<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
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, 2000
/ / 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
-----------
RESPONSE USA, INC.
(Name of small business issuer in its charter)
<TABLE>
<S><C>
DELAWARE 22-3088639
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
3 EXECUTIVE CAMPUS, 2ND FLOOR SOUTH,
CHERRY HILL, NEW JERSEY 08002
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number, including area code: (856) 661-0700
-----------
Securities registered pursuant to Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None Not Applicable
</TABLE>
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.008 PAR VALUE PER SHARE.
(Title of Class)
1
<PAGE>
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
$16,228,077.
The aggregate market value of the voting common equity held by
non-affiliates (based upon the closing bid price) on October 6, 2000, was
$2,227,711.
As of October 6, 2000, there were 11,104,052 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 2000 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, 2000 (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.
2
<PAGE>
RESPONSE USA, INC.
FORM 10-KSB ANNUAL REPORT
PART I
ITEM 1. BUSINESS
GENERAL
As used herein, the term "Company" means, unless the context
requires otherwise, Response USA, Inc. and the following wholly-owned
subsidiaries: Health Watch, Inc. ("Health Watch"), Emergency Response
Systems, Inc. ("ERS"), Response Ability Systems, Inc. ("RAS"),
Organization for Enhanced Capability, Inc. ("OEC"), In-Home Health, Inc.
("In-Home Health"), Response Security Services, LLC ("RSS"), Response
Security Monitoring, LLC ("RSM"), and prior to the Security Sale (as
hereinafter defined), United Security Systems, Inc. (" USS"), The Jupiter
Group, Inc., d/b/a Triple A Security Patrol ("Triple A Patrol") and
Response Alarm Monitoring, LLC ("RAM").
On August 11, 1999, Response USA, Inc. entered into a Stock Purchase
Agreement pursuant to which the stock of two of its wholly-owned
subsidiaries, USS (along with its wholly-owned subsidiary RAM) and Triple A
Patrol was sold to Vector Security, Inc. The closing of such transaction (the
"Security Sale") took place on September 30, 1999. Prior to the closing of
the Security Sale, the Company was engaged in the residential and commercial
security business through USS and the patrol services business through Triple
A Patrol. Following September 30, 1999, the Company 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.
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 and is 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, 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 43,000 PRS subscribers generating
approximately $925,000 in monthly recurring revenue ("MRR"). The Company
believes it is currently the second largest provider of PRS in the United
States based on MRR. The Company's revenues
3
<PAGE>
consist primarily of recurring payments for providing and monitoring 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 6,000 customers generating
approximately $100,000 in MRR, through the expansion of the Company's PRS
provider programs and by strategic acquisitions.
The Company's PRS products are electronic devices 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, where the
user's name, address and vital information are within seconds automatically
displayed on a computer screen. This signal instantaneously 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. The nature of the distress is determined and when
necessary, appropriate help is dispatched. If the user does not answer, help
is dispatched immediately. The Monitoring Station is staffed 24 hours a day,
365 days a year.
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 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 will 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, the physically challenged, and others for
whom immediate, automatic access to emergency assistance is desirable.
PRS PRODUCTS AND MONITORING SERVICES
The Company's principal PRS product called Health Watch-Registered
Trademark- is designed to monitor, identify and electronically report
emergencies requiring medical, fire and police assistance. The Health Watch
PRS unit consists of two basic components: (i) a portable pendant transmitter
that is worn around the neck or on the wrist 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 may also include a smoke detector (in certain states) that
transmits a distress signal to the Monitoring Station in the event of fire.
The Company's products are ETL (Electronic Testing Laboratory)
approved. The current products marketed by the Company have a number of
safety features, including a daily self-test, a supervised pendant,
hands-free two-way voice capability, convenience call which enables a user to
answer the telephone by pressing their help button, 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.
4
<PAGE>
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, 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, personal data relating to the user who initiated
the distress signal is retrieved and displayed to the monitor within seconds.
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, 2000, the
Company monitored approximately 43,000 PRS subscribers throughout the United
States. The Company's PRS products are not 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 day-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. In addition to the automatic
daily test calls which the Company's products provide, an average of
approximately 2,900 calls are received per day from its PRS users, of which a
relatively small number (less than 5%) require the dispatch of medical
emergency services.
The Company operates a Back Up Monitoring Station at a separate
geographic location and maintains a duplicate set of all customer data.
SALES AND MARKETING
The Company markets its Health Watch products and monitoring services
to home health care companies, hospitals and governmental agencies
("Providers"). The Company supplies the Health Watch PRS products and monitoring
services to its Providers who then market the products and services to their
subscribers. The Company receives a monthly fee from the Providers for supplying
its PRS product and monitoring services. The Providers in turn receive monthly
fees from their subscribers. Providers utilize the Company's Health Watch PRS
product and monitoring services to improve health care services in their local
community, to obtain a relationship with a subscriber who may utilize other home
care or hospital services supplied by the Providers, to enhance community
relations and to facilitate early discharge from the hospital. In addition, the
Company provides the Health Watch PRS product and other products and monitoring
services directly to the consumer through its Company-owned subsidiaries,
In-Home Health, OEC, RAS, and ERS. The Company characterizes its Company-owned
subsidiaries as in-house Providers of its products and services. Revenues
generated by Company-owned Providers are typically received directly from the
consumer or governmental agencies.
HOME HEALTH CARE DIVISION. The Company's Home Health Care Division
markets the Company's PRS products primarily to home health care companies and
hospitals. These entities typically agree to sign an exclusive five-year
agreement with the Company. The subscriber obtains the Company's PRS system from
the Provider, and the Company provides monitoring services. 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 markets the Company's PRS services to various state and local
governmental agencies. Additionally, it markets the Company's services to
local area Agencies on Aging, and other public and private organizations
designed to help senior citizens remain independent. The
5
<PAGE>
Company is currently the exclusive provider of PRS services for the Los
Angeles Department of Aging, the Philadelphia Corporation for Aging, and
other numerous state, county, and local governmental agencies. 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.
In October 1999, the Company was notified by The City of New York
Human Resources Administration ("HRA") that it was being recommended for the
award of a contract to provide Personal Response System services to HRA's
approximately 9,000 clients. The award was protested by other bidders and was
under review by HRA in accordance with applicable procurement procedures.
These protests were denied by the Chief Contracting Officer of HRA. The
existing vendor appealed the denial of its protest to the Commissioner of
HRA. This appeal has also been denied. The information received by the
Company indicates that the recommended contract award to the Company remains
unchanged; however, as of this date HRA has not awarded the contract.
FRANCHISEES. The Company ceased offering new franchises for sale in
1987 and has no 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, 2000, approximately 40
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 has supplied PRS products for
vendors under product names owned by the vendors. Currently, sales under
these programs are limited. All of the Company's private label vendors
provide their own monitoring services.
ELECTRONIC SECURITY INDUSTRY
As stated above, the Company had been 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 or the Company's Underwriters
Laboratory and Factory Mutual approved monitoring station located in Wilkes
Barre, Pennsylvania. 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. 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
6
<PAGE>
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.
RESIDENTIAL AND COMMERCIAL SYSTEMS. Residential security services
consisted of the sale, installation, monitoring and maintenance of
electronically monitored security systems to detect intrusion and fire. 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 included electronic monitoring services that
provided 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 required more complex electronic
security systems.
PRODUCTS. The Company sold products offered by several different
manufacturers. When the system was sold, the customer would pay the Company the
purchase price. When the system was leased, only an installation fee was
charged. Customers agreed to pay monthly service charges for monitoring and
could also subscribe for maintenance services. Pricing depended 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 held the required licenses and was in substantial compliance with all
licensing and regulatory requirements in each jurisdiction in which it operated.
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 and state public utilities commissions. The Company's
PRS products are also regulated by the Federal Food and Drug Administration.
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 risks of liability for employee acts or omissions, or system failures. 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
7
<PAGE>
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 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 components that comprise the products that it designs and
installs. 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. 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. We believe we are the second largest provider of
PRS in the United States based on MRR. 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
8
<PAGE>
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.
EMPLOYEES
At October 1, 2000, the Company employed 140 full-time employees. Of
this number, 48 are engaged in sales, sales service and installation, 35 in
central station monitoring, 36 in administration, and 21 in manufacturing and
product development. None of the Company's employees are represented by a labor
union, and the Company considers its employee relations to be satisfactory.
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 $14,830,642 for Fiscal 1999 and $1,746,948 for
Fiscal 2000. The $1,746,948 net loss for Fiscal 2000 was net of a $14,841,872
gain on the sale of the security division and a $4,058,914 loss on debt
extinguishment related to the Security Sale (see Note 3 of Notes to the
Consolidated Financial Statements of the Company). We had an accumulated deficit
of $60,895,375 at June 30, 2000. 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, 2000, the Company had approximately $30,850,000 of
indebtedness outstanding under its financing agreements. This debt bears
interest at rates ranging from 8.3% to 9.5% per year. The Company is required to
pay financing fees to its lender for each additional borrowing. Taking these
financing fees into consideration, the Company's effective interest rates range
from 13.06% to 13.55%.
9
<PAGE>
As a result of these arrangements, the Company is required to make
substantial principal and interest payments on this debt. We cannot assure you
that cash from operations will 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 during the period of Fiscal 1994
through Fiscal 2000 had been through acquisitions. Although acquisitions are no
longer part of our primary growth strategy, we may make strategic acquisitions.
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 acquire 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.
POSSIBLE NEED FOR ADDITIONAL FINANCING
We expect to continue to require outside sources of financing to
implement our growth strategy. The financing agreement currently in place is the
primary source of additional funds. We may raise funds by selling common stock,
preferred stock or debt securities or by obtaining additional 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
current presidential administration and Congress have periodically asserted a
need to overhaul or reform the nation's health care system. Such legislative
initiatives, if enacted, could impose pressures on the pricing structures
applicable to our PRS 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 PRS
products and services.
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
Because our business involves responding to personal emergencies,
failures of the our products or services carry a high risk of liability claims.
We try to manage this risk through contractual limits on liability
10
<PAGE>
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 exceeds 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.
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. Additionally, some burglar alarm companies also 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 components that comprise the products
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 current executive officers, Jeffrey Queen,
our Chief Executive Officer, and Andrew Queen, our President. 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 these
officers 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 our Chairman of the Board, Richard M.
Brooks, was no longer the Chairman of the Board.
SHARES ELIGIBLE FOR FUTURE SALE; EFFECT OF PREVIOUSLY ISSUED OPTIONS AND
WARRANTS
As of October 1, 2000, we had 11,104,052 shares of common stock
outstanding, of which 5,942,323 are freely tradable without restriction or
further registration under the Securities Act and 5,161,729 of which are subject
to applicable Rule 144 limitations.
11
<PAGE>
In addition to the shares now traded in the market, we have 1,953,117
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
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.
OUR COMMON STOCK HAS BEEN DE-LISTED FROM THE NASDAQ SMALLCAP MARKET
On September 13, 2000, our common stock was de-listed from the
NASDAQ SmallCap Market for failure to maintain a closing bid price of at
lease $1.00 per share for the required minimum time period. As a result,
trading in our common stock is now conducted on the Electronic Bulletin
Board. As a result of the de-listing, it could become more difficult to
dispose of or obtain accurate quotations as to the price of our common stock.
ITEM 2. PROPERTIES
The Company leases approximately 10,000 square feet of space in Cherry
Hill, New Jersey, for its executive and administrative offices, at an annual
rental of $171,000. The lease expires in July, 2004, after which the Company has
a five-year renewal option. The Company also leases (i) 2,000 square feet in Los
Angeles, California, for use as a sales and installation facility, at an annual
rental of $24,000, which lease expires in October, 2000; (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 $123,000, which lease expires in
September, 2001; (iv) 7,500 square feet in Boca Raton, Florida for use as
assembly facilities, which leases expire in October, 2000 and December, 2000 at
annual rentals totaling $60,000; (v) 1,100 square feet in Cleveland, Ohio for a
sales and installation facility at an annual rental of $15,780, which lease
expires in September, 2003; (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; and, (vii) 2,000 square feet in Orlando, Florida for a
back up central station at an annual rental of $21,735, which lease expires in
August, 2002.
The Company believes that its current facilities are adequate for its
needs.
ITEM 3. LEGAL PROCEEDINGS
12
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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. 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
---- --- ---- ---
BID ASK
--- ---
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 2000:
First Quarter.............................................................................. $1 3/4 $1 1/32 $1 25/32 $1 1/16
Second Quarter............................................................................. $1 9/32 $27/32 $1 5/16 $7/8
Third Quarter.............................................................................. $1 9/16 $1 1/32 $1 5/8 $1 3/32
Fourth Quarter............................................................................. $3/4 $3/8 $13/16 $13/32
FISCAL YEAR ENDED 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............................................................................. $6 3/4 $6 1/4 $6 13/16 $6 3/8
</TABLE>
On October 6, 2000, the closing bid price of the Company's Common
Stock as reported on the Electronic Bulletin Board was $.375 per share. As of
October 6, 2000, there were 253 stockholders of record of the Common Stock.
The total monthly trading volume of the Common Stock on the Nasdaq SmallCap
Market and the Electronic Bulletin Board for the month ended September 30,
2000 was 388,000 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
13
<PAGE>
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 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.
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 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 43,000 PRS subscribers
generating approximately $925,000 in Monthly Recurring Revenue ("MRR"). The
Company believes it is currently the second largest provider of PRS in the
United States based on MRR. The Company's revenues consist primarily of
recurring payments for the monitoring of PRS products.
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.
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 or by the Company's previously owned
Underwriters Laboratory and Factory Mutual approved monitoring station located
in Wilkes Barre, Pennsylvania. The monitoring station personnel verify the
nature of
14
<PAGE>
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 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.
On September 30, 1999, the Company sold its security division to Vector
in the Security Sale. The total consideration for the Security Sale was
approximately $47,000,000 (see Note 3 of Notes to Consolidated Financial
Statements of the Company).
As a result of the Security Sale, the Company is no longer engaged in
the alarm or patrol businesses and is solely engaged in the PRS business.
Simultaneous with the Security Sale, the Company moved all of its PRS monitoring
to its Monitoring Station located in Boca Raton, Florida. Information with
respect to the alarm and patrol businesses is included in this Annual Report
because the financial statements included herein include historical financial
information from such businesses.
15
<PAGE>
RESULTS OF OPERATIONS
FISCAL YEARS 2000 AND 1999
The following table sets forth certain operating data for the fiscal
years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
CORPORATE &
SECURITY PRS OTHER TOTAL
----------------- ------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 2000
Revenues:
Product Sales $1,084,517 $613,780 $1,698,297
Monitoring & Service 3,121,546 10,536,940 13,658,486
Security Patrol 871,294 871,294
-------------------------------------------------------------------------------------
TOTAL REVENUES 5,077,357 11,150,720 0 16,228,077
-------------------------------------------------------------------------------------
Cost of Revenues:
Product Sales 1,014,500 465,786 1,480,286
Monitoring & Service 960,489 2,481,217 3,441,706
Security Patrol 706,616 706,616
-------------------------------------------------------------------------------------
TOTAL COST OF REVENUES 2,681,605 2,947,003 0 5,628,608
-------------------------------------------------------------------------------------
Gross Profit:
Product Sales 70,017 147,994 218,011
Monitoring & Service 2,161,057 8,055,723 10,216,780
Security Patrol 164,678 164,678
-------------------------------------------------------------------------------------
TOTAL GROSS PROFIT 2,395,752 8,203,717 0 10,599,469
-------------------------------------------------------------------------------------
Selling, general and administrative 2,040,845 8,681,628 437,460 11,159,933
Depreciation and Amortization 1,255,756 4,303,695 5,559,451
Severance charges 2,133,065 2,133,065
-------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (900,849) (4,781,606) (2,570,525) (8,252,980)
-------------------------------------------------------------------------------------
Interest expense (3,890,521)
Gain on sale of security division 14,841,872
Loss on sale of marketable
securities (25,000)
Other Income 234,734
Income tax expense (596,139)
Loss on extraordinary item (4,058,914)
---------------
NET LOSS ($1,746,948)
===============
</TABLE>
16
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
CORPORATE &
SECURITY PRS OTHER TOTAL
----------------- ------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
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 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 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 628,174 628,174
---------------------------------------------------------------------------------
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 7,998,630
Severance 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)
Income tax expense (27,548)
Loss on extraordinary item (2,567,806)
---------------
NET LOSS ($14,830,642)
===============
</TABLE>
17
<PAGE>
RESULTS OF OPERATIONS
A majority of the Company's revenues are derived from monthly recurring
payments for the monitoring, rental and servicing of PRS, and prior to September
30, 1999, electronic security systems, pursuant to contracts with initial terms
of up to five years. The PRS division also sells PRS products to private label
wholesale and home health care agencies. Service revenues for both the PRS and
security divisions are derived from payments under extended warranty contracts
and for service calls performed on a time and material basis. The security
division also generated revenues from the sale and installation of security
systems and from security patrol services. 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. PRS and alarm monitoring and rental
services generate significantly higher gross margins than do the other services
provided by the Company.
Operating revenues decreased by $11,201,576 or 41% from the year ended
June 30, 1999 ("Fiscal 1999") to the year ended June 30, 2000 ("Fiscal 2000").
These decreases were primarily attributable to the sale of the security division
on September 30, 1999. The Company had no operating revenues from the security
division for the nine months ended June 30, 2000. Operating revenues for the PRS
division increased by $2,568,493 or 30% from Fiscal 1999 to Fiscal 2000.
Product sales for the PRS division decreased by $305,430 or 33% from
Fiscal 1999 to Fiscal 2000. This decrease is the result of a decrease in sales
of PRS to private label wholesalers and home health care agencies, as the
Company has redirected its efforts to expand its MRR from rental programs
through Providers.
Monitoring and service revenues for the PRS division accounted for an
increase in operating revenues of $2,873,923 or 38% from Fiscal 1999 to Fiscal
2000. This increase is the result of the Company's continued efforts to expand
its MRR from rental programs through Providers.
Gross profit for the PRS division increased by $2,504,854 or 44% from
Fiscal 1999 to Fiscal 2000. This increase is also primarily due to the Company's
continued efforts to expand MRR from rental programs through Providers.
Monitoring and rental services generate significantly higher gross margins than
product sales.
The Gross Profit Margin as a percentage of sales for the PRS
division improved from 66% to 74% from Fiscal 1999 to Fiscal 2000.
Selling, general and administrative expenses ("SG&A") decreased by
$3,073,285 or 22% from Fiscal 1999 to Fiscal 2000. This decrease is due to
the sale of the security division on September 30, 1999. SG&A for the PRS
division increased by $2,450,909 or 39% from Fiscal 1999 to Fiscal 2000. This
increase is due primarily to increased payroll and overhead required to
service the increased PRS customer base. Since the sale of the security
division on September 30, 1999, the Company has been focusing its efforts on
improving the efficiencies of the PRS division. During Fiscal 2000, the
Company incurred approximately $203,000 in expenses related to consolidating
certain functions and processes so that it can operate more efficiently.
18
<PAGE>
Depreciation and amortization expense for the PRS division increased by
$1,562,316 or 57% from Fiscal 1999 to Fiscal 2000. The increase in amortization
and depreciation expense in the PRS division is primarily due to the Company's
acquisitions of monitoring contracts and increases in equipment used for PRS
rentals.
Severance charges for Fiscal 2000, related to severance costs for
two former officers of the Company, were $2,133,065. On January 18, 2000 the
Company terminated without cause the employment of its Executive Vice President
(the "Executive") effective February 29, 2000. Pursuant to the Executive's
employment agreement and subsequent severance, noncompetition, and nondisclosure
agreement, the Company agreed to pay the Executive $1,019,705. On June 27, 2000,
the Board of Directors of the Company reached a severance, noncompetition and
nondisclosure agreement with its Chief Executive Officer, (the "Former CEO"), to
be effective July 24, 2000. Pursuant to this agreement, the Company agreed to
pay its Former CEO severance payments of $441,203 in a lump sum, and monthly
installments of $36,767 over twenty-four months. The total severance (excluding
an estimate of the cost of the Former CEO's time as a consultant and imputed
interest at 10%) of $1,113,360 has been accrued at June 30, 2000 and recorded as
a severance charge.
Net interest expense decreased by $225,811 or 5% from Fiscal 1999 to
Fiscal 2000. On September 30, 1999 the Company reduced its indebtedness by
approximately $31.5 million as a result of the sale of its security division
(see Note 3 of Notes to Consolidated Financial Statements of the Company). As of
June 30, 2000, the Company still maintains approximately $31,600,000 in
long-term debt with interest rates ranging from 8% to 9.83%.
The Company recorded a gain on sale of the security division of
$14,841,872 for Fiscal 2000 (see Note 3 of Notes to Consolidated Financial
Statements of the Company).
A subsidiary of the Company, RAS, filed a petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in
October 1987. RAS's Plan of Reorganization became effective in February 1990.
The Company was to pay out approximately $990,000, representing 30.5% of the
total claims, over a ten year period, with the final payments to be made in
March of 2000. The Company has paid approximately $755,000 over this ten year
period. In accordance with Section 347 of the United States Bankruptcy Code,
in March of 2000, the Company recorded $234,734 as other income, which
represents unclaimed property of creditors.
Income tax expense for Fiscal 2000 was $596,139, of which
$369,000 is related to the gain on sale of the security division.
Simultaneous with the Security Sale, the Company paid $30,628,277,
including interest, of its Financing Agreement with McGinn Smith Capital
Holdings Corporation ("MSCH"), and as a result, wrote off Deferred Financing
Costs of $4,058,914. This amount was recorded as a loss on debt extinguishment,
an extraordinary item.
The net loss for the Fiscal 2000 was $1,746,948 or ($0.24) per share
based on 7,348,613 weighted average number of shares outstanding, as compared to
a net loss of $14,830,642 or ($2.01) per share based on 7,382,618 weighted
average number of shares outstanding for Fiscal 1999. The decrease in net loss
is primarily attributable to the gain from the sale of the security division of
$14,841,872 or $2.02 per share less the loss on debt extinguishment of
$4,058,914 or ($0.55) per share. Included in this net loss are non-cash charges
totaling $6,617,021, consisting of depreciation and amortization of $5,559,451
and amortization of deferred financing
19
<PAGE>
costs of $1,057,570. Also included in the net loss for Fiscal 2000 are
severance charges of $2,133,065 (see Note 5 of Notes to Consolidated
Financial Statements of the Company).
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased by $1,724,039 from a working
capital deficiency of $36,166 at June 30, 1999 to working capital of $1,687,873
at June 30, 2000. This increase is primarily attributable to the Security Sale.
The Company believes that its existing cash on hand and available borrowings
under the MSCH Financing Agreement will be sufficient to fund the Company's
principal and interest payments on its debt and capital expenditures, which are
the Company's principal uses of cash, for at least the next twelve months.
On June 30, 1999, the Company's Receivable Financing Agreement with
MSCH 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 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 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.
In contemplation of the Company's sale of USS to Vector in the Security
Sale, 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. USS maintained its Membership Interest in RAM, which was sold to
Vector as part of the Security Sale (see Note 3 of Notes to Consolidated
Financial Statements of the Company) (the Second Purchase Agreements as amended
together with the Second Receivable Agreements as amended collectively referred
to subsequently herein as the "Financing Agreement").
On September 30, 1999, the Company sold its stock in USS to Vector and
paid off approximately $30,628,000, including accrued interest, of the MSCH
Financing Agreement in respect of RAM. In connection with the refinancing, the
Company incurred a charge for loss on debt extinguishment of $4,058,914.
The MSCH Financing Agreement provides for borrowing based on a multiple
of MRR. As of June 30, 2000, $30,637,939 was outstanding to MSCH under the MSCH
Financing Agreement in respect of RSS and RSM and based upon existing and
pledged MRR levels, approximately $240,000 of net borrowings was available. As
of August 31, 2000, the Company's MRR levels would support net borrowings of
$1.1 million.
On September 13, 2000, the Company's credit facility with MSCH
was increased from $40 Million to $50 Million to provide for the Company's
anticipated growth in MRR.
Under the MSCH Financing Agreement, the Company is required to pay
financing fees ranging from 13% to 15% of the principal amount borrowed 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
20
<PAGE>
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 13.06% to 13.55%. In connection with the
various borrowings under the Financing Agreement, the Company recorded debt
issuance costs of $9,716,695. In connection with the repayment of $30,628,277
of the MSCH Financing Agreement on September 30, 1999, the Company wrote off
debt issuance costs of $4,058,914, net of accumulated amortization of
$934,099.
Beginning in December 1999, the MSCH Financing Agreement was amended to
include a five percent holdback on all future fundings, which is due back to the
Company upon final payment of the corresponding note payable. These holdbacks,
totaling $203,612, have been recorded on the Company's balance sheet as other
noncurrent assets.
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 monitoring contracts held by RSS and RSM. At
June 30, 2000, the net book value of such monitoring contracts was
$18,432,297.
Net cash used in operating activities decreased from $7,633,872 used in
Fiscal 1999 to $7,047,406 used in Fiscal 2000.
Net cash provided by investing activities was $32,224,259 for Fiscal
2000 as compared to net cash used in investing activities for Fiscal 1999 of
$18,355,060. The Company received net proceeds from the sale of the security
division of $43,311,460. During Fiscal 2000, the Company paid stock guarantees
of $4,485,567, paid $3,732,246 for the purchase of monitoring contracts,
purchased property and equipment for $2,881,256, which includes equipment used
for rentals in the amount of $2,054,470. The balance of the capital expenditures
were incurred mainly for the transfer of all of the Company's PRS subscriber
accounts from its previously owned monitoring station in Wilkes Barre,
Pennsylvania to its Monitoring Station in Boca Raton, Florida.
Net cash used in financing activities was $25,767,402 for Fiscal 2000.
In Fiscal 2000, the Company received proceeds of $10,224,720 from additional
borrowings under the MSCH Financing Agreement for the PRS division net of
holdbacks totaling $203,612 and incurred $1,497,837 in deferred financing costs.
During Fiscal 2000, the Company paid $32,193,022 in principal payments on
long-term debt. The Company also repurchased and retired 1,724,612 shares of its
Common Stock for $2,301,263 during Fiscal 2000.
Historically, the Company's revenues have not been sufficient to
fund its operations, and thus it has had to finance its operating losses
externally, through debt and equity financing. The Company has undergone a
number of operational changes during fiscal years 2000 and 2001. In September
1999, the Company sold its security business, as more fully described in Note
3 to Notes to Consolidated Financial Statements. In July 2000, the Company
changed its management team. The new management's efforts have been focused
on restructuring operations, which include personnel and other cost
reductions, a consolidation of operations and an expanded focus on internal
growth. Management expects such operational changes to substantially reduce
cash used in operations and that such improvements, together with existing
cash on hand and available borrowings under the MSCH Financing Agreement will
allow the Company to implement its growth strategy and meet its cash
requirements for at least the next twelve months. The Company's continued
ability to operate is dependent upon its ability to achieve levels of reveune
to support the Company's cost structure.
21
<PAGE>
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
Not Applicable
PART III
The information required by Part III (Items 9, 10, 11 and 12 of Form
10-KSB) is incorporated hereby by reference to the Company's Definitive 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, 2000.
22
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-B).
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
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)
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)
23
<PAGE>
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) Response USA, Inc. 1999 Stock Option Plan(5)
10(n) 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)(6)
10(o) Settlement Agreement dated as of January 11, 2000 by and among the Company, Jeffrey Queen, Andrew Queen, and
the Jeffrey Queen and Andrew Queen Irrevocable Trust U/A January 2, 1998 (excluding all exhibits and schedules)
(7)
10(p) Severance, Noncompetition and Nondisclosure Agreement dated January 18, 2000 by and between the Company and
Ronald Feldman (excluding all schedules)
10(q) Amendment to the Severance, Noncompetition and Nondisclosure Agreement of Ronald Feldman dated as of
February, 2000 (excluding all schedules)
10(r) Amendment No. 1 dated July 10, 2000 to Settlement Agreement by and among the Company, Jeffrey Queen, Andrew
Queen and the Jeffrey Queen and Andrew Queen Irrevocable Trust U/A January 2, 1998(8)
10(s) Severance, Noncompetition and Nondisclosure Agreement dated as of July 19, 2000 by and between the Company
and Richard M. Brooks (excluding all exhibits and schedules)
11 Statement re: computation of earnings (loss) per share
21 Subsidiaries of the Company
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.
24
<PAGE>
(6) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1999.
(7) Incorporated by reference to the Company's Report on Form 8-K
filed on January 21, 2000.
(8) Incorporated by reference to Amendment No. 2 to form 13D of
Jeffrey Queen dated July 26, 2000.
(b) Reports on Form 8-K. On January 21, 2000, the Company filed a Report on
Form 8-K reporting information under "Item 5 Other Events." On August 2,
2000, the Company filed a Report on Form 8-K reporting information under
"Item 5 Other Events."
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, 2000 F-3
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 2000 and
June 30, 1999 F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for the Fiscal
Years Ended June 30, 2000 and June 30, 1999 F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2000
and June 30, 1999 F-6
Notes to Consolidated Financial Statements F-8
</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, 2000 and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for the years ended June 30, 2000 and 1999. 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 auditing standards
generally accepted in the United States of America. 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 statements present fairly, in all
material respects, the financial position of the Company as of June 30, 2000
and the results of its operations and its cash flows for the years ended June
30, 2000 and 1999 in conformity with accounting principles generally accepted
in the United States of America.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
September 22, 2000
F-2
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
<TABLE>
-------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,650,467
Trade accounts receivable, net of allowance for doubtful accounts of $420,664 1,592,402
Inventory 1,880,959
Prepaid expenses and other current assets 339,089
-----------
Total current assets 6,462,917
-----------
MONITORING CONTRACT COSTS -
Net of accumulated amortization of $6,823,589 18,599,993
-----------
PROPERTY AND EQUIPMENT -
Net of accumulated depreciation and amortization of $4,175,612 4,638,545
-----------
OTHER ASSETS:
Deferred financing costs, net of accumulated amortization of $1,074,283 3,753,045
Other noncurrent assets 301,717
-----------
Total other assets 4,054,762
-----------
TOTAL ASSETS $33,756,217
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt:
Notes payable 1,922,712
Capitalized lease obligations 60,307
Accounts payable, trade 407,057
Accrued expenses and other current liabilities 977,417
Accrued severance 953,065
Accrued income taxes 201,062
Deferred revenue 253,424
-----------
Total current liabilities 4,775,044
-----------
LONG-TERM LIABILITIES - Net of current portion:
Long-term debt: 29,450,997
Notes payable 158,188
Capitalized lease obligations 451,213
Accrued severance -----------
Total long-term liabilities 30,060,398
-----------
COMMITMENTS AND CONTINGENCIES (see Note 13)
STOCKHOLDERS' DEFICIENCY:
Common stock, par value $.008, authorized 37,500,000 shares,
issued and outstanding 7,398,670 shares 59,190
Additional paid-in capital 59,756,960
Accumulated deficit (60,895,375)
-----------
Total stockholders' deficiency (1,079,225)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $33,756,217
===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
OPERATING REVENUES:
Product sales $ 1,698,297 $ 4,778,545
Monitoring and service 13,658,486 19,786,538
Security patrol 871,294 2,864,570
------------ ------------
16,228,077 27,429,653
------------ ------------
COST OF REVENUES:
Product sales 1,480,286 4,474,744
Monitoring and service 3,441,706 5,959,620
Security patrol 706,616 2,236,396
------------ ------------
5,628,608 12,670,760
------------ ------------
GROSS PROFIT 10,599,469 14,758,893
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 11,159,933 14,233,218
Compensation, options/employment contracts 437,500
Depreciation and amortization 5,559,451 7,998,630
Severance charges (see Note 5) 2,133,065 208,501
------------ ------------
18,852,449 22,877,849
------------ ------------
LOSS FROM OPERATIONS (8,252,980) (8,118,956)
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net (3,890,521) (4,116,332)
Gain on sale of security division 14,841,872
Loss on sale of marketable securities (25,000)
Other income 234,734
------------ ------------
11,161,085 (4,116,332)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 2,908,105 (12,235,288)
INCOME TAXES (596,139) (27,548)
------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 2,311,966 (12,262,836)
EXTRAORDINARY ITEM - Loss on debt extinguishment (4,058,914) (2,567,806)
------------ ------------
NET LOSS $ (1,746,948) $(14,830,642)
============ ============
INCOME (LOSS) PER COMMON SHARE, Basic and diluted:
Income (loss) before extraordinary item 0.31 (1.66)
Extraordinary item (0.55) (0.35)
------------ ------------
NET LOSS $ (0.24) $ (2.01)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC & DILUTED 7,348,613 7,382,618
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 2000 AND 1999
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ADDITIONAL COLLATERAL
NUMBER PAID-IN SHARES COMPREHENSIVE
OF SHARES AMOUNT CAPITAL IN ESCROW LOSS
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1998 6,317,023 $ 50,537 $60,664,468
Acquisitions (see Note 4) 1,024,835 8,199 4,388,524
Payment of stock guarantees 12,500 100 (383,401)
Issuance of shares in escrow to guarantee
acquisition note (see Note 4) 454,222 3,634 496,366 (500,000)
Exercise of stock options and warrants 422,800 3,382 9,302
Issuance of shares of common stock in
connection with refinancing (see Note 8) 119,632 957 779,043
Issuance of stock guarantee (put
warrant) in connection with refinancing
see Note 8) 311,383
Payment of stock guarantee related to
refinancing (see Note 8) (505,679)
Net issuance costs incurred in connection
with the issuance of common stock (51,804)
Comprehensive loss:
Net loss $(14,830,642)
Other comprehensive loss:
Unrealized holding losses on available-
for-sale stock (10,000)
------------
Total comprehensive loss $(14,840,642)
----------- ------- ----------- ---------- ============
BALANCE, JUNE 30, 1999 8,351,012 $66,809 $65,708,202 $ (500,000)
=========== ======= =========== ==========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED
LOSS DEFICIT TOTAL
<S> <C> <C> <C>
BALANCE, JUNE 30, 1998 $ (44,317,785) $16,397,220
Acquisitions (see Note 4) 4,396,723
Payment of stock guarantees (383,301)
Issuance of shares in escrow to guarantee
acquisition note (see Note 4)
Exercise of stock options and warrants 12,684
Issuance of shares of common stock in
connection with refinancing (see Note 8) 780,000
Issuance of stock guarantee (put
warrant) in connection with refinancing
see Note 8) 311,383
Payment of stock guarantee related to
refinancing (see Note 8) (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)
Other comprehensive loss:
Unrealized holding losses on available-
for-sale stock (10,000) (10,000)
Total comprehensive loss
------- ----------- ----------
BALANCE, JUNE 30, 1999 $10,000) $(59,148,427) $6,116,584
======= =========== ==========
</TABLE>
See notes to consolidated financial statements.
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 2000 AND 1999
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ADDITIONAL COLLATERAL
NUMBER PAID-IN SHARES COMPREHENSIVE
OF SHARES AMOUNT CAPITAL IN ESCROW LOSS
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1999 8,351,012 $ 66,809 $65,708,202 $(500,000)
Cancellation of shares in escrow to
guarantee acquisition note and
payment of holdback (see Note 4) (437,500) (3,500) (396,500) 500,000
Cancellation of shares in escrow in
connection with an acquisition
(see Note 4) (18,199) (146) 146
Payment of stock guarantees (4,485,567)
Stock repurchases and cancellations (1,724,612) (13,797) (2,287,466)
Shares issued in connection with an
acquisition (see Note 4) 1,227,969 9,824 1,218,145
Comprehensive loss:
Net loss $(1,746,948)
Other comprehensive loss:
Unrealized holding losses on
available-for-sale stock
10,000
----------
Total comprehensive loss $(1,736,948)
---------- ------- ----------- --------- ----------
BALANCE, JUNE 30, 2000 7,398,670 $59,190 $59,756,960 $
========== ======= =========== =========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED
LOSS DEFICIT TOTAL
<S> <C> <C> <C>
BALANCE, JUNE 30, 1999 $ (10,000) $(59,148,427) 6,116,584
Cancellation of shares in escrow to
guarantee acquisition note and
payment of holdback (see Note 4) 100,000
Cancellation of shares in escrow in
connection with an acquisition
(see Note 4)
Payment of stock guarantees (4,485,567)
Stock repurchases and cancellations (2,301,263)
Shares issued in connection with an
acquisition (see Note 4) 1,227,969
Comprehensive loss:
Net loss (1,746,948) (1,746,948)
Other comprehensive loss:
Unrealized holding losses on
available-for-sale stock
10,000 10,000
Total comprehensive loss
------- ----------- ---------
BALANCE, JUNE 30, 2000 $ $(60,895,375) $(1,079,225)
======= =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (1,746,948) $ (14,830,642)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 5,559,451 7,998,630
Amortization of deferred financing costs and debt discount 1,057,570 3,630,258
Loss on debt extinguishment 4,058,914
(Gain) loss on sale of property and equipment 60,494 (4,651)
Loss on sale of marketable securities 25,000
Gain on sale of security division (14,841,872)
Changes in assets and liabilities which (used) provided cash:
Increase in accounts receivable-Trade (163,037) (1,567,459)
(Increase) decrease in inventory 17,126 (943,509)
Increase in prepaid expenses and other current assets (12,438) (121,956)
Increase in deposits (41,132) (7,153)
Increase in accounts payable-Trade (353,995) 25,734
Increase (decrease) in accrued expenses and other current liabilities (498,003) 777,566
Decrease in accrued deferred compensation (2,562,500)
Decrease in deferred revenues (168,536) (28,190)
------------ --------------
Net cash used in operating activities (7,047,406) (7,633,872)
------------ --------------
INVESTING ACTIVITIES:
Purchase of monitoring contracts (net of purchase holdbacks) (3,732,246) (13,476,397)
Net proceeds from the sale of security division (net of purchase holdbacks) 43,311,460
Proceeds from the sale of property and equipment 11,868 21,095
Purchase of property and equipment (2,881,256) (4,516,426)
Payment of stock guarantees (4,485,567) (383,332)
------------ --------------
Net cash provided by (used in) investing activities 32,224,259 (18,355,060)
------------ --------------
FINANCING ACTIVITIES:
Payment of stock guarantee on debt issuance (350,000)
Deferred financing costs incurred (1,497,837) (7,231,121)
Proceeds of long-term debt (net of purchase holdbacks) 10,224,720 55,006,729
Principal payments on long-term debt (32,193,022) (19,122,681)
Stock repurchases (2,301,263)
Net costs incurred in connection with Common Stock issuances (51,803)
Net proceeds from the exercise of stock options and warrants 12,684
------------ --------------
Net cash provided by (used in) financing activities (25,767,402) 28,263,808
------------ --------------
NET INCREASE (DECREASE) IN CASH (590,549) 2,274,876
CASH, BEGINNING OF YEAR 3,241,016 966,140
------------ --------------
CASH, END OF YEAR $ 2,650,467 $ 3,241,016
============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 3,189,811 $ 2,990,156
Cash paid during the year for income taxes $ 395,076 $ 27,548
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
During Fiscal 1999 and Fiscal 2000 capitalized lease
obligations of $336,635 and $250,901 were incurred for the acquisition
of property and equipment, respectively.
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 8 of Notes to Consolidated Financial
Statements of the Company).
During Fiscal 1999 and Fiscal 2000, the Company issued 1,024,835 and
1,227,969 shares of Common Stock, valued at $4,396,723 and $1,227,969,
respectively, in connection with acquisitions (see Note 4 of Notes to
Consolidated Financial Statements of the Company). During Fiscal 1999, as part
of one such acquisition, the Company issued 454,222 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 shares, valued at 175% of the original note
amount, to be placed in escrow. The Company 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. On September 30, 2000, the Company released
16,722 shares from escrow to the sellers to satisfy the purchase holdback of
$100,000. Also on this date, the Company paid the balance of the Acquisition
Note and as a result, the remaining 437,500 shares held in escrow were released
to the Company and retired. Additionally, during Fiscal 2000, as part of the
Health Watch acquisition, 18,199 shares held in escrow were released to the
Company and retired.
During Fiscal 1999, the Company issued 15,166 shares of Common Stock
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 Fiscal 1999.
During Fiscal 1999, a long-term note payable in the amounts of
$650,000 was incurred for the acquisition of monitoring contracts.
See notes to consolidated financial statements.
F-7
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000 AND 1999
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 Health Watch, Inc., Response Ability Systems, Inc., Emergency
Response Systems, Inc., Organization for Enhanced Capability, Inc., In-Home
Health, Inc., United Security Systems, Inc. ("USS), d/b/a Triple A Protection
("Triple A"), The Jupiter Group, Inc., d/b/a Triple A Security Patrol
("Triple A Patrol"), and Response Acquisition Corp. All significant
intercompany transactions and balances have been eliminated.
On September 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"). See Note 3.
NATURE OF BUSINESS AND REVENUE RECOGNITION - The Company 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's PRS enables individual users, such as elderly or disabled
persons, to transmit a distress signal using a portable transmitter. The
Company performs its PRS services through Health Watch, Inc., Response
Ability Systems, Inc., Emergency Response Systems, Inc., Organization for
Enhanced Capability, Inc., and In-Home Health, 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.
Prior to September 30, 1999 (see Note 3), the Company was a fully
integrated security systems provider engaged in the monitoring, sale,
installation and maintenance of residential and commercial security systems. The
Company also provided security patrol services as a supplement to its alarm
monitoring services. The Company performed its security and patrol services
through United Security Systems, Inc. and The Jupiter Group, Inc. Revenues from
the sale of security and fire alarm systems were recognized when installed.
Revenues under contracts for monitoring and service were deferred and recognized
ratably over the contract period.
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
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
F-8
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS
(CONTINUED)
CONCENTRATION OF CREDIT RISK - The Company's products are sold directly and
through distributors in the United States to hospitals, home health care
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.
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 personal 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 personal
response 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.
F-9
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS
(CONTINUED)
DEFERRED FINANCING COSTS AND AMORTIZATION - Costs incurred in connection with
various financings 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 - 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. Effective July 1, 2000, the Company adopted SFAS No. 133. As the Company
has no instruments that are defined as derivatives under SFAS No. 133.
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
basis include accounts receivable reserves, inventory reserves, depreciation and
amortization of property and equipment, amortization of capitalized costs, and
deferred revenue.
INCOME (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.
F-10
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS
(CONTINUED)
For the years ended June 30, 1999 and 2000, 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 is the same as basic loss per common share for both periods.
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 (see Note 10).
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------
2000 1999
<S> <C> <C>
Potential Common Shares resulting from:
Stock options 1,074,367 697,242
Warrants 878,750 946,150
--------- ---------
1,953,117 1,643,392
========= =========
</TABLE>
RECLASSIFICATIONS - Certain amounts in the June 1999 financial statements
have been reclassified to conform to the June 2000 presentation.
2. OPERATIONS
Historically, the Company's revenues have not been sufficient to
fund its operations, and thus it has had to finance its operating losses
externally, through debt and equity financing. The Company has undergone a
number of operational changes during fiscal years 2000 and 2001. In September
1999, the Company sold its security business, as more fully described in Note
3. In July 2000, the Company changed its management team. The new
management's efforts have been focused on restructuring operations, which
include personnel and other cost reductions, a consolidation of operations
and an expanded focus on internal growth, rather than external acquisitions.
Management expects such operational changes to substantially reduce cash used
in operations and that such improvements, together with existing cash on hand
and available borrowings under the MSCH financing agreement will allow the
Company to implement its growth strategy and meet its cash requirements for
at least the next twelve months. The Company's continued ability to operate
is dependent upon its ability to achieve levels of revenue to support the
Company's cost structure.
F-11
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
3. THE SALE OF THE SECURITY DIVISION
On September 30, 1999, the Company sold its electronic security and
patrol subsidiaries, United Security Systems, Inc. ("USS") and The Jupiter
Group, Inc. d/b/a Triple A Patrol ("Triple A Patrol") (USS together with
Triple A Patrol, collectively referred to herein as the "Security Division")
to Vector Security, Inc. ("Vector") for approximately $51,000,000 (the
"Security Sale") pursuant to the terms of a Stock Purchase Agreement, dated
August 11, 1999, as amended (the "Stock Purchase Agreement"). The Stock
Purchase Agreement provided for aggregate holdbacks of approximately
$5,100,000, which were to be held by Vector pending finalization of certain
post-closing adjustments. On March 13, 2000, the Company and Vector reached
an Agreement regarding the final purchase price and certain other post
closing adjustments, in which Vector agreed to pay the Company the amount of
$1,575,956 as full and final payment and settlement of all amounts due to the
Company from Vector. The parties further agreed that Vector's payment to the
Company represented the full and final resolution of any and all
disagreements among the parties and that no further claims, actions or
set-offs may be asserted by either party, except as provided in the Stock
Purchase Agreement.
The Company has recorded a gain on sale of the security division of
$14,841,872 for the year ended June 30, 2000. The Company received net
proceeds from the sale of the security division of $43,311,460, net of
certain severance and transaction expenses totaling approximately $4,000,000.
Simultaneous with the Security Sale, the Company paid off
$30,628,277 of McGinn, Smith Capital Holdings Corp. ("MSCH") financing,
including accrued interest. As a result of paying off this debt, the Company
recorded a loss on debt extinguishment of $4,058,914. The Company also paid
other notes payable totaling $455,602, paid stock guarantees of $3,703,675,
related to prior security acquisitions and released from escrow and
subsequently canceled 437,500 shares of Common Stock related to the guarantee
of an acquisition note. The $3,703,675 stock guaranty was recorded as a
reduction to paid-in capital.
F-12
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
4. ACQUISITIONS
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. During Fiscal
2000, 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.
Additionally, the Sellers were 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. The sale of the
Security Division was an event which resulted in the acceleration of such
payment. On January 11, 2000, the Company entered into a settlement agreement
(the "Settlement Agreement") with the Sellers in regards to such payment.
Pursuant to the Settlement Agreement, the Company issued to Jeffrey Queen,
Andrew Queen, and the Jeffrey Queen and Andrew Queen Irrevocable Trust U/A
(the "Queens") an aggregate of 1,227,969 shares of the Company's Common Stock
valued at $1,227,969 (based on the average closing bid price for the 15 days
prior to the settlement date and representing approximately 19.9% of the
Company's Common Stock prior to such issuance), and paid the Queens an
aggregate of $2,522,031 in cash. In addition, the Queens agreed not to sell
their shares of Common Stock prior to January 11, 2002 without the consent of
the Company, subject to earlier termination under certain circumstances. The
Company also agreed to refrain from taking certain extraordinary corporate
actions without the consent of the Queens and agreed that the Queens would
have the right to nominate two additional members of the Company's Board of
Directors (in addition to their right to currently nominate one member of the
Board of Directors) under certain circumstances. In April 2000, the Queens
exercised their right to nominate one member of the Board of Directors of the
Company.
F-13
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
4. ACQUISITIONS (CONTINUED)
As part of the Health Watch acquisition, the Company guaranteed the
value of the Payment Shares at $4.15 and was therefore obligated to pay an
amount equal to the difference between the guaranteed value and the proceeds
from the sale of the shares nine months after the closing and on subsequent
make-up dates (each such date shall be referenced to as the "Make-up Date").
On October 1, 1999, the Company paid the Queens $622,251 as payment of their
stock price guaranty, such amount was recorded as a reduction to additional
paid-in capital. The second Make-up Date was July 10, 2000 and pursuant to
the Settlement Agreement, the Company was also obligated to pay an amount
equal to the product of (x) the difference between $4.15 and the average
closing bid price of the Company's Common Stock on the NASDAQ Small Cap
Market for the fifteen day period prior to delivery of stock to the Queens
and (y) the number of shares of the Company's Common Stock owned by the
Queens prior to the delivery of the 1,227,969 shares of stock in January 2000
of the Company). On July 10, 2000, the Company's liability under these
agreements was approximately $1.85 million to be paid either in cash or in
shares of the Company's Common Stock. On July 19, 2000, the Company executed
Amendment No. 1 (the "Amendment") to the Settlement Agreement by and among
the Company and the Queens. Under the Amendment, the Company agreed to issue
the Queens 3,705,382 shares of the Company's Common Stock having an agreed
upon value of $0.50 per share in settlement of its obligations under the
Settlement Agreement giving the Queens a 46% interest in the Company. The
Amendment also gave the Queens the right to elect three additional nominees
to the Board of Directors, such that the Queen's representation shall
constitute four of the seven Directors of the Company following the
resignation of one of the then current Directors of the Company. At a Board
meeting held on June 27, 2000, the Board enlarged its size from five to seven
members.
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 terms of three years commencing on
October 1, 1998.
During the year ended June 30, 2000, the Company acquired additional
monitoring contracts for an aggregate purchase price of $919,576. As
consideration, the Company paid $862,567 in cash and recorded purchase
holdbacks of $57,009 (which are payable over periods of up to two years based
on performance guarantees of the seller). The pro forma effects of these
acquisitions are not considered material. In satisfaction of holdback
liabilities related to prior acquisitions totaling $550,600, the Company paid
cash of $347,648, issued 16,722 shares of its Common Stock valued at
$100,000, and reduced monitoring contract costs by $102,952. In addition, the
Company paid a stock guaranty of $159,641 related to prior PRS acquisitions,
which was recorded as a reduction to additional paid-in capital.
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 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 454,222 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 shares, valued at 175% of the original
note amount, to be placed in escrow. The Company recorded the shares issued in
F-14
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
4. ACQUISITIONS (CONTINUED)
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 purchase price of the these
acquisitions was allocated based on the fair market value of the assets
acquired and liabilities assumed and the pro forma effects are not considered
material.
5. SEVERANCE CHARGES
During the years ended June 30, 2000 and June 30, 1999, the Company
recorded severance charges totaling $2,133,065 and $208,501, respectively.
The majority of the charges in the year ended June 30, 1999 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. The severance
charges for the year ended June 30, 2000 consist of obligations due to two of
the Company's former executives (see Note 13).
6. INVENTORY
As of June 30, 2000, inventory consisted of the following:
<TABLE>
<S> <S>
Parts inventory $ 460,415
Finished goods 1,539,374
----------
1,999,789
Reserve for obsolescence (118,830)
----------
$1,880,959
==========
</TABLE>
F-15
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
7. PROPERTY AND EQUIPMENT
As of June 30, 2000, property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
<S> <C> <C>
Office furniture and equipment 5 years $ 3,052,766
Equipment held for lease 5 years 5,500,202
Automotive equipment 3 years 82,593
Leasehold improvements 5 years 178,596
-----------
8,814,157
Less accumulated depreciation
(Includes $2,167,423 for equipment held for lease) (4,175,612)
-----------
$ 4,638,545
===========
</TABLE>
Depreciation expense was $1,713,231 and $1,574,369 for Fiscal 2000 and Fiscal
1999, respectively.
F-16
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
8. LONG-TERM NOTES PAYABLE
RECEIVABLE FINANCING AGREEMENT
<TABLE>
<S>
Principal payments payable as follows: $1,810,545 - fiscal year 2001, <C>
$3,018,195 - fiscal year 2002, $4,343,361 - fiscal year 2003, $15,297,580 -
fiscal year 2004, and $6,168,258 - fiscal year 2005; plus interest of
8.3% - 9.5% on the outstanding loan balance; collateralized by
related monitoring contracts. $ 30,637,939
EQUIPMENT FINANCING
Payable in monthly installments of $326 including interest at a rate of 9.83%;
final payment due August 2002; collateralized by related equipment 7,305
OTHER
Notes payable in monthly installments aggregating $6,750 including
interest at 8.0%; final payment due January, 2001 72,186
Notes payable in monthly installments of $6,234 including interest
at 8.0% final payment due July 2004 656,279
------------
31,373,709
Less current portion 1,922,712
------------
$ 29,450,997
============
</TABLE>
Principal payments on long-term notes payable for the next five
years are due as follows: years ending June 30, 2001 - $1,922,712; 2002 -
$3,086,430; 2003 - $4,434,287; 2004 - $15,762,022; and 2005 - $6,168,258.
On June 30, 1999, the Company's Receivable Financing Agreement with
MSCH was modified. As of June 30, 1999, Response Acquisition Corp., a
subsidiary of the Company ("RAC") merged with and into USS, and USS was the
surviving corporation. Also on June 30, 1999, 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
LLC purchased certain contracts and receivables from USS. RAM purchased alarm
receivables and contracts from USS, RSM purchased Personal Response System
("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"),
F-17
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
8. LONG-TERM NOTES PAYABLE (CONTINUED)
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 in the
Security Sale, 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. USS maintained its Membership Interest in RAM,
which was sold to Vector as part of the Security Sale (see Note 3) (the
Second Purchase Agreements, as amended, together with the Second Receivable
Agreements, as amended, collectively referred to subsequently herein as the
"Financing Agreement").
On September 30, 1999, the Company sold its stock in USS to Vector
and paid off approximately $30,628,000, including accrued interest, of the
MSCH Financing Agreement in respect of RAM. In connection with the
refinancing, the Company incurred a charge for loss on debt extinguishment of
$4,058,914.
The MSCH Financing Agreement provides for borrowing based on a
multiple of MRR. As of June 30, 2000, $30,637,939 was outstanding to MSCH
under the MSCH Financing Agreement in respect of RSS and RSM and based upon
existing and pledged MRR levels, approximately $240,000 of net borrowings was
available. As of August 31, 2000, the Company's MRR levels would support net
borrowings of $1.1 million.
On September 13, 2000, the Company's credit facility with MSCH was
increased from $40 Million to $50 Million to provide for the Company's
experienced and expected growth.
Under the MSCH Financing Agreement, the Company is required to pay
financing fees ranging from 13% to 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 13.06% to 13.55%. In connection with the various
borrowings under the Financing Agreement, the Company recorded debt issuance
costs of $9,716,695, of which $780,000 was paid in 119,632 shares of Common
Stock (the "Fee Shares") in Fiscal 1999. The Company agreed that in the event
the proceeds to be derived by MSCH from the sale of the Fee Shares was less
than $780,000, the Company would be 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.
In connection with the repayment of $30,628,000 of the MSCH
Financing Agreement on September 30, 1999, the Company wrote off debt
issuance costs of $4,058,915, net of accumulated amortization of $934,099.
Beginning in December 1999, the MSCH Financing Agreement was amended
to include a five percent holdback on each funding going forward, which is
due back to the Company upon final payment of the
F-18
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
8. LONG-TERM NOTES PAYABLE (CONTINUED)
corresponding note payable. These holdbacks, totaling $203,612, have been
recorded on the Company's balance sheet as other noncurrent assets.
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 monitoring contracts held by RSM and RSS. At
June 30, 2000 the net book value of such monitoring contracts was $18,432,297.
9. CAPITALIZED LEASE OBLIGATIONS
The Company leases office furniture and equipment with a cost of
$243,955 and a net book value of $210,783 at June 30, 2000, 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, 2000.
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
<S> <C>
2001 $ 98,368
2002 98,152
2003 93,719
2004
2005
---------
Total minimum lease payments 290,239
Less amount representing interest (71,744)
---------
Present value of net minimum lease payments $ 218,495
=========
</TABLE>
10. STOCKHOLDERS' EQUITY (DEFICIENCY)
During Fiscal 1999, the Company issued 119,632 shares of its Common
Stock to MSCH 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. 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 was recorded as a reduction to
Additional Paid-In Capital (see Note 8).
During Fiscal 1999 and Fiscal 2000, the Company issued 1,024,835 and
1,227,969 shares of Common Stock, valued at $4,396,723 and $1,227,969,
respectively, in connection with acquisitions (see Note 4). During Fiscal
1999, as part of one such acquisition, the Company issued 454,222 shares of
its common
F-19
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
10. STOCKHOLDERS' EQUITY (DEFICIENCY)(CONTINUED)
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 shares, valued at 175% of the original
note amount, to be placed in escrow. The Company 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. On September 30, 2000, the Company
released 16,722 shares from escrow to the sellers to satisfy the purchase
holdback of $100,000. Also on this date, the Company paid the balance of the
Acquisition Note and as a result, the remaining 437,500 shares held in escrow
were released to the Company and retired. Additionally, during Fiscal 2000,
as part of the Health Watch acquisition, 18,199 shares held in escrow were
released to the Company and retired.
During Fiscal 1999, the Company issued 15,166 shares of Common Stock
and paid $383,301 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 Fiscal 1999.
During Fiscal 2000, the Company repurchased and retired 1,724,612
shares of its Common Stock for $2,301,263.
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, under the 1997 Stock Option Plan. The options
vested 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.
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
and December 1999, the Board of Directors granted incentive stock options to
Directors of the Company to purchase 90,000 and 60,000 shares of the
Company's Common Stock, respectively, 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. In February 2000, the Compensation
Committee of the Board of Directors of the Company awarded incentive stock
options to certain officers and key employees of the Company to purchase
450,000 shares of the Company's Common Stock. Of the shares issued, 350,000
vested immediately and the remaining 100,000 vest one-third annually.
F-20
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
10. STOCKHOLDERS' EQUITY (DEFICIENCY)(CONTINUED)
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, 1998 1,159,681 $0.03 - 13.35 $ 3.69
Options granted 183,875 2.06 - 4.06 3.09
Options exercised (422,800) 0.03 0.03
Options canceled or expired (223,514) .30 - 7.88 4.64
--------- ------------- ------
Options outstanding at June 30, 1999 697,242 .30 - 13.35 5.45
========= ============= ======
Options granted 510,000 .97 - 1.53 1.19
Options exercised 0
Options canceled or expired (132,875) .30 - 7.88 5.02
--------- ------------- ------
Options outstanding at June 30, 2000 1,074,367 $.30 - 13.35 $ 3.48
========= ============= ======
Options exercisable at June 30, 2000 974,367 $.30 - 13.35 $ 3.68
========= ============= ======
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at June 30, 2000:
<TABLE>
<CAPTION>
OUTSTANDING REMAINING AVERAGE
RANGE OF JUNE 30, CONTRACTUAL EXERCISE
EXERCISE PRICE 2000 LIFE PRICE
<S> <C> <C> <C>
$0.30 467 16 months $ 0.30
$0.97 - 1.53 510,000 115 months 1.19
$2.06 - 4.06 104,650 102 months 3.02
$6.03 437,500 91 months 6.03
$7.88 8,000 16 months 7.88
$13.35 13,750 61 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 BASED
F-21
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
10. STOCKHOLDERS' EQUITY (DEFICIENCY)(CONTINUED)
COMPENSATION, the Company's pro forma net loss and loss per share for June
30, 2000 and 1999 would have been as follows:
<TABLE>
<CAPTION>
REPORTED PRO FORMA
<S> <C> <C>
2000 Net loss $ 1,746,948 $ 2,545,636
2000 Net loss per share, basic and diluted $ 0.24 $ 0.35
1999 Net loss $ 14,830,642 $ 15,753,780
1999 Net loss per share, basic and diluted $ 2.01 $ 2.13
</TABLE>
The fair value of the stock options issued during the fiscal years
ended June 30, 1999 and 2000 were from $1.23 to $2.43 and from $0.58 to
$0.93, respectively.
The fair value of options granted under its stock option plans
during Fiscal 1999 and Fiscal 2000 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 75% and from 75% to 76% for 1999
and 2000, respectively
(iii) risk free interest rate of
between 6% and 6.3%
(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, 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
Warrants canceled or expired (67,400) 11.25-13.50
---------- -----------
Warrants outstanding, June 30, 2000 878,750 $6.00-24.00
========== ===========
</TABLE>
F-22
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
11. INCOME TAXES
The differences between the provision for income taxes and income
taxes computed using the federal income statutory tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
2000 1999
<S> <C> <C>
Amount computed using the statutory rate $ (391,274) $(5,042,418)
Increase (decrease) in taxes resulting from:
Nondeductible expenses 59,064 198,465
State taxes, net of federal taxes 343,954 18,183
Federal tax valuation allowance 584,395 4,853,318
---------- -----------
Income taxes (benefit) $ 596,139 $ 27,548
========== ===========
</TABLE>
At June 30, 2000, 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
Deferred compensation 320,894
Other 6,492
Accounts receivable reserves 374,192
Inventory reserves 82,892
Property 2,315,999
Warranty reserves 113,305
Accrued vacation accrual 122,542
Uncollected interest revenue 120,284
Net operating loss carryforwards 9,726,289
-----------
13,624,051
Less valuation allowance (13,624,051)
-----------
$
===========
</TABLE>
F-23
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
11. INCOME TAXES (CONTINUED)
For income tax reporting, the Company has net operating loss
carryforwards available to reduce future federal and state income taxes. If
not used, the carryforwards will expire as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, FEDERAL STATE
<S> <C> <C>
2001 $ 1,360,072
2002 1,675,580
2003 880,361
2004 732,057
2005 824,454
2006 42,709
2007 311,250
2008 644,074
2009 $ 2,199,823 516,667
2010 1,076,985 425,456
2011 1,360,312 556,065
2012 2,510,281 541,162
2013 3,257,270 335,989
2014 15,497,382 4,067,771
2015 2,567,666
------------ ------------
$ 25,902,053 $ 15,481,333
============ ============
</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 2000 and prior years.
12. 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 1999 and Fiscal
2000 were $165,897 and 112,403, respectively.
F-24
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
13. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - The Company has employment contracts with
certain employees for terms through February 2003. At June 30, 2000, these
contracts provide for annual base salaries aggregating $510,000.
On January 18, 2000, the Company terminated without cause the
employment of its former Executive Vice President (the "Executive") effective
February 29, 2000. Pursuant to the Executive's employment agreement and
subsequent severance, noncompetition, and nondisclosure agreement, the
Company agreed to pay as severance $1,019,705, of which $850,640 was paid
during Fiscal 2000. The balance, which is included in accrued expenses at
June 30, 2000, is to be paid as follows: (1) five monthly installment
payments of $29,102 each from August 1, 2000 through December 1, 2000, and
(2) a final payment of $23,555 on January 1, 2001.
On June 27, 2000, the Board of Directors of the Company reached a
severance, noncompetition and nondisclosure agreement with its former Chief
Executive Officer ("Former CEO"). Pursuant to the terms of the Settlement
Agreement and the terms of the Former CEO's Employment Agreement with the
Company, both of which were executed on July 19, 2000: (1) the Former CEO
resigned as Chief Executive Officer of the Company as of July 24, 2000, but
shall continue to serve as Chairman of the Board until date the Former CEO no
longer serves as a Director of the Company, (2) the Former CEO shall, as
requested by the Chief Executive Officer or the Board of Directors of the
Company, devote a decreasing amount of his time over the next twenty-four
months as a consultant to the Company on certain transactions, and (3) the
Company shall pay the Former CEO severance payments of $441,203 in a lump
sum, and monthly installments of $36,767 over the next twenty-four months.
The Severance Agreement also contains noncompetition and confidentiality
provisions. The total severance (excluding an estimate of the cost of the
Former CEO's time as a consultant and imputed interest at 10%) of $1,113,360
has been accrued and recorded as a severance charge.
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-25
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS - The Company leases its facilities and various
equipment under operating leases expiring at various dates through September
2005. The following is a schedule of future minimum rental payments required
under these leases:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
<S> <C>
2001 $ 523,072
2002 356,437
2003 227,912
2004 209,690
2005 37,978
-----------
$ 1,355,089
===========
</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 $665,416 and
$612,346 for Fiscal 1999 and Fiscal 2000, respectively.
CONTINGENCIES - In the normal course of business, the Company is subject to
litigation, none of which is expected to have a material effect on the
consolidated financial position, results of operations or cash flows of the
Company.
As part of the Health Watch acquisition, the Company has guaranteed
the value of its common stock at prices ranging from $1.00 to $4.15. These
guarantees expire on October 1, 2003. As of June 30, 2000, the Company's
contingent liabilities under these agreements aggregated $2,648,719, which
may be settled in cash or by the issuance of common stock. On August 16,
2000, the Company issued 3,705,382 shares of its common stock, valued at $.50
per share, to the Queens related to these guarantees (see Note 4). Subsequent
to this issuance of shares, the Company has guarantees remaining with the
Queens on 5,161,729 shares of its common stock, of which 3,933,760 are
guaranteed at $.50 per share and 1,227,969 are guaranteed at $1.00 per share.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash approximates its fair value because of
its short maturity.
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.
F-26
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
15. 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 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. The Corporate and
Other Segment is made up primarily of professional fees and officer severance
charges.
F-27
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
15. INDUSTRY SEGMENT INFORMATION (CONTINUED)
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., which were sold on September 30, 2000 (see Note 3), and the PRS
segment includes the operations of Health Watch, Inc., Response Ability
Systems, Inc., Emergency Response Systems, Inc., In-Home Health, Inc. and
Organization for Enhanced Capability, 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 2000:
Revenues:
Product Sales $ 1,084,517 $ 613,780 $ 1,698,297
Monitoring and service 3,121,546 10,536,940 13,658,486
Security Patrol 871,294 871,294
--------- ---------- -------------
Total revenues 5,077,357 11,150,720 16,228,077
Gross profit 2,395,752 8,203,717 10,599,469
Selling, general and administrative expenses 2,040,845 8,681,628 $ 437,460 11,159,933
Depreciation and amortization expense 1,255,756 4,303,695 5,559,451
Net loss from operations (900,849) (4,781,606) (2,570,525) (8,252,980)
Total assets at June 30, 2000 0 31,889,687 1,866,530 33,756,217
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
Selling, general and administrative expenses 7,686,978 6,230,719 $ 315,521 14,233,218
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 at June 30, 1999 39,444,085 27,660,289 1,337,618 68,441,992
</TABLE>
F-28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Annual
Report on Form 10-KSB to be signed on its behalf by the undersigned,
thereunto duly authorized.
RESPONSE USA, INC.
By: /s/ Jeffrey Queen
-------------------------
Jeffrey Queen
Chief Executive Officer
and a Director
Dated: October 13, 2000
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
<S> <C> <C>
/s/ Jeffrey Queen
---------------------- Chief Executive Officer October 13, 2000
Jeffrey Queen and a Director
/s/ Donna Dorris
----------------------
Donna Dorris Chief Financial Officer October 13, 2000
(Principal Financial and Accounting Officer)
/s/ Andrew Queen
----------------------
Andrew Queen President and Director October 13, 2000
/s/ Richard M. Brooks
----------------------
Richard M. Brooks Chairman of the Board October 13, 2000
Director
/s/ Gerard Christopher
----------------------
Gerard Christopher Secretary and Treasurer October 13, 2000
/s/ Richard B. DeWolfe
----------------------
Richard B. DeWolfe Director October 13, 2000
----------------------
Ronald Rosenwasser Director October __, 2000
/s/ A. Clinton Allen
---------------------- Director
A. Clinton Allen October 13, 2000
/s/ Daniel Abramowitz
---------------------- Director
Daniel Abramowitz October 13, 2000
</TABLE>
F-29
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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)
F-30
<PAGE>
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) Response USA, Inc. 1999 Stock Option Plan(5)
10(n) 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)(6)
10(o) Settlement Agreement dated as of January 11, 2000 by and
among the Company, Jeffrey Queen, Andrew Queen, and the
Jeffrey Queen and Andrew Queen Irrevocable Trust U/A
January 2, 1998(7)
10(p) Severance, Noncompetition and Nondisclosure Agreement dated
January 18, 2000 by and between the Company and Ronald
Feldman (excluding all schedules)
10(q) Amendment to the Severance, Noncompetition and Nondisclosure
Agreement of Ronald Feldman dated as of February,
2000 (excluding all schedules)
10(r) Amendment No. 1 dated July 10, 2000 to Settlement Agreement
by and among the Company, Jeffrey Queen, Andrew Queen and
the Jeffrey Queen and Andrew Queen Irrevocable Trust U/A
January 2, 1998(8)
10(s) Severance, Noncompetition and Nondisclosure Agreement
dated as of July 19, 2000 by and between the Company and
Richard M. Brooks (excluding all exhibits and schedules)
11 Statement re: computation of earnings (loss) per share
21 Subsidiaries of the Company
27 Financial Data Schedule
-----------
(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.
F-31
<PAGE>
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1999.
(7) Incorporated by reference to the Company's Report on Form 8-K filed
on January 21, 2000.
(8) Incorporated by reference to Amendment No. 2 to Form 13D of Jeffrey Queen
dated July 26, 2000.
(b) Reports on Form 8-K. On January 21, 2000, the Company filed a Report on
Form 8-K reporting information under "Item 5 Other Events." On August 2,
2000, the Company filed a Report on Form 8-K reporting information under
"Item 5 Other Events."
F-32
