question on or prior to the one
year anniversary of the Closing Date; provided that this clause (B) will not
apply to any Loss incurred as a result of Section 7.2(a)(iv), fraud, any
inaccuracy or a breach by the Company or the Seller of any representations and
warranties set forth in Sections 3.3(a) (Capital Stock), 3.7(c) (Ownership of
Assets), 3.8 (Taxes), 3.18 (Environmental Matters) and 4.3 (Title to Shares) or
any certification relating thereto, provided further that the Seller will not be
liable for any Loss described in Section 7.2(a) above in connection with any
breach of the representations and warranties contained in Sections 3.3(a),
3.7(c), 3.8, 3.18 or 4.3 or any certification relating thereto, unless the Buyer
gives the Seller written notice asserting the misrepresentation, breach or other
matter in question on or prior to
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the end of the applicable statute of limitations after which period such
representation and warranty shall terminate and be of no further force or
effect, and
(C) the Seller will not be liable for any Loss described in Section
7.2(a) above to the extent that the aggregate amount of all Losses described in
Section 7.2(a) above exceeds 33% (thirty-three percent) of the Final Purchase
Price (the "Cap"); provided that the Cap will not apply to any Loss incurred as
a result of fraud, any inaccuracy or breach by the Company or the Seller of any
representations and warranties set forth in Sections 3.3(a) (Capital Stock),
3.7(c) (Ownership of Assets), 3.8 (Taxes), 3.18 (Environmental Matters) and 4.3
(Title to Shares), or any certification relating thereto.
(b) BY THE BUYER. Subject to the limitations set forth in this Section
7.2(b) and in Section 7.2(c), after the Closing, the Buyer will indemnify the
Seller and its Affiliates, partners, officers, directors, employees, agents,
representatives, successors (collectively, the "SELLER INDEMNITEES") and hold
any Seller Indemnitee harmless from and against any Loss which any Seller
Indemnitee may suffer, sustain or become subject to, as the result of:
(i) any breach by the Buyer of any representation, warranty or
certification of the Buyer set forth in this Agreement or any certificate
delivered by the Buyer in connection with the Closing; or
(ii) any breach by the Buyer at any time, or, by the Company
following the Closing, of any covenant or agreement set forth in this Agreement;
or
(iii) any breach by the Buyer of any Transaction Document.
(c) CONSEQUENTIAL DAMAGES; MITIGATION. Neither the Seller nor the Buyer
will have any obligation to indemnify any Buyer Indemnitee or Seller Indemnitee
for (a) any Consequential Damages, or (b) any other Losses (i) that are
recovered by the indemnitee from any third party (including insurers, subject to
the last two sentences of this clause (c)), or (ii) to the extent (and as of and
not until the time) such Losses are offset by actual tax savings realized on
account of such Losses by the indemnitee or any of its Affiliates. In the event
any relevant insurance payment has not been received at the time an amount is
due any Buyer Indemnitee or Seller Indemnitee, as the case may be, pursuant to
the provisions of Article 7 hereof, then the amount so due shall be paid in full
by the Seller or the Buyer, as the case may be. To the extent the Buyer
Indemnitee or Seller Indemnitee, as the case may be, receives any payment
pursuant to any insurance policies as to a claim with respect to which it has
previously received payment from the Seller or the Buyer, as the case may be,
hereunder, then in such event the Buyer Indemnitee or Seller Indemnitee, as the
case may be, shall promptly reimburse the Seller or the Buyer, as the case may
be, for the full amount of any such duplicate payment received.
(d) EXCLUSIVE REMEDY. Anything in this Agreement or applicable law to
the contrary notwithstanding, it is understood and agreed by the Buyer and the
Seller that except as expressly provided in Sections 6.3, 7.2(a) and 7.2(b),
after the Closing neither the Buyer nor the Seller will have any obligation or
liability to the other, and neither the Buyer nor the Seller will have any
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claim or recourse against the Buyer or the Seller, as a result of the breach
prior to the Closing of any representation, warranty, covenant or agreement of
the Company, the Seller or the Buyer contained herein or otherwise arising out
of or in connection with the transactions contemplated by this Agreement or the
operations of the Company, it being understood and agreed that the remedies
provided for in Sections 6.3, 7.2(a) and 7.2(b) will be the sole and exclusive
remedy for any such claim or recourse by the Buyer or the Seller for any such
matters, whether such claims are framed in contract, tort or otherwise.
(e) RIGHT TO SET-OFF. Upon notice to Seller specifying in reasonable
detail the basis for such set-off, Buyer may set-off any amount to which it may
be entitled against amounts otherwise payable to Seller. The exercise of such
right of set-off by Buyer in good faith, whether or not ultimately determined to
be justified, will not constitute an event of default under this Agreement or
any Transaction Document. Neither the exercise or failure to exercise such right
of set-off or to give notice of a claim will constitute an election of remedies
or limit Buyer in any manner in the enforcement of any other remedies that may
be available to it.
7.3 INDEMNIFICATION PROCEDURES.
(a) NOTICE OF CLAIM. Any party making a claim for indemnification under
Section 7.2 (the "INDEMNIFIED PARTY") will notify the Person from whom
indemnification is claimed (the "INDEMNIFYING PARTY") of the claim in writing
promptly after receiving written notice of any action, lawsuit, proceeding,
investigation or other claim against it (if by a third party) or after
discovering the liability, obligation or facts giving rise to such claim for
indemnification. Such notice will describe the claim, the amount thereof (to the
extent then known and quantifiable), and the basis therefor, in each case to the
extent known to the Indemnified Party. Subject to Section 7.2(a), the failure to
so notify the Indemnifying Party will not relieve the Indemnifying Party of its
obligations under Section 7.2, except to the extent that such failure actually
prejudices the Indemnifying Party.
(b) ASSUMPTION OF DEFENSE. Except where the Indemnifying Party fails to
provide reasonable assurance of its financial capacity to defend and provide
indemnification, with respect to any third party claim which gives rise or is
alleged to give rise to a claim for indemnity under Section 7.2, the
Indemnifying Party, at its option (subject to the limitations set forth below),
will be entitled to assume responsibility for and control the defense of such
claim and to appoint a competent and reputable counsel reasonably acceptable to
the Indemnified Party to act as lead counsel of such defense.
(c) LIMITS OF ASSUMPTION OF DEFENSE. An Indemnifying Party's rights
under Section 7.3(b) will be subject to the following limitations:
(i) with respect to any claim the defense of which the Indemnifying
Party has assumed, the Indemnified Party will be entitled to participate in the
defense of such claim and to employ counsel of its choice for such purpose, and
the fees and expenses of such separate counsel will be borne by the Indemnified
Party; and
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(ii) if the Indemnifying Party assumes control of the defense of
any such claim, then the Indemnifying Party will obtain the prior written
consent of the Indemnified Party before entering into any settlement of such
claim, unless such settlement or judgment relates solely to monetary damages and
such settlement expressly and unconditionally releases the Indemnified Party
from all liabilities and obligations with respect to such claim, without
prejudice. Notwithstanding the foregoing, the Indemnifying Party shall not make
any settlement or compromise with respect to any matter relating to Taxes or Tax
Returns to the extent such settlement or compromise materially affects Tax
periods beginning after the Closing Date, without the prior written consent of
the Indemnified Party, which consent shall not be unreasonably withheld.
If the Indemnifying Party does not assume control of the defense of any claim
pursuant to the limitations set forth in this Section 7.3, or the Indemnifying
Party has the right, but does not assume control of the defense of any claim,
then the Indemnifying Party may nonetheless participate (at its own expense) in
the defense of such claim and the Indemnified Party will consult with the
Indemnifying Party in respect of such defense, as reasonably requested by the
Indemnifying Party, and the Indemnified Party will not enter into any settlement
of such claims which could result in any liability to the Indemnifying Party
under Section 7.2(a) or 7.2(b), as the case may be, unless the Indemnified Party
gives prior written notice to the Indemnifying Party of any such settlement and
receives written approval of such settlement from the Indemnifying Party, such
approval not to be unreasonably withheld. Upon receiving such written approval,
the Indemnified Party may enter into such settlement and such settlement will be
binding upon the Buyer and the Seller for purposes of determining whether any
amount of indemnification is payable pursuant to Section 7.2, subject to any
applicable limitations set forth in Section 7.2; and, for the avoidance of
doubt, if the Indemnifying Party does assume the defense of such claim within
five (5) business days after notice of the proposed settlement is given, the
costs and expenses incurred by the Indemnified Party (including reasonable legal
expenses and fees) prior to the assumption of such defense by the Indemnifying
Party shall be added to any Loss incurred by such claim. As used in this Article
VII, the term "settlement" refers to any settlement, compromise, consent or
similar decree, or election to permit default judgment to be entered, in respect
of any claim.
7.4 TREATMENT OF INDEMNIFICATION PAYMENTS. Each Party will treat all
payments made pursuant to Section 7.2 as adjustments of the Final Purchase Price
consistent with Section 1.338 H 10 election for tax purposes. Each Party agrees
to use reasonable efforts to seek recovery under any insurance coverage which
such Party may have in respect of any Loss. Notwithstanding the foregoing,
nothing herein contained shall require either of the parties to institute a suit
or other proceeding as to any denial of coverage or reservation of rights by any
insurance carrier as to any coverage applicable to the subject matter of any
claim by an Indemnified Party.
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ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1 THE BUYER'S RETENTION OF RECORDS; CONTINUING ASSISTANCE. After the
Closing, the Buyer and the Company shall provide the Seller, and its counsel,
accountants and other representatives, and the Seller shall provide the Buyer
and the Company and their respective counsel, accountants and other
representatives, with reasonable access during normal business hours to the
books, records, property, personnel, contracts, commitments and documents
relating to the Company in its possession pertaining to transactions occurring
prior to the Closing Date when requested; provided that such access does not
unreasonably interfere with the business or operations of the Company or the
Person providing such access. At the request and expense of the requesting
Person, the requested Person will deliver copies of any such books and records
to the requesting Person. The Buyer agrees that it shall preserve and keep all
books and records of the Company in the Buyer's possession for a period of at
least seven (7) years from the Closing Date. If, in order to properly prepare
documents required to be filed with governmental authorities or its financial
statements, it is necessary that any party hereto or any successors be furnished
with additional information relating to the Company, and such information is in
the possession of any other party hereto, such party agrees to use its best
efforts to furnish such information to such requesting party, at the cost and
expense of the party being furnished such information.
8.2 PRESS RELEASES AND ANNOUNCEMENTS. (i) Prior to such time as the
boards of directors of the Company, the Seller and the Buyer have given the
approvals described in Sections 3.2, 4.2 and 5.2 (the "APPROVAL TIME"), neither
the Buyer nor the Seller shall make any press releases related to this Agreement
or any transaction contemplated hereby or other announcements generally to
customers or other Persons having business relationships with the Company, and
(ii) following the Approval Time, except for any public disclosure which either
the Buyer or the Seller in good faith believes is reasonably advisable under any
Legal Requirement (in which case, if practicable, the disclosing party will give
the other parties an opportunity to review and comment upon such legally
required disclosure before it is made):
(a) prior to the Closing, no press releases related to this Agreement
or any transaction contemplated hereby or other announcements generally to
customers or other Persons having business relationships with the Company (it
being understood that the Buyer will have the right to contact such Persons in
connection with its investigation of the business of the Company as provided in
Section 2.2(a) and as the Seller may otherwise consent) will be issued or made
without the mutual approval of the Seller and the Buyer, other than notices to
third parties from whom Consent is required to be obtained in connection with
the transactions contemplated hereby; and
(b) after the Closing, neither party will make any press release or
other public announcement with respect to the Company, this Agreement or any
transaction contemplated hereby without the other party's consent, which shall
not be unreasonably withheld or delayed.
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8.3 FURTHER ASSURANCES. Each party will execute and deliver such
further instruments or documents and take such additional actions as any other
party may reasonably request to effect, consummate, confirm or evidence the
transfer to the Buyer of the Shares and the other transactions contemplated
hereby.
8.4 EXPENSES. Except as otherwise expressly provided herein, each of
the Seller and the Buyer will pay all of its own fees, costs and expenses
(including fees, costs and expenses of legal counsel, investment bankers,
accountants, brokers or other representatives and consultants and appraisal
fees, costs and expenses), and the Seller will pay any cost of the Company,
incurred in connection with the preparation, negotiation, execution and delivery
of this Agreement and the other Transaction Documents, the performance of their
obligations hereunder and thereunder, and the consummation of the transactions
contemplated hereby and thereby. The Company or the Seller will prepare and
file, on or before the due dates thereof, any required forms with respect to any
transfer, stamp, conveyance, recording or other similar Taxes, fees, duties or
governmental charges (collectively, "TRANSFER TAXES") imposed by any Taxing
jurisdiction by reason of the transactions contemplated by this Agreement. The
Buyer agrees to cooperate with the Seller in connection with the preparation and
filing of any forms relating to Transfer Taxes. Each of the Buyer and the Seller
will be responsible for one-half of all Transfer Taxes imposed on the Buyer, the
Seller, the Company or any property of the Company by reason of any transaction
contemplated by this Agreement. If valuations of any property or leases are
required to determine the amount of any Transfer Taxes, the Seller and the Buyer
will reasonably determine such valuations, and the parties agree that they will
not take (or cause to be taken) any position inconsistent with such valuations
in connection with any Tax Return or otherwise.
8.5 NON-SOLICITATION.
(a) GENERAL. (i) During the period beginning on the date of this
Agreement and ending on the first anniversary of the Closing Date, without the
Buyer's previous written consent, the Seller will not directly or indirectly
contact, approach, solicit, divert, entice, induce, take away, interfere with or
employ, hire or contract with (whether as an employee, consultant, agent,
independent contractor or otherwise) any person who is employed by the Company
either on the date of this Agreement or on the Closing Date, which shall not
include general solicitations through the media.
(ii) As to all of the customers of the Company, in addition to, and not
in derogation of, the provisions of Section 8.6 hereof, the Seller agrees that
it shall not directly or indirectly, either alone or as a consultant, advisor,
partner, joint ventures, member or stockholder of any person, company, or
business organization, solicit, divert, take away or accept, or attempt to
solicit, divert, take away or accept any security alarm or guard, response or
patrol business from any customer of the Company who becomes a customer of the
Buyer in accordance with the terms of this Agreement; provided, however, the
foregoing restriction shall not prohibit the Seller or its subsidiaries from
continuing to operate its personal response system business.
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(iii) If a court of competent jurisdiction declares that any term or
provision of this Section 8.5(a) is invalid or unenforceable, the parties agree
that the court making the determination of invalidity or unenforceability will
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement will be enforceable as so modified after
the expiration of the time within which the judgment, order or decree of such
court may be appealed.
(b) REMEDY FOR THE SELLER'S BREACH. The Seller acknowledges and agrees
that in the event of a breach by the Seller of any of the provisions of this
Section 8.5, monetary damages will not constitute a sufficient remedy and that
Buyer would have no adequate remedy at law. Consequently, in the event of any
such breach, the Buyer and/or its successors or assigns may, in addition to
other rights and remedies existing in their favor, apply to any court of law or
equity of competent jurisdiction for specific performance and/or injunctive or
other relief in order to enforce or prevent any violations of the provisions
hereof, in each case without the requirement of posting a bond or security, the
Seller hereby expressly waiving the requirement for any such bond or security,
or proving actual injury or damages.
(c) ACKNOWLEDGMENT. The Seller acknowledges and agrees that (i) the
covenants set forth in this Section 8.5 are reasonable in scope, duration,
geographic area and in all other respects, (ii) the Buyer would not have entered
into this Agreement but for the covenants of the Seller contained in this
Section 8.5, and (iii) the covenants contained in this Section 8.5 have been
made in order to induce the buyer to enter into this Agreement and shall be
deemed to be independent covenants.
8.6 NON-COMPETE COVENANT.
(a) NON-COMPETITION WITH BUSINESS OF THE COMPANY. In addition to and
not in derogation of the provisions of Section 8.5 hereof, effective upon the
Closing Date, for a period of two (2) years after the date hereof (the
"NON-COMPETITION PERIOD"), the Seller shall not, directly or indirectly, own,
operate, lease, manage, control, engage in, invest in, lend to, partner or joint
venture with, be a member of, permit its name be used by, act as consultant or
advisor to (alone or in association with any person, firm, corporate or other
business organization) any person or entity that is in the security alarm or
guard, response or patrol business anywhere where the Company currently operates
("COVERED ACTIVITIES"); provided, however, the foregoing restriction shall not
prohibit the Seller or its subsidiaries from continuing to operate its personal
response system business. Nothing herein shall prohibit the Seller from being a
passive owner of the outstanding stock of any class of securities of a publicly
traded corporation engaged in Covered Activities, so long as the Seller does not
actively participate in the management of such corporation and so long as the
Seller owns no more than ten (10%) percent of the issued and outstanding stock
of such corporation.
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(b) ACKNOWLEDGMENT. The Seller acknowledges and agrees that (i) the
covenants set forth in this Section 8.6 are reasonable in scope, duration,
geographic area and in all other respects, (ii) the Buyer would not have entered
into this Agreement but for the covenants of the Seller contained in this
Section 8.6, and (iii) the covenants contained in this Section 8.6 have been
made in order to induce the Buyer to enter into this Agreement and shall be
deemed to be independent covenants.
(c) SEVERABILITY. If a court shall hold that the duration, scope, or
area restrictions stated in this Section 8.6 are unreasonable under
circumstances then existing, the parties agree that the maximum duration, scope,
or area reasonable under such circumstances shall be substituted for the stated
duration, scope or area. If any provision of this Section 8.6 shall be
determined by any court of competent jurisdiction to be invalid, illegal or
unenforceable in whole or in part and such determination shall become final, and
such determination shall not be curable by the application of the previous
sentence, such provision shall be deemed to be severed or limited, but only to
the extent required to render the remaining provisions of this Section 8.6
enforceable. This Section 8.6, as thus amended, shall be enforced to give effect
to the intention of the parties insofar as that is possible.
(d) REMEDIES. The Seller acknowledges and agrees that in the event of a
breach by Seller of any of the provisions of this Section 8.6, monetary damages
will not constitute a sufficient remedy and that the Buyer would have no
adequate remedy at law. Accordingly, in the event of any such breach, the Buyer
and/or its successors and assigns may, in addition to any other rights and
remedies existing in their favor, apply to any court of law or equity of
competent jurisdiction for specific performance, injunctive or other relief in
order to enforce or prevent any violations of the provisions hereof without the
Buyer having to post a bond or security, the Seller hereby expressly waiving the
requirements for any such bond or security, or proving actual injury or damages.
8.7 HSR ACT COMPLIANCE. If required, within seven (7) days after the
date hereof, the Seller and the Buyer shall file any notification required to be
filed under the HSR Act to consummate the transactions contemplated hereby, and
shall request early termination of the waiting period thereunder. The Seller and
the Buyer shall use all commercially reasonable efforts to comply as promptly as
practicable, with any request made pursuant to the HSR Act for additional
information. The Seller and the Buyer shall cooperate with each other in such
compliance to the extent commercially reasonable. The Buyer shall pay the
statutory filing fees required by law in connection with the filings required
under the HSR Act.
8.8 EMPLOYEE MATTERS. Schedule 8.8 attached hereto is a list of
employees of the Company and/or Seller who are engaged in management of the
Company (the "MANAGEMENT EMPLOYEES") as of the date indicated thereon (which
date is not more than thirty (30) days prior to the date hereof), including each
such person's name and current position or job classification, along with true
and complete confidential wage or salary and bonus information for each
Management Employee. On and after the Closing, neither the Seller nor Buyer
shall have any further obligation to provide benefits, or make its benefit plans
available, to the Management
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Employees (or their covered dependents) or other current or former employees of
the Company (or their covered dependents), except as may be required under
applicable law (including without limitation, health continuation coverage under
Code Section 4980B).
8.9 TAX MATTERS. The following provisions shall govern the allocation
of responsibility as between the Buyer and the Seller for certain Tax matters
following the Closing Date:
8.9.1 The Seller shall indemnify and hold harmless the Buyer and the
Company (i) for any and all Taxes of the Company with respect to all taxable
periods of the Company ending on or prior to the Closing Date, including,
without limitation, any Tax liability asserted against Company arising out of
its inclusion in any consolidated return, (ii) for all Taxes allocated to the
Seller pursuant to Section 8.9.2, and (iii) for any reasonable costs and
expenses arising directly out of the imposition, assessment or assertion of any
such Taxes, including those costs incurred pursuant to the terms of this
Agreement in connection with the assertion or defense of any claim or assessment
for such Taxes (collectively, "OTHER AMOUNTS"). The Buyer shall indemnify and
hold harmless the Seller (i) for any and all Taxes of the Company imposed on the
Seller with respect to all taxable periods of the Company beginning after the
Closing Date, (ii) for all Taxes allocated to the Buyer pursuant to Section
8.9.2, and (iii) for any reasonable costs and expenses arising directly out of
the imposition, assessment or assertion of any such Taxes, including those costs
incurred pursuant to the terms of this Agreement in connection with the
assertion or defense of any claim or assessment for such Taxes.
8.9.2 If, with respect to any Tax, the taxable period of the Company
does not terminate on the Closing Date, the Tax (whether based on income,
capital, ownership of property or otherwise) attributable to the taxable period
of the Company that includes the Closing Date shall be allocated to (i) the
Seller for the period up to and including the Closing Date; and (ii) the Buyer
for the period subsequent to the Closing Date (plus amounts reserved therefor on
the Final Balance Sheet). Any indemnification hereunder shall be subject to the
procedures set forth in Section 7.3 hereof. For purposes of this section, Taxes
for the period up to and including the Closing Date shall be determined on the
basis of a closing of the books as of the Closing Date, except that any Tax
imposed annually based on ownership of assets on a particular date, or any
similar tax, shall be prorated to the period prior to and including the Closing
Date and the period thereafter. Where applicable, the parties agree to elect to
close the tax year as of the Closing Date by closing of the books.
8.9.3 The Seller shall prepare or cause to be prepared in a manner
consistent with past practice, and timely file or cause to be timely filed, all
Tax Returns of the Company with respect to periods ending on or before the
Closing Date. The Buyer and the Company shall furnish Tax information to the
Seller for inclusion in such Tax Returns in accordance with the Company's past
practice. The Buyer shall prepare or cause to be prepared in a manner consistent
with past practice, and timely file or cause to be filed, all Tax Returns of the
Company with respect to periods ending after the Closing Date. Buyer shall
deliver or cause to be delivered to the Seller all Tax Returns of the Company
for periods beginning prior to the Closing Date for Seller's
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review and approval at least thirty (30) days prior to the due date thereof.
Seller shall deliver to the Buyer any Tax Returns relating to the Company for
periods beginning prior to the Closing Date for Buyer's review and approval at
least thirty (30) days prior to the due date thereof. Tax Returns which include
periods ending on or before the Closing Date, and which must be signed by an
officer of the Company, shall be delivered to the Buyer not less than fifteen
(15) days prior to the due date, including any extensions thereof. The Buyer
shall cause such Tax Returns to be signed by an officer of the Company promptly
after delivery of each such Tax Return.
8.9.4 Whenever any Taxing authority sends a notice of an audit,
initiates an examination of the Company, or otherwise asserts a claim, makes an
assessment, or disputes the amounts of Taxes for which the Seller is or may be
liable under this Agreement, the Buyer shall promptly inform the Seller. The
failure of the Buyer to notify the Seller promptly shall not relieve the Seller
of any obligations under this Agreement except to the extent such failure
prejudices Seller's ability to defend the claim. The Seller shall have the
complete right to control, at its cost, any resulting proceedings. The Buyer
shall have the right to attend the proceedings at its own expense. The Seller
may settle any such claim, assessment, or dispute to the extent such proceedings
or determinations affect the amount of Taxes for which the Seller is liable
under this Agreement, only with the prior consent of the Buyer, which consent
shall not be unreasonably withheld or delayed. Whenever any Taxing authority
sends a notice of an audit, initiates an examination of the Company, or
otherwise asserts a claim, makes an assessment or disputes the amount of Taxes
for which the Buyer is or may be liable under this Agreement, the Seller shall
promptly inform the Buyer. The Buyer shall have the right to control, at its
cost, any resulting proceedings and to determine whether and when to settle any
such claim, assessment, or dispute, except to the extent such proceedings or
determinations affect the amount of Taxes for which the Seller is liable under
this Agreement. This Section 8.9.4 shall be subject to the terms of Section 7.3.
8.9.5 Each of the Buyer and the Seller will provide the other with such
reasonable assistance as may be requested by either of them in connection with
the preparation of any Tax Return, any audit or other examination by any taxing
authority, or any judicial or administrative proceedings relating to liability
for Taxes, and each will retain and provide the other with any records or
information which may be relevant to such Return, audit, or examination,
proceedings or determination. Such assistance shall include making employees
available on a mutually convenient basis to provide additional information and
explanation of any material provided hereunder and shall include providing
copies of any relevant Tax Return and supporting work schedules. The party
requesting assistance hereunder shall reimburse the other for reasonable expense
incurred in providing such assistance except with respect to the preparation of
any Tax Return. Without limiting in any way the foregoing provisions of this
Section 8.9.5, the Buyer hereby agrees that it will retain, until the
appropriate statutes of limitation (including any extensions) expire, copies of
all Tax Returns, work schedules and other records or information which it
possesses and which may be relevant to such Returns of the Company for all
Taxable periods ending on or prior to the Closing Date, and that such records
shall be maintained until the expiration of the applicable statute of
limitations, including any extensions thereof. The Buyer will not destroy or
otherwise dispose of such records without first providing the Seller a
reasonable opportunity to review and take possession of such records.
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8.9.6 Any and all Tax sharing agreements or practices among or between
the Company on the one hand and the Seller or any of its affiliates on the other
hand shall be terminated as of the Closing Date and no payments relating thereto
shall be made subsequent to the Closing Date.
8.9.7 All powers of attorney authorizing any party to represent the
Company with respect to Taxes shall be terminated on or before the Closing Date.
8.9.8 At the Closing, the Seller shall furnish the Buyer with an
affidavit, as described in Section 1445(b)(2) of the Code, signed under penalty
of perjury, containing such shareholder's United States taxpayer identification
number, address, and a statement that Seller is not a foreign person.
8.9.9 The Company and the Buyer shall jointly and severally indemnify
the Seller and the Seller Indemnities against and hold them harmless from any
liability resulting from any Taxes and additions thereto of the Company or any
of its Affiliates with respect to any taxable period beginning after the Closing
Date and any liability for fees, costs and expenses (including reasonable
attorneys' fees) arising out of or incident to any examination, administrative
hearing or other proceeding before any Taxing authority or any judicial
authority with respect to an amount indemnified pursuant to this sentence.
8.9.10 If the Company incurs a net or capital loss, business credit or
other Tax attribute in a taxable period beginning after the Closing Date that
must be carried back to the Seller's consolidated, combined or unitary Tax
Return, the Company may file a refund claim or application for adjustment only
after receiving the written consent of the Seller, which may not be unreasonably
withheld. In the event the Seller is finally determined to be entitled to
receive a refund attributable to such claim or application, upon receipt of such
refund the Seller shall promptly pay the Company the amount of such refund
(including any interest received thereon from the Governmental Entity or
interest which would have been received from the Governmental Entity if the Tax
had not been credited).
8.10 STANDARD COLLECTION PROCEDURES. The Company shall, and the Buyer
shall cause the Company to, use the Buyer's standard collection procedures with
respect to its accounts and provide the Seller with monthly reports with respect
to such collections until the Settlement Date.
8.11 OVERDUE ACCOUNTS. The Buyer shall, between the Determination Date
and the Settlement Date, have the option to cause all contracts which are
Overdue Contracts (as defined in the definition of RMR) as of the Determination
Date ("CANCELABLE OVERDUE CONTRACTS") to be canceled effective as of the Closing
Date; PROVIDED that the Buyer and the Seller agree that any Cancelable Overdue
Contracts not so canceled shall not be deemed Overdue Contracts (as of the
Closing Date or otherwise) for the purpose of calculating the Company's RMR as
of the Closing Date as part of the purchase price adjustment described in
Section 1.3.
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8.12 INDEPENDENT INVESTIGATION. The Buyer acknowledges and agrees that
(i) as of the Closing Date, it shall have made its own inquiry and investigation
into, and, based upon thereon, will have formed an independent judgment
concerning, the Shares and, the Company, and their respective business; (ii) as
of the Closing Date, it shall have been furnished with or given adequate access
to such information as it has requested assuming compliance by the Seller with
the terms of this Agreement; and (iii) it will not assert any claim against the
Seller or any of its directors, officers, employees, agents, stockholders,
Affiliates, consultants or representatives, or hold any such persons liable for
any, inaccuracies, misstatements or omissions with respect to the Confidential
Memorandum furnished to the Buyer or other information (other than, with respect
to the Seller, the representations and warranties contained in this Agreement).
8.13 I.R.C. Section 338 (H) (10) ELECTION. Buyer and Seller shall
jointly make an election under Section 338(h)(10) of the Code and any
corresponding election under state and local tax laws with respect to the
purchase of the Shares under this Agreement, by timely executing and filing IRS
Form 8023 (or other applicable documents or instruments) in accordance with
Treasury Regulation Section 1.338(h)(10)-1(d)(2) (or such other applicable
regulations). The Seller shall pay any Tax attributable to the making of the
election and shall indemnify the Buyer, and the Company, with respect to any
such Tax. The Seller shall be liable for and shall indemnify the Buyer for any
Tax liability that may be imposed on the Company, or the Buyer, pursuant to
Treasury Reg. 1.1502-6 (or such other applicable regulation) for any pre-Closing
Date period.
8.14 PERS MONITORING. The Seller shall cause all PERS customers that
are monitored by the Company to be monitored by other than the Company prior to
the Closing Date. In the event any PERS customers are monitored by the Company
on or after the Closing Date, Seller shall, (a) as of the Closing Date enter
into the Company's standard form of wholesale or dealer monitoring services
agreement, pursuant to which the Seller shall (b) pay for (i) all labor costs,
(ii) any switch or communication costs, and (iii) all other costs incurred by
either the Company or the Buyer to monitor the PERS customers. Seller shall use
its best efforts to cause all such PERS customers to be monitored by other than
the Company as soon as practicable after the Closing Date.
8.15 CENTRAL STATION OPERATORS. Subject to compliance with all
applicable employment laws, as of the Closing Date the Buyer shall cause the
Company to either (i) retain central station operators and customer service
personnel in their current position(s), or (ii) offer central station operators
and customer service personnel, whose positions may be eliminated, another
position with the Company without any reduction in wage rate. Although all such
employees shall be "at will" employees, the Buyer shall cause the Company to use
commercially reasonable efforts to continue to employ all such employees for a
minimum of one year from the Closing Date.
8.16 TELEPHONE SWITCH. In the event the Company's telephone switch
and/or related equipment (collectively, the "Switch") does not process data and
voice communications in an accurate and timely manner to permit Buyer, and the
Company, to comply with all relevant (i) standards of Underwriters Laboratories,
Inc. or Factory Mutual Research Corporation, or (ii) industry custom and
practice, Seller shall indemnify Buyer, and the Company, for all costs and
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expenses incurred in repairing or replacing the Switch, in Buyer's reasonable
discretion, from time to time as may be commercially reasonable (which costs and
expenses shall not exceed, in the aggregate, $250,000); PROVIDED, HOWEVER, that
notice of the decision to repair or replace the Switch shall be given to the
Seller on or before the Settlement Date.
ARTICLE IX
MISCELLANEOUS
9.1 AMENDMENT AND WAIVER. This Agreement may be amended and any
provision of this Agreement may be waived; PROVIDED that any such amendment or
waiver (a) will be binding upon the Seller (and the Company, prior to the
Closing) only if such amendment or waiver is set forth in a writing executed by
the Seller, and (b) will be binding upon the Buyer (and the Company, after the
Closing) only if such amendment or waiver is set forth in a writing executed by
the Buyer. No course of dealing between or among any Persons having any interest
in this Agreement will be deemed effective to modify, amend or discharge any
part of this Agreement or any rights or obligations of any party under or by
reason of this Agreement. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof will constitute
a waiver of any such breach or any other covenant, duty, agreement or condition.
The rights and remedies of the parties to this Agreement are cumulative and not
alternative.
9.2 NOTICES. All notices, demands and other communications given or
delivered under this Agreement will be in writing and will be deemed to have
been given when personally delivered or transmitted by telecopy (with written
confirmation of receipt) or two business days after being mailed by registered
or certified mail (return receipt requested) or one business day after being
sent or delivered by overnight document courier service (receipt requested).
Notices, demands and communications to the parties will, unless another address
is specified in writing, be sent to the addresses indicated below:
TO THE SELLER (OR TO THE COMPANY, PRIOR TO THE CLOSING):
Response USA, Inc.
3 Executive Campus
2nd Floor South
Cherry Hill, NJ 08002
Attention: Richard M. Brooks
Telecopy: 609/896-3535
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WITH A COPY (WHICH COPY WILL NOT CONSTITUTE NOTICE) TO:
Burns & Levinson LLP
125 Summer Street
Boston, MA 02110
Attention: Josef B. Volman, Esq.
Telecopy: 617/345-3299
TO THE BUYER (OR TO THE COMPANY, AFTER THE CLOSING):
Vector Security, Inc.
5125 Campus Drive
Plymouth Meeting, PA 19462
Attention: John A. Murphy
Telecopy: 610/825-4856
WITH A COPY (WHICH COPY WILL NOT CONSTITUTE NOTICE) TO:
Tannenbaum & Chanin, LLP
1515 Market Street, Tenth Floor
Philadelphia, PA 19102
Attention: Carl S. Tannenbaum, Esq.
Telecopy: (215) 523-5339
9.3 BINDING AGREEMENT; ASSIGNMENT. This Agreement and all of the
provisions hereof will be binding upon and inure to the benefit of the parties
and their respective successors and assigns; PROVIDED that neither this
Agreement nor any of the rights, interests or obligations hereunder may be
assigned by the Seller (or the Company, prior to the Closing) without the prior
written consent of the Buyer and neither this Agreement nor any of the rights,
interests or obligations hereunder may be assigned by the Buyer (or the Company,
after the Closing) without the prior written consent of the Seller. Subject to
the preceding sentence, this Agreement will apply to, be binding in all respects
upon, and inure to the benefit of the successors and permitted assigns of the
parties. Nothing expressed or referred to in this Agreement will be construed to
give any Person other than the parties to this Agreement any legal or equitable
right, remedy, or claim under or with respect to this Agreement or any
Transaction Document.
9.4 SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid or unenforceable by any court of competent jurisdiction under
applicable law, such provision will be ineffective only to the extent of such
prohibition, or invalidity, or unenforceability, without invalidating the
remainder of such provisions or the remaining provisions of this Agreement.
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9.5 NO STRICT CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent.
In the event an ambiguity or question of intent or interpretation arises, this
Agreement will be construed as if drafted jointly by the parties, and no
presumption or burden of proof will arise favoring or disfavoring any Person by
virtue of the authorship of any of the provisions of this Agreement.
9.6 CAPTIONS. The captions used in this Agreement are for convenience
of reference only and do not constitute a part of this Agreement and will not be
deemed to limit, characterize or in any way affect any provision of this
Agreement, and all provisions of this Agreement will be enforced and construed
as if no caption had been used in this Agreement.
9.7 ENTIRE AGREEMENT. This Agreement and the documents referred to
herein contain the entire agreement between the parties and supersede any prior
understandings, agreements or representations by or between the parties, written
or oral, which may have related to the subject matter hereof in any way.
9.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original but all of which taken
together will constitute one and the same instrument.
9.9 GOVERNING LAW. All questions concerning the construction, validity
and interpretation of this Agreement will be governed by and construed in
accordance with the internal laws of the State of Delaware, without giving
effect to any choice of law or conflict of law provision (whether of the State
of Delaware or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Delaware. In furtherance of the
foregoing, the internal law of the State of Delaware will control the
interpretation and construction of this Agreement (and all schedules and
exhibits hereto), even if under the jurisdiction's choice of law or conflict of
law analysis, the substantive law of some other jurisdiction would ordinarily
apply.
9.10 JURISDICTION AND VENUE. ALL JUDICIAL PROCEEDINGS BROUGHT BY OR
AGAINST THE COMPANY, THE SELLER OR THE BUYER WITH RESPECT TO THIS AGREEMENT, ANY
OTHER AGREEMENT CONTEMPLATED HEREBY OR ANY TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY MAY BE BROUGHT IN COURT OF CHANCERY OF THE STATE OF DELAWARE. BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY, THE SELLER AND THE BUYER
ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS RESPECTIVE PROPERTIES, GENERALLY
AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURT, AND
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION
WITH THIS AGREEMENT. THE COMPANY, THE SELLER AND THE BUYER HEREBY WAIVE ANY
CLAIM THAT
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SUCH JURISDICTION IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF
VENUE.
9.11 WAIVER OF RIGHT TO JURY TRIAL. THE COMPANY, THE SELLER AND THE
BUYER HEREBY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN
ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT
OF THIS AGREEMENT, ANY OTHER AGREEMENT CONTEMPLATED HEREBY OR THEREBY OR THE
VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF.
9.12 PARTIES IN INTEREST. Nothing in this Agreement, express or
implied, is intended to confer on any Person other than the parties and their
respective successors and permitted assigns any rights or remedies under or by
virtue of this Agreement.
9.13 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Where any accounting
determination or calculation is required to be made under this Agreement, such
determination or calculation (unless otherwise provided) will be made in
accordance with GAAP and with the Company's past practices consistently applied.
9.14 OTHER DEFINITIONAL PROVISIONS. The terms "hereof," "herein" and
"hereunder" and terms of similar import will refer to this Agreement as a whole
and not to any particular provision of this Agreement. Section, clause, Exhibit
and Schedule references contained in this Agreement are references to Sections,
clauses, Exhibits and Schedules in or attached to this Agreement, unless
otherwise specified. Each defined term used in this Agreement has a comparable
meaning when used in its plural or singular form. Each gender specific term used
in this Agreement has a comparable meaning whether used in a masculine, feminine
or gender-neutral form. Whenever the term "including" is used in this Agreement
(whether or not that term is followed by the phrase "but not limited to" or
"without limitation" or words of similar effect) in connection with a listing of
items within a particular classification, that listing will be interpreted to be
illustrative only and will not be interpreted as a limitation on, or an
exclusive listing of, the items within that classification. Each reference in
this Agreement to any Legal Requirement will be deemed to include such Legal
Requirement as it hereafter may be amended,
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supplemented or modified from time to time and any successor thereto, unless
such treatment would be contrary to the express terms of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Stock Purchase
Agreement as of the date first written above.
RESPONSE USA, INC.
By: ____________________________________
Name:
Title:
UNITED SECURITY SYSTEMS, INC.
By: ____________________________________
Name:
Title:
THE JUPITER GROUP, INC.
By: ____________________________________
Name:
Title:
VECTOR SECURITY, INC.
By: _____________________________________
Name:
Title:
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EXHIBIT A
DEFINED TERMS
As used in the Agreement to which this Exhibit A is attached, the following
terms will have the following respective meanings:
"AFFILIATE" when used with respect to any Person means any other Person
controlling, controlled by or under common control with such Person.
"APPROVAL DATE" has the meaning set forth in Section 3.2.
"BUYER" has the meaning set forth in the Preamble.
"CLOSING" has the meaning set forth in Section 1.4.
"CLOSING DATE" has the meaning set forth in Section 1.4.
"CODE" has the meaning set forth in Section 3.8(a).
"COMPANY" shall mean collectively, United Security Systems, Inc. and The Jupiter
Group, Inc., and Response Alarm Monitoring, LLC, a wholly owned subsidiary of
USS.
"CONSENT" means any consent, order, approval, authorization or other action of,
or any filing with or notice to or other action with respect to, any
Governmental Entity or any other Person which is required for any of the
execution, delivery or performance of this Agreement or any other Transaction
Document, the consummation of the transactions contemplated hereby or thereby,
or the conduct of the business or operation of the business of the Company, the
ownership of the Shares or the holding or utilization of any of the Company's
assets thereafter, whether such requirement arises pursuant to any Legal
Requirement or any agreement, including any of the foregoing which is required
in order to prevent a breach of or a default under or a termination or
modification of any agreement.
"CONSEQUENTIAL DAMAGES" means (a) Losses arising out of any interruption of
business, loss of profits, loss of goodwill or (b) any indirect, incidental or
special Losses, but expressly excluding, without limitation, any direct Losses.
"DETERMINATION DATE" means the four month anniversary of the Closing Date.
"EQUITY SECURITY" of any Person means (i) any capital stock, partnership,
membership, joint venture or other ownership or equity interest, participation
or securities (whether voting or non-voting, whether preferred, common or
otherwise, and including any stock appreciation, contingent interest or similar
right) and (ii) any option, warrant, security or other right (including debt
securities) directly or indirectly convertible into or exercisable or
exchangeable for, or
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otherwise to acquire directly or indirectly, any stock, interest, participation
or security described in clause (i) above.
"ERISA" has the meaning set forth in Section 3.14.
"GAAP" means United States generally accepted accounting principles, as in
effect from time to time.
"GOVERNMENTAL ENTITY" means any government, agency, governmental department,
commission, board, bureau, court, arbitration panel or instrumentality of the
United States of America or any state or other political subdivision thereof
(whether now or hereafter constituted and/or existing) and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the regulations promulgated thereunder.
"INDEBTEDNESS" means without duplication, (i) any indebtedness for borrowed
money or issued in substitution for or exchange of indebtedness for borrowed
money, (ii) any indebtedness evidenced by any note, bond, debenture or other
debt security, (iii) any indebtedness for the deferred purchase price of
property or services with respect to which a Person is liable, contingently or
otherwise, as obligor or otherwise (other than trade payables and other current
liabilities incurred in the ordinary course of business which are not more than
six months past due), (iv) any commitment by which a Person assures a creditor
against loss (including contingent reimbursement obligations with respect to
letters of credit), (v) any indebtedness guaranteed in any manner by a Person
(including guarantees in the form of an agreement to repurchase or reimburse),
(vi) any obligations under capitalized leases with respect to which a Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise, or with
respect to which obligations a Person assures a creditor against loss, (vii) any
indebtedness secured by a Lien (other than any Permitted Lien) on a Person's
assets, and (viii) any unsatisfied obligation for "withdrawal liability" to a
"multi-employer plan" as such terms are defined under ERISA.
"INDEMNIFIED PARTY" has the meaning set forth in Section 7.3(a).
"INDEMNIFYING PARTY" has the meaning set forth in Section 7.3(a).
"INSIDER" means any stockholder, officer or director of either the Seller or the
Company, any affiliate or natural or adoptive member of the immediate family of
any of the foregoing Persons, or any Person in which any of the foregoing
Persons directly or indirectly owns any material beneficial interest. The
"Immediate Family" of any individual means such individual's (and such
individual's present or former spouse's) grandparents, parents, spouse,
siblings, children and grandchildren.
"INVESTIGATING PARTIES" has the meaning set forth in Section 2.2(a).
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"IRS" means the Internal Revenue Service.
"KNOWLEDGE" when used in reference to (i) the Company and/or Seller means the
actual knowledge of Richard Brooks, Ronald Feldman or Robert May, and (ii) the
Buyer means the actual knowledge of John Murphy.
"LATEST BALANCE SHEET" has the meaning set forth in Section 3.5.
"LEGAL REQUIREMENT" means any federal, state and local laws, statutes, codes,
rules, regulations, ordinances, judgments, orders, decrees and the like of any
Governmental Entity, including common law.
"LIEN" means any mortgage, pledge, hypothecation, lien (statutory or otherwise),
preference, priority, security agreement or other encumbrance of any kind or
nature whatsoever (including any conditional sale or other title retention
agreement and any lease having substantially the same effect as any of the
foregoing and any assignment or deposit arrangement in the nature of a security
device).
"LOSS" has the meaning set forth in Section 7.2(a).
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the Shares or the
business, operations, financial condition or results of operations of the
Company, taken as a whole.
"McGINN FACILITY" means the Receivable Financing Agreement dated as of June 30,
1999 among Response Alarm Monitoring, LLC, McGinn, Smith Acceptance Corp. and
USS.
"NET ENTERPRISE VALUE" means, as of any date, the amount determined pursuant to
the Net Enterprise Value Schedule attached hereto.
"PERMITTED LIENS" means
(1) liens securing the payment of Taxes which are not yet due and
payable or which are being contested in good faith by appropriate proceedings;
(2) easements, rights-of-way, reservation of rights, conditions or
covenants, zoning, building or similar restrictions or other restrictions or
encumbrances that do not, individually or in the aggregate, materially interfere
with the further conduct of the business of the Company;
(3) restrictions on transfer imposed under state or federal securities
laws;
(4) the lessors' and sublessors' rights under the leases of real and
personal property by the Company as lessee which are part of the Company's
assets;
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(5) mechanics', carriers', workers', repairers', and similar
non-consensual Liens arising by operation of law and relating to obligations
which secure only liabilities which are not yet due and payable on the Closing
Date; and
(6) those Liens listed on SCHEDULE 3.7B.
"PERSON" means an individual, a partnership, a limited liability company, a
corporation, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization or any Governmental Entity.
"PROPRIETARY RIGHTS" means all of the following items, along with all income,
royalties, damages and payments due or payable at the Closing or thereafter,
including damages and payments for past, present or future infringements or
misappropriations thereof, the right to sue and recover for past infringements
or misappropriations thereof and any and all corresponding rights that, now or
hereafter, may be secured throughout the world: patents, patent applications,
and any reissue, continuation, continuation-in-part, division, revision,
extension or re-examination thereof, trademarks, service marks, trade dress,
logos, trade names and corporate names together with all goodwill associated
therewith, copyrights (registered or unregistered); and all registrations,
applications and renewals for any of the foregoing; licenses or other agreements
to or from third parties regarding the foregoing; and all copies and tangible
embodiments of the foregoing (in whatever form or medium), in each case
including the items set forth on SCHEDULE 3.10.
"RMR" means, without duplication, as of any date, the sum of (i) commercial
service contract revenue, (ii) residential service contract revenue, (iii)
municipal service contract revenue, (iv) inspection contract revenue, (v) patrol
service contract revenue and (vi) dealer monitoring revenue, in each case
billable to customers of the Company for a one-month period (regardless of
whether billed monthly or less frequently) including only customers served under
written or oral customer contracts that are then in full force and effect which
are: (a) assignable without the consent of any third party, (b) acceptable to
the Buyer's errors and omissions insurance carrier, and (c) except in the case
of (v) above, only for the provision of monitoring, leasing, inspection and
maintenance of burglar, fire, sprinkler, and other monitoring systems.
Notwithstanding the foregoing, RMR, shall not include any amounts derived from:
(A) direct wire telephone line charges and other telephone line charges, such as
derived channel and multiplex receiver line charges, and other direct
pass-through charges; (B) reimbursement for or prepayment of any false alarm
assessment; (C) reimbursement for or prepayment of amounts in respect of Taxes,
fees, monitoring charges or other charges imposed by any Governmental Entity or
authority relating to the provision of alarm services or the leasing of alarm
systems; (D) customers who have canceled their accounts prior to Closing or who
have notified the Company prior to Closing of their intent to cancel their
accounts following the Closing Date; (E) time and material service revenue or
other revenues that are not received on a regular and recurring basis; (F)
installation purchase payments made by customers or amounts representing
discounts offered for payment in advance for monitoring services to be rendered
or representing payments to be applied towards the customers' purchase of the
alarm security system; (G) any customer if the customer is not "on-line" for
monitoring, leasing, inspection or maintenance service; (H) late charges,
interest fees, or similar charges assessed against the customers; or (I) alarm
services to be provided under any
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contract as to which the customer is in arrears on any payments relating to
regular and recurring services pursuant to such contract for a period in excess
of one hundred twenty (120) days ("OVERDUE CONTRACTS") as of such date; PROVIDED
that any contract, which is an Overdue Contract as of the Closing Date but which
is not an Overdue Contract as of the Determination Date, shall not be treated as
an Overdue Contract (as of the Closing Date or otherwise) for the purposes of
determining the Company's RMR as of the Closing Date as part of the purchase
price adjustment described in Section 1.3.
"SALE TRANSACTION" has the meaning set forth in Section 2.2(b).
"SELLER" has the meaning set forth in the Preamble.
"SETTLEMENT DATE" has the meaning set forth in Section 1.3(b).
"TAX" (and, with correlative meaning, "TAXES", "TAXABLE" and "TAXING") has the
meaning set forth in Section 3.8(a).
"TAX RETURNS" has the meaning set forth in Section 3.8(a).
"TRANSACTION DOCUMENTS" means this Agreement the other agreements to be executed
and delivered in connection with this Agreement.
"WORKING CAPITAL" means, as of any date, the total current assets, but excluding
intercompany accounts of the Company as of such date, less the total current
liabilities excluding intercompany accounts of the Company and Taxes as of such
date, each as determined in accordance with GAAP and with the Company's past
practices consistently applied.
"YEAR 2000 COMPLIANCE" means that any software, hardware or firmware used by
Company on or after January 1, 1999 or January 1, 2000 will not produce errors
and will continue performing properly and accurately creating, processing,
exchanging, recording, storing, manipulating or presenting time/date-related
data in the same manner and with the same functionality as it performed before
January 1, 1999 or January 1, 2000, including leap year calculations, provided
that all other products (e.g., other software, hardware and firmware) used with
it or with which it interacts properly exchange time/date-related data with the
Company's software, hardware or firmware.
<PAGE>
EXHIBIT 11
COMPUTATION OF LOSS PER SHARE
FOR THE FISCAL YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Net loss $(14,830,642) $ (9,665,503)
Deduct:
Accretion, discount and dividends on
preferred stock 3,210,333
------------- -------------
Net loss applicable to common shareholders $(14,830,642) $(12,875,836)
------------- -------------
Weighted average number of common shares
outstanding 7,382,618 3,696,372
------------- -------------
------------- -------------
Basic loss per share $ (2.01) $ (3.48)
------------- -------------
------------- -------------
Net loss for diluted loss per share
computation $(14,830,642) $(9,665,503)
------------- -------------
------------- -------------
Weighted average number of common shares
outstanding 7,382,618 3,696,372
Common share equivalent applicable to:
Warrants - Class A 128,407 411,127
Warrants - Class B 154,285 493,983
Warrants - Class C 9,067 16,567
Warrants - Other 1,090,097 882,724
Stock options 1,002,157 862,446
Less common stock acquired with net proceeds (2,384,013) (2,505,145)
------------- -------------
Weighted average number of common shares and
common share equivalents used to compute
diluted loss per share 7,382,618 3,858,074
------------- -------------
------------- -------------
Diluted loss per share $ (2.01) $ (2.51)
------------- -------------
------------- -------------
</TABLE>
<PAGE>
EXHIBIT 21
Subsidiaries of the Company
1. Response Ability Systems, Inc.; incorporated in New Jersey.
2. Emergency Response Systems, Inc.; incorporated in Delaware; also does
business in the state of California under the name Personal Emergency
Response Systems, Inc.
3. Organization for Enhanced Capability, Inc.; incorporated in
Massachusetts.
4. In-Home Health, Inc.; incorporated in Ohio.
5. Response Security Monitoring, LLC; formed in Delaware.
6. Response Security Services, LLC; formed in Delaware.
7. Health Watch, Inc.; incorporated in Florida.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,241
<SECURITIES> 15
<RECEIVABLES> 4,596
<ALLOWANCES> 762
<INVENTORY> 2,621
<CURRENT-ASSETS> 10,274
<PP&E> 11,786
<DEPRECIATION> 5,896
<TOTAL-ASSETS> 68,442
<CURRENT-LIABILITIES> 10,310
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 6,050
<TOTAL-LIABILITY-AND-EQUITY> 68,442
<SALES> 4,779
<TOTAL-REVENUES> 27,430
<CGS> 4,475
<TOTAL-COSTS> 12,671
<OTHER-EXPENSES> 26,994,181
<LOSS-PROVISION> 491
<INTEREST-EXPENSE> 4,116
<INCOME-PRETAX> (12,235)
<INCOME-TAX> 28
<INCOME-CONTINUING> (12,263)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,263)
<EPS-BASIC> (2.01)
<EPS-DILUTED> (2.01)
</TABLE>
