-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FoUfY0kAZKK51IuB+irmgNzsaJE4P4z48zjUbnZKuWCzDSd0Mnm4L6u/X5NIW5AV JZ9A0QscXMFEThGCkA4dqQ== 0001047469-97-008564.txt : 19971224 0001047469-97-008564.hdr.sgml : 19971224 ACCESSION NUMBER: 0001047469-97-008564 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19971222 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESPONSE USA INC CENTRAL INDEX KEY: 0000889087 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 223088639 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-37595 FILM NUMBER: 97742664 BUSINESS ADDRESS: STREET 1: 11-H PRINCESS ROAD CITY: LAWRENCEVILLE STATE: NJ ZIP: 08648 BUSINESS PHONE: 6098964500 MAIL ADDRESS: STREET 1: 11-H PRINCESS ROAD CITY: LAWRENCEVILLE STATE: NJ ZIP: 08648 SB-2/A 1 FORM SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1997 REGISTRATION NO. 333-37595 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------------- AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- RESPONSE USA, INC. (Name of small business issuer in its charter) DELAWARE 7382 22-3088639 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification No.) organization)
RESPONSE USA, INC. 11-H PRINCESS ROAD LAWRENCEVILLE, NEW JERSEY 08648 (609) 896-4500 (Address and telephone number of principal executive offices) ------------------------------ RESPONSE USA, INC. 11-H PRINCESS ROAD LAWRENCEVILLE, NEW JERSEY 08648 (609) 896-4500 (Address of principal place of business or intended principal place of business) ------------------------------ RICHARD M. BROOKS, CHIEF EXECUTIVE OFFICER RESPONSE USA, INC. 11-H PRINCESS ROAD LAWRENCEVILLE, NEW JERSEY 08648 (609) 896-4500 (Name, address and telephone number of agent for service) ------------------------------ COPIES TO: KENNETH R. KOCH, ESQUIRE ROBERT H. COHEN, ESQUIRE Squadron, Ellenoff, Plesent & Sheinfeld, LLP Morrison Cohen Singer & Weinstein, LLP 551 Fifth Avenue 750 Lexington Avenue New York, New York 10176 New York, New York 10022 (212) 661-6500 (212) 735-8680 (212) 697-6686 (fax) (212) 735-8708 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Securities Act"), please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, please check the following box. / / The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED DECEMBER 22, 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS [LOGO] 2,400,000 SHARES RESPONSE USA, INC. COMMON STOCK Response USA, Inc., a Delaware corporation (the "Company"), hereby offers 2,400,000 shares of common stock, par value $0.008 per share (the "Common Stock") (after giving effect to the anticipated one-for-three reverse stock split). The Company has applied for listing of the Common Stock on the Nasdaq National Market under the symbol "RSPN." The Common Stock is currently being traded on the Nasdaq SmallCap Market under the symbol "RUOK." On December 18, 1997, the closing bid price of the Common Stock as reported in the Nasdaq SmallCap Market was $8.25 per share (after giving effect to the anticipated one-for-three reverse stock split). See "Price Range of Common Stock." SEE "RISK FACTORS" LOCATED ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. -------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING DISCOUNTS AND PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)(3) Per Share................................................ $ $ $ Total.................................................... $ $ $
(1) Does not include additional consideration to Hampshire Securities Corporation, the representative (the "Representative") of the several underwriters named herein (the "Underwriters"), consisting of (i) a non-accountable expense allowance, and (ii) warrants to purchase up to an aggregate of 240,000 shares of Common Stock (the "Representative's Warrants"). The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses of this offering payable by the Company estimated at $ , including non-accountable expense allowance described in note (1) above ($ in the event of the exercise in full of the Underwriters' over-allotment option). (3) The Company has granted the Underwriters a 45-day option to purchase up to an additional 360,000 shares of Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ , and $ , respectively. See "Underwriting." The shares of Common Stock are being offered by the Underwriters named herein, subject to prior sale, when, as and if delivered to and accepted by them, and subject to their right to reject orders in whole or in part, and to certain other matters. It is expected that delivery of the certificates representing shares of Common Stock will be made against payment therefor at the offices of Hampshire Securities Corporation, on or about , 1998. -------------------------- HAMPSHIRE SECURITIES CORPORATION --------------- THE DATE OF THIS PROSPECTUS IS , 1998 CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING SYNDICATE COVERING TRANSACTIONS, PENALTY BIDS AND SHORT SALES. FOR A DESCRIPTION OF THESE ACTIVITIES; SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ SMALLCAP MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) GIVES EFFECT TO THE ANTICIPATED ONE-FOR-THREE REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK WHICH IS EXPECTED TO BE EFFECTIVE IN JANUARY 1998, (II) ASSUMES AN ESTIMATED OFFERING PRICE OF $8.25 PER SHARE, (III) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (IV) ASSUMES THE REDEMPTION OF THE COMPANY'S SERIES A CONVERTIBLE PREFERRED STOCK (THE "PREFERRED STOCK") AND COMPLIANCE WITH ALL OTHER PROVISIONS OF THE SETTLEMENT AGREEMENT BETWEEN THE COMPANY AND THE HOLDERS OF THE PREFERRED STOCK. SEE "DESCRIPTION OF SECURITIES - -- SERIES A CONVERTIBLE PREFERRED STOCK." EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. AS USED IN THIS PROSPECTUS, THE TERM "COMPANY" MEANS, UNLESS THE CONTEXT REQUIRES OTHERWISE, THE COMPANY AND ITS WHOLLY-OWNED SUBSIDIARIES, UNITED SECURITY SYSTEMS, INC. ("USS"), EMERGENCY RESPONSE SYSTEMS, INC. ("ERS") RESPONSE ABILITY SYSTEMS, INC. ("SYSTEMS") AND, HEALTHLINK, LTD. ("HEALTHLINK"), AN ENTITY IN WHICH THE COMPANY HAS A 50% EQUITY INTEREST. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." THE COMPANY The Company is a fully-integrated security systems provider engaged in the monitoring, sale, installation and maintenance of residential and commercial security systems and personal emergency response systems ("PERS"). The Company is a regional provider of security alarm monitoring services for residential and small business subscribers operating in the states of New York, New Jersey, Pennsylvania, Delaware and Connecticut. The Company is also a nationwide provider of PERS products which enable individual users, such as elderly or disabled persons, to transmit a distress signal using a portable transmitter. The Company currently has an aggregate of approximately 48,000 alarm and PERS subscribers for which it provides monitoring services. As a result of the Company's acquisitions of subscriber account portfolios, the Company's monthly recurring revenue ("MRR") has grown by 60%, to approximately $800,000 for the month ended September 30, 1997 from approximately $500,000 for the month ended June 30, 1995. According to a May 1997 report published by Security Distributing and Marketing ("SDM"), an organization which publishes industry reports, as of December 31, 1996, the Company is the 31st largest electronic security company in the United States, based on total revenues, and the 25th largest electronic security company, based on recurring annual revenues. The Company's electronic security systems business utilizes electronic systems installed in businesses and residences to provide (i) detection of events such as intrusion or fire, (ii) surveillance and (iii) control of access to property. The detection devices are monitored by a third-party monitoring station located in Euclid, Ohio (the "Monitoring Station"). The Monitoring Station personnel verify the nature of the emergency and contact the appropriate emergency authorities in the user's area. In some instances, commercial customers may monitor these devices at their own premises or the devices may be connected to local fire or police departments. The products and services marketed in the electronic security services industry range from residential systems that provide basic entry and fire protection to more sophisticated commercial systems. The Company's PERS is an electronic device which is designed to monitor, identify and electronically report emergencies requiring medical, fire or police assistance, to help elderly, disabled and other individuals. When activated by the pressing of a button, or automatically, in the case of certain environmental temperature fluctuations, the transmitter sends a radio signal to a receiving base installed in the user's home. The receiving base relays the signal over telephone lines to the Monitoring Station which provides continuous monitoring services. In addition, this signal establishes two-way voice communication between the user and the Monitoring Station personnel directly through the PERS unit, thereby avoiding any need for the user to access a telephone. 3 The electronic security services industry is highly fragmented and the Company's strategy is to grow by acquisition, as well as by offering new products and services. According to an industry report published in 1996, there are approximately 12,000 separate security services companies nationally, and according to the May 1997 SDM Report, the electronic security industry generates an aggregate of approximately $13 billion in revenues annually. The Company believes that there is an industry-wide trend towards consolidation due, in part, to the relatively high fixed costs of maintaining a centralized monitoring station and the relatively low incremental cost of servicing additional subscribers. The Company completed the acquisition of an aggregate of 38 subscriber account portfolios (a total of approximately 25,000 subscriber accounts) during the three fiscal years ended June 30, 1997. The Company has entered into an agreement with Triple A Security Systems, Inc. ("Triple A"), pursuant to which the Company will acquire substantially all of the assets of Triple A upon the consummation of this offering. Triple A is engaged in the monitoring, sale and installation of residential and commercial security systems, principally in northeastern Pennsylvania. Triple A currently services approximately 14,000 subscriber accounts which are monitored by its central monitoring station. See "Business --Pending Acquisitions." In March 1997, the Company acquired a 50% interest in HealthLink. HealthLink markets a low-cost PERS product containing basic one-way transmission features (the "HealthLink System"). The HealthLink System is distributed nationally through retail stores, including Target Stores ("Target") (808 stores), Long's Drugs, a west-coast regional chain (305 stores), Fred Myer, a northwest regional chain (104 stores), Fry's, a southwest regional chain (51 stores) and Bergen Brunswick's west-coast Good Neighbor Pharmacies (429 stores), accounting for distribution through a total of approximately 1,700 stores as of the date of this Prospectus. The Company is negotiating with several other chain stores to further increase distribution. The Company provides monitoring and related services to HealthLink System customers, is responsible for billing and collecting from such customers and receives a portion of the recurring revenue as a fee for providing these services. In November 1996, the Company entered into a two-year agreement granting it the exclusive worldwide distribution rights within the health care industry to WanderWatch,-TM- a monitoring system designed to assist in the care of patients with Alzheimer's disease, autism, head injury, dementia or other diseases or injuries which may involve memory loss. WanderWatch-TM- is similar to PERS, except that the transmitter is designed to be continuously activated and transmits a signal to the base unit. If the base unit does not receive the requisite number of transmissions, it indicates that the patient may have wandered outside the "safety range," and triggers an alarm in the home base unit. If the alarm is not disabled, a signal is automatically transmitted to the Monitoring Station, whose personnel will then place calls based upon a set protocol established by the caregivers. The license agreement for WanderWatch-TM- provides for automatic one-year renewals and the Company's exclusive rights to the license are subject to forfeiture under certain circumstances. WanderWatch-TM- is currently being test-marketed by the Company and the Company does not anticipate commencing distribution of the product prior to July 1, 1998. The Company is a Delaware corporation, organized in March 1992. The Company's principal executive offices are located at 11-H Princess Road, Lawrenceville, New Jersey 08648, and its telephone number is 609-896-4500. 4 THE OFFERING Common Stock offered by the Company........................... 2,400,000 shares Common Stock outstanding prior to this offering..................... 2,201,029 shares(1) Common Stock outstanding after this offering.......................... 4,601,029 shares(1)(2) Use of Proceeds..................... To consummate the acquisition of Triple A and to reduce certain indebtedness and other obligations of the Company. See "Use of Proceeds." Risk Factors........................ The purchase of the shares of Common Stock is speculative and involves substantial risk. Prospective investors should carefully review and consider the information set forth under "Risk Factors." Nasdaq SmallCap Market Symbol....... RUOK Proposed Nasdaq National Market Symbol............................ RSPN
- ------------------------ (1) Does not include up to (i) 667,583 shares of Common Stock issuable upon exercise of outstanding options granted to officers, directors, employees and consultants of the Company, at exercise prices ranging from $.03 to $13.35 per share, including 422,800 shares of Common Stock issuable upon exercise of outstanding options granted to certain officers and directors at an exercise price of $0.03 per share, 200,000 shares of Common Stock issuable upon exercise of outstanding options granted to two officers of USS, one of whom is a director of the Company at an exercise price of $4.50 per share and 44,783 shares of Common Stock issuable upon exercise of outstanding options granted to employees and consultants at exercise prices ranging from $.30 to $13.35 per share, (ii) 1,708,750 shares of Common Stock issuable upon exercise of outstanding warrants at exercise prices ranging from $6.00 to $24.00 per share, including 114,833 and 147,250 shares of Common Stock issuable upon exercise of outstanding warrants granted to the holders of the Company's Preferred Stock at exercise prices of $6.00 and $10.125 per share, respectively (the "Preferred Warrants"), 411,127 shares of Common Stock issuable upon exercise of the Company's publicly-traded Class A Warrants at an exercise price of $7.50 per share (the "Class A Warrants"), 493,983 shares of Common Stock issuable upon exercise of the Company's publicly-traded Class B Warrants at an exercise price of $9.75 per share (the "Class B Warrants"), 16,567 shares of Common Stock issuable upon exercise of the Company's Class C Warrants at exercise prices ranging from $9.78 to $16.875 per share (the "Class C Warrants"), 150,000 shares issuable upon exercise of a warrant granted to BKR, Inc. in connection with the Company's investment in HealthLink at an exercise price of $9.00 per share and 375,000 shares of Common Stock issuable upon exercise of outstanding warrants granted to consultants and placement agents at exercise prices ranging from $13.50 to $24.00 per share, (iii) 102,320 shares of Common Stock issuable upon conversion of the Company's Series B Preferred Stock (the "Series B Preferred Stock"), (iv) 240,000 shares of Common Stock issuable upon exercise of the Representative's Warrants to be issued to the Representative on the closing of this offering, and (v) 600,000 shares of Common Stock issuable upon exercise of options which may be granted pursuant to the Company's 1997 Stock Option Plan (the "1997 Plan") to be adopted by the stockholders of the Company at the next annual meeting, which is scheduled to take place on January 6, 1998. See "Management" and "Description of Securities." (2) Does not include shares of Common Stock to be issued upon consummation of two pending acquisitions, based upon the market price of the Common Stock at the time of the consummation. Assuming the current market price of $8.25 per share, an aggregate of 397,055 shares of Common Stock would be issued upon consummation of such acquisitions. See "Business--Pending Acquisitions." 5 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA INFORMATION
PRO FORMA HISTORICAL AS ADJUSTED(3) HISTORICAL ----------------------------------- -------------- ----------------------- YEAR ENDED JUNE 30, THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------- 1995 1996 1997 1997 1996 1997 ---------- ---------- ----------- -------------- ----------- ---------- INCOME STATEMENT DATA: Revenues: Product Sales......................... $4,520,062 $2,352,449 $ 2,938,618 $ 4,726,515 $ 656,128 $ 662,846 Monitoring and Related Services....... 4,812,474 8,515,247 9,784,285 14,776,735 2,386,239 2,585,038 ---------- ---------- ----------- -------------- ----------- ---------- Total Revenues...................... 9,332,536 10,867,696 12,722,903 19,503,250 3,042,367 3,247,884 ---------- ---------- ----------- -------------- ----------- ---------- Cost of Revenues: Product Sales(1)...................... 2,635,674 1,718,689 1,970,158 3,364,629 451,535 398,442 Monitoring and Related Services(2).... 1,125,123 1,779,490 2,127,257 4,438,081 747,025 768,739 ---------- ---------- ----------- -------------- ----------- ---------- Total Cost of Revenues.............. 3,760,797 3,498,179 4,097,415 7,802,710 1,198,560 1,167,181 ---------- ---------- ----------- -------------- ----------- ---------- Gross profit............................ 5,571,739 7,369,517 8,625,488 11,700,540 1,843,807 2,080,703 ---------- ---------- ----------- -------------- ----------- ---------- Operating Expenses: Selling, General and Administrative... 6,327,622 6,416,486 9,126,641 11,266,985 1,421,984 1,615,635 Compensation--Options/Employment Contracts........................... -- -- 3,689,700 3,689,700 862,500 (450,000) Depreciation and Amortization......... 1,302,208 2,200,894 2,976,433 4,535,493 662,719 837,539 Interest.............................. 1,220,618 3,185,603 1,349,480 1,449,080 503,470 643,780 Litigation Settlement................. 240,000 -- -- -- -- -- Recovery of Termination Benefits Cost................................ (392,699) -- -- -- -- -- Recovery of Restructuring Charges..... (52,920) -- -- -- -- -- ---------- ---------- ----------- -------------- ----------- ---------- Total Operating Expenses............ 8,644,829 11,802,983 17,142,254 20,941,258 3,450,673 2,646,954 ---------- ---------- ----------- -------------- ----------- ---------- Loss from Operations.................. (3,073,090) (4,433,466) (8,516,766) (9,240,718) (1,606,866) (566,251) Other Income (Expense): Interest Income....................... 42,260 21,568 12,176 27,504 7,939 1,708 Joint Venture Loss.................... -- -- (123,325) (123,325) -- (130,138) ---------- ---------- ----------- -------------- ----------- ---------- Loss Before Extraordinary Item............ (3,030,830) (4,411,898) (8,627,915) (9,336,539) (1,598,927) (694,681) Extraordinary Item Loss on Debt Extinguishment........................ -- -- 2,549,708 2,549,708 2,549,708 -- ---------- ---------- ----------- -------------- ----------- ---------- Net Loss.................................. (3,030,830) (4,411,898) (11,177,623) (11,886,247) (4,148,635) (694,681) Dividends and Accretion on Preferred Stock..................................... -- -- (6,876,521) -- (6,125,549) (335,272) ---------- ---------- ----------- -------------- ----------- ---------- Net Loss Applicable to Common Shareholders.............................. $(3,030,830) $(4,411,898) $(18,054,144) $(11,886,247) $(10,274,184) $(1,029,953) ---------- ---------- ----------- -------------- ----------- ---------- ---------- ---------- ----------- -------------- ----------- ---------- Loss per Common Share: Loss Before Extraordinary Item........ $ (15.07) $ (8.61) $ (5.80) $ (2.18) $ (1.23) $ (0.33) Extraordinary Item.................... -- -- (1.71) (0.59) (1.96) -- ---------- ---------- ----------- -------------- ----------- ---------- Net Loss.............................. $ (15.07) $ (8.61) $ (7.51) $ (2.77) $ (3.19) $ (0.33) ---------- ---------- ----------- -------------- ----------- ---------- ---------- ---------- ----------- -------------- ----------- ---------- Net Loss Applicable to Common Shareholders........................ $ (15.07) $ (8.61) $ (12.14) $ (2.77) $ (7.89) $ (0.48) ---------- ---------- ----------- -------------- ----------- ---------- ---------- ---------- ----------- -------------- ----------- ---------- Weighted Average Number of Common Shares Outstanding........................... 201,064 512,179 1,487,574 4,284,629 1,302,284 2,132,533 ---------- ---------- ----------- -------------- ----------- ---------- ---------- ---------- ----------- -------------- ----------- ---------- PRO FORMA AS ADJUSTED(3) -------------- 1997 -------------- INCOME STATEMENT DATA: Revenues: Product Sales......................... $1,071,442 Monitoring and Related Services....... 4,032,063 -------------- Total Revenues...................... 5,103,505 -------------- Cost of Revenues: Product Sales(1)...................... 762,719 Monitoring and Related Services(2).... 1,397,054 -------------- Total Cost of Revenues.............. 2,159,773 -------------- Gross profit............................ 2,943,732 -------------- Operating Expenses: Selling, General and Administrative... 1,756,395 Compensation--Options/Employment Contracts........................... -- Depreciation and Amortization......... 1,238,836 Interest.............................. 667,650 Litigation Settlement................. -- Recovery of Termination Benefits Cost................................ -- Recovery of Restructuring Charges..... -- -------------- Total Operating Expenses............ 3,662,881 -------------- Loss from Operations.................. (719,149) Other Income (Expense): Interest Income....................... 4,026 Joint Venture Loss.................... (130,138) -------------- Loss Before Extraordinary Item............ (845,261) Extraordinary Item Loss on Debt Extinguishment........................ -- -------------- Net Loss.................................. (845,261) Dividends and Accretion on Preferred Stock..................................... -- -------------- Net Loss Applicable to Common Shareholders.............................. $ (845,261) -------------- -------------- Loss per Common Share: Loss Before Extraordinary Item........ $ (0.17) Extraordinary Item.................... -- -------------- Net Loss.............................. $ (0.17) -------------- -------------- Net Loss Applicable to Common Shareholders........................ $ (0.17) -------------- -------------- Weighted Average Number of Common Shares Outstanding........................... 4,929,588 -------------- --------------
6
HISTORICAL PRO FORMA YEAR ENDED JUNE 30, HISTORICAL AS ADJUSTED(3) ---------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1995 1996 1997 1997 1997 ---------- ---------- ---------- ------------- -------------- CERTAIN SUBSCRIBER DATA: MRR(4)...................................... $ 500,000 $ 720,600 $ 800,000 $ 800,000 $ 1,067,000 Number of Retail Subscribers................ 28,628 34,173 37,770 37,592 47,592 Number of Wholesale Subscribers............. 9,440 11,132 9,639 7,720 11,720 Total Number of Subscribers................. 38,068 45,305 47,409 45,312 59,312 MRR per Retail Subscriber(5)................ $ 16.93 $ 20.25 $ 20.27 $ 20.55 $ 21.56 MRR per Wholesale Subscriber(5)............. $ 1.63 $ 2.22 $ 3.50 $ 3.55 $ 3.50
SEPTEMBER 30, 1997 --------------------------------------------- PRO FORMA HISTORICAL AS ADJUSTED(3) ------------- -------------- CONSOLIDATED BALANCE SHEET DATA: Working Capital (Deficit)........................................ $ (841,753) $ (327,913) Total Assets..................................................... 30,296,434 44,532,441 Long-Term Debt, Net of Current Portion(6)........................ 12,944,996 13,834,440 Preferred Stock.................................................. 6,818,055 31 Total Stockholders' Equity....................................... 11,100,411 23,546,498
- ------------------------ (1) Includes cost of goods sold and installation expenses. (2) Includes monitoring costs, time and material expenses and patrol costs. (3) Pro forma to reflect (i) the acquisitions of Triple A and The Jupiter Group, Inc. d/b/a Triple A Patrol ("Jupiter") as if they had occurred on July 1, 1996; and 397,055 shares of Common Stock to be issued to Triple A and Jupiter in connection with the acquisitions (assuming a $8.25 per share offering price) (ii) the sale by the Company of 2,400,000 shares of Common Stock offered hereby and the application of the net proceeds therefrom and (iii) the redemption of the Preferred Stock. The pro forma financial information is unaudited and may not be indicative of the results that actually would have occurred if the acquisition had occurred on July 1, 1997. See "Use of Proceeds," "Capitalization" and "Description of Securities." (4) MRR is monthly recurring revenue which the Company is entitled to receive under contracts in effect at the end of the period. MRR is a term commonly used in the industry as a measure of the size of a company but not as a measure of profitability or performance, and does not include any allowance for future attrition or allowance for doubtful accounts. The Company does not have sufficient information as to the attrition of acquired subscriber accounts to predict the amount of MRR that will be realized in future periods or the impact of the attrition of acquired subscriber accounts on the Company's overall rate of attrition. A retail subscriber is a subscriber who contracts directly with the Company for monitoring services. A wholesale subscriber is a subscriber who contracts through a third party for monitoring services provided by the Company. See "Risk Factors--Attrition of Subscriber Accounts." (5) MRR at the end of the period divided by the number of retail or wholesale (as the case may be) subscribers at the end of the period. (6) Includes $12,660,000 of borrowings under the Credit Line. As of December 18, 1997, actual borrowings under the Credit Line were $14,410,000. 7 RISK FACTORS AN INVESTMENT IN THE SHARES OF COMMON STOCK BEING OFFERED HEREBY IS HIGHLY SPECULATIVE, INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, TOGETHER WITH OTHER MATTERS REFERRED TO HEREIN, INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO, THE FOLLOWING RISK FACTORS. IT MUST BE RECOGNIZED THAT OTHER UNFORSEEN RISKS MIGHT ARISE IN THE FUTURE AND AFFECT THE COMPANY TO A GREATER EXTENT THAN COULD EVER BE ANTICIPATED. THIS PROSPECTUS 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 PROSPECTUS 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. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE ACCOMPANYING INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, THE INFORMATION UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES. HISTORY OF SIGNIFICANT LOSSES; WORKING CAPITAL DEFICIT; UNCERTAIN FUTURE PROFITABILITY; ASSETS ENCUMBERED; HIGHLY-LEVERAGED STRUCTURE The Company has incurred net losses of $3,030,830, $4,411,898, $18,054,144 and $694,681 (inclusive of dividends and accretion on preferred stock of $6,876,521 for the fiscal year ended June 30, 1997) for the three fiscal years ended June 30, 1995, 1996 and 1997, and the three months ended September 30, 1997, respectively and an accumulated deficit of $32,471,902 at September 30, 1997. It is anticipated that such losses will continue for the foreseeable future. The Company had a net working capital deficit of $1,023,805 as at June 30, 1997 and $841,753 as at September 30, 1997. In addition, the Company's future plans are subject to known and unknown risks and uncertainties that may cause the Company to continue to incur substantial losses from operations. There can be no assurance that the Company's operations will ever become profitable or that, if it is successful in doing so, it will be able to maintain profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." On June 30, 1996, the Company completed a restructuring of its long-term debt and obtained a $15,000,000 credit line (the "Credit Line") from Mellon Bank, N.A. (the "Bank"). As of December 18, 1997, $590,000 was available for borrowing under the Credit Line. On December 10, 1997, the Bank issued a committment letter to the Company to increase the Credit Line to $18,000,000. The increase in the Credit Line is subject to the satisfaction of a number of conditions, including the Company's receipt of a minimum of $7,000,000 of net proceeds from this offering (after giving effect to the redemption of the Preferred Stock), and there can be no assurance that all of such conditions will be satisfied or that the Company will receive such increase in the Credit Line. The Company intends to use a portion of the net proceeds of this offering to pay down a portion of the outstanding indebtedness under the Credit Line and intends to subsequently borrow approximately $7,060,000 to redeem the Preferred Stock, assuming the redemption occurs on February 2, 1998, which does not include payments of $795,150 on each of December 15, 1997 and January 15, 1998, which the Bank has consented to allow the Company to make using cash flow from operations and funds available under the Credit Line. See "Use of Proceeds" and "Description of Securities-- Series A Convertible Preferred Stock." At September 30, 1997, after giving pro forma effect to the receipt and application of the net proceeds from this offering and the redemption of the Preferred Stock, the Company's pro forma consolidated long-term indebtedness would have been approximately $14,069,749. As a result of such borrowings, the Company's capital structure is highly leveraged. The Company's indebtedness requires that a significant amount of its cash flow from operations 8 be applied to the payment of interest, and there can be no assurance that the Company's operations will generate sufficient cash flow to service this indebtedness. Borrowings under the Credit Line are at variable rates of interest, which subjects the Company to fluctuations in interest rates. The Credit Line is secured by all of the assets of the Company, and includes financial and other covenants that restrict the operational and financial flexibility of the Company, including restrictions on indebtedness, liens, acquisitions and other significant corporate events. Failure to comply with certain covenants would, among other things, permit the Bank to accelerate the maturity of the obligations thereunder and could result in cross-defaults permitting the acceleration of debt under other Company agreements and the foreclosure on all of the assets of the Company. In addition, the Company is required to obtain the consent of the Bank under the Credit Line and to maintain certain financial ratios in order to undertake significant acquisitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company's highly-leveraged capital struc- ture could impair its ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, or other purposes, to compete effectively or to operate successfully in the future. As of March 31, 1997, June 30, 1997 and September 30, 1997, the Company was not in compliance with certain financial covenants under the Credit Line. The Company subsequently entered into amendments to the Credit Line which amended the covenants for the third and fourth quarters of the fiscal year ended June 30, 1997 and the first quarter of fiscal 1998 such that the Company was then in compliance with the Credit Line. While the Company believes that it will be able to maintain compliance with the financial covenants under the Credit Line, there can be no assurance that the Company will maintain compliance with such financial covenants, or that the Company will be able to obtain necessary consents, waivers or amendments to the Credit Line in the future. RISK RELATED TO GROWTH THROUGH ACQUISITIONS Since fiscal year end 1994, substantially all of the Company's growth has been through acquisitions. One of the Company's primary strategies is to continue to increase its revenues and the markets it serves through the acquisition of other companies in the electronic security services industry and portfolios of alarm monitoring accounts. During the fiscal years ended June 30, 1995, 1996 and 1997, the Company consummated eight acquisitions (an aggregate of 10,700 subscriber accounts), 16 acquisitions (an aggregate of 9,200 subscriber accounts) and 14 acquisitions (an aggregate of 5,300 subscriber accounts), respectively. In the event that the Company targets larger acquisitions, such as the acquisition of Triple A, such acquisitions can be expected to involve significant expenditures of capital and time, whether or not consummated. In addition, the acquisition of electronic security service companies may become more expensive in the future, to the extent that demand and competition increases. There can be no assurance that the Company will be able to identify acquisition candidates, successfully consummate such acquisitions, acquire or profitably manage such acquisition candidates or successfully integrate such businesses into its operations without substantial costs, delays or other problems. In addition, the Company is unable to predict the size or frequency of any future acquisitions, and there can be no assurance that any businesses acquired will be profitable at the time of their acquisition or will achieve sales and profitability that justify the investment therein or that the Company will be able to realize expected operating and economic efficiencies following such acquisitions. Acquisitions may involve a number of special risks, including (i) adverse effects on the Company's reported operating results, (ii) diversion of management's attention, (iii) increased burdens on the Company's management resources and financial controls, (iv) dependence on retention and hiring of key personnel, (v) risks associated with unanticipated problems or legal liabilities and (vi) amortization of acquired intangible assets, some or all of which could have a material adverse effect on the Company's operations and financial performance. Furthermore, significant acquisitions, such as the acquisition of Triple A, require consent of the Bank under the Credit Line and there can be no assurance that the Bank will consent to such acquisitions. Failure to receive any such consent of the Bank could have a material adverse effect on the Company's operations and financial performance. 9 The Company has entered into an agreement to acquire Jupiter, a company engaged in the patrol service business. The Company has no experience in the patrol service business and such industry may involve risks and uncertainties which are unknown to the Company and which could have a material adverse effect on the Company's financial condition and results of operations. In addition, the patrol service business has a significantly lower profit margin than the other services provided by the Company, which could also have a material adverse effect on the Company's results of operations and financial performance. See "Business--Pending Acquisitions." Since the Company's primary consideration in making an acquisition is the amount of MRR associated with the seller's subscriber accounts, the price paid by the Company is customarily directly tied to such MRR. No audited historical financial information was available for any of the Company's acquisitions made since 1994, except Triple A and Jupiter, which financial statements are included in this Prospectus, if consummated. Therefore, the actual MRR acquired may be less than the Company anticipated. Thus, the Company must rely on management's knowledge of the industry, due diligence procedures, and representations and warranties of the sellers. In the event the Company's assessment of the MRR of an acquired company is higher than actual MRR for an acquired company, the Company's financial condition and results of operations could be materially adversely affected. A difference between the accounting treatment of the purchase of subscriber accounts and the accounting treatment of the generation of subscriber accounts through direct sales by the Company's sales force has a significant impact on the Company's results of operations. The costs of monitoring contracts (acquired either through the Company's dealer program or through the acquisition of subscriber account portfolios) are capitalized and amortized over estimated lives ranging from five to ten years on a straight-line basis for alarm and PERS accounts. Included in capitalized costs are acquisition transition costs that reflect the Company's estimate of costs associated with incorporating the acquired subscriber accounts into its operations. In contrast, all of the Company's costs related to the marketing, sales and installation of new alarm monitoring systems generated by its sales force are expenses in the period in which such activities occur. The Company's marketing, sales and installation expenses for new systems generally exceed installation revenues. Such accounting treatment could adversely affect the Company's financial condition and results of operations. See "Business." POTENTIAL NEED FOR ADDITIONAL FINANCING Based on the Company's operating plan, the Company believes that the net proceeds of this offering, together with cash on hand and available debt financing under the Credit Line, will be sufficient to satisfy its current capital requirements for at least 12 months following this offering. However, in the event that the Company were to make significant acquisitions for cash consideration, the Company may require additional capital before such time. Sources of funds may include the issuance of Common Stock or preferred stock sold in a public offering or in private placements, debt securities or bank financing. There can be no assurance that the Company would be able to obtain capital on a timely basis, on favorable terms, or at all. If the Company is unable to obtain such financing, or generate funds from operation sufficient to meet it needs, the Company may be unable to implement its current plans for expansion and development. See "Use of Proceeds." ATTRITION OF SUBSCRIBER ACCOUNTS The Company is heavily dependent on its recurring monitoring and service revenues. Given the relatively fixed nature of monitoring and service expenses, increases and decreases in monitoring and service revenues have a significant impact on the Company's financial performance. Substantially all of the Company's monitoring and service revenues are derived from recurring charges to subscribers for the provision of various services. Although no single subscriber represents more than one-half of one percent of the Company's recurring revenue base, the Company is vulnerable to subscribers canceling their 10 contracts. In recent years, lost recurring revenues from such cancellations have exceeded the new recurring revenues added by the Company's internal sales efforts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." At September 30, 1997, the cost of subscriber accounts and intangible assets, net of previously accumulated amortization, was $18,045,284, which constituted 59.6% of the book value of the Company's total assets. The Company's acquired subscriber accounts are amortized on a straight-line basis over the estimated life of the related revenues. The Company's assumed attrition rate for all of its subscriber accounts, expressed as total accounts lost per year, net of new accounts from subscribers who move into premises previously occupied by Company subscribers and accounts for which the Company is reimbursed by virtue of a guarantee by the seller of the account, is approximately 10%. It is the Company's policy to review periodically actual account attrition and, when necessary, adjust the remaining estimated lives of the Company's acquired accounts to reflect assumed future attrition (see Note 1 of Notes to Consolidated Financial Statements of the Company). There could be a material adverse effect on the Company's results of operations and financial condition if actual account attrition significantly exceeds assumed attrition and the Company has to make further adjustments with respect to the amortization of acquired subscriber accounts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Subscriber Attrition." COMPETITION The electronic security services industry is highly competitive and fragmented. The Company competes with national and regional companies, as well as smaller local companies, in all of its operations. Furthermore, new competitors continue to enter the industry and the Company may encounter additional competition from such future industry entrants. Subject to regulatory compliance, certain companies engaged in the telephone and cable business are competing in the electronic security services industry and other such companies may, in the future, enter the industry. Certain of the Company's current competitors have, and new competitors may have, substantially greater financial resources than the Company. There can be no assurance that the Company will be able to compete successfully in the electronic security services industry. The Company's principal competitors with respect to its PERS are other national or regional emergency response providers and burglar alarm companies that offer medical emergency features in addition to their home protection systems. Many of these companies have greater financial resources than the Company and may enjoy a particular competitive advantage due to their access to a larger client base. There can be no assurance that the Company will be able to compete successfully in the PERS industry. See "Business--Competition." DEPENDENCE ON THE MONITORING STATION The Company is dependent on an independent third-party monitoring station to monitor substantially all of its subscriber accounts. The Company's agreement with the Monitoring Station expires in April 2000 and is terminable sooner under certain circumstances. Although the Company believes that alternative monitoring stations are available on commercially reasonable terms, any termination or temporary interruption of services by the Monitoring Station for any reason including a catastrophic event such as tornado, hurricane, earthquake, fire or other disaster which rendered the Monitoring Station temporarily or permanently inoperable could adversely affect the Company's financial condition and results of operations. DEPENDENCE ON SUPPLIERS AND MANUFACTURERS The Company does not manufacture any of the equipment or components that it designs and installs. Although the Company believes that a variety of alternative sources of supply are available on commercially reasonable terms, 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 11 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. See "Business--Suppliers, Manufacturing and Assembly." PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE The nature of the security services provided by the Company potentially exposes it to greater risk of liability claims for employee acts or omissions or system failure than may be inherent in many other service businesses. Although (i) substantially all of the Company's customers have subscriber agreements which contain provisions for limited liability and predetermined liquidated damages and (ii) the Company carries insurance which provides coverage against certain of such liabilities, there can be no assurance that such existing arrangements will prevent the Company from being adversely affected as a result of damages arising from the acts of its employees, defective equipment, the acts or omissions of the Monitoring Station or because some jurisdictions prohibit or restrict limitations on liabilities and liquidated damages. In addition, certain of the Company's insurance policies and the laws of some states may limit or prohibit insurance coverage for punitive damages and for certain other kinds of damages arising from employee misconduct. In addition, in some states, the contractual limitation on liability and indemnification provisions may be ineffective in cases of gross negligence or intentional misconduct and in certain other situations. See "Business--Risk Management." The sale and service of the Company's products entails the risk of product liability claims. In addition, many of the companies with which the Company does or may do business may require financial assurances of product reliability. The Company has product liability insurance, but may be required to pay higher premiums associated with new product development. Product liability insurance is expensive and there can be no assurance that additional insurance will be available on acceptable terms, if at all, or that it will provide adequate coverage against potential liabilities. The inability to obtain additional insurance at an acceptable cost or to otherwise protect against potential product liability could prevent or inhibit commercialization of the Company's products. A successful claim brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company. POSSIBLE ADVERSE EFFECT OF "FALSE ALARMS" ORDINANCES AND GOVERNMENT REGULATIONS The Company believes that approximately 97% of alarm activations that result in the dispatch of police or fire department personnel are not emergencies, and thus are "false alarms." Significant concern has arisen in certain municipalities about this high incidence of false alarms. This concern could cause a decrease in the likelihood or timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain alarm monitoring services. A number of local governmental authorities have considered or adopted various measures aimed at reducing the number of false alarms. Such measures include (i) subjecting alarm monitoring companies to fines or penalties for transmitting false alarms, (ii) licensing individual alarm systems and the revocation of such licenses following a specified number of false alarms, (iii) imposing fines on alarm subscribers for false alarms, (iv) imposing limitations on the number of times the police will respond to alarms at a particular location after a specified number of false alarms and (v) requiring further verification of an alarm signal before the police will respond. Enactment of such measures could adversely affect the Company's future business and operations. See "Business--Government Regulation." The Company's operations are also subject to a variety of federal, state, county and municipal laws, regulations and licensing requirements. Many of the states in which the Company operates, as well as certain local authorities, require the Company to obtain licenses or permits to conduct a security alarm services business. Certain governmental entities also require persons engaged in the security alarm services business to be licensed and to meet certain standards in the selection and training of employees and in the 12 conduct of business. The loss of such licenses, or the imposition of conditions on the granting or retention of such licenses, could have a material adverse effect on the Company. The Company's advertising and sales practices are regulated by both the Federal Trade Commission (the "FTC") and state consumer protection laws. Such regulations include restrictions on the manner in which the Company promotes the sale of its products and the obligation of the Company to provide purchasers of its products with certain rights. While the Company believes that it has complied with these regulations in all material respects, there can be no assurance that none of these regulations were violated in connection with the solicitation of the Company's existing subscriber accounts, particularly with respect to accounts acquired from third parties, or that no such violations will occur in the future. See "Business-- Governmental Regulation." GEOGRAPHIC CONCENTRATION The Company's existing alarm subscriber base is geographically concentrated in New York, New Jersey, Connecticut, Delaware and Pennsylvania. Accordingly, the performance of the Company may be adversely affected by regional or local economic conditions. The Company may from time to time make acquisitions in regions outside of its current operating area. The acquisition of companies in other regions, or in metropolitan areas in which the Company does not currently have subscribers, requires an investment by the Company. In order for the Company to expand successfully into a new area, the Company must acquire companies with a sufficient number and density of subscriber accounts in such area to support the investment. There can be no assurance that the Company will find such opportunities or that an expansion into new geographic areas will generate operating profits. DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant degree upon the continuing contributions of its senior management and other key employees, including Richard M. Brooks, the Company's Chief Executive Officer, President, Chief Financial Officer and Chairman of the Board, and Ronald A. Feldman, the Company's Chief Operating Officer, Vice President, Secretary and Treasurer. It is an event of default under the Credit Line if Messrs. Brooks and Feldman or Todd Herman, President of USS, are not employed in certain management positions. The Company has key-man life insurance policies on the lives of Messrs. Brooks and Feldman in the amount of $3,000,000 and $1,000,000, respectively. See "Management." CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS Upon the consummation of this offering, the Company's directors and executive officers will beneficially own approximately 11.8% of the outstanding shares of Common Stock (excluding shares of Common Stock to be issued to one of the directors upon consummation of the Triple A and Jupiter acquisitions) and, accordingly, will have substantial influence over the outcome of any matter submitted to a vote of stockholders, including the election of directors and the approval of significant corporate transactions (such as acquisitions of the Company or its assets). Such influence could delay or prevent a change of control of the Company. See "Principal Stockholders" and "Description of Securities." POSSIBLE VOLATILITY OF STOCK PRICE The stock market has from time to time experienced extreme price and volume fluctuations that have been unrelated to the operating performance of particular companies. The market price of the Common Stock may be significantly affected by quarterly variations in the Company's operating results, changes in financial estimates by securities analysts or failure by the Company to meet such estimates, litigation involving the Company, general trends in the security alarm industry, actions by governmental agencies, 13 national economic and stock market conditions, industry reports and other factors, many of which are beyond the control of the Company. See "Price Range of Common Stock." SUBSTANTIAL DILUTION Investors purchasing shares in this offering will incur immediate and substantial dilution of approximately $3.13 (38%) per share between the adjusted net tangible book value per share of Common Stock after this offering and the estimated public offering price of $8.25 per share. NO DIVIDENDS The Company has never paid any cash or other dividends on its Common Stock. Payment of dividends on the Common Stock is within the discretion of the Board of Directors and will depend upon the Company's earnings, its capital requirements and financial condition, and other relevant factors. For the foreseeable future, the Board intends to retain future earnings, if any, to finance its business operations and does not anticipate paying any cash dividends with respect to the Common Stock. Pursuant to the terms of the Credit Line, the Company may not declare any dividends while any outstanding balance exists under the Credit Line. See "Management's Discussion and Analysis and Results of Operations--Liquidity and Capital Resources" and "Dividend Policy." SHARES ELIGIBLE FOR FUTURE SALE; EFFECT OF PREVIOUSLY ISSUED OPTIONS; REGISTRATION RIGHTS Upon the consummation of this offering, the Company will have outstanding 4,601,029 shares of Common Stock, of which the 2,400,000 shares offered hereby will be freely tradeable without restriction or further registration under the Securities Act. An additional 2,093,766 shares of Common Stock are also freely tradeable. The remaining approximately 107,263 shares of Common Stock are "restricted securities" (as that term is defined in Rule 144 under the Securities Act) and in the future may only be sold pursuant to a registration statement under the Securities Act, in compliance with the exemption provisions of Rule 144 or pursuant to another exemption under the Securities Act. The holders of 107,263 shares of Common Stock have demand and "piggyback" registration rights. In general, under Rule 144, as currently in effect, a person (including a person who may be deemed an "affiliate" of the Company as that term is defined under the Securities Act) who has beneficially owned such shares for at least one year would be entitled to sell within any three-month period a number of shares beneficially owned for at least one year that do not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are further subject to certain restrictions relating to the manner of sale, notice and the availability of current public information about the Company. After two years have elapsed from the date of the issuance of restricted securities by the Company or their acquisition from an affiliate, such shares may be sold without limitation by persons who have not been affiliates of the Company for at least three months. Commencing approximately 12 months following the date of this Prospectus, substantially all of such securities would become eligible for sale in the public market pursuant to Rule 144. The beneficial owners of 607,723 shares of Common Stock (including shares of Common Stock issuable upon exercise of outstanding options) have agreed not to sell such shares for a period of 12 months after this offering without the consent of the Representative. The sale, or availability for sale, of substantial amounts of Common Stock in the public market subsequent to this offering pursuant to Rule 144 or otherwise could materially adversely affect the market price of the Common Stock and could impair the Company's ability to raise additional capital through the sale of its equity securities or debt financing. The Company has reserved from the authorized, but unissued, Common Stock, 2,478,653 shares of Common Stock issuable upon exercise of outstanding options warrants and convertible securities. The existence of such outstanding securities may prove to be a hindrance to future financings, since the holders of such securities may be expected to exercise them at a time when the Company would otherwise be able 14 to obtain additional equity capital on terms more favorable to the Company. See "Description of Securities." The holders of the Representative's Warrants will have certain demand and "piggyback" registration rights with respect to the shares of Common Stock underlying such warrants, commencing one year after the effective date of this offering. If the Representative should exercise registration rights to effect the distribution of the securities underlying the Representatives' Warrants, it will be unable to make an active market in the Company's securities prior to and during such distribution. If it ceases making a market in the Common Stock, the market and market prices for the Common Stock may be materially adversely affected, and holders thereof may be unable to sell or otherwise dispose of the Common Stock. In addition, the holders of the Preferred Warrants have demand and "piggyback" registration rights. No prediction can be made as to the effect, if any, that sales of such securities, or the availability of such securities for sale, will have on the market prices prevailing from time to time for the Common Stock. However, even the possibility that a substantial number of the Company's securities may, in the near future, be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. See "Shares Eligible For Future Sale," "Description of Securities" and "Underwriting." DELAWARE ANTI-TAKEOVER STATUTE; LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS; POSSIBLE ADVERSE EFFECTS ASSOCIATED WITH THE ISSUANCE OF "BLANK CHECK" PREFERRED STOCK The Company is a Delaware corporation and is subject to the prohibitions imposed by Section 203 of the Delaware General Corporate Law ("DGCL"), which is generally viewed as an anti-takeover statute. In general, this statute will prohibit the Company from entering into certain business combinations without the approval of its Board of Directors and, as accordingly, could prohibit or delay mergers or other attempted takeovers or changes in control with respect to the Company. Such provisions may discourage attempts to acquire the Company. A change of control of the Company would also cause a default under the Credit Line which could accelerate the maturity of the obligations thereunder. The Company's Certificate of Incorporation includes provisions to eliminate, to the full extent permitted by the DGCL as in effect from time to time, the personal liability of directors of the Company for monetary damages arising from a breach of their fiduciary duties as directors. The Certificate of Incorporation also includes provisions to the effect that (subject to certain exceptions) the Company shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify, and upon request shall advance expenses to, any director or officer to the extent that such indemnification and advancement of expenses is permitted under such law, as it may from time to time be in effect. In addition, the Company's Bylaws (the "Bylaws") require the Company to indemnify, to the full extent permitted by law, any director, officer, employee or agent of the Company for acts which such person reasonably believes are not in violation of the Company's corporate purposes as set forth in the Certificate of Incorporation. As a result of such provisions in the Certificate of Incorporation and the Bylaws, stockholders may be unable to recover damages against the directors and officers of the Company for actions taken by them which constitute negligence, gross negligence or a violation of their fiduciary duties, which may reduce the likelihood of stockholders instituting derivative litigation against directors and officers and may discourage or deter stockholders from suing directors, officers, employees and agents of the Company for breaches of their duty of care, even though such action, if successful, might otherwise benefit the Company and its stockholders. In addition, the Company's Certificate of Incorporation authorizes the Company's Board of Directors to issue up to 250,000 shares (of which 239,430.42 remain available) of "blank check" preferred stock, from time to time, in one or more series, solely on the authorization of its Board of Directors. The Board of Directors will thus be authorized, without further approval of the stockholders, to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges and restrictions applicable to each new series of preferred stock. The 15 issuance of such stock could, among other results, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, make it more difficult for a third party to gain control of the Company, discourage bids for the Common Stock at a premium, or otherwise adversely affect the market price of the Common Stock. See "Description of Securities--Preferred Stock." CERTAIN NON-CASH CHARGES The Company may incur certain non-cash charges (i) of up to $900,000 for the fiscal year ended June 30, 1998, as deferred compensation expense relating to certain performance options granted to two officers of USS, based upon fluctuations in the market price of the Common Stock, and (ii) for the fiscal year ended June 30, 1998 in connection with the issuance of a certain performance warrant issued to BKR, Inc. in connection with the Company's investment in HealthLink, based upon the value of such warrant. Such charges could have a material adverse effect on the Company's results of operations. See "Management," "Business--HealthLink" and Notes 3 and 14 of Notes to Consolidated Financial Statements of the Company. 16 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 2,400,000 shares of Common Stock being offered by the Company are estimated to be approximately $17,820,000, ($20,493,000 if the Underwriters' over-allotment is exercised in full), after deducting the underwriting discounts and estimated offering expenses payable by the Company, assuming a public offering price of $8.25 per share. Of such net proceeds, it is anticipated that approximately $10,000,000 will be used to consummate the acquisition of substantially all of the assets of Triple A, which acquisition is expected to be consummated upon the consummation of this offering. Triple A is a provider of residential and commercial security systems, principally in northeastern Pennsylvania. See "Business--Pending Acquisitions." The Company intends to use the remaining approximately $7,820,000 of such net proceeds to reduce amounts outstanding under the Credit Line and intends to subsequently borrow approximately $7,060,000 under the Credit Line to redeem the Preferred Stock, assuming the redemption occurs on February 2, 1998, which does not include payments of $795,150 on each of December 15, 1997 and January 15, 1998, which the Bank has consented to allow the Company to make using cash flow from operations and funds available under the Credit Line. See "Description of Securities--Series A Preferred Stock." Funds from the Credit Line were utilized to repay prior existing indebtedness to the lender which had financed the acquisition of certain subscriber account portfolios, inventory and working capital purposes. Pending application of the net proceeds, the Company intends to invest the net proceeds in short-term investment grade, interest-bearing securities. Amounts outstanding under the Credit Line bear interest at the Bank's prime rate plus 1 3/4% per annum and are due on June 30, 2000. The Company may borrow up to $15,000,000 under the Credit Line and, as of December 18, 1997, $14,410,000 was outstanding under the Credit Line. On December 10, 1997, the Bank issued a committment letter to the Company to increase the Credit Line to $18,000,000. The increase in the Credit Line is subject to the satisfaction of a number of conditions, including the Company's receipt of a minimum of $7,000,000 of net proceeds from this offering (after giving effect to the redemption of the Preferred Stock), and there can be no assurance that all of such conditions will be satisfied or that the Company will receive such increase in the Credit Line. The Company expects that additional proceeds from any exercise of the Underwriters' over-allotment option will be used similarly or to supplement working capital. Based on the Company's operating plan, the Company believes that the net proceeds of this offering, together with cash on hand and available debt financing under the Credit Line, will be sufficient to satisfy its current working capital requirements for at least 12 months following this offering. Such belief is based upon certain assumptions (including assumptions as to the Company's contemplated operations and business plan and economic and industry conditions) and there can be no assurance that such resources will be sufficient for such purpose. Furthermore, in the event that the Company were to make significant acquisitions for cash consideration, the Company may require additional capital. In addition, contingencies may arise which may require the Company to obtain additional capital. There can be no assurance that the Company will be able to obtain such capital on favorable terms or at all. See "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." 17 PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded in the over-the-counter market on the Nasdaq SmallCap Market under the trading symbol "RUOK." The Company has applied for listing of the Common Stock, upon completion of this offering, on the Nasdaq National Market under the symbol "RSPN." The following table sets forth, for the quarters indicated, the high and low bid and asked prices for the Company's Common Stock in the over-the-counter market (as adjusted to reflect the anticipated one-for-three reverse stock split). Such prices reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
BID ASK ------------------ ------------------ HIGH LOW HIGH LOW ------- ------- ------- ------- FISCAL YEAR ENDING JUNE 30, 1998: First Quarter....... $12 $ 6 3/4 $12 3/4 $ 8 7/16 Second Quarter (through December 18, 1997).......... $11 7/16 9 9/16 12 9 27/32 FISCAL YEAR ENDED JUNE 30, 1997: First Quarter....... $26 5/8 $ 9 3/8 $27 3/8 $ 9 3/4 Second Quarter...... 15 3/8 7 1/8 16 1/8 7 7/8 Third Quarter....... 16 1/8 8 1/16 16 7/8 8 5/8 Fourth Quarter...... 9 4 5/16 9 3/8 4 11/16 FISCAL YEAR ENDED JUNE 30, 1996: First Quarter....... $21 9/16 $11 1/4 $23 7/16 $13 1/8 Second Quarter...... 18 12 3/4 18 3/4 13 7/8 Third Quarter....... 18 3/8 14 1/4 18 3/4 15 Fourth Quarter...... 25 1/2 15 3/8 26 1/4 15 3/4
On December 18, 1997, the closing bid price of the Company's Common Stock as reported on the Nasdaq SmallCap Market was $8.25 per share (as adjusted to reflect the anticipated one-for-three reverse stock split). As of December 17, 1997 there were 225 stockholders of record of the Common Stock. DIVIDEND POLICY The Company has not paid dividends on the Common Stock since inception and does not intend to pay any dividends to its stockholders in the foreseeable future. The Company currently intends to retain earnings, if any, for the development and expansion of its business. The declaration of dividends in the future will be at the discretion of the Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors. The Company is prohibited from declaring dividends while any outstanding balance exists under the Credit Line. 18 CAPITALIZATION The following table sets forth the capitalization of the Company at September 30, 1997, and as adjusted to reflect (i) the sale of the 2,400,000 shares of Common Stock of the Company offered hereby (after giving effect to the anticipated one-for-three reverse stock split) at an assumed offering price of $8.25 per share, (ii) the application of the estimated net proceeds therefrom, (iii) the redemption of the Preferred Stock, (iv) the issuance of the Series B Preferred Stock and (v) the issuance of 397,055 shares in connection with two pending acquisitions. This table below should be read in conjunction with the financial statements and related notes appearing elsewhere in this Prospectus.
AT SEPTEMBER 30, 1997 ------------------------------- PRO FORMA AS ACTUAL(1) ADJUSTED(2)(3) ------------- ---------------- Short-Term Debt, Including Capital Lease Obligations:........................... $ 157,815 $ 235,309 Long-Term Debt, Net of Current Portion:......................................... 12,944,996 13,834,440 Stockholders' Equity: Preferred stock--Par value $1,000 Authorized 250,000 shares Issued and outstanding 5,890 shares--Series A, actual; none, pro forma as adjusted................................................................ 6,818,055 -- Issued and outstanding 3,069.58 shares--Series B.......................... 31 31 Common stock--Par value $.008 Authorized 12,500,000 shares Issued and outstanding 2,189,301 shares, actual; 4,986,356, pro forma as adjusted................................................................ 17,515 39,890 Additional Paid-in Capital...................................................... 36,755,462 55,996,838 Unrealized Holding Losses on Available For Sale Securities...................... (18,750) (18,359) Deficit......................................................................... (32,471,902) (32,471,902) Total Stockholders' Equity...................................................... 11,100,411 23,546,498 ------------- Total Capitalization........................................................ $ 24,045,407 $ 37,380,938 ------------- ---------------- ------------- ----------------
- ------------------------ (1) Reflects the anticipated one-for-three reverse stock split as if it had occurred at September 30, 1997. See Note 16 of Notes to Consolidated Financial Statements of the Company. (2) Pro forma to reflect (i) the 2,400,000 shares of Common Stock offered hereby and the application of the net proceeds thereof, (ii) the redemption of 5,890 shares of Series A Preferred Stock and (iii) the acquisition of Triple A and Jupiter as if they had occurred prior to September 30, 1997, including the issuance of 397,055 shares of Common Stock to be issued upon the consummation of the acquisition (based upon a market price of $8.25 per share at the time of the consummation of the acquisitions). See "Description of Securities" and Note 16 of Notes to Consolidated Financial Statements of the Company. (3) Does not include up to (i) 240,000 shares of Common Stock issuable upon exercise of the Representative's Warrants to be issued to the Representative on the closing of this offering and (ii) 2,478,653 shares of Common Stock issuable upon the exercise of outstanding options and warrants at exercise prices ranging from $0.03 to $24.00 per share and upon conversion of convertible securities. 19 SELECTED FINANCIAL INFORMATION The following table presents, for the periods and dates indicated, selected historical and pro forma as adjusted financial data and other data of the Company. The historical statement of operations data and the balance sheet data of the Company for and at the year ended June 30, 1997 are derived from the Company's financial statements, which have been audited by Deloitte & Touche LLP, independent certified public accountants, and which appear elsewhere in this Prospectus. The historical statement of operations data and the balance sheet data of the Company for and at the years ended June 30, 1995 and 1996 are derived from the Company's financial statements, which have been audited by Fishbein and Company, PC, independent certified public accountants, and which appear elsewhere in this Prospectus. The Selected Financial Data presented below as of September 30, 1997, and for the three months ended September 30, 1996 and 1997, are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position and the results of operations for this period, applied on a basis consistent with the audited financial statements. The unaudited pro forma as adjusted statement of operations and the balance sheet data of the Company give effect to (i) the consummation of this offering and the application of the net proceeds therefrom, as set forth in "Use of Proceeds," (ii) the acquisitions of Triple A and Jupiter and (iii) the effects of certain pro forma adjustments to the historical financial statements described below, as if such events occurred prior to September 30, 1997. This information should be read in conjunction with the Company's financial statements and the related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Capitalization," included elsewhere in this Prospectus. The pro forma as adjusted information is not necessarily indicative of what the actual results would have been had the transactions occurred prior to September 30, 1997, nor does it purport to indicate the results of future operations. The pro forma as adjusted information reflects the acquisition of Triple A and Jupiter and does not reflect any other acquisitions of the Company occurring after September 30, 1997, which acquisitions were not deemed to be material acquisitions by the Company. 20
PRO FORMA HISTORICAL AS ADJUSTED(3) HISTORICAL ----------------------------------- -------------- ----------------------- YEAR ENDED JUNE 30, THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------- 1995 1996 1997 1997 1996 1997 ---------- ---------- ----------- -------------- ----------- ---------- INCOME STATEMENT DATA: Revenues: Product Sales......................... $4,520,062 $2,352,449 $ 2,938,618 $ 4,726,515 $ 656,128 $ 662,846 Monitoring and Related Services....... 4,812,474 8,515,247 9,784,285 14,776,735 2,386,239 2,585,038 ---------- ---------- ----------- -------------- ----------- ---------- Total Revenues...................... 9,332,536 10,867,696 12,722,903 19,503,250 3,042,367 3,247,884 ---------- ---------- ----------- -------------- ----------- ---------- Cost of Revenues: Product Sales(1)...................... 2,635,674 1,718,689 1,970,158 3,364,629 451,535 398,442 Monitoring and Related Services(2).... 1,125,123 1,779,490 2,127,257 4,438,081 747,025 768,739 ---------- ---------- ----------- -------------- ----------- ---------- Total Cost of Revenues.............. 3,760,797 3,498,179 4,097,415 7,802,710 1,198,560 1,167,181 ---------- ---------- ----------- -------------- ----------- ---------- Gross profit............................ 5,571,739 7,369,517 8,625,488 11,700,540 1,843,807 2,080,703 ---------- ---------- ----------- -------------- ----------- ---------- Operating Expenses: Selling, General and Administrative... 6,327,622 6,416,486 9,126,641 11,266,985 2,284,484 1,165,635 Compensation--Options/Employment Contracts........................... -- -- 3,689,700 3,689,700 -- -- Depreciation and Amortization......... 1,302,208 2,200,894 2,976,433 4,535,493 662,719 837,539 Interest.............................. 1,220,618 3,185,603 1,349,480 1,449,080 503,470 643,780 Litigation Settlement................. 240,000 -- -- -- -- -- Recovery of Termination Benefits Cost................................ (392,699) -- -- -- -- -- Recovery of Restructuring Charges..... (52,920) -- -- -- -- -- ---------- ---------- ----------- -------------- ----------- ---------- Total Operating Expenses............ 8,644,829 11,802,983 17,142,254 20,941,258 3,450,673 2,646,954 ---------- ---------- ----------- -------------- ----------- ---------- Loss from Operations.................. (3,073,090) (4,433,466) (8,516,766) (9,240,718) (1,606,866) (566,251) Other Income (Expense): Interest Income....................... 42,260 21,568 12,176 27,504 7,939 1,708 Joint Venture Loss.................... -- -- (123,325) (123,325) -- (130,138) ---------- ---------- ----------- -------------- ----------- ---------- Loss Before Extraordinary Item............ (3,030,830) (4,411,898) (8,627,915) (9,336,539) (1,598,927) (694,681) Extraordinary Item Loss on Debt Extinguishment........................ -- -- 2,549,708 2,549,708 2,549,708 -- ---------- ---------- ----------- -------------- ----------- ---------- Net Loss.................................. (3,030,830) (4,411,898) (11,177,623) (11,886,247) (4,148,635) (694,681) Dividends and Accretion on Preferred Stock..................................... -- -- (6,876,521) -- (6,125,549) (335,272) ---------- ---------- ----------- -------------- ----------- ---------- Net Loss Applicable to Common Shareholders.............................. $(3,030,830) $(4,411,898) $(18,054,144) $(11,886,247) $(10,274,184) $(1,029,953) ---------- ---------- ----------- -------------- ----------- ---------- ---------- ---------- ----------- -------------- ----------- ---------- Loss per Common Share: Loss Before Extraordinary Item........ $ (15.07) $ (8.61) $ (5.80) $ (2.18) $ (1.23) $ (0.33) Extraordinary Item.................... -- -- (1.71) (0.59) (1.96) -- ---------- ---------- ----------- -------------- ----------- ---------- Net Loss.............................. $ (15.07) $ (8.61) $ (7.51) $ (2.77) $ (3.19) $ (0.33) ---------- ---------- ----------- -------------- ----------- ---------- ---------- ---------- ----------- -------------- ----------- ---------- Net Loss Applicable to Common Shareholders........................ $ (15.07) $ (8.61) $ (12.14) $ (2.77) $ (7.89) $ (0.48) ---------- ---------- ----------- -------------- ----------- ---------- ---------- ---------- ----------- -------------- ----------- ---------- Weighted Average Number of Common Shares Outstanding........................... 201,064 512,179 1,487,574 4,284,629 1,302,284 2,132,533 ---------- ---------- ----------- -------------- ----------- ---------- ---------- ---------- ----------- -------------- ----------- ---------- PRO FORMA AS ADJUSTED(3) -------------- 1997 -------------- INCOME STATEMENT DATA: Revenues: Product Sales......................... $1,071,442 Monitoring and Related Services....... 4,032,063 -------------- Total Revenues...................... 5,103,505 -------------- Cost of Revenues: Product Sales(1)...................... 762,719 Monitoring and Related Services(2).... 1,397,054 -------------- Total Cost of Revenues.............. 2,159,773 -------------- Gross profit............................ 2,943,732 -------------- Operating Expenses: Selling, General and Administrative... 1,756,395 Compensation--Options/Employment Contracts........................... -- Depreciation and Amortization......... 1,238,836 Interest.............................. 667,650 Litigation Settlement................. -- Recovery of Termination Benefits Cost................................ -- Recovery of Restructuring Charges..... -- -------------- Total Operating Expenses............ 3,662,881 -------------- Loss from Operations.................. (719,149) Other Income (Expense): Interest Income....................... 4,026 Joint Venture Loss.................... (130,138) -------------- Loss Before Extraordinary Item............ (845,261) Extraordinary Item Loss on Debt Extinguishment........................ -- -------------- Net Loss.................................. (845,261) Dividends and Accretion on Preferred Stock..................................... -- -------------- Net Loss Applicable to Common Shareholders.............................. $ (845,261) -------------- -------------- Loss per Common Share: Loss Before Extraordinary Item........ $ (0.17) Extraordinary Item.................... -- -------------- Net Loss.............................. $ (0.17) -------------- -------------- Net Loss Applicable to Common Shareholders........................ $ (0.17) -------------- -------------- Weighted Average Number of Common Shares Outstanding........................... 4,929,588 -------------- --------------
21
HISTORICAL PRO FORMA YEAR ENDED JUNE 30, AS ADJUSTED(3) ---------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1995 1996 1997 1997 1997 ---------- ---------- ---------- ------------- -------------- CERTAIN SUBSCRIBER DATA: MRR(4)...................................... $ 500,000 $ 720,600 $ 800,000 $ 800,000 $ 1,067,000 Number of Retail Subscribers................ 28,628 34,173 37,770 37,592 47,592 Number of Wholesale Subscribers............. 9,440 11,132 9,639 7,720 11,720 Total Number of Subscribers................. 38,068 45,305 47,409 45,312 59,312 MRR per Retail Subscriber(5)................ $ 16.93 $ 20.25 $ 20.27 $ 20.55 $ 21.56 MRR per Wholesale Subscriber(5)............. $ 1.63 $ 2.22 $ 3.50 $ 3.55 $ 3.50
SEPTEMBER 30, 1997 --------------------------------------------- PRO FORMA HISTORICAL AS ADJUSTED(3) ------------- -------------- CONSOLIDATED BALANCE SHEET DATA: Working Capital (Deficit)........................................ $ (841,753) $ (327,913) Total Assets..................................................... 30,296,434 44,532,441 Long-Term Debt, Net of Current Portion(6)........................ 12,944,996 13,834,440 Preferred Stock.................................................. 6,818,055 31 Total Stockholders' Equity....................................... 11,100,411 23,546,498
- ------------------------ (1) Includes cost of goods sold and installation expenses. (2) Includes monitoring costs, time and material expenses and patrol costs. (3) Pro forma to reflect (i) the acquisitions of Triple A and Jupiter as if they had occurred on July 1, 1996; and 397,055 shares of Common Stock to be issued to Triple A and Jupiter in connection with the acquisitions (assuming a $8.25 per share offering price) (ii) the sale by the Company of 2,400,000 shares of Common Stock offered hereby and the application of the net proceeds therefrom and (iii) the redemption of the Preferred Stock. The pro forma financial information is unaudited and may not be indicative of the results that actually would have occurred if the acquisition had occurred on July 1, 1997. See "Use of Proceeds," "Capitalization" and "Description of Securities." (4) MRR is monthly recurring revenue which the Company is entitled to receive under contracts in effect at the end of the period. MRR is a term commonly used in the industry as a measure of the size of a company but not as a measure of profitability or performance, and does not include any allowance for future attrition or allowance for doubtful accounts. The Company does not have sufficient information as to the attrition of acquired subscriber accounts to predict the amount of MRR that will be realized in future periods or the impact of the attrition of acquired subscriber accounts on the Company's overall rate of attrition. A retail subscriber is a subscriber who contracts directly with the Company for monitoring services. A wholesale subscriber is a subscriber who contracts through a third party for monitoring services provided by the Company. See "Risk Factors--Attrition of Subscriber Accounts." (5) MRR at the end of the period divided by the number of retail or wholesale (as the case may be) subscribers at the end of the period. (6) Includes $12,660,000 of borrowings under the Credit Line. As of December 18, 1997, actual borrowings under the Credit Line were $14,410,000. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company and related notes thereto. GENERAL Since fiscal year end 1994, substantially all of the Company's growth has been through the acquisition of smaller alarm companies. During the fiscal year ended June 30, 1995 ("Fiscal 1995"), the Company consummated eight acquisitions, purchasing approximately 10,700 subscriber accounts for an aggregate consideration of $5,218,944 in cash and 48,090 shares of Common Stock. During the fiscal year ended June 30, 1996 ("Fiscal 1996"), the Company consummated 16 acquisitions, purchasing approximately 9,200 subscriber accounts for an aggregate consideration of $5,638,637 in cash and 98,014 shares of Common Stock. As part of the acquisitions, the Company also issued 5,000 shares of Common Stock valued at $70,311 as payment of financing costs to the lender that financed the acquisitions. During the fiscal year ended June 30, 1997 ("Fiscal 1997"), the Company consummated 14 acquisitions, purchasing approximately 5,300 subscriber accounts for an aggregate consideration of $3,424,712 in cash and 8,334 shares of Common Stock. The Company typically acquires only the subscriber accounts, and not the facilities or liabilities, of acquired companies. As a result, the Company is able to obtain gross margins on the monitoring of acquired subscriber accounts that are similar to those that the Company currently generates on the monitoring of its existing subscriber base. In addition, the Company may increase the monitoring charges paid by those subscribers if it is determined that those currently being paid do not reflect the market area rates. The Company anticipates continuing its acquisition program which may subject the Company to certain risks and uncertainties. In addition, the Company's financial information for Fiscal 1997 reflects the Company's investment in a joint venture with BKR, Inc. to form HealthLink in March 1997 (see Note 3 of Notes to Consolidated Financial Statements of the Company). See "Risk Factors--Risk Related to Growth Through Acquisitions." In July 1996, the Company completed a restructuring of its long-term debt. The Company obtained the $15,000,000 Credit Line from the Bank and issued $7,500,000 of its Preferred Stock to institutional and individual domestic and foreign investors. The proceeds were used to reduce the Company's long-term indebtedness and resulted in a substantial decrease in the Company's interest expense (see Notes 7 and 9 of Notes to Consolidated Financial Statements of the Company). A majority of the Company's revenues are derived from monthly recurring payments for the monitoring, rental and servicing of both electronic security systems and PERS, pursuant to contracts with initial terms up to five years. Service revenues are derived from payments under extended warranty contracts and for service calls performed on a time and material basis. The remainder of the Company's revenues are generated from the sale and installation of security systems and PERS. Monitoring and service revenues are recognized as the service is provided. Sale and installation revenues are recognized when the required work is completed. All direct installation costs, which include materials, labor and installation overhead, and selling and marketing costs are expensed in the period incurred. Alarm monitoring and rental services generate significantly higher gross margins than do the other services provided by the Company. The Company has significantly expanded its operations during the two years ended June 30, 1997. Its alarm subscriber base has grown to over 25,000 customers and the Company's total account base is in excess of an aggregate of approximately 48,000 alarm and PERS subscribers as of the date of this Prospectus. 23 RESULTS OF OPERATIONS The following table summarizes the components of the Company's revenues and cost of revenues for the fiscal years ended June 30, 1995, 1996 and 1997 and the three months ended September 30, 1996 and 1997:
THREE MONTHS ENDED SEPTEMBER YEAR ENDED JUNE 30, 30, ------------------------------------------------------------------ ------------------------------- 1995 1996 1997 1996 1997 -------------------- --------------------- --------------------- -------------------- --------- Operating revenues: Product sales...... $4,520,062 48.4% $2,352,449 21.6% $2,938,618 23.1% $ 656,128 21.6% $ 662,846 Monitoring and Related Services......... 4,812,474 51.6% 8,515,247 78.4% 9,784,285 76.9% 2,386,239 78.4% 2,585,038 --------- --------- ---------- --------- ---------- --------- --------- --------- --------- 9,332,536 100.0% 10,867,696 100.0% 12,722,903 100.0% 3,042,367 100.0% 3,247,884 --------- --------- ---------- --------- ---------- --------- --------- --------- --------- Cost of Revenues*: Product sales...... 2,635,674 28.2% 1,718,689 15.8% 1,970,158 15.5% 451,535 14.8% 398,442 Monitoring and Related Services......... 1,125,123 12.1% 1,779,490 16.4% 2,127,257 16.7% 747,025 24.6% 768,739 --------- --------- ---------- --------- ---------- --------- --------- --------- --------- Total Cost of Revenues......... 3,760,797 40.3% 3,498,179 32.2% 4,097,415 32.2% 1,198,560 39.4% 1,167,181 --------- --------- ---------- --------- ---------- --------- --------- --------- --------- Gross Profit....... $5,571,739 59.7% $7,369,517 67.8% $8,625,488 67.8% $1,843,807 60.6% $2,080,703 --------- --------- ---------- --------- ---------- --------- --------- --------- --------- --------- --------- ---------- --------- ---------- --------- --------- --------- --------- Operating revenues: Product sales...... 20.4% Monitoring and Related Services......... 79.6% --------- 100.0% --------- Cost of Revenues*: Product sales...... 12.3% Monitoring and Related Services......... 23.6% --------- Total Cost of Revenues......... 35.9% --------- Gross Profit....... 64.1% --------- ---------
- ------------------------ * As a percentage of total revenues THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996: Operating revenues increased by $205,517 or 7% for the quarter ended September 30, 1997 ("Fiscal 1998") as compared to the quarter ended September 30, 1996 ("Fiscal 1997"). An increase in sales of electronic security systems to both residential and commercial customers totaling approximately $45,000, was offset by a decrease in sales of personal emergency response systems (PERS) to private label wholesalers of approximately $45,000. The growth in monitoring and service revenues of $198,799 or 8% for Fiscal 1998 as compared to Fiscal 1997, was due to the acquisition of monitoring contracts and the success of the Company's extended warranty program. Gross Profit for Fiscal 1998 was $2,080,703, which represents an increase of $236,896, or 13%, over the $1,843,807 of gross profit recognized in Fiscal 1997. The increase was due primarily to an increase in monitoring and service revenues, and the success of the extended warranty program, which is concurrent with the increase in the Company's subscriber base. The Gross Profit Margin (GPM), as a percentage of sales, was 61% for the quarter ended September 30, 1996, as compared to 64% for the quarter ended September 30, 1997. The GPM on product sales rose from 31% in Fiscal 1997 to 40% for Fiscal 1998. The increase is due to increased revenues derived from the installation of electronic security systems to commercial customers as opposed to residential customers and the utilization of in-house labor in lieu of subcontractors for the installation of electronic security systems. The GPM on monitoring and service revenues increased slightly from 69% to 70% for the periods ended September 30, 1996 and 1997, respectively. Selling, general and administrative expenses (excluding compensation expense (benefit) in connection with employment agreements of $862,500 and $(450,000), and the amortization of transition costs of $91,047 and $11,178, for Fiscal 1997 and Fiscal 1998, respectively) grew to $1,626,813 for the three months ended September 30, 1997, which represents an increase of $113,782 or 7%, over selling, general and administrative expenses for the three months ended September 30, 1996. Selling, general and administrative expenses, as a percentage of total operating revenues, remained at 50% for the comparative periods ended September 30, 1996 and 1997. The increase in selling, general and administrative expenses was primarily due to increases in corporate overhead expenses incurred to assimilate newly acquired customers 24 into the Company's customer base, to support the larger subscriber base, and sales and marketing expenses associated with the test-marketing of WanderWatch. While selling, general and administrative expenses, as a percentage of revenues, remained the same for Fiscals 1997 and 1998, monitoring and service revenues increased by 8% between comparable periods, reflecting efficiencies realized in the Company's corporate offices. The Company anticipates that its current level of selling general and administrative expenses, as a percentage of sales, will decrease as a result of the Company's operating revenues growing substantially due to increases in monitoring and service revenues from ongoing acquisitions. During the quarter ended September 30, 1996, the Company recorded a deferred compensation liability with a corresponding charge to selling, general and administrative expense in the amount of $862,500, pursuant to employment contracts. As of September 30, 1997, due to increases in the market value of the Company's common stock, the Company reduced both the deferred compensation liability and selling, general and administrative expense by $450,000 pursuant to the same employment contracts. Increases in the Company's stock price result in a decreasing obligation on behalf of the Company and also are the cause for the compensation benefit in 1997. Amortization and depreciation expenses increased by $174,820, from $662,719 to $837,539 for the three months ended September 30, 1996 and 1997, respectively. This increase in amortization and depreciation expense is the result of the Company's acquisition of approximately 5,000 monitoring contracts and the purchase of property and equipment of approximately $630,000 (including equipment used for rentals) during the past twelve months. Interest expense increased by $140,310 or 28% for the three months ended September 30, 1997, as compared to the same period ended September 30, 1996. The increase in interest expense is due to an increase in borrowings of approximately $4.7 million during the past twelve months, which was used primarily for acquisitions and other capital expenditures. On March 4, 1997, the Company entered into a joint venture agreement with BKR, Inc. to acquire a 50% interest in HealthLink Ltd. Healthlink Ltd. subcontracts its production of the HealthLink System to a third-party foreign manufacturer. The HealthLink System, a low cost PERS product, will be distributed nationally through retail stores. For the quarter ended September 30, 1997, the Company has realized a loss from joint venture of $130,138. The net loss for the three months ended September 30, 1997 was $694,681 or ($.33) per share based on 2,132,533 shares outstanding, as compared to a net loss of $4,148,635 or ($3.19) per share based on 1,302,284 shares outstanding for the three months ended September 30, 1996. The net loss applicable to common shareholders (net loss adjusted for dividends and accretion on preferred stock) for the periods ended September 30, 1996 and 1997 were $10,274,184 or ($7.89) per share based on 1,302,284 shares outstanding; and $1,029,953 or ($.48) per share based on 2,132,533 shares outstanding, respectively. Earnings before interest, taxes, depreciation and amortization (EBITDA), excluding charges for the loss on debt extinguishment, compensation expense (benefit) - employment agreements, and the loss on joint venture was $421,823 for the quarter ended September 30, 1996 as compared to $465,068 for the quarter ended September 30, 1997. YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996: Operating revenues increased by $1,855,207, or 17.1%, for Fiscal 1997, as compared to Fiscal 1996. Product sales increased by $586,169, or 24.9%, for Fiscal 1997, as compared to Fiscal 1996. The increase in product sales was due primarily to the sale of PERS to home health care agencies, private label wholesalers and sales of electronic security systems to commercial customers. The significant growth in monitoring and service revenues of $1,269,038, or 14.9%, for Fiscal 1997, as compared to Fiscal 1996, was due to the acquisition of monitoring contracts and the success of the Company's extended warranty program. 25 Gross Profit for Fiscal 1997 was $8,625,488, which represents an increase of $1,255,971, or 17.0%, over the $7,369,517 of gross profit recognized in Fiscal 1996. The increase was due primarily to an increase in monitoring and service revenues, and the success of the extended warranty program, which was concurrent with the increase in the Company's subscriber base. The Gross Profit Margin ("GPM"), as a percentage of sales, was 67.8% for both Fiscal 1996 and Fiscal 1997. The GPM on product sales rose from 26.9% for Fiscal 1996 to 33.0% for Fiscal 1997. The increase was due to increased revenues derived from the installation of electronic security systems to commercial customers as opposed to residential customers and the utilization of in-house labor in lieu of subcontractors for the installation of electronic security systems. The GPM on monitoring and service revenues decreased slightly to 78.3% for Fiscal 1997 from 79.1% for Fiscal 1996. Selling, general and administrative expenses (excluding charges incurred for legal fees in connection with the preferred stock litigation of $475,000, the non-cash charge of $689,000 for consulting fees and the non-cash loss recognized on available-for-sale securities of $218,000) grew to $7,744,641 for Fiscal 1997, which represents an increase of $1,328,155, or 20.7%, over selling, general and administrative expenses for Fiscal 1996. Selling, general and administrative expenses (excluding such charges and losses in the aggregate amount of $1,382,000), as a percentage of total operating revenues, increased slightly from 59.0% for Fiscal 1996 to 60.9% for Fiscal 1997. The increase in selling, general and administrative expenses was due primarily to increases in corporate overhead expenses incurred to assimilate newly acquired customers into the Company's customer base and to support the larger subscriber base. On December 16, 1996, the Company granted to employees non-qualified stock options at $.30 per share, expiring November 27, 2001, and, on June 27, 1997, reduced the exercise price of options granted to certain officers and directors of the Company from $4.50 to $.03 and, as a result thereof, the Company recorded compensation expense of $2,032,200 for Fiscal 1997. In addition, the Company recorded deferred compensation expense of $1,657,500 for Fiscal 1997, in connection with two employment contracts with officers of USS. (See Note 14 of Notes to Consolidated Financial Statements of the Company.) Amortization and depreciation expenses increased by $775,539, from $2,200,894 to $2,976,433 for Fiscal 1996 and Fiscal 1997, respectively. This increase in amortization and depreciation expense is the result of the Company's purchase of monitoring contracts totaling $4,168,525 and property and equipment totaling $636,659 (including equipment held for lease of $150,000) during Fiscal 1997. Interest expense decreased by $1,836,123, or 57.6%, for Fiscal 1997, as compared to Fiscal 1996. In July 1996, the Company completed a restructuring of its long-term debt. The Company obtained the $15,000,000 Credit Line from the Bank and issued $7,500,000 of its Preferred Stock to institutional and individual domestic and foreign investors. The proceeds of the financing were utilized to reduce the Company's long-term indebtedness. The restructuring resulted in an extraordinary charge of $2,549,708 for early extinguishment of debt in Fiscal 1997. Equity in loss of joint venture consists of the Company's share ($123,325) of HealthLink's losses for Fiscal 1997. The net loss applicable to common shareholders (net loss adjusted for dividends and accretion on Preferred Stock) for Fiscal 1997 was $18,054,144, or $(12.14) per share, based on 1,487,574 shares outstanding. The net loss for Fiscal 1997, excluding the following nonrecurring charges: (i) loss on early debt extinguishment of $2,549,708; (ii) compensation expense recognized from the grant of stock options and from employment contracts of $3,689,700; (iii) legal fees incurred in connection with the preferred stock litigation of $475,000; (iv) the non-cash charge of $689,000 for consulting fees; and (v) loss realized on available-for-sale securities of $218,000, was $3,556,215, or $(2.39) per share, based on 1,487,574 shares outstanding, as compared to a net loss of $4,411,898, or $(8.61) per share, based on 512,179 shares outstanding for Fiscal 1996. The net losses for Fiscal 1996 and Fiscal 1997 are attributable to depreciation, amortization and interest expense totaling $5,386,497 and $4,325,913, respectively. Earnings before interest, taxes, depreciation and amortization ("EBITDA"), excluding nonrecurring charges and the loss on 26 the HealthLink joint venture, was approximately $950,000 for Fiscal 1996, as compared to approximately $880,000 for Fiscal 1997. The decrease was due primarily to the write-down of inventory used to service outdated electronic security systems acquired from other alarm dealers, and an increase in the Company's provision for doubtful accounts, along with direct write-offs to bad debt expense totaling approximately $830,000. YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995: The Company significantly expanded its operations for Fiscal 1996. Its alarm subscriber base grew to over 21,000 customers, an increase of approximately 62.0% over the number of subscribers as of Fiscal 1995. The substantial increase in operating revenues and monitoring service revenues resulted primarily from acquisitions totaling over 9,200 monitoring accounts from other dealers and companies, and the sale of the Company's PERS products to hospitals and home health care agencies. The Company's account base totaled in excess of 45,000 monitoring subscribers as of June 30, 1996. Operating revenues increased by $1,535,160, or 16.4%, for Fiscal 1996 as compared to Fiscal 1995. Product sales decreased by $2,167,613, or 48.0%, for Fiscal 1996 as compared to Fiscal 1995. The decline in product sales was due to the Company's strategy of expanding primarily through the acquisition of monitoring contracts, as opposed to direct sales of security systems. Sales of electronic security systems decreased by approximately $2,500,000 for Fiscal 1996 as compared to Fiscal 1995. Revenues from the sale of PERS products increased by approximately $300,000 for Fiscal 1996 as compared to Fiscal 1995. The significant growth in monitoring and service revenues of $3,702,773, or 76.9%, for Fiscal 1996, as compared to Fiscal 1995, was due to the acquisition of monitoring contracts and the success of the Company's extended warranty program and the acquisition of the Medical Alert Systems Monitoring Division of ERS in November 1994. Gross Profit for Fiscal 1996 was $7,369,517, which represents an increase of $1,797,778, or 32.3%, over the $5,571,739 of gross profit recognized in Fiscal 1995. The increase was due primarily to an increase in monitoring and service activities and the success of the extended warranty program, which is related to the increase in the Company's subscriber base by approximately 9,200 subscribers. Gross Profit, as a percentage of operating revenues, increased from 59.7% for Fiscal 1995 to 67.8% for Fiscal 1996. The increase was caused primarily by an increase in monitoring and service revenues as a percentage of total revenues from 51.6% in Fiscal 1995 to 78.4% in Fiscal 1996. The cost of product sales rose from 58.3% for Fiscal 1995 to 73.1% for Fiscal 1996. An increase in competition, including the advertisement of free security systems, resulted in a lower average selling price for the Company's security systems, causing a decline in the Gross Profit Margin in Fiscal 1996. Selling, general and administrative expenses rose to $6,416,486 in Fiscal 1996, which represents an increase of $88,864, or 1.4%, over selling, general and administrative expenses for Fiscal 1995. Selling, general and administrative expenses, as a percentage of total operating revenues, declined from 67.8% for Fiscal 1995 to 59.0% for Fiscal 1996. Sales and marketing expenses declined from $2,000,000 for Fiscal 1995 to $700,000 for Fiscal 1996, a decrease of $1,300,000, or 65.0%. Sales and marketing expenses declined due to the Company's strategy to grow through acquisitions as opposed to new system installations. General and administrative expenses rose from $4,327,622 in Fiscal 1995 to $5,716,486 in Fiscal 1996, representing an increase of $1,388,864, or 32.1%. The increase in general and administrative expenses was caused by increases in corporate overhead expenses incurred to support a larger subscriber base. Amortization and depreciation expenses increased by $898,686, or 69.0% from $1,302,208 for Fiscal 1995 to $2,200,894 for Fiscal 1996. This increase in amortization expense is the result of the Company's purchase of monitoring contracts totaling $7,996,459. Interest expense increased by $1,964,985, to $3,185,603 for Fiscal 1996, from $1,220,618 for Fiscal 1995. The primary reason for the increase was additional interest expense on long-term debt incurred by 27 the Company in connection with its acquisitions and purchases of monitoring contracts. In July 1996, the Company obtained the $15,000,000 Credit Line from the Bank, of which $10,500,000 was used to repay existing notes payable collateralized by monitoring contracts. In June 1994, an employee resigned and, pursuant to the severance agreement, he was to receive annual compensation of $120,000 plus benefits through October 31, 1997. In connection with this severance agreement, a charge of $409,673 was recorded as termination benefits for the fiscal year ended June 30, 1994, representing the present value of the obligation based on an interest rate of 8.5%. During Fiscal 1995, the Company renegotiated this agreement, resulting in a recovery of $392,699 of termination benefits cost. In April 1994, the Company initiated a plan of restructuring designed to reduce costs, improve operational efficiencies and increase overall future profitability as the Company refocused sales and marketing efforts on security and fire alarm systems for residential and commercial properties. As a result, the Company streamlined its organization and closed its manufacturing and monitoring facilities. During Fiscal 1995, the Company recorded a recovery of $52,920 of these costs, resulting from an over-accrual at June 30, 1994. The net loss for Fiscal 1996 was $4,411,898, or $(8.61) per share, based on 512,179 shares outstanding, as compared to a net loss for Fiscal 1995 of $3,030,830, or $(15.07) per share, based on 201,064 shares outstanding. The net loss for the period is attributable primarily to $5,386,497 in amortization and interest expense related to the Company's acquisition of subscribers from other dealers and increased selling, general and administrative expenses incurred in connection with the expansion of the Company's subscriber monitoring account base. EBITDA improved by approximately $1,500,000, to approximately $950,000 for Fiscal 1996, as compared to a loss before interest, taxes, depreciation and amortization of approximately $550,000 for Fiscal 1995. ACCOUNTING DIFFERENCES FOR ACCOUNT PURCHASES AND NEW INSTALLATIONS A difference between the accounting treatment of the purchase of subscriber accounts and the accounting treatment of the generation of new accounts through direct sales by the Company's sales force has a significant impact on the Company's results of operations. The costs of monitoring contracts (acquired either through the Company's dealer program or through acquisition of subscriber account portfolios) are capitalized and amortized over estimated lives ranging from five to 10 years for alarm and PERS accounts. Included in capitalized costs are certain acquisition transition costs associated with incorporating the purchased subscriber accounts into the Company's operations. Such costs include costs incurred by the Company in fulfilling the Seller's preacquisition obligations to the acquired subscribers, such as providing warranty repair services. In contrast, all of the Company's costs related to the sales, marketing and installation of new alarm monitoring systems generated by the Company's sales force are expenses in the period in which such activities occur. SUBSCRIBER ATTRITION Subscriber attrition has a direct impact on the Company's results of operations, since it affects both the Company's revenues and its amortization expense. Attrition can be measured in terms of canceled subscriber accounts and in terms of decreased MRR resulting from canceled subscriber accounts. The Company experiences attrition of subscriber accounts as a result of several factors, including relocation of subscribers, adverse financial and economic conditions and competition from other alarm service companies. In addition, the Company may lose certain subscriber accounts, particularly subscriber accounts acquired as part of an acquisition, if the Company does not service those subscriber accounts successfully or does not assimilate such accounts into the Company's operations. Gross subscriber attrition is defined by the Company for a particular period as a quotient, the numerator of which is equal to the number of subscribers who disconnect during such period, and the denominator of which is the average of the number 28 of subscribers at each month end during such period. Net MRR attrition is defined by the Company for a particular period as a quotient, the number of which is an amount equal to gross MRR lost as the result of canceled subscriber accounts during such period, net of MRR during such period (i) generated by increases in rates to existing subscribers, (ii) resulting from the reconnection of premises previously occupied by subscribers of the Company or of prior subscribers of the Company, (iii) resulting from conversions and (iv) associated with canceled accounts with respect to which the Company obtained an account guarantee, and the denominator of which is the average month-end MRR in effect during such period. Although the Company believes that its formulas of gross subscriber attrition and net MRR attrition are similar to those used by other security alarm companies, there can be no assurance that gross subscriber attrition and net MRR attrition, as presented by the Company, are comparable to other similarly titled measures of other alarm monitoring companies. During Fiscal 1997, the Company experienced gross attrition of approximately 10.6% and net MRR attrition of approximately 10.4%. LIQUIDITY AND CAPITAL RESOURCES In July 1996, the Company completed a restructuring of its long-term debt. The Company obtained the $15,000,000 Credit Line from the Bank and issued $7,500,000 of Preferred Stock to institutional and individual domestic and foreign investors. The proceeds of the financing were utilized to repay the Company's long-term indebtedness and resulted in a substantial decrease in the Company's borrowing costs. As of December 18, 1997, the Company has $590,000 available under the Credit Line. On December 10, 1997, the Bank issued a committment letter to the Company to increase the Credit Line to $18,000,000. The increase in the Credit Line is subject to the satisfaction of a number of conditions, including the Company's receipt of a minimum of $7,000,000 of net proceeds from this offering (after giving effect to the redemption of the Preferred Stock), and there can be no assurance that all of such conditions will be satisfied or that the Company will receive such increase in the Credit Line. Amounts outstanding under the Credit Line bear interest at the Bank's prime rate, plus 1 3/4%. As of March 31, 1997, June 30, 1997 and September 30, 1997, the Company was not in compliance with certain financial covenants under the Credit Line. The Company subsequently entered into amendments to the Credit Line which amended the covenants for the third and fourth quarters of the fiscal year ended June 30, 1997 and the first quarter of the fiscal year ended June 30, 1998 such that the Company was then in compliance with the Credit Line. While the Company believes that it will be able to maintain compliance with the financial covenants under the Credit Line, there can be no assurance that the Company will maintain compliance with such financial covenants, or that the Company will be able to obtain necessary consents, waivers or amendments to the Credit Line in the future. The restructuring resulted in an extraordinary charge of $2,549,708 for early extinguishment of debt in Fiscal 1997. The Company's working capital improved by $182,052, from a working capital deficiency of $1,023,805 to a working capital deficiency of $841,753 at September 30, 1997, as compared to June 30, 1997. Net cash used in operating activities for the three months ended September 30, 1997 was $223,841 as compared to $2,452,516 for the three months ended September 30, 1996. A net loss of $694,681 including noncash transactions totaling $816,665, provided cash from operating activities in the amount of $121, 984. The noncash transactions are as follows: (i) depreciation and amortization of $1,139,016; (ii) compensation benefit in connection with employment agreements of $450,000; (iii) a loss on joint venture of $130,138; and (iv) a gain on sale of equipment of $2,489. Cash used in operating activities included changes in accounts receivable, and prepaid expenses and other current assets totaling $285,617. The increase in accounts receivable of $110,181 was primarily due to the increase in monthly monitoring and service billings, as a result of the acquisition of approximately 5,000 subscriber accounts during the past twelve months. Prepaid expenses and other current assets increased by $175,436, due primarily to expenditures in connection with the planned secondary offering and a security deposit on a pending acquisition. In connection with the acquisition of accounts, the Company incurred cash expenditures for previously accrued transition costs (costs associated with the transfer of acquired customers to the Company's 29 central monitoring station, notification of change in the service provider, and service calls to customer premises), of $11,178 for the three months ended September 30, 1997 as compared to $91,047 for the three months ended September 30, 1996. Net cash used in investing activities for the three months ended September 30, 1997 was $226,079 as compared to $582,913 for the three months ended September 30, 1996. Purchases of monitoring contracts, and property and equipment accounted for $111,648 and $114,431 (including equipment used for rentals in the amount of $52,075), of the cash used in investing activities. Net cash provided by financing activities was $434,182 for the three months ended September 30, 1997, as compared to $1,503,483 for the three months ended September 30, 1996. Proceeds from the exercise of stock options and warrants totaled $82,421. Net proceeds received from a line of credit of $425,000 were used primarily for the acquisition of monitoring contracts, and expenses incurred in connection with the planned secondary offering. Costs incurred in connection with the prior years refinancing totaled $43,081. Principal payments on long-term debt totaling $30,158 were made during the three months ended September 30, 1997. Systems filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code in October 1987. Systems' Plan of Reorganization became effective in February 1990 and provided for, among other things, long-term payments to creditors totaling approximately $2,800,000. As of September 30, 1997, deferred payment obligations to such pre-reorganization creditors totaled $270,560, which is payable in varying installments through the year 2000. The Company has no material commitments for capital expenditures during the next 12 months and believes that its current cash and working capital position and future cash flow from operations will be sufficient to meet its working capital needs for 12 months. The Company intends to use borrowings under the Credit Line to acquire monitoring contracts. Additional funds beyond those currently available will be required to continue the acquisition program, and there can be no assurance that the Company will be able to obtain such financing. INFLATION The Company does not believe that inflation has a material effect on its operations. CERTAIN NON-CASH CHARGES The Company may incur certain non-cash charges (i) of up to $900,000 for the fiscal year ended June 30, 1998, as deferred compensation expense relating to certain performance options granted to two officers of USS, based upon fluctuations in the market price of the Common Stock, and (ii) for the fiscal year ended June 30, 1998 in connection with the issuance of a certain performance warrant issued to BKR, Inc. in connection with the Company's investment in HealthLink, based upon the value of such warrant. See "Management," "Business--HealthLink" and Notes 3 and 14 of Notes to Consolidated Financial Statements of the Company. Such charges could have a material adverse effect on the Company's results of operations. 30 BUSINESS GENERAL The Company is a fully-integrated security systems provider engaged in the monitoring, sale, installation and maintenance of residential and commercial security systems and PERS. The Company is a regional provider of security alarm monitoring services for residential and small business subscribers operating in the states of New York, New Jersey, Pennsylvania, Delaware and Connecticut. The Company is also a nationwide provider of PERS products which enable individual users, such as elderly or disabled persons, to transmit a distress signal using a portable transmitter. The Company currently has an aggregate of approximately 48,000 alarm and PERS subscribers for which it provides monitoring services. As a result of the Company's acquisitions of subscriber account portfolios, the Company's MRR has grown by 60%, to approximately $800,000 for the month ended September 30, 1997 from approximately $500,000 for the month ended June 30, 1995. According to a May 1997 report published by SDM, an organization which publishes industry reports, as of December 31, 1996, the Company is the 31st largest electronic security company in the United States, based on total revenues, and the 25th largest electronic security company, based on recurring annual revenues. The Company's electronic security systems business utilizes electronic systems installed in businesses and residences to provide (i) detection of events such as intrusion or fire, (ii) surveillance and (iii) control of access to property. The detection devices are monitored by the Monitoring Station. The Monitoring Station personnel verify the nature of the emergency and contact the appropriate emergency authorities in the user's area. In some instances, commercial customers may monitor these devices at their own premises or the devices may be connected to local fire or police departments. The products and services marketed in the electronic security services industry range from residential systems that provide basic entry and fire protection to more sophisticated commercial systems. The Company's PERS is an electronic device which is designed to monitor, identify and electronically report emergencies requiring medical, fire or police assistance, to help elderly, disabled and other individuals. When activated by the pressing of a button, or automatically, in the case of certain environmental temperature fluctuations, the transmitter sends a radio signal to a receiving base installed in the user's home. The receiving base relays the signal over telephone lines to the Monitoring Station which provides continuous monitoring services. In addition, this signal establishes two-way voice communication between the user and the Monitoring Station personnel directly through the PERS unit, thereby avoiding any need for the user to access a telephone. The electronic security services industry is highly fragmented and the Company's strategy is to grow by acquisition, as well as by offering new products and services. According to an industry report published in 1996, there are approximately 12,000 separate security services companies nationally and, according to the May 1997 SDM report, the electronic security industry generates an aggregate of approximately $13 billion in revenues annually. The Company believes that there is an industry-wide trend towards consolidation due, in part, to the relatively high fixed costs of maintaining a centralized monitoring station and the relatively low incremental cost of servicing additional subscribers. The Company completed the acquisition of an aggregate of 38 subscriber account portfolios (a total of approximately 25,000 subscriber accounts) during the three fiscal years ended June 30, 1997. The Company has entered into an agreement with Triple A, pursuant to which the Company will acquire substantially all of the assets of Triple A upon the consummation of this offering. Triple A is engaged in the installation, monitoring and servicing of residential and commercial alarm systems, principally in northeastern Pennsylvania. Triple A currently services approximately 14,000 subscriber accounts which are monitored by its central monitoring station. See "--Pending Acquisitions." In March 1997, the Company acquired a 50% interest in HealthLink. HealthLink markets a low-cost PERS product containing basic one-way transmission features. The HealthLink System is distributed 31 nationally through retail stores, including Target (808 stores), Long's Drugs, a west-coast regional chain (305 stores), Fred Myer, a northwest regional chain (104 stores), Fry's, a southwest regional chain (51 stores) and Bergen Brunswick's west-coast Good Neighbor Pharmacies (429 stores), accounting for distribution through a total of approximately 1,700 stores as of the date of this Prospectus. The Company is negotiating with several other chain stores to further increase distribution. The Company provides monitoring and related services to HealthLink System customers, is responsible for billing and collecting from such customers and receives a portion of the recurring revenue as a fee for providing these services. In November 1996, the Company entered into a two-year agreement granting it the exclusive worldwide distribution rights within the health care industry to WanderWatch,-TM- a monitoring system designed to assist in the care of patients with Alzheimer's disease, autism, head injury, dementia or other diseases or injuries which may involve memory loss. WanderWatch-TM- is similar to PERS, except that the transmitter is designed to be continuously activated and transmits a signal to the base unit. If the base unit does not receive the requisite number of transmissions, it indicates that the patient may have wandered outside the "safety range," and triggers an alarm in the home base unit. If the alarm is not disabled, a signal is automatically transmitted to the Monitoring Station, whose personnel will then place calls based upon a set protocol established by the caregivers. The license agreement for WanderWatch-TM- provides for automatic one-year renewals and the Company's exclusive rights to the license are subject to forfeiture under certain circumstances. WanderWatch-TM- is currently being test-marketed by the Company and the Company does not anticipate commencing distribution of the product prior to July 1, 1998. The Company's revenues consist primarily of recurring payments under written contracts for the monitoring and servicing of security systems and PERS products. The Company currently monitors approximately 48,000 subscribers. For the fiscal year ended June 30, 1997, monitoring and service revenues represented 76.9% of total revenues. MRR is a term commonly used in the alarm industry and means monthly recurring revenue that the Company is entitled to receive under contracts in effect at the end of the period. MRR is utilized by the alarm industry to measure the size of a company, but not as a measure of profitability or performance, and does not include any allowance for future attrition or allowance for doubtful accounts. During the fiscal year ended June 30, 1997, the Company's MRR grew by 60.0%, to approximately $800,000 from approximately $500,000 for the fiscal year ended June 30, 1995. Total revenues have increased during such period from $9,332,536 to $12,722,903, or 36.3%. ELECTRONIC SECURITY INDUSTRY The security services industry encompasses a wide range of products and services, which can be broadly divided into electronic monitoring products and services which the Company provides and highly labor intensive manned guarding and patrol services, which the Company does not currently provide, but will provide upon the consummation of the acquisition of Jupiter (see Note 16 of Notes to Consolidated Financial Statements of the Company). Electronic monitoring products and services consist of the sale, installation, continuous monitoring and maintenance of electronic security systems. This business utilizes modern electronic devices installed in customers' businesses and residences to provide (i) detection of events such as intrusion or fire, (ii) surveillance, (iii) control of access and (iv) control of articles. Event detection devices are monitored by a monitoring center, which is linked to the customer through telephone lines. This center is often located at remote distances from the customer's premises. In some instances, the customer may monitor these devices at its own premises or the devices may be connected to local fire or police departments. The products and services marketed in the electronic security services industry range from residential systems that provide basic entry and fire protection to sophisticated commercial systems incorporating closed-circuit television systems and access control. See "Business -- Pending Acquisitions." The Company believes that the electronic security services industry is characterized by the following attributes: 32 - HIGH DEGREE OF FRAGMENTATION. The electronic security services industry is comprised of a large number of local and regional companies and several integrated national companies. The Company believes that, based on industry studies, there are approximately 12,000 separate security services companies nationally generating an aggregate of approximately $13 billion in revenues annually. A survey published by SDM magazine in May 1996 reported that, in 1995, based upon information provided by the respondents, the 100 largest companies in the industry accounted for approximately 23% of total industry revenues. - TREND TOWARD CONSOLIDATION. The Company believes that because the central station monitoring sector of the electronic industry has relatively high fixed costs but relatively low incremental costs associated with servicing additional subscribers, the industry offers significant opportunities for consolidation. In addition, the Company believes that the fragmented nature of the industry can be attributed to the low capital requirements associated with performing basic installation and maintenance of electronic security systems. However, the business of a full service, integrated electronic security services company which provides central station monitoring services is capital intensive, and the Company believes that the high fixed costs of establishing both central monitoring stations and full service operations contribute to the small number of national competitors. - CONTINUED PRODUCT DIVERSIFICATION AND INTEGRATION OF SERVICES. A recent trend in the commercial electronic security services industry has been increased integration of different types of products into single systems provided by single vendors. The Company believes that this trend has resulted from commercial needs for enhanced security services on a more cost-effective basis. Whereas basic alarm systems were once adequate for many businesses, it appears that many companies now require access control and closed circuit television systems integrated into a single system to provide for their overall security needs. A security system which provides burglar and fire alarm monitoring along with closed circuit television and access control, all integrated into one central system, not only provides enhanced security services, but also is more cost-effective than four separate systems installed by four separate vendors. The Company is positioning itself to take advantage of this trend by expanding the breadth of its electronic security service offerings. - ADVANCES IN DIGITAL COMMUNICATIONS TECHNOLOGY. Prior to the development of digital communications technology, alarm monitoring required a dedicated telephone line, which made long-distance monitoring uneconomic. Consequently, in order to achieve a national or regional presence, alarm monitoring companies were required to maintain a large number of geographically dispersed monitoring stations. The development of digital communications technology eliminated the need for dedicated telephone lines, reducing the cost of monitoring services to the subscriber and permitting the monitoring of subscriber accounts over a wide geographic area from a central monitoring station. The elimination of local monitoring stations has decreased the cost of providing alarm monitoring services and has substantially increased the economies of scale for larger alarm service companies. In addition, the concurrent development of microprocessor-based control panels has substantially reduced the cost of the equipment available to subscribers in the residential and commercial markets and has substantially reduced service costs because many diagnostic and maintenance functions can be performed from a company's office without having to send a technician to the customer's premises. The Company believes that several factors contribute to a favorable market for electronic security services generally in the United States: - HIGH LEVEL OF CONCERN ABOUT CRIME. As violent crime and the reporting of crime by the news media has increased, the perception by Americans that crime is a significant problem has also grown. Concurrently, demand for security systems has grown with greater awareness of risk management 33 within the business community. In addition to the protection that electronic detection and surveillance systems provide, the Company believes that such systems also have a deterrent effect against crime. - INSURANCE REQUIREMENTS AND PREMIUM DISCOUNTS. The increase in demand for security systems may also be attributable, in part, to the requirement of insurance companies that businesses install an electronic security system as a condition of insurance coverage. The purchase of an electronic alarm system often entitles the subscriber to obtain premium discounts as well. In addition, in order to comply with many municipal fire codes, the installation of an electronic fire system is required in many localities. ELECTRONIC SECURITY SERVICES MONITORED ELECTRONIC SECURITY SYSTEMS The Company's electronically-monitored security systems involve the use on a customer's premises of devices designed to detect or react to various occurrences or conditions, such as intrusions, movement, fire, smoke, flooding, environmental conditions (including temperature or humidity variations) and other hazards. In most systems these detection devices are connected to a microprocessor-based control panel which communicates through telephone lines to the Monitoring Station where alarm and supervisory signals are received and recorded. Systems may also incorporate an emergency "panic button," which when pushed causes the control panels to transmit an alarm signal that takes priority over other alarm signals. In most systems, control panels can identify the nature of the alarm and the areas within a building where the sensor was activated and transmit the information to the Monitoring Station. Depending upon the type of service for which the subscriber has contracted, Monitoring Station personnel respond to alarms by relaying appropriate information to the local fire or police departments, notifying the customer or taking other appropriate action. As of June 30, 1997, the Company has approximately 25,000 alarm subscribers for which it provides monitoring services. Of such alarm subscribers, approximately 80% are residential and 20% are commercial. RESIDENTIAL SYSTEMS. Residential security services consists of the sale, installation, monitoring and maintenance of electronically monitored security systems to detect intrusion and fire. The Company believes that the demand for residential systems results from a general awareness of crime and security concerns. In addition, residential customers are usually able to obtain more favorable insurance rates if an electronically monitored security system is installed in their home. Approximately 80% of the Company's customers are residential. On average, fees charged for residential monitoring services are lower than the fees charged for commercial monitoring services. Contracts for residential services are generally for an initial four-year term, automatically renewing on a year-to-year basis thereafter, unless canceled. COMMERCIAL SYSTEMS. The Company also provides electronic security services and products to commercial businesses and facilities. These systems and products are tailored to customers' specific needs and include electronic monitoring services that provide intrusion and fire detection, as well as card or keypad activated access control systems and closed circuit television systems. The Company also markets standard security packages for specific types of commercial customers. Certain commercial customers require more complex electronic security systems. To meet this demand, the Company also sells integrated electronic security systems that combine a variety of electronic security services and products. These systems are integrated by the Company to provide a single computer-controlled security system. PRODUCTS The Company sells products offered by several different manufacturers. Systems are generally purchased by the customers, although the Company does lease a limited number of systems. When the system is sold, the customer pays the Company the purchase price. When the system is leased, only an 34 installation fee is charged. Customers agree to pay monthly service charges for monitoring and may also subscribe for maintenance services. Uniform package prices are offered to residential customers who purchase standard security systems, which includes a fixed number of detection devices. Frequently, customers add detection devices at an additional charge to expand the coverage of the system. Pricing depends upon the monitoring components installed, the type of alarm transmission and other services required. INSTALLATION, SERVICE AND MAINTENANCE As part of its effort to provide high-quality service to its residential and commercial customers, the Company maintains a trained installation, service and maintenance staff. These employees are trained by the Company to install and service the various types of commercial and residential security systems which the Company sells. The Company does not manufacture any of the components used in its electronic security service business. Installations of new alarm systems are performed promptly after the completion of the sale of the account. After completing an installation, the technician instructs the subscriber on the use of the system and furnishes a written manual and, in many instances, an instruction video. Additional follow-up instruction is provided by sales consultants in the branch offices on an as-needed basis. The increasing density of the Company's subscriber base as a result of the Company's continuing strategy to "infill" its existing branch service areas with new subscribers permits more efficient scheduling and routing of field service technicians and results in economies of scale at the branch level. The increased efficiency in scheduling and routing also allows the Company to provide faster field service response and support, which leads to a higher level of subscriber satisfaction. The Company offers an extended one-year service protection plan which provides that, for an additional fee, the Company will cover the normal costs of repair and maintenance of its systems during normal business hours after the expiration of the initial warranty period. CONTRACTS The Company's alarm monitoring subscriber contracts generally have initial terms ranging from four to five years in duration, and provide for automatic renewal for a fixed period, unless the Company or subscriber elects to cancel the contract at the end of the applicable period. The Company maintains an individual file with a signed copy of the contract for each of its subscribers and a computerized data base. Substantially all of the Company's alarm monitoring agreements for the Company's residential subscribers (which constitute approximately 80% of the Company's alarm subscriber customer base) provide for subscriber payments of between $20 and $32 per month. The Company's commercial subscribers typically pay between $25 to $50 per month. In the normal course of its business, the Company experiences customer cancellations of monitoring and related services as a result of subscribers relocating, the cancellation of purchased accounts in the process of assimilation into the Company's operations, unfavorable economic conditions, dissatisfaction with field maintenance service and other reasons. This attrition is offset to a certain extent by revenues from the sale of additional services to existing subscribers, price increases, the reconnection of premises previously occupied by subscribers, conversion of accounts previously monitored by other alarm dealers and guarantees provided by sellers of such accounts against account cancellations for a period following the acquisition. 35 ELECTRONIC SECURITY SERVICES BUSINESS STRATEGY THE ACQUISITION PROGRAM The Company grows primarily by acquiring subscriber accounts from smaller alarm companies. The Company focuses on acquisitions that allow it to increase its subscriber density in each area in which it operates. This leads to greater field maintenance and repair efficiencies. The Company believes that it is an effective competitor in the acquisition market because of the substantial experience of its management team over the past three years in completing 38 acquisitions. In addition, the Company has entered into agreements, pursuant to which, if consummated, the Company would acquire an additional 14,000 subscriber accounts. During the fiscal year ended June 30, 1995, the Company consummated eight acquisitions, purchasing approximately 10,700 subscriber accounts for an aggregate consideration of $5,218,944 in cash and 48,090 shares of Common Stock. During the fiscal year ended June 30, 1996, the Company consummated 16 acquisitions, purchasing approximately 9,200 subscriber accounts for an aggregate consideration of $5,638,637 in cash and 98,014 shares of Common Stock. As part of the acquisitions, the Company also issued 5,000 shares of restricted Common Stock as payment of financing costs to the lender that financed the acquisitions. During the fiscal year ended June 30, 1997, the Company consummated 14 acquisitions, purchasing approximately 5,300 subscriber accounts for an aggregate consideration of $3,424,712 in cash and 8,334 shares of Common Stock. The Company anticipates continuing its acquisition program. The Company typically acquires only the subscriber accounts, and not the facilities or liabilities, of acquired companies. As a result, the Company is able to obtain gross margins on the monitoring of acquired subscriber accounts that are similar to those that the Company currently generates on the monitoring of its existing subscriber base. In addition, the Company may increase the monitoring charges paid by those subscribers if it is determined that those currently being paid do not reflect the market area rates. The Company is unable to predict the timing, size or frequency of any acquisitions in the future. See "Risk Factors -- Risk Related to Growth Through Acquisitions." Since the Company's primary consideration in making an acquisition is the amount of MRR that will be derived from such new subscribers, the price paid by the Company is customarily based upon such MRR. To protect the Company against the loss of acquired accounts and to encourage the seller of such accounts to facilitate the transfer of the subscribers, management typically requires the seller to provide guarantees against account cancellation for a period following the acquisition, typically 9-18 months. The Company usually holds back from the seller 10%-20% of the acquisition price, and has the contractual right to utilize such holdback to recapture a portion of the purchase price based on the lost MRR arising from the cancellation of acquired accounts. In evaluating the quality of the accounts acquired, the Company relies primarily on management's knowledge of the industry, its due diligence procedures, its experience integrating accounts into the Company's operations, its assumptions as to attrition rates for the acquired accounts and the representations and warranties of the sellers. The Company employs a comprehensive acquisition program to identify, evaluate, and assimilate acquisitions of new subscriber accounts that includes three stages: (i) the identification and negotiation stage; (ii) the due diligence stage; and (iii) the assimilation stage. The Company actively seeks to identify prospective companies and dealers through membership in trade associations, trade magazine advertising and contacts through various vendors and other industry participants. The Company's use of standard form agreements and experience in identifying and negotiating previous acquisitions, helps to facilitate the successful negotiation and execution of acquisitions in a timely manner. 36 The Company conducts an extensive pre-closing review and analysis of all facets of the seller's operations. The process includes a combination of selective field equipment installations, individual review of substantially all of the subscriber contracts, an analysis of all the rights and obligations under such contracts and other types of verification of the seller's operations. The Company develops a specific assimilation process, in conjunction with the seller, for each acquisition. Assimilation programs typically include a letter, approved by the Company, from the seller to its subscribers, explaining the sale and the transition, followed by one or more letters or packages that include the Company's subscriber service brochures, field service and monitoring service telephone number stickers, yard signs and window decals. Thereafter, almost all new subscribers are contacted individually by telephone by a member of the Company's customer service department for the purpose of soliciting certain information and addressing the subscriber's questions or concerns. PENDING ACQUISITIONS On September 30, 1997, the Company entered into an asset purchase agreement with Triple A, pursuant to which, as amended, the Company agreed to acquire substantially all of the assets of Triple A for aggregate consideration of approximately $13,000,000, including $10,000,000 payable in cash, approximately $2,250,000 payable in Common Stock of the Company, based on the lesser of market (as defined in the agreement) at closing or the price per share of Common Stock with respect to this offering, and $750,000 in the assumption of liabilities of Triple A. The purchase price is subject to adjustment at the closing under certain circumstances. The closing of the acquisition is conditioned on the closing of this offering, and the Company intends to utilize a portion of the proceeds from this offering to consummate the acquisition. Triple A is engaged in the installation, monitoring and servicing of residential and commercial alarm systems, principally in northeastern Pennsylvania. Triple A currently services approximately 14,000 subscriber accounts which are monitored by Triple A's central monitoring station. As part of the acquisition, the Company has agreed to enter into an employment agreement with Robert L. May, President and sole stockholder of Triple A and who subsequently has become a director of the Company, on terms to be agreed upon by the parties. The financial statements for Triple A are included herewith. The holder of all of the common stock of Triple A is the owner of 80% of the common stock of Jupiter. In connection with the Triple A acquisition, on September 30, 1997, the Company entered into an agreement to acquire all of the outstanding stock of Jupiter, a patrol service company, for aggregate consideration of approximately $1,045,000 payable in Common Stock, based on the lesser of market (as defined in the agreement) at closing or the price per share of Common Stock with respect to this offering. The closing of the acquisition is conditional on the closing of this offering. Jupiter's patrol services are principally supplied in areas in which the Company believes that Triple A is a substantial provider of security systems services. The patrol service supplements the Company's alarm monitoring service by providing routine patrol of a subscriber's premises and neighborhood, response to alarm system activations and "special watch" services, such as picking up mail and newspaper and increased surveillance when the customer is on vacation. Jupiter also offers "dedicated" patrol service to homeowners' associations in selected markets, for which Jupiter provides a marked car for patrol exclusively in such association's neighborhood. The Company believes that offering such services will enable it to increase sales of the Company's alarm monitoring services within such neighborhoods. The acquisition involves a line of business in which the Company has no previous experience and may involve risks and uncertainties which are unknown to the Company. The financial statements of Jupiter are included herewith. See "Risk Factors--Risk Related to Growth Through Acquisitions." 37 DEALER PROGRAM The Company recently commenced a dealer program (the "Dealer Program") which allows it to participate in the growth of the residential security alarm market by providing monitoring and field service repair services to subscriber accounts generated on a monthly basis through exclusive purchase agreements with independent alarm companies specializing in the sale and installation of residential alarm systems. The dealers that the Company selects for the Dealer Program are typically small alarm companies that specialize in installing alarm systems for residential or small businesses in a specified geographic area. The Company enters into exclusive contracts with such dealers that provide for the purchase by the Company of the dealers' subscriber accounts on an ongoing basis. The dealers install alarm systems, arrange for the subscriber to enter into the Company's alarm monitoring agreements, and install the Company's yard signs and window decals. In addition, the Company evaluates the credit history of the prospective new subscriber prior to purchase from the dealer. The Company is currently purchasing approximately 50-75 accounts per month through its Dealer Program and anticipates an expansion of this program during its next fiscal year. PATIENT MONITORING SERVICES PERS INDUSTRY The personal emergency response industry generally consists of companies that provide technological support services to help elderly or medically-at-risk individuals live independently, without the need of supervised care. In the Company's view, the recent growth of the emergency response market is strongly linked to the belief of medical professionals that such individuals should be encouraged to live independently for as long as possible. The Company believes that the demand for emergency response systems may increase as the number of people over 65 years of age, and the number of such persons living alone, increases. Currently, two groups of individuals are perceived to be the principal users of PERS products. The first group consists of elderly people who are capable of living independently and who are seeking ways to extend their ability to maintain their independence. The second group consists of those who experience short-term medical needs for whom the PERS is primarily used to reduce the length of a hospital stay and to provide short-term assistance at home during the recuperation period. Other potential users include "latch-key" children and others for whom immediate, automatic access to emergency assistance is desirable. PERS PRODUCTS AND MONITORING SERVICES PRODUCTS. The Company's PERS is designed to monitor, identify and electronically report emergencies requiring medical, fire and police assistance. The PERS unit consists of two basic components: (i) a portable pendant transmitter that is worn around the neck (the system also includes a portable, hand-held transmitter that can be attached to the user's belt or mounted on a wall); and (ii) a receiving base that is installed in the user's home and connected to the user's telephone line. The Company's PERS also includes a smoke detector (in certain states) that transmits a distress signal to the Monitoring Station in the event of fire, and a medical/police hand-held transmitter that transmits a medical or police distress signal to the Monitoring Station. Both the pendant and medical/police hand-held transmitter send a medical distress signal to the Monitoring Station; however, the hand-held transmitter also sends a police distress signal on a separate channel when activated. The Company's PERS has a variety of safety features, including an environmental control which detects temperature fluctuations, a cancel function to avoid false alarms, an alternative power source, which allows the system to remain functional in the event of a generalized power failure, and a special transmitter designed for use by handicapped persons. In addition, once activated, the PERS "seizes" the user's telephone line to which the receiving base is connected and dials the Monitoring Station until a connection is established, regardless of whether the user's telephone is in use or off the hook. Each PERS is tested before release for sale and is re-tested immediately after installation in a user's home. 38 MONITORING SERVICES. Users of the Company's PERS products initiate a distress signal by pressing a button on the portable transmitter included in the system. Once activated, the transmitter sends radio signals to the receiving base (the transmitter has an effective range of approximately 150 feet), which in turn translates the radio signal and automatically dials the Monitoring Station using a toll-free telephone number. Once telephone contact is made with the Monitoring Station, a coded signal automatically initiates the electronic retrieval of personal data relating to the user who initiated the distress signal. Such data includes the user's name and address, directions to the user's home, allergies, medications, best route of entry into the user's home during an emergency, and the doctor and family members that should be contacted. In addition, this signal establishes two-way voice communication between the user and Monitoring Station personnel directly through the PERS unit, avoiding any need for the user to access a telephone. Monitoring personnel verify the nature of the emergency by speaking with the individual and, if necessary, notify the predetermined emergency authorities in the user's area. If the monitoring personnel are unable to establish voice communication with the user, emergency agencies are notified immediately. As of June 30, 1997, the Company has approximately 23,000 PERS monitoring subscribers in approximately 45 states for whom it provides monitoring services. The Company's monitoring service is available only to users of the Company's PERS; PERS products cannot be programmed to permit the customer to utilize a competitor's monitoring service. The Company provides all of its PERS users with a 24-hours-per-day, 365 days-per-year monitoring service. The monthly charge for monitoring services paid by the subscriber is approximately $28. The Company's contracted monitoring facility is located in Euclid, Ohio and is accessible by PERS users nationwide through toll-free emergency telephone lines. The monitoring facility contains telecommunications and computer equipment with the capacity to monitor tens of thousands of PERS users simultaneously, and to receive and act upon a user's emergency signal. On average, the Company receives 1,000 calls per day from its PERS users, of which approximately 60% are made by users for test purposes. The Company maintains a duplicate set of all customer data at its contracted Euclid, Ohio facility. SALES AND MARKETING The Company sells its PERS products in the United States directly to consumers through referrals by affiliated hospitals and through franchisees and private label re-sellers (principally home alarm companies). In Canada, the Company's PERS products are marketed exclusively by a Canadian distributor. Until 1991, substantially all PERS products were sold through franchisees, although the sale of new franchises was discontinued in 1987. Currently, the Company's direct sales are generated principally by the Company's home health care division, which commenced operations in March 1991. The following is a summary of the Company's current and proposed marketing programs. FRANCHISEES AND DISTRIBUTORSHIP. The Company ceased offering new franchises for sale in 1987 and has no current plans to resume selling franchises in the future. Existing franchisees, however, are allowed to renew their franchise annually upon payment of a $350 renewal fee. As of November 30, 1997, approximately 85 franchisees had paid their franchise renewal fee for the 1998 fiscal year. Franchisees are independent contractors who purchase or lease their PERS requirements from the Company in accordance with a schedule of prices established by the Company, and resell PERS products in non-exclusive territories. Franchisees also are required to contract with the Company to provide monitoring services to the franchisee's customers. In addition, the Company offers billing and collection services to franchisees. Franchisees are required to pay a monthly fee to the Company for each customer monitored, the amount of which is dependent upon the number of accounts serviced and the level of other services (for instance, billing and collection) provided. The Company also sells advertising and promotional materials, accessories and supplies to its franchisees pursuant to a published price list. HOME HEALTH CARE DIVISION. In March 1991, the Company established a home health care division to market PERS products to hospitals and home health care agencies. Hospitals and home health care 39 agencies may either purchase or lease/purchase PERS products for their patients, with monitoring services provided by the Company. The consumer acquires the PERS from the home health care agency, and the Company's obligations are limited to providing monitoring services. Additional markets for the Company's home health care division include state and local welfare agencies. The Company is also actively soliciting agreements with municipalities to provide the Company's PERS services as part of the municipalities' total health and other assistance programs. The Company has entered into agreements with the Philadelphia Corporation on Aging and the municipality of Los Angeles, Department of Aging, pursuant to which the Company provides PERS and monitoring services to clients of such entities. PRIVATE LABEL PROGRAMS. The Company also supplies PERS products for vendors under product names owned by the vendors. Currently, sales under these programs are limited. Currently, all of the Company's private label vendors provide their own monitoring services. The Company's gross profit margins on sales in its private label programs are significantly lower than margins on its direct and franchisee sales programs. PRODUCTION The principal materials utilized in the production of PERS products consist of electronic components which are obtained from several suppliers. The sub-contractor also purchases molded plastic, printed circuit boards and miscellaneous hardware from several sources. The Company believes that the required electronic components are not unique to a particular vendor and that other sources could be obtained, although some delay in production might result if it were necessary to find new sources for electronic components. HEALTHLINK HealthLink is a 50% joint venture between the Company and BKR, Inc. HealthLink was formed in March 1997 to distribute the HealthLink System through retail pharmacies. In connection with its investment in HealthLink, the Company issued 364,722 shares of Common Stock to BKR, Inc. and issued a performance-based warrant, expiring March 3, 2002, to BKR, Inc., entitling it to purchase up to 10,000 shares of Common Stock for each 10,000 PERS placed on line by HealthLink at an exercise price of $9.00 per share up to a maximum of 150,000 shares of Common Stock. HealthLink's distribution has grown from 58 stores in the fourth quarter of 1996 to approximately 1,700 stores as of the date of this Prospectus. To date, HealthLink has sold and shipped approximately 3,300 systems to such stores. HealthLink is currently available in Target (808 stores) nationwide, Long's Drugs (305 stores), Fry's (51 stores), Fred Myer (104 stores) and in 429 Bergen Brunswick's west-coast Good Neighbor Pharmacies. The HealthLink System is designed as a low-cost PERS for use by senior citizens. The HealthLink System has a suggested retail price of $129.95 in most stores, and provides monitoring revenue to HealthLink of approximately $23 per month. The HealthLink System is manufactured by a third-party foreign manufacturer. The Company provides monitoring and related services to HealthLink System customers, is responsible for billing and collecting from such customers and receives a portion of the recurring revenue as a fee for providing these services. WANDERWATCH-TM- On November 22, 1996, the Company entered into a two-year agreement with Sloan Electronics, Incorporated ("Sloan") granting the Company the exclusive worldwide distribution rights within the health care industry to WanderWatch-TM-, a wandering compliance monitoring system designed for use in home health care and assisted living facility environments. The WanderWatch-TM- system is designed to provide around-the-clock monitoring of patients that suffer from Alzheimer's disease, autism, dementia, head injury or other diseases or injuries which may involve memory loss. The WanderWatch-TM- system consists of a wireless ankle transmitter that sends a radio frequency transmission to a base unit, usually located 40 centrally in a home. If the base unit does not receive a requisite number of transmissions within a 60-second interval, it indicates that the patient may have wandered outside of the "safety range" and triggers a loud beeping alarm in the base unit. If the alarm is not disabled within 60 seconds, a signal is automatically transmitted to the Monitoring Station. The license agreement for WanderWatch-TM- provides for automatic one-year renewals, provided that neither party has notified the other that it has failed to comply with the terms of the agreement within 60 days prior to the expiration of any such renewal term. In addition, the Company's exclusive rights to the license are subject to forfeiture in the event that the Company fails to achieve certain targeted annual sales increases of WanderWatch-TM- and fails to use reasonable efforts to fully and effectively promote the sale of WanderWatch-TM-. In such event, the Company's license of WanderWatch-TM- would become non-exclusive. The agreement also contains certain non-competition provisions which restrict the right of both parties to produce products which could be considered directly competitive with WanderWatch-TM-. The agreement provides for an initial license fee of $35,000 payable by the Company, a per-unit purchase price payable by the Company and a per-unit percentage of the monthly recurring revenue received from WanderWatch-TM-, equal to the lesser of 20% or $7.50 from revenues derived from end users of WanderWatch-TM-, subject to a certain maximum fee for recurring revenues. The agreement provides that Sloan shall allocate time and financial resources for research and development to improve WanderWatch-TM-. Approximately 2,800,000 patients are afflicted with Alzheimer's disease and are being cared for in their homes. Alzheimer's disease is a progressive, degenerative disease of the brain, and the most common form of dementia. There are approximately four million people afflicted with Alzheimer's disease in the United States. Approximately one in ten persons over the age of 65, and nearly half of the people over the age of 85, have Alzheimer's disease. Over 70% of Alzheimer's patients live at home. An Alzheimer's patient will live an average of eight years and as many as 20 years or more from the onset of symptoms. The WanderWatch-TM- system will be offered to the caregivers (I.E., family members and professional caregivers) on a monthly rental basis. Additionally, WanderWatch-TM- will be offered through the Company's existing distribution network of home health care companies, hospitals, visiting nurse associations and various governmental agencies. WanderWatch-TM- is currently being test-marketed by the Company, and the Company does not anticipate commencing distribution of the product prior to July 1, 1998. MONITORING STATION In April 1994, the Company entered into an agreement with Emergency Response Center, Inc. ("ERC"), owner of the Monitoring Station, expiring in April 2000. The agreement automatically renews for successive one-year terms unless either party gives the other written notice of termination not later than six months prior to the end of the then current term of the agreement. Pursuant to the agreement, in consideration for providing monitoring services and electronic data base storage for the Company, ERC receives monitoring service fees based upon the number of subscribers it services and certain other start-up and maintenance costs. Upon consummation of the Triple A acquisition, the Company will own Triple A's monitoring station, located in Wilkes-Barre, Pennsylvania, which will continue to provide monitoring services to Triple A customers. GOVERNMENTAL REGULATION The Company's operations are subject to a variety of federal, state, county and municipal laws, regulations and licensing requirements. Many of the states in which the Company operates, as well as certain local authorities, require the Company to obtain licenses or permits to conduct a security alarm services business. Certain governmental entities also require persons engaged in the security alarm services business to be licensed and to meet certain standards in the selection and training of employees and in the conduct of business. The Company believes that it holds the required licenses and is in substantial compliance with all licensing and regulatory requirements in each jurisdiction in which it operates. 41 The security alarm industry is also subject to the oversight and requirements of various insurance, approval, listing and standards organizations. Adherence to the standards and requirements of such organizations may be mandatory or voluntary depending upon the type of customer served, the nature of security service provided and the requirements of the local governmental jurisdiction. The Company has not had any material difficulties in complying with such standards and requirements in the past. The Company's electronic security business relies on the use of telephone lines and radio frequencies to transmit signals and to communicate with field personnel. The cost of such lines and the type of equipment which may be utilized in telephone line transmissions are regulated by both the federal and state governments. The operation and utilization of radio frequencies are regulated by the Federal Communications Commission and state public utilities commissions. The Company's PERS products are regulated by the Federal Food and Drug Administration. The Company's advertising and sales practices are regulated by both the FTC and state consumer protection laws. Such regulations include restrictions on the manner in which the Company promotes the sale of its products and the obligation of the Company to provide purchasers of its products with certain rescission rights. While the Company believes that it has complied with these regulations in all material respects, there can be no assurance that none of these regulations were violated in connection with the solicitation of the Company's existing subscriber accounts, particularly with respect to accounts acquired from third parties, or that no such violations will occur in the future. The Company believes that approximately 97% of alarm activations that result in the dispatch of police or fire department personnel are not emergencies, and thus are "false alarms." Significant concern has arisen in certain municipalities about this high incidence of false alarms. This concern could cause a decrease in the likelihood or timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain alarm monitoring services. A number of local governmental authorities have considered or adopted various measures aimed at reducing the number of false alarms. Such measures include (i) subjecting alarm monitoring companies to fines or penalties for transmitting false alarms, (ii) licensing individual alarm systems and the revocation of such licenses following a specified number of false alarms, (iii) imposing fines on alarm subscribers for false alarms, (iv) imposing limitations on the number of times the police will respond to alarms at a particular location after a specified number of false alarms and (v) requiring further verification of an alarm signal before the police will respond. Enactment of such measures could adversely affect the Company's future business and operations. Although it ceased offering new franchises for sale in 1987, the Company's continuing relationship with its existing franchisees is subject to regulation under state laws and by the FTC. Moreover, the Company continues to be bound by obligations to franchisees under certain state consent orders regarding alleged franchise sales practices. At various times, the Company also has been named in state actions or inquiries related to the sales practices of its franchisees. The Company believes it is not liable for the actions of its franchisees; however, there can be no assurance that it will not be subject to future orders. The Company may be subject to additional regulation in the future, and changes in laws and regulations applicable to the Company could increase the cost of compliance and otherwise materially and adversely affect the Company in ways not presently foreseeable. RISK MANAGEMENT The nature of the services provided by the Company potentially exposes it to greater risks of liability for employee acts or omissions, or system failures, than may be inherent in many other service businesses. To reduce those risks, substantially all of the Company's customers have subscriber agreements which contain provisions for limited liability and predetermined liquidated damages to customers and indemnification by customers against third-party claims; however, some jurisdictions prohibit or restrict limitations on liability and liquidated damages. The Company carries insurance of various types, including general 42 liability and errors and omissions insurance to insure it from liability arising from acts or omissions of its employees. The Company's general and umbrella liability insurance policies combined provide up to $10,000,000 of coverage, depending on the nature of claims. Certain of the Company's insurance policies and the laws of some states may limit or prohibit insurance coverage for punitive or certain other kinds of damages arising from employee misconduct. In addition, in some states the contractual limitation of liability and indemnification provisions may be ineffective in cases of gross negligence or intentional misconduct and in certain other situations. INSURANCE The Company maintains general liability insurance policies covering various types of liability including products liability. The product liability insurance has policy limits of $1,000,000 per occurrence and $5,000,000 in the aggregate per year and the errors and omissions liability insurance policy limits are $1,000,000 per occurrence and $5,000,000 in the aggregate per year with a deductible of $50,000 per occurrence payable by the Company. These policies are subject to exclusions and other terms which the Company believes are typical for policies of similarly situated companies. The Company believes that its insurance coverage is adequate for its needs, but there can be no assurance that the Company will not be subjected to claims in the future which are not covered by its insurance or which exceed its insurance coverage. INTELLECTUAL PROPERTY The Company owns a federal trademark registration for the trade name "Response Ability" and holds a license for the names "WanderWatch" and "HealthLink." The Company believes that its rights in these trademarks are of unlimited duration and adequately protected by registration or applications to register. In addition, the Company relies on trade secret and other laws to protect its proprietary rights in its security systems and programs. No assurance can be given that the Company will be able to successfully enforce or protect its rights to its trademarks or proprietary information in the event that any of them is subject to third-party infringement or misappropriation. The Company's central monitoring operations utilize proprietary software which the Company has licensed from a third party. SUPPLIERS, MANUFACTURING AND ASSEMBLY The Company currently has multiple sources of supply for the components used in the electronic security and PERS products that it designs and installs. The Company does not manufacture any of the products that it designs and installs, or any of the components thereof. The Company's products are assembled from such components by third-party contract assemblers. The Company believes that a variety of alternative sources of supply are available on reasonable terms. However, the Company has no guaranteed supply arrangements with its suppliers and purchases components pursuant to purchase orders placed from time to time in the ordinary course of business. There can be no assurance that shortages of components will not occur in the future. Failure of sources of supply and the inability of the Company to develop alternative sources of supply if required in the future could have a material adverse effect on the Company's operations. COMPETITION ELECTRONIC MONITORING SERVICES The security services business is highly competitive and new competitors are continually entering the field. Competition is based primarily on price in relation to quality of service. Sources of competition in the security services business are other providers of central monitoring services, systems directly connected to police and fire departments, local alarm systems and other methods of protection, such as manned guarding. 43 The central monitoring sector of the electronic security business is characterized by low marginal costs associated with monitoring additional customers. Despite the opportunity for economies of scale by consolidation of monitoring and administrative functions, the industry is highly fragmented, with thousands of small providers. There are also a limited number of larger competitors, including ADT Limited, a division of Tyco, International, Borg-Warner Security Corporation (under the Wells Fargo and Pony Express brand names), a division of Honeywell, Inc., Brinks Home Security, a division of The Pittston Company, SecurityLink by Ameritech and Protection One, Inc. PERS The emergency response industry is serviced by numerous companies that provide PERS products and services, including monitoring services. A majority of the emergency response companies offer systems that are monitored through a central monitoring facility. In some instances, companies which sell PERS units establish agreements with local burglar alarm companies to provide the service on a per-user fee basis, or have their own monitoring capability. A number of emergency response companies offer their products through hospitals that distribute and monitor the systems. Several companies offer systems that utilize a direct dial/pre-recorded telephone message to selected telephone numbers directly without a monitoring station. The Company's principal competitors are other national or regional emergency response providers and burglar alarm companies that offer medical emergency features in addition to their home protection systems. Many of these companies have greater financial resources than the Company and may enjoy a particular competitive advantage due to their access to a larger client base. The Company considers its principal competitors to be American Medical Alert Corp. and Lifeline Systems, Inc. Methods of competition in the PERS industry consist of quality, service and price of the PERS products. While price is a factor, the customer's primary consideration in choosing a PERS supplier is the quality of monitoring service provided and the reliability of the PERS products. The Company believes that it competes favorably as to all of these factors. EMPLOYEES At December 1, 1997, the Company employed 148 full-time employees. Of this number, 17 are engaged in sales, 8 in quality control, 50 in field service and installation, 29 in customer service, 16 in acquisition assimilation and 28 in administration. None of the Company's employees are represented by a labor union, and the Company considers its employee relations to be satisfactory. PROPERTIES The Company leases 15,000 square feet in Lawrenceville, New Jersey, for its executive and administrative offices, at an annual rental of $172,000. The lease expires in June 1999, after which the Company has a five-year renewal option. The Company also leases (i) 1,100 square feet in Wilmington, Delaware, for use as a sales and installation facility, at an annual rental of $14,400, which lease expires in February 1998, after which the Company has a one-year renewal option on the same terms and conditions; (ii) 2,000 square feet in Los Angeles, California, for use as a sales and installation facility, at an annual rental of $24,000, which lease expires in October 2000; (iii) 5,000 square feet for its inventory, storage and testing facility in Florida, which is adjacent to the Company's third-party assembler, at an annual rental of $19,200, which lease expires in March 1999; and (iv) 2,900 square feet in Allentown, Pennsylvania, for use as a sales and installation facility, at an annual rental of $24,000, which lease expires in November 1998, after which the Company has two, one-year renewal options on the same terms and conditions. The Company believes that its current facilities are adequate for its needs. 44 LEGAL PROCEEDINGS The Company experiences routine litigation in the normal course of its business. The Company does not believe that any of such pending litigation will have a material adverse effect on the financial condition or results of operations of the Company. In February 1996, the Company consented to the issuance of an Order Instituting Proceedings pursuant to the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Findings and Order of the Securities and Exchange Commission (the "Finding"), without admitting or denying allegations of facts contained therein. In July 1993, the Company sold 20,000 shares of Common Stock pursuant to what it claimed to be an exemption from registration under Regulation S of the Securities Act. The Finding stated that such sales were made under circumstances in which the Company knew or should have known that such exemption was not available. Consequently, the Finding stated, the sales were made in violation of the registration provisions of the Securities Act. The Company consented to permanently cease and desist from committing or causing any violation, and any future violation, of Section 5 of the Securities Act. Prior to its acquisition by the Company, Systems was named in a number of civil and administrative proceedings relating to its franchise sales. The Company does not presently offer franchises for sale; however, the Company is bound by certain consent decrees and regulations involving its continuing relationship with franchisees. 45 MANAGEMENT The current executive officers and directors of the Company are set forth below:
NAME AGE POSITION - ------------------------------------ --- --------------------------------------------------------------------- Richard M. Brooks(1)................ 49 Chief Executive Officer, President, Chief Financial Officer and Chairman of the Board Ronald A. Feldman................... 35 Vice President, Chief Operating Officer, Secretary-Treasurer and Director Robert L. May....................... 40 Director A. Clinton Allen(2)................. 53 Director Todd E. Herman...................... 43 Director, President of USS Robert M. Rubin..................... 57 Director Stuart Levin........................ 37 Director Bruce H. Luehrs(1)(2)............... 44 Director Stuart R. Chalfin(1)(2)............. 56 Director
- ------------------------ (1) Member of Audit Committee (2) Member of Stock Option Committee Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and have qualified. Directors do not receive remuneration for their services as such, but may be reimbursed for expenses incurred in connection therewith, such as the cost of travel to Board meetings. Under the Credit Line, the Bank is entitled to cause the Company to nominate one person to the Company's Board of Directors. Bruce H. Luehrs is currently the Bank's nominee. Officers serve at the pleasure of the Board of Directors until their successors have been elected and have qualified. RICHARD M. BROOKS has been Chief Executive Officer and Chairman of the Company since July 1994, a Director of the Company since August 1990, and has served as the President and Chief Financial Officer of the Company since February 1990. Mr. Brooks was Chief Operating Officer of the Company from February 1990 until July 1994. From August 1986 to February 1990, Mr. Brooks was general counsel to Systems. Mr. Brooks served as Regional Counsel Mid-Atlantic Region for the Interstate Commerce Commission from May 1979 to March 1983 and was a senior attorney for the United States Treasury Department from March 1974 to April 1979. Mr. Brooks received his Bachelor of Science Degree in Business Administration in June 1970 from Temple University, and graduated from Temple University School of Law in 1973. ROBERT L. MAY has served as Director of the Company since December 1997. Mr. May also serves as President of Triple A, a security services company since 1981 and President of Jupiter, a company which provides guards, patrol and alarm response services to customers of Triple A since 1992. Mr. May also serves as director of Integral Technologies, Inc., an industry software provider, and is the director and President of the Central Station Alarm Association and Alarm Dealers Association, respectively. Mr. May has previously served as President of the Pennsylvania Burglar and Fire Alarm Association. A. CLINTON ALLEN has served as Director of the Company since December 1997. Mr. Allen also serves as Vice Chairman and a director of The DeWolfe Companies Inc., a home ownership service company, since 1991. Mr. Allen is Chairman and Chief Executive Officer of A.C. Allen & Company, Inc., an investment banking consulting firm. Mr. Allen also serves as a director of Swiss Army Brands, Inc., a distributor of knives, cutlery and watches and is a member of its Executive Committee, and is a director of SweetWater, Inc., a water technology company. Mr. Allen also serves as a director and Vice Chairman of 46 Psychemedics Corporation, a drug testing services company. Mr. Allen was also the founder of Blockbuster Video, a home video entertainment company. RONALD A. FELDMAN has been a Director and Secretary-Treasurer of the Company since August 1990 and Chief Operating Officer since July 1994. He has also served as the Secretary and Treasurer of Systems from June 1990 and Vice President of the Company since April 1992. From August 1986 through September 1989, he was the supervisor of Systems' manufacturing operations and supervised the Company's monitoring activities since March 1987. Mr. Feldman attended Temple University from 1980 to 1982. TODD E. HERMAN has been a Director of the Company since February 1995 and President of USS since 1984. Mr. Herman was also Vice President of Investech Properties, Inc., a private investment and development firm, from 1984 through 1990. Mr. Herman received his Bachelor of Science degree in Business Administration from Washington University of St. Louis, Missouri in 1975 and graduated from Seton Hall School of Law in 1982. Mr. Herman is a Certified Public Accountant. ROBERT M. RUBIN has been a Director of the Company since October 1991. Mr. Rubin has served as Chairman of Connectsoft Communications Corporation, a developmental stage company, since June 1997. Mr. Rubin has also served as Chairman of the Board of Directors of American United Global, Inc. ("AUGI") since May 1991, and was its Chief Executive Officer from May 1991 to January 1994. Since January 1996, Mr. Rubin has also served as President and Chief Executive Officer of AUGI. Mr. Rubin was the founder, President, Chief Executive Officer and a director of Superior Care, Inc. ("SCI") from its inception in 1976 until May 1986. Mr. Rubin continued as a director of SCI (now known as Olsten Corporation ("Olsten")) until late 1987. Olsten, a New York Stock Exchange listed company, is engaged in providing home care and institutional staffing services and health care management services. Mr. Rubin is Chairman of the Board and a minority stockholder of ERD Waste Technology, Inc. ("ERD"), a diversified waste management public company specializing in the management and disposal of municipal solid waste, industrial and commercial non-hazardous waste and hazardous waste. In September 1997, ERD filed for protection under Chapter 11 of the United States Bankruptcy Code. Mr. Rubin is a former director and Vice Chairman, and currently a minority stockholder, of American Complex Care, Incorporated ("ACCI"), a public company formerly engaged in providing on-site health care services, including intra-dermal infusion therapies. Mr. Rubin is also the Chairman of the Board of Western Power & Equipment Corp. ("Western") and Chairman of the Board of IDF International, Inc. ("IDF"), both public companies. Western, a 56.6%-owned subsidiary of AUGI, is engaged in the distribution of construction equipment, principally manufactured by Case Corporation. IDF, a 58%-owned subsidiary of AUGI, is engaged in providing construction consulting services to businesses and municipalities and site acquisition, architectural and engineering services for the cellular communications industry. Mr. Rubin is also a director and a minority stockholder of Diplomat Corporation, a public company engaged in the manufacture and distribution of baby products. STUART LEVIN has been a Director of the Company since February 1994. Mr. Levin has been employed by the Company as its Director of Operations since October 1991 and Director of the Company's home health care division, since April 1994. Prior to October 1991, Mr. Levin held management positions with Tandy Corporation, and was the President of W.A.S., Inc., a food distribution company. Mr. Levin attended Temple University from 1978 to 1980. BRUCE H. LUEHRS has been a Director of the Company since October 1, 1997. Mr. Luehrs has an extensive background in venture capital, mergers and acquisitions and commercial and investment banking. In September 1996, Mr. Luehrs formed Penn Valley Capital ("PVC"), which provides advisory services to companies in transition due to periods of rapid growth or financial difficulty. From July 1995 to September 1996, Mr. Luehrs was a principal with Columbia Capital Corporation, a merchant bank focusing on the telecommunications industry. From June 1992 to July 1995, Mr. Luehrs served as Executive Vice President and Chief Financial Officer of Seaview Thermal Systems, a technology-driven 47 environmental services company. From February 1990 through March 1992, Mr. Luehrs was a principal of PNC Equity Management, an equity fund affiliated with PNC Corporation. Mr. Luehrs received his undergraduate degree in economics from Duke University and his Masters in Management from Northwestern University. STUART R. CHALFIN has been a Director of the Company since October 1, 1997. Since 1975, Mr. Chalfin has been a principal of Fishbein & Company, P.C., independent public accountants, where he specializes in advising closely held businesses and professionals. Mr. Chalfin is affiliated with the Committee on Relations with Colleges and Universities and the Linda Creed Foundation and is a member of the American Institute of Certified Public Accountants. EMPLOYMENT AND CONSULTING AGREEMENTS Mr. Brooks and Mr. Feldman each have employment agreements, expiring June 30, 2000, to act in the capacities listed above for the Company. Such agreements provide for initial annual base salaries of $225,000 and $150,000, respectively. The Credit Line provides that the salaries and bonuses received by Messrs. Brooks and Feldman in any fiscal year shall not exceed $225,000 and $150,000, respectively. Under their employment agreements, Messrs. Brooks and Feldman also receive life insurance, disability, hospitalization, major medical, vacation and other employee benefits, reimbursement of reasonable business expenses incurred on behalf of the Company, a non-accountable expense allowance of up to $1,000 per month, in the case of Mr. Brooks, and $500 per month, in the case of Mr. Feldman, and use of Company-owned vehicles. The employment agreements are terminable only upon certain circumstances, such as for cause, disability and death, and if terminated for any other reason, such employees shall be entitled to receive the present value of all compensation and benefits through June 30, 2000. The Company maintains and is the beneficiary of key person life insurance policies in the amount of $3,000,000 and $1,000,000 on the lives of Messrs. Brooks and Feldman, respectively. In addition to cash compensation and other benefits, in connection with amendments to their employment agreements executed in August 1992, Messrs. Brooks and Feldman received options to purchase 44,445 and 28,356 shares of Common Stock, respectively, at a price equal to $11.25. These options are exercisable until November 14, 2004. Messrs. Brooks and Feldman also received options to purchase 200,000 and 66,667 shares of Common Stock, respectively, awarded under the Company's Non-Qualified Stock Option Plan. In November 1995, the exercise price on Messrs. Brooks' and Feldman's options were reduced to the prevailing market price of $7.50 and subsequently reduced to $4.50 on June 15, 1997 and to $0.03 on June 27, 1997. During February 1996, Messrs. Brooks and Feldman both exercised options to purchase 8,334 shares of Common Stock. Mr. Herman and John Colehower have employment agreements with USS, expiring March 4, 1999, to act as President and Treasurer of USS and Vice President of USS, respectively. Such agreements provide for an initial base salary of $120,000, and may be increased at the discretion of the Board of Directors of the Company, as well as certain additional payments and benefits based upon increases in the Company's subscriber accounts. As a result of certain obligations to Messrs. Herman and Colehower, the Company recorded a deferred compensation liability of $1,207,500 as of September 30, 1997, based on such obligations, which are not due until March 1999. Under their employment agreements, Messrs. Herman and Colehower also receive life insurance, disability, hospitalization, major medical, vacation and other employee benefits. The employment agreements are terminable only upon certain circumstances, such as for cause, disability and death or, for any other reason, upon 90 days' written notice. In addition to cash compensation and other benefits, Messrs. Herman and Colehower received options to purchase 100,000 shares each of Common Stock at an exercise price of $4.50. These options were subject to a vesting schedule, which schedule has been accelerated such that all of such options are fully vested. 48 Robert M. Rubin, a Director of the Company, has performed consulting services for the Company in the past. In February 1993, Mr. Rubin was issued a warrant to purchase 1,667 shares of Common Stock at $15.00 per share, in consideration of services to the Company. The exercise price of such warrant was subsequently reduced to $.024 per share and the warrant was exercised. In September 1994, Mr. Rubin was granted options to purchase 1,667 shares of Common Stock at the prevailing market price of $2.4375, which options were exercised. In February 1995, Mr. Rubin was granted options to purchase 50,000 shares of Common Stock at a price of $11.25 per share, which options are exercisable for a period of ten years. In November 1995, Mr. Rubin was granted options to purchase 50,000 shares of Common Stock at the prevailing market price of $7.50 and in November 1995, the exercise price of Mr. Rubin's options granted in February 1995 were reduced to the prevailing market price of $7.50. (See Note 10 of Notes to Consolidated Financial Statements of the Company). On June 27, 1997, the exercise price of all of Mr. Rubin's options was reduced to $0.03. On October 1, 1994, Mr. Rubin entered into a consulting agreement with the Company pursuant to which he was paid an annual consulting fee of $60,000 for a period of two years. The agreement was terminated on April 30, 1996, at which time Mr. Rubin converted outstanding loans in the amount of $200,000 into 28,069 shares of Common Stock and converted subordinated debentures in the amount of $101,329 into 22,518 shares of Common Stock. See "Management" and "Principal Stockholders." EXECUTIVE COMPENSATION The following table sets forth the annual and long-term compensation for services in all capacities paid by the Company to its Chief Executive Officer and each executive officer whose annual compensation exceeded $100,000 (the "Named Executive Officers") during fiscal 1995, 1996 or 1997: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION --------------------------------------------- --------------------------------------------------- SECURITIES OTHER ANNUAL RESTRICTED UNDERLYING LONG-TERM NAME AND PRINCIPAL BONUS COMPENSATION STOCK OPTIONS/ INCENTIVE PLAN POSITION YEAR SALARY ($) ($) ($)(1) AWARD(S) SARS (#) PAYOUTS - ------------------ --------- ----------- ------------- ----------------------- ------------- ----------- ----------------- Richard M. Brooks, 1997 $ 220,673 -- -- -- 236,111(2) -- President, Chief 1996 $ 217,980 -- -- -- -- -- Executive 1995 $ 175,003 -- -- -- -- -- Officer and Chief Financial Officer Ronald A. Feldman, 1997 $ 137,307 -- -- -- 86,689(2) -- Chief Operating 1996 $ 135,654 -- -- -- -- -- Officer, 1995 $ 106,495 -- -- -- -- -- Vice President, Secretary and Treasurer ALL OTHER NAME AND PRINCIPAL COMPENSATION POSITION ($) - ------------------ --------------------- Richard M. Brooks, -- President, Chief -- Executive -- Officer and Chief Financial Officer Ronald A. Feldman, -- Chief Operating -- Officer, -- Vice President, Secretary and Treasurer
- ------------------------ (1) Excludes perquisites and other personal benefits, securities and properties otherwise categorized as salary or bonuses which in the aggregate, for each of the Named Executive Officers did not exceed the lesser of either $50,000 or 10% of the total annual salary reported for such person. (2) Such options were originally granted in prior periods; however, on June 15, 1997, the Company reduced the exercise price of such options from $7.50 per share to $4.50 per share. On June 27, 1997, the Company further reduced the exercise price of such options from $4.50 per share to $0.03 per share. See "Management -- Reduction of Exercise Price of Certain Stock Options." 49 INCENTIVE STOCK OPTION PLAN In March 1992, the Company's Board of Directors and stockholders adopted and approved an Incentive Stock Option Plan ("ISO Plan"). The ISO Plan provides for the grant to key employees of the Company of stock options intended to qualify as "incentive stock options" under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). A total of 13,334 shares of Common Stock have been reserved for issuance under the ISO Plan, all of which shares have been granted as of the date of this Prospectus. The ISO Plan is administered by a committee of the Board of Directors which, among other things, has the sole discretion to select optionees and determine the number of shares covered by each option, its exercise price and certain of its other terms. The exercise price of options granted under the ISO Plan may not be less than the fair market value of Common Stock on the date of grant, and not less than 110% of such fair market value in the case of participants owning more than 10% of Common Stock. Options expire no later than 10 years after they are granted (five years after grant in the case of participants owning more than 10% of the Company's Common Stock). The number of shares for which the optionee may exercise an option in any calendar year is limited to option shares with an aggregate fair market value, determined at the time the option is granted, which does not exceed $100,000. The $100,000 limit for any calendar year is subject to further reduction by the fair market value of any stock (determined at the time of option grant) for which the employee was granted an option under any Company plan during such calendar year. Options terminate three months after the optionee ceases to be employed by the Company unless the optionee's employment is terminated by reason of disability, in which case, the options shall expire following one year after such employment termination. The committee has the right to accelerate the expiration date in certain events. Options granted under the ISO Plan are not transferable, except by will or the law of descent and distribution. NON-QUALIFIED STOCK OPTION PLAN In August 1990, the Company's Board of Directors approved a Nonqualified Stock Option Plan (the "NQO Plan") pursuant to which the Company may grant stock options to directors, officers, key employees and consultants. A total of 3,453 shares of Common Stock were reserved for issuance under the NQO Plan, all of which shares have been granted as of the date of this Prospectus. Options shall terminate six months after the optionee ceases to be employed by the Company or any subsidiary, regardless of the cause for termination. REDUCTION OF EXERCISE PRICE OF CERTAIN STOCK OPTIONS On June 15, 1997, the Company reduced the exercise price of options to purchase 622,800 shares of Common Stock granted to officers, directors and a key employee of the Company, from $7.50 to $4.50, or the prevailing market price. On June 27, 1997, the Company further reduced the exercise price of options to purchase 422,800 shares of Common Stock granted to certain officers and directors of the Company, from $4.50 to $0.03, which resulted in a compensation expense of $1,889,916. 1997 STOCK OPTION PLAN In October 1997, the Board of Directors of the Company adopted the 1997 Plan. The 1997 Plan is subject to approval by the Company's stockholders at the next annual meeting of stockholders, which is expected to take place on January 6, 1998. The 1997 Plan provides for the grant of options to purchase up to, but not in excess of, 600,000 shares of Common Stock to key employees, including but not limited to officers, directors, agents, consultants and independent contractors of the Company or any parent or subsidiary of the Company (excluding members of the Administrator (as defined in the 1997 Plan)). Options may be either "incentive stock options" within the meaning of Section 422 of the Code, or non-qualified options. Incentive stock options may be granted 50 only to employees of the Company or a subsidiary of the Company, while non-qualified options may be issued to non-employee directors, as well as to employees of the Company or its subsidiary. The 1997 Plan is administered by a committee selected by the Board of Directors (the "Administrator"), which determines, among other things, those individuals who receive options, the time period during which the options may be exercised, the number of shares of Common Stock issuable upon the exercise of each option and the option exercise price. Pursuant to the 1997 Plan, the Administrator determines, among other things, those individuals who receive options, the time period during which the grants will be made, the number of shares of Common Stock to be granted and the price (if any) to be paid by such key employees therefor. The exercise price per share of Common Stock subject to an incentive option may not be less than the fair market value per share of Common Stock on the date the option is granted. The per share exercise price of the Common Stock subject to a non-qualified option may be established by the Administrator. If the aggregate fair market value (determined as of the date the option is granted) of Common Stock for which any person may be granted incentive stock options which first become exercisable in any calendar year exceeds $100,000, such stock option shall be treated, to the extent of such excess, as an option which does not qualify as an incentive stock option. No person who owns, directly or indirectly, at the time of the granting of an incentive stock option to such person, 10% or more of the total combined voting power of all classes of stock of the Company (a "10% Shareholder") shall be eligible to receive any incentive stock options under the 1997 Plan unless the exercise price is at least 110% of the fair market value of the shares of Common Stock subject to the option, determined on the date of grant. Non-qualified options are not subject to such limitation. No stock option may be transferred by an optionee other than by will or the laws of descent and distribution, and, during the lifetime of an optionee, the option will be exercisable only by the optionee. In the event of termination of employment other than by death, retirement, permanent and total disability, unless extended by the Administrator on or before such employee's date of termination of employment, the optionee will have no more than three months after such termination during which the optionee shall be entitled to exercise all or any part of such employee's option, unless otherwise determined by the Administrator. Upon termination of employment of an optionee by reason of death, retirement, permanent or total disability, such optionee's options remain exercisable for one year thereafter to the extent such options were exercisable on the date of such termination. Options under the 1997 Plan must be issued within 10 years from the effective date of the Plan. The effective date of the 1997 Plan is September 1997. Incentive stock options granted under the 1997 Plan cannot be exercised more than 10 years from the date of grant. Incentive stock options issued to a 10% Shareholder are limited to five-year terms. All options granted under the 1997 Plan provide for the payment of the exercise price in cash or check or by delivery to the Company of shares of Common Stock already owned by the optionee having a fair market value equal to the exercise price of the options being exercised, or by a combination of such methods, or by such other methods approved by the Administrator pursuant to the 1997 Plan. Therefore, an optionee may be able to tender shares of Common Stock to purchase additional shares of Common Stock and may theoretically exercise all of such optionee's stock options with no additional investment other than the purchase of the original shares. Any unexercised options that expire or that terminate upon an employee's ceasing to be employed by the Company become available again for issuance under the 1997 Plan. As of the date hereof, no options have been granted pursuant to the 1997 Plan; however, the Company currently intends to grant options to purchase approximately (i) 75,000 shares of Common Stock to Mr. Allen, a director, (ii) 105,000 shares of Common Stock to Mr. May, a director, and (iii) 300,000 shares of Common Stock to other officers and directors of the Company, all of which options are expected to be granted on the effective date of this offering at an exercise price equal to the public offering price. 51 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning options granted to or held by the Named Executive Officers during the fiscal year ended June 30, 1997:
INDIVIDUAL GRANTS -------------------------------------------------------------------------- PERCENT OF NUMBER OF TOTAL OPTIONS SECURITIES GRANTED TO UNDERLYING OPTIONS EMPLOYEES IN EXERCISE OR BASE NAME GRANTED FISCAL YEAR PRICE ($/SH) EXPIRATION DATE - ------------------------------------------- ------------------- --------------- ------------------- --------------- Richard M. Brooks.......................... 236,111(1) 42.7% $ .03 11/14/04 Ronald A. Feldman.......................... 86,689(1) 15.4% $ .03 11/14/04
- ------------------------ (1) Such options were originally granted in prior periods; however, on June 15, 1997, the Company reduced the exercise price of such options from $7.50 per share to $4.50 per share. On June 27, 1997, the Company further reduced the exercise price of such options from $4.50 per share to $0.03 per share. See "Management -- Reduction of Exercise Price of Certain Stock Options." AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES The following table sets forth certain information regarding stock options exercised by the Named Executive Officers during the fiscal year ended June 30, 1997, as well as the number of exercisable and unexercisable in-the-money stock options and their values at fiscal year end. An option is in-the-money if the fair market value for the underlying securities exceeds the exercise price of the option.
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED IN- UNEXERCISED OPTIONS THE-MONEY OPTIONS AT FY-END AT FY-END SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE(1) - ----------------------------------------------- ----------------- ----------------- ------------------- ----------------- Richard M. Brooks.............................. 0 0 236,111/0 $ 1,586,666/0 Ronald A. Feldman.............................. 0 0 86,689/0 $ 582,550/0
- ------------------------ (1) The value of unexercised options is determined by multiplying the number of options held by the difference between the closing price of the Common Stock of $6 3/4 at June 30, 1997 (as adjusted to reflect the anticipated one-for-three reverse stock split), as reported by the Nasdaq SmallCap Market, and the exercise price of the options. 52 PRINCIPAL STOCKHOLDERS The following table sets forth certain information, as of the date of this Prospectus, based upon 2,201,029 shares of Common Stock outstanding and as adjusted to reflect the sale of 2,400,000 shares of Common Stock (after giving effect to the anticipated one-for-three reverse stock split) by the Company in this offering regarding the beneficial ownership of the Company's Common Stock by (i) all persons known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director and executive officer of the Company and (iii) all directors and executive officers of the Company as a group. Information as to Kenneth Stickney was derived from the Schedule 13D filed by such stockholder, and, except for the percentage ownership, reflects the information contained therein as of the date such 13D was filed.
PERCENTAGE OF OUTSTANDING STOCK OWNED(3) ---------------------------------- AMOUNT AND NATURE NAME AND ADDRESS OF BENEFICIAL OF BENEFICIAL OWNER(2) OWNERSHIP(1) BEFORE OFFERING AFTER OFFERING - -------------------------------------------------------- ------------------------ ----------------- --------------- Richard M. Brooks(4).................................... 236,772 9.7% 4.9% Ronald A. Feldman (5)................................... 87,356 3.8% 1.9% Robert M. Rubin (6)..................................... 175,760 7.6% 3.7% Stuart Levin (7)........................................ 4,834 * * Todd E. Herman (8)...................................... 102,667 4.5% 2.2% Kenneth Stickney........................................ 159,722 7.3% 3.5% Bruce H. Luehrs......................................... 334 * * Stuart R. Chalfin....................................... -0- * * Robert L. May (9)....................................... -0- * * A. Clinton Allen........................................ -0- * * Executive Officers and Directors as a group (nine persons) (10)......................................... 607,723 22.3% 11.8%
- ------------------------ * Less than one percent. (1) For purposes of the above table, a person or group of persons is deemed to have "beneficial ownership" of any shares that such person or group has the right to acquire within 60 days after such date; and for purposes of computing the percentage of outstanding shares held by each person or group on a given date, such shares are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act, and is generally determined by voting power and/or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, the Company believes that the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (2) The address for the referenced individuals who beneficially owns 5% or more of the outstanding Common Stock of the Company is c/o Response USA, Inc., 11-H Princess Road, Lawrenceville, New Jersey, except for Robert M. Rubin, whose address is 9450 Aegean Drive, Boca Raton, Florida 33496, BKR, Inc., whose address is 7944 East Beck Lane, Suite 210, Scottsdale, Arizona 85260, and Kenneth Stickney, whose address is 7944 East Beck Lane, Suite 210, Scottsdale, Arizona 85260. (3) Individual percentages have been rounded to the nearest 0.1%. (4) Includes 236,111 shares issuable upon exercise of currently exercisable options. See "Management -- Employment and Consulting Agreements." (5) Includes 86,689 shares issuable upon exercise of currently exercisable options. See "Management -- Employment and Consulting Agreements." 53 (6) Mr. Rubin's wife and children own 1,840 shares of Common Stock, as to which Mr. Rubin disclaims beneficial ownership. Includes 100,000 shares issuable upon exercise of currently exercisable options. See "Management--Employment and Consulting Agreements." (7) Includes 4,834 shares issuable upon exercise of currently exercisable options. (8) Includes 100,000 shares issuable upon exercise of currently exercisable options. See "Management-- Employment and Consulting Agreements." (9) Does not include approximately 371,723 shares of Common Stock to be received by Mr. May upon consummation of the acquisitions of Triple A and Jupiter, based upon the assumed offering price of $8.25 per share. (10) Includes 527,634 shares issuable upon exercise of currently exercisable options referred to in notes (4), (5), (6), (7) and (8) above. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Except as described under "Management" and "Executive Compensation," the Company has not engaged in any transactions with individuals who, at the time of such transaction, were officers, directors, principal stockholders or affiliates thereof during the three fiscal years ended June 30, 1997. In connection with the appointment of A. Clinton Allen as a director of the Company, the Company entered into a one-year renewable consulting agreement with Mr. Allen commencing February 1998, pursuant to which Mr. Allen will receive $4,000 per month in consideration for providing certain consulting services to the Company. 54 DESCRIPTION OF SECURITIES The following summary description of the Company's capital stock and selected provisions of its Certificate of Incorporation and Bylaws is a summary and is qualified in its entirety by reference to the Company's Certificate of Incorporation and Bylaws, copies of which have been filed with the Securities and Exchange Commission (the "Commission") as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Company is authorized to issue up to 12,500,000 shares of Common Stock, par value $.008 per share, of which 2,201,029 shares are outstanding as of the date hereof. Holders of Common Stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. There is no cumulative voting for election of directors. Subject to the prior rights of any series of preferred stock which may from time to time be outstanding, if any, holders of Common Stock are entitled to receive ratably, dividends when, as, and if declared by the Board of Directors out of funds legally available therefor and, upon the liquidation, dissolution or winding up of the Company, are entitled to share ratably in all assets remaining after payment of liabilities and payment of accrued dividends and liquidation preferences on the preferred stock, if any. Holders of Common Stock have no preemptive rights and have no rights to convert their Common Stock into any other securities. The outstanding Common Stock is validly authorized and issued, fully paid and nonassessable. The stockholders of the Company will vote on a proposed amendment to the Company's Certificate of Incorporation to increase the authorized number of Common Stock to 37,500,000 at their annual meeting, which is scheduled to take place on January 6, 1998. PREFERRED STOCK The Company is authorized to issue up to 239,430.42 shares of preferred stock, par value $1,000 per share. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any such preferred stock could adversely affect the rights of the holders of Common Stock and, therefore, reduce the value of the Common Stock. The ability of the Board of Directors to issue preferred stock could discourage, delay or prevent a takeover of the Company. See "Risk Factors -- Delaware Anti-Takeover Statute; Limitation of Liability of Directors and Officers; Possible Adverse Effects Associated with the Issuance of 'Blank Check' Preferred Stock." SERIES A CONVERTIBLE PREFERRED STOCK In May 1996, the Company authorized the issuance of 7,500 shares (of which 5,890 shares remain outstanding as of the date hereof) of 1996 Series A Convertible Preferred Stock with a par value of $1,000 per share. The holders of the Preferred Stock are not entitled to receive dividends and have no voting rights. The Preferred Stock is convertible into a number of shares of Common Stock determined by using a formula of "the premium plus $1,000, divided by the conversion price." The premium as defined equates to an annual 10% deemed dividend, and the conversion price is equal to the lesser of $15.00 or 80% of the average closing bid price of Common Stock for the five days immediately preceding the date of conversion. Up to 50% of the Preferred Stock was convertible commencing 45 days after issuance, and the balance was convertible commencing 70 days after issuance. After June 1, 1999, the Company may require conversion. The Preferred Stock has an aggregate liquidation preference of $7,362,500 plus the cumulative 10% deemed dividend. In January and February 1996, certain holders of the Preferred Stock commenced litigation against the Company, challenging, among other things, the Company's decision to suspend conversion rights and 55 seeking, among other things, specific performance under the Certificate of Designations to convert their Preferred Stock to Common Stock of the Company. Prior to June 30, 1997, the Company reached an agreement, which was subsequently amended pursuant to an amendment dated November 30, 1997 (as amended, the "Settlement Agreement") with the holders (the "Holders") of the Preferred Stock (other than Halifax Fund, LP ("Halifax")), pursuant to which the Holders agreed to refrain from all conversions of the Preferred Stock for specified periods, and the Company agreed to issue to the Holders of the Preferred Warrants as described below and to amend (subject to stockholder approval, which is expected to take place on Jauary 6, 1998) the terms of the Preferred Stock by the filing of an Amended and Restated Certificate of Designation (the "Amendment"). Pursuant to the terms of the Settlement Agreement, on June 26, 1997, each Holder received 5,000 Preferred Warrants for each 100 shares of Preferred Stock held as of June 26, 1997, an aggregate of 114,833 Preferred Warrants. The Preferred Warrants, which are not redeemable by the Company, are exercisable at a price per share of $6.00 and entitle the holder thereof to purchase one share of Common Stock per Preferred Warrant. Of such Preferred Warrants, 50% are exercisable after June 30, 1998 and the remaining 50% of the Preferred Warrants are exercisable after June 30, 1999. The Preferred Warrants expire after June 30, 2006. In connection with the amendment executed on November 30, 1997, each Holder received an additional 7,500 Warrants (the "Additional Warrants") for each 100 shares of Preferred Stock held as of November 30, 1997. The Additional Warrants, which are redeemable by the Company, are exercisable at a price per share of $10.125 and entitle the holder thereof to purchase one share of Common Stock per Additional Warrant. Of such Additional Warrants, fifty percent (50%) are exercisable after December 1, 1998 and fifty percent (50%) are exercisable after December 1, 1999. The Additional Warrants expire after November 30, 2007. In consideration of the issuance of the Preferred Warrants as amended, and subject to the terms and conditions set forth in the Settlement Agreement, each Holder agreed (a) to give its proxy and its consent in favor of the Amendment and (b) to refrain from any and all conversions of such Holder's Preferred Stock, pursuant to the terms of the original Certificate of Designation, until the earlier of February 12, 1998 or upon the occurrence of defaults on certain dates ("Trigger Dates"). If the Company fails to comply with the Trigger Dates, the Holder's right to convert its Preferred Stock shall be activated if and only if a majority of the Holders as of such Trigger Date have collectively provided appropriate written notice exercising such right. The Trigger Dates are comprised of the following: (i) the repurchase of 10% of the aggregate number of shares of Preferred Stock on December 15, 1997 for aggregate consideration of $795,150; (ii) the printing of prospectuses relating to this offering by January 7, 1998; (iii) the holding of the Company's annual stockholders meeting by January 7, 1998; (iv) commencement of a road show relating to this offering on January 16, 1998; (v) the repurchase of 10% of the aggregate number of shares of Preferred Stock on January 15, 1998 for aggregate consideration of $795,150; and (vi) the redemption of the remaining shares of Preferred Stock by February 2, 1998 (subject in certain circumstances to extension, but in no event later than February 12, 1998). To date, all such Trigger Dates have been met. The Amendment gives the Company the right to redeem the Preferred Stock ("Redemption") for payment of the following to the Holders: (i) cash in an amount equal to One Thousand Three Hundred Fifty Dollars ($1,350) per share of Preferred Stock (the "Redemption Price"); and (ii) interest at a rate of twelve percent (12%) per annum on the Redemption Price from May 12, 1997 until consummation of the Redemption. The Amendment provides that the suspension of conversion rights would no longer be effective and the right to convert the Preferred Stock shall be effective commencing on and after February 12, 1998, in accordance with the terms set forth in the Amended and Restated Certificate of Designations. In addition, pursuant to the Settlement Agreement, each Holder agreed to refrain from conversions of the Preferred Stock until the earlier of February 12, 1998 or certain other specified dates. 56 On June 30, 1997, the Company agreed to convert 1,000 shares of Preferred Stock owned by Halifax and issued to Halifax 300,000 shares of the Company's Common Stock and concluded the Settlement Agreement with the Holders. The Company assisted in locating EC Capital, Inc., a market maker in the Company's securities as a purchaser for the Common Stock received by Halifax upon conversion of its Preferred Stock. Halifax's Common Stock was purchased for an aggregate price of $1,500,000, comprised of $1,350 per share for each share of Preferred Stock, plus $150,000 for reimbursement of attorneys' fees. The Company issued to Halifax 5,000 Class C Warrants for each 100 shares of Preferred Stock held by Halifax. In the event that the Company settles with any other Holder of Preferred Stock on terms which Halifax in its sole discretion believes are better than those received by Halifax in the settlement, Halifax has the right to elect the alternative settlement. Upon the consummation of this offering, the Company intends to utilize funds available under the Credit Line to redeem the Preferred Stock which, based upon an assumed redemption date of February 2, 1998, would have an aggregate redemption price of approximately $7,060,000. SERIES B PREFERRED STOCK In September 1997, the Company authorized the issuance of 3,069.58 shares (all of which shares remain outstanding as of the date hereof) of 1997 Series B Preferred Stock with a par value of $.01 per share. The holders of the Series B Preferred Stock are not entitled to receive dividends and have no voting rights. Each share of the Series B Preferred Stock is convertible at any time into 100 shares of Common Stock, subject to adjustment under certain circumstances. CLASS A WARRANTS The Company currently has outstanding publicly-traded Class A Warrants to purchase up to 411,127 shares of Common Stock at an exercise price of $7.50 per share at any time until October 22, 1998. Each holder thereof is entitled to purchase one share of Common Stock for each nine Class A Warrants and payment of $7.50. The Class A Warrants contain anti-dilution provisions providing for adjustment of the exercise price and the number of shares of Common Stock underlying the Class A Warrants upon the occurrence of certain events. The Class A Warrants are redeemable by the Company, upon proper notice, at a redemption price of $.30 per share, until October 1998, after a period of at least ten consecutive business days on which the closing high bid price for the Common Stock as reported on the Nasdaq SmallCap Market, or, the closing sales price, if the Common Stock is listed on an exchange or reporting system that provides last sales prices, equals or exceeds 120% of the then current exercise price of the Class A Warrants. CLASS B WARRANTS The Company currently has outstanding publicly-traded Class B Warrants to purchase up to 493,983 shares of Common Stock at an exercise price of $9.75 per share at any time until October 22, 1998. Each holder thereof is entitled to purchase one share of Common Stock for each nine Class B Warrants and payment of $9.75. The Class B Warrants contain anti-dilution provisions providing for adjustment of the exercise price and the number of shares of Common Stock underlying the Class B Warrants upon the occurrence of certain events. The Class B Warrants are redeemable by the Company upon the same terms as the Class A Warrants. CLASS C WARRANTS The Company currently has outstanding Class C Warrants to purchase up to 16,567 shares of Common Stock at exercise prices ranging from $9.78 to $16.875 per share at any time until January 15, 2000. The Class C Warrants contain anti-dilution provisions providing for adjustment of the exercise price and the number of shares of Common Stock underlying the Class C Warrants upon the occurrence of certain events. The Class C Warrants were issued in connection with a private financing by the Company. 57 PREFERRED WARRANTS The Company currently has outstanding Preferred Warrants to purchase up to 262,083 shares of Common Stock at exercise prices ranging from $6.00 to $10.125 per share at any time until June 25, 2007. The Company issued such Preferred Warrants in connection with the settlement with the Holders. The Preferred Warrants contain anti-dilution provisions providing for adjustment of the exercise price and the number of shares of Common Stock underlying the Preferred Warrants upon the occurrence of certain events. The Preferred Warrants also entitle the holders to certain "piggyback" registration rights with respect to the shares issuable upon exercise thereof at any time that the Company files a registration statement other than one relating solely to the sale of securities to participants in a Company employee benefit plan, one not including substantially the same information as would be required to be included in a registration statement covering the sale of such Common Stock, or one only registering Common Stock issuable upon conversion of convertible debt securities which are also being registered. REPRESENTATIVE'S WARRANTS In connection with this offering, the Company has agreed to issue to the Representative the Representative's Warrants. The Representative's Warrants will be exercisable for a period of four years commencing one year after the closing of this offering. The Representative and their designees are entitled to certain registration rights under the Securities Act relating to the shares of Common Stock received upon the exercise of the Representative's Warrants. The Representative's Warrants may not be sold or transferred during the first year after issuance, except to persons who are officers of the Representative or by operation of law. The exercise price and the number of shares of Common Stock that may be purchased are subject to adjustment pursuant to anti-dilution provisions of the Representative's Warrants. TRANSFER AGENT Upon consummation of this offering, American Stock Transfer and Trust Company will be the Transfer Agent for the Company's Common Stock and registrar for the Company's publicly-traded warrants. DIRECTORS' LIMITATION OF LIABILITY AND INDEMNIFICATION The Company's Certificate of Incorporation includes provisions which eliminate the personal liability of directors for monetary damages resulting from breaches of their fiduciary duty (except for liability for breaches of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, violations under Section 174 of the DGCL or for any transaction from which the director derived an improper personal benefit). The Company believes that these provisions are necessary to attract and retain qualified persons as directors and officers. Section 145 of the DGCL permits indemnification by a corporation of certain officers, directors, employees and agents. The Company's Bylaws provide that the Company will indemnify each of its directors and officers with respect to all liability and loss suffered and expenses incurred by such person in any action, suit or proceeding in which such person was or is made or threatened to be made a party or is otherwise involved by reason of the fact that such person is or was a director or officer of the Company. The Company is also obligated to pay the expenses of the directors and officers incurred in defending such proceedings, subject to reimbursement if it is subsequently determined that such person is not entitled to indemnification. The Company maintains a policy of insurance under which the directors and officers of the Company will be insured, subject to the limits of the policy, against certain losses arising from claims made against such directors and officers by reason of any acts or omissions covered under such policy in their respective capacities as directors or officers, including liabilities under the Securities Act. Insofar as indemnification 58 for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. DELAWARE ANTI-TAKEOVER LAW The Company is subject to Section 203 of the DGCL ("Section 203"), which, subject to certain exceptions and limitations, prohibits a Delaware corporation from engaging in any "business combination" with any "interested stockholder" for a period of three years following the date that such stockholder became an interested stockholder, unless: (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (for the purposes of determining the number of shares outstanding under the DGCL, those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer are excluded from the calculation); or (iii) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. For purposes of Section 203, a "business combination" includes (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (iii) subject to certain exceptions, any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation which has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. Section 203 defines an "interested stockholder" as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. 59 SHARES ELIGIBLE FOR FUTURE SALE Upon the consummation of this offering, the Company will have outstanding 4,601,029 shares of Common Stock, of which the 2,400,000 shares offered hereby will be freely tradeable without restriction or further registration under the Securities Act. An additional 2,093,766 shares of Common Stock are also freely tradeable. The remaining approximately 107,263 shares of Common Stock are "restricted securities" (as that term is defined in Rule 144 under the Securities Act) and in the future may only be sold pursuant to a registration statement under the Securities Act, in compliance with the exemption provisions of Rule 144 or pursuant to another exemption under the Securities Act. Commencing approximately 12 months following the date of this Prospectus, substantially all of these restricted securities would become eligible for sale in the public market pursuant to Rule 144. The beneficial owners of 607,723 shares of Common Stock (including shares of Common Stock issuable upon exercise of outstanding options) have agreed not to sell such shares for a period of 12 months after this offering without the consent of the Representative. In general, under Rule 144, as currently in effect, a person (including a person who may be deemed an "affiliate" of the Company as that term is defined under the Securities Act) who has beneficially owned such shares for at least one year would be entitled to sell within any three-month period a number of shares beneficially owned for at least one year that do not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are further subject to certain restrictions relating to the manner of sale, notice and the availability of current public information about the Company. After two years have elapsed from the date of the issuance of restricted securities by the Company or their acquisition from an affiliate, such shares may be sold without limitation by persons who have not been affiliates of the Company for at least three months. The sale, or availability for sale, of substantial amounts of Common Stock in the public market subsequent to this offering pursuant to Rule 144 or otherwise could materially adversely affect the market price of the Common Stock and could impair the Company's ability to raise additional capital through the sale of its equity securities or debt financing. The holders of the Representative's Warrants will have certain demand and "piggyback" registration rights with respect to the shares of Common Stock underlying such warrants, commencing one year after the effective date of this offering. In addition, the holder of 107,263 shares of Common Stock issued upon exercise of a warrant and the holders of the Preferred Warrants have demand and "piggyback" registration rights. See "Underwriting." If the Representative should exercise registration rights to effect the distribution of the securities underlying the Representatives' Warrants, it will be unable to make an active market in the Company's securities prior to and during such distribution. If it ceases making a market in the Common Stock, the market and market prices for the Common Stock may be materially adversely affected, and holders thereof may be unable to sell or otherwise dispose of the Common Stock. See "Description of Securities" and "Underwriting." No prediction can be made as to the effect, if any, that sales of such securities, or the availability of such securities for sale, will have on the market prices prevailing from time to time for the Common Stock. However, even the possibility that a substantial number of the Company's securities may, in the near future, be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. See "Shares Eligible For Future Sale" and "Underwriting." 60 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the Company has agreed to sell an aggregate of 2,400,000 shares of Common Stock to the Underwriters named below, for whom Hampshire Securities Corporation is acting as the Representative, and the Underwriters have severally agreed to purchase the number of shares of Common Stock set forth opposite their respective names in the table below at the offering price, less underwriting discounts set forth on the cover page of this Prospectus.
UNDERWRITERS NUMBER OF SHARES - ----------------------------------------------------------------------------------------------- ----------------- Hampshire Securities Corporation............................................................... ----------------- Total...................................................................................... 2,400,000
The Underwriting Agreement provides that the obligation of the Underwriters to purchase the shares of Common Stock is subject to certain conditions. The Underwriters are committed to purchase all of the shares of the Common Stock (other than those covered by the over-allotment option described below), if any are purchased. On November 17, 1997, Hampshire Securities Corporation and certain of its principals entered in an Agreement and Plan of Merger (the "Merger Agreement") with a subsidiary of Gruntal & Co., L.L.C. ("Gruntal"), pursuant to which Hampshire Securities Corporation will become a wholly-owned subsidiary of Gruntal. It is currently anticipated that the merger will be effective in January 1998. The Underwriters propose to offer the Common Stock to the public initially at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, discount not in excess of $ per share; and the Underwriters may allow, and such dealers reallow, a concession of not more than $ per share to certain other dealers. After this offering, the public offering price, the concession to selected dealers and the reallowance to other dealers may be changed by the Representative. The Company has agreed to pay the Representative a non-accountable expense allowance equal to 3% of the gross proceeds received by the Company from the sale of the 2,400,000 shares of Common Stock offered hereby, of which $50,000 has already been paid. The Company has also agreed to pay certain of the Underwriters' expenses in connection with this offering, including expenses in connection with qualifying the shares offered hereby for sale under the laws of such states as the Underwriters may designate and the placement of tombstone advertisements. The Company has also granted to the Representative and its designees, for nominal consideration, warrants to purchase from the Company up to 240,000 shares of Common Stock at an exercise price per share equal to 120% of the public offering price per share. The Representative's Warrants may not be sold, transferred, assigned, pledged or hypothecated for 12 months from the date of this Prospectus, except to members of the selling group. The Representative's Warrants contain anti-dilution provisions upon the occurrence of certain events, including stock dividends, stock splits and recapitalizations, and grant registration rights to the holders thereof at the expense of the Company, at the request of the holders of a majority thereof (on no more than one occasion) during the four-year period beginning on the first anniversary of the date of this Prospectus and "piggyback" registration rights (on no more than one occasion). In addition, the Company and any stockholders of the Company owning in excess of 5% of the Company's Common Stock have granted the Representative the right to sell, for a period of 18 months from the date of this Prospectus, any securities sold by the Company or such stockholders. See "Description of Securities -- Representative's Warrants." The Company has also granted to the Underwriters, exercisable for 45 days from the date of this Prospectus, an option to purchase up to 360,000 additional shares of Common Stock at the public offering price less the underwriting discount. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase additional shares of Common Stock proportionate to such Underwriter's initial commitment as indicated in the preceding table. The Underwriters shall exercise 61 such right of purchase only for the purpose of covering over-allotments, if any, made in connection with the sale of the shares of Common Stock. The Company has agreed to indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Company, its directors and officers, and certain stockholders of the Company, beneficially owning an aggregate of 607,723 shares of Common Stock prior to the offering (including shares of Common Stock issuable upon exercise of outstanding options), have agreed with the Underwriters not to publicly sell or otherwise dispose of any of their shares of Common Stock or securities exercisable for or convertible into shares of Common Stock for a period of 12 months after the date of the Prospectus without the prior written consent of the Representative. In connection with this offering, certain Underwriters may engage in passive market-making transactions in the Common Stock on the Nasdaq SmallCap Market immediately prior to the commencement of sales in this offering, in accordance with Rule 103 under Regulation M. Passive market-making consists of displaying bids on the Nasdaq SmallCap Market limited by the bid prices of independent market makers for a security and making purchases of a security which are limited by such prices and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the Common Stock during a specified prior period and must be discontinued when such limit is reached. Passive market-making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. During and after the Offering, the Underwriters may purchase and sell Common Stock in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the Offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the Common Stock sold in the Offering for their account may be reclaimed by the syndicate if such shares are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock which may be higher than the price that might otherwise prevail in the open market. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued at any time. OBSERVER TO THE BOARD In connection with this offering, the Company has agreed that, until the third anniversary of the date of this Prospectus, the Representative may appoint an observer to attend all meetings of the Company's Board of Directors. The observer will be entitled to reimbursement of reasonable and accountable out-of- pocket expenses for attendance at those meetings. In addition, the observer will be entitled to indemnification to the same extent as the Company's directors. 62 LEGAL MATTERS The validity of the shares offered hereby and certain other legal matters will be passed upon for the Company by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Morrison Cohen Singer & Weinstein, LLP, New York, New York. EXPERTS The financial statements of the Company included in this Prospectus as of and for the year ended June 30, 1997 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of the Company included in this Prospectus as of and for the years ended June 30, 1996 and 1995 have been audited by Fishbein & Company, PC, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of Triple A and Jupiter included in this Prospectus as of and for the years ended December 31, 1996 and 1995 have been audited by Terry H. Jones, CPA, independent auditor, as stated in his report appearing herein, and are included in reliance upon the report of such person given upon his authority as an expert in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act, and, in accordance therewith, files periodic reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at prescribed rates at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, NW, Washington, DC 20549, and at the Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Electronic filings made via EDGAR are publicly available through the Commission's Web site at http://www.sec.gov. Copies of such material can be obtained from the Public Reference Section of the Commission, Room 1024, 450 Fifth Street, NW Washington, DC 20549 at prescribed rates. In addition, reports and other information concerning the Company may be inspected at the offices of the NASD, 1735 K Street, NW, Washington, DC 20006. The Company has filed with the Commission a Registration Statement on Form SB-2 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act, with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is hereby made to the Registration Statement which may be examined without charge at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, NW, Washington, DC 20549. Copies thereof may be obtained from the Commission upon payment of the prescribed fees. Statements contained in this Prospectus as to the contents of any contract or document referred to herein are not necessarily complete, and in each instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. 63 INDEX TO FINANCIAL STATEMENTS
PAGE --------- RESPONSE USA, INC. AND SUBSIDIARIES Independent Auditors' Report for the Fiscal Year Ended June 30, 1997....................................... F-2 Independent Auditors' Report for the Fiscal Years Ended June 30, 1995 and June 30, 1996.................... F-3 Consolidated Balance Sheets at June 30, 1996 and June 30, 1997 and September 30, 1997 (unaudited).......... F-4 Consolidated Statements of Operations for the Fiscal Years Ended June 30, 1995, June 30, 1996 and June 30, 1997 and the three months ended September 30, 1996 (unaudited) and September 30, 1997 (unaudited)........ F-6 Consolidated Statement of Stockholders' Equity for the Fiscal Years Ended June 30, 1995, June 30, 1996 and June 30, 1997 and the three months ended September 30, 1997 (unaudited).................................. F-7 Consolidated Statement of Cash Flows for the Fiscal Years Ended June 30, 1995, June 30, 1996 and June 30, 1997 and the three months ended September 30, 1996 (unaudited) and September 30, 1997 (unaudited)........ F-9 Notes to Consolidated Financial Statements................................................................. F-13 TRIPLE A SECURITY SYSTEMS, INC. Independent Auditors' Report............................................................................... F-34 Balance Sheets at September 30, 1997, December 31, 1996 and December 31, 1995.............................. F-35 Statements of Income and Retained Earning for the Nine Months Ended September 30, 1997 and September 30, 1996 and for the Years Ended December 31, 1996 and December 31, 1995..................................... F-36 Statements of Cash Flows for the Nine Months Ended September 30, 1997 and September 30, 1996 and for the Years Ended December 31, 1996 and December 31, 1995...................................................... F-37 Notes to Financial Statements.............................................................................. F-38 THE JUPITER GROUP, INC. Independent Auditors' Report............................................................................... F-46 Balance Sheets at September 30, 1997, December 31, 1996 and December 31, 1995.............................. F-47 Statements of Income and Retained Earnings for the Nine Months Ended September 30, 1997 and September 30, 1996 and for the Years Ended December 31, 1996 and December 31, 1995..................................... F-48 Statements of Cash Flows for the Nine Months Ended September 30, 1997 and September 30, 1996 and for the Years Ended December 31, 1996 and December 31, 1995...................................................... F-49 Notes to Financial Statements.............................................................................. F-50 PRO FORMA FINANCIAL INFORMATION--RESPONSE USA, INC. AND SUBSIDIARIES Unaudited Pro Forma Financial Statements................................................................... F-54 Unaudited Pro Forma Condensed Consolidated Balance Sheet at September 30, 1997............................. F-55 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 1997..................................................................................................... F-56 Unaudited Condensed Consolidated Statement of Operations for the Fiscal Year Ended June 30, 1997........... F-57 Notes to Unaudited Pro Forma Financial Statements.......................................................... F-58
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors of Response USA, Inc.: We have audited the accompanying consolidated balance sheet of Response USA, Inc. as of June 30, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company as of June 30, 1997 and the results of its operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Philadelphia, Pennsylvania October 8, 1997 (January , 1998 as to Note 16) The accompanying financial statements reflect a one-for-three reverse split of Common Stock, which is to be effected prior to the effective date of this Registration Statement, which is expected to be on or about January , 1998. The above report is in the form which will be signed by Deloitte & Touche LLP upon consummation of such reverse split, which is described in Note 16 of Notes to Consolidated Financial Statements of the Company and, assuming that from October 8, 1997 to the date of such reverse split, no other events shall have occurred that would affect the accompanying financial statements and notes thereto. F-2 RESPONSE USA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AT JUNE 30, ---------------------------- SEPTEMBER 30, 1996 1997 1997 ------------- ------------- ------------- ASSETS (UNAUDITED) CURRENT ASSETS Cash.............................................................. $ 1,926,766 $ 698,551 $ 682,813 Marketable securities............................................. 100,000 75,000 56,250 Accounts receivable--Current portion Trade--Net of allowance for doubtful accounts of $327,072, $437,208 and $373,432, respectively........................... 1,461,911 1,443,203 1,580,791 Net investment in sales-type leases............................. 125,385 89,124 88,443 Preferred Stock subscription receivable........................... 6,525,000 Inventory......................................................... 652,551 798,814 829,453 Prepaid expenses and other current assets......................... 118,689 271,087 446,524 ------------- ------------- ------------- Total current assets.......................................... 10,910,302 3,375,779 3,684,274 ------------- ------------- ------------- MONITORING CONTRACT COSTS--Net of accumulated amortization of $2,838,374, $5,217,345 and $5,872,197, respectively............... 16,950,387 18,433,133 18,045,284 ------------- ------------- ------------- PROPERTY AND EQUIPMENT--Net of accumulated depreciation and amortization of $1,862,915, $2,363,067 and $2,466,951, respectively...................................................... 1,261,007 1,512,077 1,522,023 ------------- ------------- ------------- OTHER ASSETS Accounts receivable--Noncurrent portion Trade........................................................... 29,421 49,046 37,006 Net investment in sales-type leases............................. 323,817 179,752 165,067 Deposits.......................................................... 48,008 45,310 45,935 Investment in joint venture....................................... 3,139,484 2,963,096 Deferred compensation expense..................................... 892,500 517,500 Deferred financing costs--Net of accumulated amortization of $111,945, $254,154 and $556,131, respectively................... 3,411,803 3,612,727 3,316,249 ------------- ------------- ------------- 3,813,049 7,918,819 7,044,853 ------------- ------------- ------------- $ 32,934,745 $ 31,239,808 $ 30,296,434 ------------- ------------- ------------- ------------- ------------- -------------
See notes to consolidated financial statements F-4 RESPONSE USA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED)
AT JUNE 30, ------------------------------ SEPTEMBER 30, 1996 1997 1997 -------------- -------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) CURRENT LIABILITIES Current portion of long-term debt Notes payable................................................. $ 194,914 $ 100,329 $ 104,956 Capitalized lease obligations................................. 51,064 57,453 52,859 Accounts payable--Trade......................................... 424,921 556,205 738,909 Purchase holdbacks.............................................. 646,976 415,765 571,120 Accrued expenses and other current liabilities.................. 2,033,701 1,288,332 1,076,485 Deferred revenue................................................ 1,591,103 1,981,500 1,981,698 -------------- -------------- ------------- Total current liabilities................................... 4,942,679 4,399,584 4,526,027 -------------- -------------- ------------- LONG-TERM LIABILITIES--Net of current portion Long-term debt Notes payable................................................. 12,374,607 12,435,287 12,872,584 Capitalized lease obligations................................. 31,189 85,435 72,412 Put obligation payable.......................................... 2,580,338 Deferred compensation expense................................... 2,550,000 1,725,000 -------------- -------------- ------------- 14,986,134 15,070,722 14,669,996 -------------- -------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 13) STOCKHOLDERS' EQUITY Preferred Stock--Par value $1,000 Authorized 250,000 shares Issued and outstanding 7,500 shares--June 30, 1996 Issued and outstanding 6,890 shares--June 30, 1997 Issued and outstanding 5,890 shares--September 30, 1997..... 1,605,000 7,757,783 6,818,055 Preferred stock--Series B--Par value $.01 Authorized 3,069.58 shares Issued and outstanding 3,069.58 shares--September 30, 1997...................................................... 31 Common Stock--Par value $.008 Authorized 12,500,000 shares Issued and outstanding 1,284,982 shares--June 30, 1996; 1,769,736 shares--June 30, 1997; 2,189,301 shares--September 30, 1997........................ 10,280 14,158 17,515 Additional paid-in capital...................................... 24,971,800 35,439,510 36,755,462 Unrealized holding losses on available-for-sale securities...... (193,343) (18,750) Accumulated deficit............................................. (13,387,805) (31,441,949) (32,471,902) -------------- -------------- ------------- 13,005,932 11,769,502 11,100,411 -------------- -------------- ------------- $ 32,934,745 $ 31,239,808 $ 30,296,434 -------------- -------------- ------------- -------------- -------------- -------------
See notes to consolidated financial statements F-5 RESPONSE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, THREE MONTHS ENDED -------------------------------------- SEPTEMBER 30, 1995 1996 1997 ----------------------------- ----------- ----------- ------------ 1996 1997 -------------- ------------- (UNAUDITED) (UNAUDITED) OPERATING REVENUES Product sales........................... $ 4,520,062 $ 2,352,449 $ 2,938,618 $ 656,128 $ 662,846 Monitoring and service.................. 4,812,474 8,515,247 9,784,285 2,386,239 2,585,038 ----------- ----------- ------------ -------------- ------------- 9,332,536 10,867,696 12,722,903 3,042,367 3,247,884 ----------- ----------- ------------ -------------- ------------- COST OF REVENUES Product sales........................... 2,635,674 1,718,689 1,970,158 451,535 398,442 Monitoring and service.................. 1,125,123 1,779,490 2,127,257 747,025 768,739 ----------- ----------- ------------ -------------- ------------- 3,760,797 3,498,179 4,097,415 1,198,560 1,167,181 ----------- ----------- ------------ -------------- ------------- GROSS PROFIT.............................. 5,571,739 7,369,517 8,625,488 1,843,807 2,080,703 ----------- ----------- ------------ -------------- ------------- OPERATING EXPENSES Selling, general and administrative..... 6,327,622 6,416,486 9,126,641 1,421,984 1,615,635 Compensation--Options/Employment contracts............................. 3,689,700 862,500 (450,000) Litigation settlement................... 240,000 Recovery of termination benefits cost... (392,699) Recovery of restructuring charges....... (52,920) Depreciation and amortization........... 1,302,208 2,200,894 2,976,433 662,719 837,539 Interest................................ 1,220,618 3,185,603 1,349,480 503,470 643,780 ----------- ----------- ------------ -------------- ------------- 8,644,829 11,802,983 17,142,254 3,450,673 2,646,954 ----------- ----------- ------------ -------------- ------------- LOSS FROM OPERATIONS...................... (3,073,090) (4,433,466) (8,516,766) (1,606,866) (566,251) ----------- ----------- ------------ -------------- ------------- OTHER INCOME/(EXPENSE) Interest income......................... 42,260 21,568 12,176 7,939 1,708 Joint venture loss...................... (123,325) (130,138) ----------- ----------- ------------ -------------- ------------- 42,260 21,568 (111,149) 7,939 (128,430) ----------- ----------- ------------ -------------- ------------- LOSS BEFORE EXTRAORDINARY ITEM............ (3,030,830) (4,411,898) (8,627,915) (1,598,927) (694,681) EXTRAORDINARY ITEM Loss on debt extinguishment............. 2,549,708 2,549,708 ----------- ----------- ------------ -------------- ------------- NET LOSS.................................. (3,030,830) (4,411,898) (11,177,623) (4,148,635) (694,681) Dividends and accretion on preferred stock................................... (6,876,521) (6,125,549) (335,272) ----------- ----------- ------------ -------------- ------------- NET LOSS APPLICABLE TO COMMON SHAREHOLDERS............................ $(3,030,830) $(4,411,898) $(18,054,144) $ (10,274,184) $ (1,029,953) ----------- ----------- ------------ -------------- ------------- ----------- ----------- ------------ -------------- ------------- Loss per common share Loss before extraordinary item.......... $ (15.07) $ (8.61) $ (5.80) $ (1.23) $ (.33) Extraordinary item...................... (1.71) (1.96) -- ----------- ----------- ------------ -------------- ------------- Net loss................................ $ (15.07) $ (8.61) $ (7.51) $ (3.19) $ (.33) ----------- ----------- ------------ -------------- ------------- ----------- ----------- ------------ -------------- ------------- Net loss applicable to common shareholders.......................... $ (15.07) $ (8.61) $ (12.14) $ (7.89) $ (.48) ----------- ----------- ------------ -------------- ------------- ----------- ----------- ------------ -------------- ------------- Weighted average number of shares outstanding............................. 201,064 512,179 1,487,574 1,302,284 2,132,533 ----------- ----------- ------------ -------------- ------------- ----------- ----------- ------------ -------------- -------------
See notes to consolidated financial statements F-6 RESPONSE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNREALIZED PREFERRED STOCK HOLDING PREFERRED STOCK SERIES B COMMON STOCK LOSSES ON ---------------------- ---------------------- -------------------- ADDITIONAL AVAILABLE- NUMBER NUMBER NUMBER PAID-IN FOR-SALE ACCUMULATED OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL SECURITIES DEFICIT ----------- --------- ----------- --------- --------- --------- ---------- ----------- ------------ Balance--June 30, 1994.............. 112,666 $ 901 $7,897,290 $(5,945,077) Issuance of warrants.......... 2,920 Conversion of convertible subordinated promissory notes-- net of related costs of $318,848.......... 65,416 524 2,118,128 Acquisitions........ 88,090 705 1,424,278 Unrealized holding losses on available-for-sale securities........ (68,343) Net loss............ (3,030,830) ----------- --------- ----- --------- --------- --------- ---------- ----------- ------------ Balance--June 30, 1995.............. 266,172 2,130 11,442,616 (68,343) (8,975,907) Exercise of stock options and warrants.......... 485,100 3,880 4,428,863 Conversion of convertible subordinated promissory notes-- Net of related costs of $383,088.......... 372,329 2,979 2,848,933 Acquisitions........ 103,015 824 819,734 Issuance of common stock for consulting services.......... 667 5 8,120 Issuance of common stock as payment of notes payable........... 57,699 462 666,659 Sale of preferred stock............. 7,500 $1,605,000 4,756,875 Unrealized holding losses on available-for-sale securities........ (125,000) Net loss............ (4,411,898) ----------- --------- ----- --------- --------- --------- ---------- ----------- ------------ Balance--June 30, 1996.............. 7,500 1,605,000 1,284,982 10,280 24,971,800 (193,343) (13,387,805) Accretion on preferred stock... 5,895,000 (5,895,000) Discount on and deemed dividends on preferred stock............. 876,521 (876,521) Exercise of stock options and warrants.......... 55,650 445 407,508 Issuance of warrants to consultants in connection with the exercise of warrants.......... 689,000 Repricing of stock purchase warrants.......... 2,848,765 Conversion of convertible subordinated promissory notes-- Net of related costs of $5,068... 3,704 30 44,902 Acquisitions........ 13,900 111 74,889 Issuance of stock options........... 2,032,200 TOTAL ---------- Balance--June 30, 1994.............. $1,953,114 Issuance of warrants.......... 2,920 Conversion of convertible subordinated promissory notes-- net of related costs of $318,848.......... 2,118,652 Acquisitions........ 1,424,983 Unrealized holding losses on available-for-sale securities........ (68,343) Net loss............ (3,030,830) ---------- Balance--June 30, 1995.............. 2,400,496 Exercise of stock options and warrants.......... 4,432,743 Conversion of convertible subordinated promissory notes-- Net of related costs of $383,088.......... 2,851,912 Acquisitions........ 820,558 Issuance of common stock for consulting services.......... 8,125 Issuance of common stock as payment of notes payable........... 667,121 Sale of preferred stock............. 6,361,875 Unrealized holding losses on available-for-sale securities........ (125,000) Net loss............ (4,411,898) ---------- Balance--June 30, 1996.............. 13,005,932 Accretion on preferred stock... 0 Discount on and deemed dividends on preferred stock............. 0 Exercise of stock options and warrants.......... 407,953 Issuance of warrants to consultants in connection with the exercise of warrants.......... 689,000 Repricing of stock purchase warrants.......... 2,848,765 Conversion of convertible subordinated promissory notes-- Net of related costs of $5,068... 44,932 Acquisitions........ 75,000 Issuance of stock options........... 2,032,200
F-7 RESPONSE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
UNREALIZED PREFERRED STOCK HOLDING PREFERRED STOCK SERIES B COMMON STOCK LOSSES ON ---------------------- ---------------------- -------------------- ADDITIONAL AVAILABLE- NUMBER NUMBER NUMBER PAID-IN FOR-SALE ACCUMULATED OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL SECURITIES DEFICIT ----------- --------- ----------- --------- --------- --------- ---------- ----------- ------------ Investment in joint venture........... 364,721 2,918 3,297,082 Conversion of preferred stock... (610) (618,738) 63,446 508 618,230 Issuance of warrants to preferred shareholders...... 105,000 (105,000) Issuance of warrants in connection with the obtaining preferred stock... 350,000 Cancellation of common stock held in escrow......... (16,667) (134) 134 Unrealized holding losses on available-for-sale securities........ 193,343 Net loss............ (11,177,623) ----------- --------- ----- --------- --------- --------- ---------- ----------- ------------ Balance--June 30, 1997.............. 6,890 7,757,783 1,769,736 14,158 35,439,510 0 (31,441,949) Exercise of stock options........... 12,069 97 82,324 Exercise of warrants to lender......... 3,070 $ 31 107,263 858 (889) Discount on and deemed dividends on preferred stock............. 185,272 (185,272) Conversion of preferred stock... (1,000) (1,125,000) 300,000 2,400 1,272,600 (150,000) Issuance costs incurred in connection with the preferred stock settlement........ (38,081) Acquisitions-- pursuant to stock price guarantees........ 233 2 (2) Unrealized holding losses on available-for-sale securities........ (18,750) Net loss............ (694,681) ----------- --------- ----- --------- --------- --------- ---------- ----------- ------------ Balance--September 30, 1997 (unaudited)....... 5,890 $6,818,055 3,070 $ 31 2,189,301 $ 17,515 $36,755,462 $ (18,750) ($32,471,902) ----------- --------- ----- --------- --------- --------- ---------- ----------- ------------ ----------- --------- ----- --------- --------- --------- ---------- ----------- ------------ TOTAL ---------- Investment in joint venture........... 3,300,000 Conversion of preferred stock... 0 Issuance of warrants to preferred shareholders...... 0 Issuance of warrants in connection with the obtaining preferred stock... 350,000 Cancellation of common stock held in escrow......... 0 Unrealized holding losses on available-for-sale securities........ 193,343 Net loss............ (11,177,623) ---------- Balance--June 30, 1997.............. 11,769,502 Exercise of stock options........... 82,421 Exercise of warrants to lender......... 0 Discount on and deemed dividends on preferred stock............. 0 Conversion of preferred stock... 0 Issuance costs incurred in connection with the preferred stock settlement........ (38,081) Acquisitions-- pursuant to stock price guarantees........ 0 Unrealized holding losses on available-for-sale securities........ (18,750) Net loss............ (694,681) ---------- Balance--September 30, 1997 (unaudited)....... $11,100,411 ---------- ----------
See notes to consolidated financial statements F-8 RESPONSE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED JUNE 30, SEPTEMBER 30, ----------------------------------- ---------------------- 1995 1996 1997 1996 1997 ---------- ---------- ----------- ----------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net Loss........................................ $(3,030,830) ($4,411,898) ($11,177,623) $(4,148,635) $(694,681) Adjustments to reconcile net loss to net cash used in operating activities Amortization of monitoring contract costs..... 959,574 1,765,744 2,378,969 546,024 654,851 Depreciation and amortization of property and equipment................................... 342,634 435,150 547,464 116,695 136,438 Gain on sale of monitoring contracts.......... (91,663) (Gain)/Loss on sale of property and equipment................................... 13,177 39,851 15,389 11,319 (2,489) Loss on available-for-sale securities......... 218,343 Amortization of deferred financing costs and debt discount............................... 87,594 85,324 389,674 401,264 301,477 Amortization of goodwill (see Note 3)......... 50,000 46,250 Interest accrued and added to long-term notes payable..................................... 14,804 Restructuring charges......................... 140,691 Loss on joint venture......................... 123,325 130,138 Issuance of common stock for interest on note payable..................................... 11,849 Issuance of common stock for consulting fees........................................ 8,125 Issuance of warrants for consulting fees...... 689,000 106,000 Compensation expense benefit in connection with the issuance of stock options and employment agreements....................... 3,689,700 862,500 (450,000) (Increase) decrease in accounts receivable Trade....................................... (156,123) (330,830) (29,004) (445,179) (125,546) Net investment in sales-type leases......... (96,354) 31,344 53,843 (3,006) 15,365 Decrease in income tax refunds receivable..... 109,000 (Increase) decrease in notes receivable--Related party................... (50,000) 50,000 (Increase) decrease in inventory.............. 180,351 (171) (146,263) (155,712) (30,639) (Increase) decrease in prepaid expenses and other current assets........................ 57,375 (13,203) (152,397) 3,869 (175,436) (Increase) decrease in deposits............... (2,270) 9,014 2,697 (3,702) (625) Increase (decrease) in accounts payable--Trade.............................. (30,033) (78,479) 130,672 101,575 4,331 Decrease in termination benefits obligation... (409,673) Increase (decrease) in accrued expenses and other current liabilities................... (96,024) 196,940 (712,877) 200,477 (33,473) Increase (decrease) in deferred revenues...... 676,264 302,488 390,395 (46,005) 198 ---------- ---------- ----------- ----------- --------- Net cash used in operating activities....... (1,289,843) (1,990,415) (3,538,693) (2,452,516) (223,841) ---------- ---------- ----------- ----------- ---------
See notes to consolidated financial statements F-9 RESPONSE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED YEAR ENDED JUNE 30, SEPTEMBER 30, ----------------------------------- ---------------------- 1995 1996 1997 1996 1997 ---------- ---------- ----------- ----------- --------- (UNAUDITED) CASH FLOWS FROM INVESTING ACTIVITIES Investment in joint venture..................... (12,810) Decrease in cash held in escrow................. 582,220 Proceeds from the sale of monitoring contracts..................................... 298,938 Purchase of monitoring contracts (net of purchase holdbacks)........................... (6,061,319) (6,210,340) (3,863,360) (482,183) (111,648) Proceeds from the sale of property and equipment..................................... 21,537 11,422 39,864 20,000 Purchase of property and equipment.............. (462,210) (459,898) (636,659) (120,730) (114,431) ---------- ---------- ----------- ----------- --------- Net cash used in investing activities....... (5,919,772) (6,359,878) (4,472,965) (582,913) (226,079) ---------- ---------- ----------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of preferred stock... 7,500,000 7,500,000 Costs incurred in connection with the preferred stock issuance................................ (1,012,449) (1,146,924) (38,081) Costs incurred in connection with common stock issuances..................................... (34,220) Deferred financing costs incurred............... (163,550) (952,537) 22,761 (691,377) (5,000) Convertible subordinated promissory notes issued in connection with private placements......... 912,500 1,960,000 Proceeds of long-term notes payable............. 7,523,320 6,963,891 15,235,000 10,750,000 425,000 Principal payments on long-term debt Notes payable................................. (1,168,081) (2,244,495) (15,292,934) (15,076,982) (12,542) Capitalized lease obligations................. (30,772) (41,988) (82,460) (21,224) (17,616) Net proceeds from the exercise of stock options and warrants.................................. 4,432,743 447,745 190,000 82,421 ---------- ---------- ----------- ----------- --------- Net cash provided by financing activities... 7,073,417 10,117,614 6,783,443 1,503,493 434,182 ---------- ---------- ----------- ----------- --------- NET INCREASE (DECREASE) IN CASH................... (136,198) 1,767,321 (1,228,215) (1,531,936) (15,738) CASH--BEGINNING................................... 295,643 159,445 1,926,766 1,926,766 698,551 ---------- ---------- ----------- ----------- --------- CASH--ENDING...................................... $ 159,445 $1,926,766 $ 698,551 $ 394,830 $ 682,813 ---------- ---------- ----------- ----------- --------- ---------- ---------- ----------- ----------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest.......................... $1,104,653 $3,012,698 $ 1,280,340 $ 199,857 $ 434,892 Cash paid (received) during the year for income taxes--Net.................................... (109,000) -- --
See notes to consolidated financial statements F-10 RESPONSE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES YEARS ENDED JUNE 30, 1995, 1996 AND 1997 During the years ended June 30, 1995, 1996 and 1997, convertible subordinated promissory notes of $2,437,500, $3,235,000 and $50,000, respectively, were converted into common stock. The Company reduced deferred financing costs and additional paid-in capital in the amount of $318,848, $383,088 and $5,068 for the years ended June 30, 1995, 1996 and 1997 respectively. During the years ended June 30, 1995, 1996 and 1997, long-term notes payable of $62,704, $63,933 and $74,028, respectively, were incurred for the purchase of property and equipment. During the years ended June 30, 1995, 1996 and 1997, capitalized lease obligations of $59,947, $43,933 and $143,100, respectively, were incurred for the acquisition of property and equipment. During the years ended June 30, 1996 and 1997, the Company reduced monitoring contract costs and the corresponding purchase holdbacks in the amount of $838,174 and $306,808, respectively. The Company issued 4,656 shares of its common stock, valued at $67,781, as payment for purchase holdbacks during the year ended June 30, 1996. During the year ended June 30, 1996, the Company increased monitoring contract costs and the corresponding transition costs liability (included in accrued expenses and other current liabilities) in the amount of $525,647. During the years ended June 30, 1995, 1996 and 1997, the Company issued 88,090, 103,015 and 13,900 shares of its common stock, valued at $1,424,983, $820,558 and $75,000, respectively, in connection with acquisitions (see Note 2). The amount includes 5,000 shares of common stock valued at $70,311 issued as payment of deferred financing costs during the year ended June 30, 1996. During the year ended June 30, 1996, the Company recorded a preferred stock subscription receivable of $6,525,000 for preferred stock subscribed with a par value of $7,500,000, net of the related placement fees of $1,138,125 (of which $975,000 was paid from the proceeds at closing, and $163,125 was included in accrued expenses and paid subsequently). The Company issued warrants in connection with the sale of preferred stock valued at $3,200,000 and recorded a discount on the preferred stock of $5,895,000. During the year ended June 30, 1997, the Company recorded accretion to preferred stock in the amount of $5,895,000 with a corresponding charge to accumulated deficit. The accretion represents the intrinsic value of the beneficial conversion feature contained within the preferred stock (see Note 9). During the year ended June 30, 1997, the Company recorded $350,000 as additional paid-in capital, related to the issuance of warrants to a consultant in connection with the sale of preferred stock. During the year ended June 30, 1997, the Company recorded a deemed dividend in the amount of $704,271 in connection with the preferred stock issuance, with a corresponding charge to accumulated deficit (see Note 9). As a result, the Company recorded a discount on preferred stock in the amount of $172,250. During the year ended June 30, 1997, $610,000 of preferred stock and $8,738 in deemed dividends were converted into 63,446 shares of common stock. During the year ended June 30, 1997, the Company recorded additional paid-in capital of $105,000, with a corresponding charge to accumulated deficit, to reflect the fair value of the additional warrants issued to the preferred shareholders. F-11 RESPONSE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES YEARS ENDED JUNE 30, 1995, 1996 AND 1997 (CONTINUED) During the year ended June 30, 1997, the Company issued 364,721 shares of common stock, valued at $3.3 million in connection with a joint venture (see Note 3). During the year ended June 30, 1997, in connection with the repricing of stock purchase warrants, the Company recorded deferred financing costs and additional paid-in capital of $2,848,765. During the year ended June 30, 1997, the Company reduced accounts receivable-trade and accounts receivable-net investment in sales-type leases in the amount of $28,088 and $126,482, respectively, and recorded monitoring contract costs of $154,570, in connection with the purchase of monitoring accounts. During the year ended June 30, 1997, the Company recorded consulting fees in the amount of $689,000 in connection with the exercise of warrants. During the year ended June 30, 1996, the Company issued 57,699 shares of common stock, valued at $667,121, as payment on notes payable. During the year ended June 30, 1996, the Company issued 667 shares of common stock, valued at $8,125 as payment for consulting services. During the year ended June 30, 1995, a long term note payable of $150,000 was incurred in connection with the purchase of monitoring contracts (see Note 2). QUARTERS ENDED SEPTEMBER 30, 1996 AND 1997 During the three months ended September 30, 1997 and 1997, long-term notes payable of $19,049 and $29,464, respectively, were incurred for the purchase of property and equipment. In July 1996, capitalized lease obligations of $143,000 were incurred for the acquisition of property and equipment. During the three months ended September 30, 1996, the Company recorded accretion to preferred stock in the amount of $5,895,000 with a corresponding charge to accumulated deficit. The accretion represents the intrinsic value of the beneficial convertion feature contained within the preferred stock. During the three months ended September 30, 1996 and 1997, the Company recorded deemed dividends and accretion on such dividends in the amount of $230,549 and $185,272, respectively, in connection with the preferred stock issuance, with a corresponding charge to accumulated deficit (see Note 4). During the three months ended September 30, 1996 and 1997, $510,000 and $1,000,000 of preferred stock, and $4,767 and $100,000 in deemed dividends were converted into 50,357 and 300,000 shares of common stock, respectively. During the three months ended September 30, 1996, the Company increased the put obligation payable associated with warrants issued to the Company's lender and the corresponding charge to deferred financing costs by $585,065 in connection with the refinancing at June 30, 1996. On June 24, 1997, the Company, in return for the holder of the warrants forgiving the put obligation feature, reduced the exercise price of such warrants from $9.75 to $4.50. On August 13, 1997, the Holder exercised the warrants and received 107,263 shares of common stock and blank check preferred stock convertible into 102,319 shares of common stock (see Note 3). During the three months ended September 30, 1997, the Company issued 2,900 shares of its common stock and canceled 2,667 shares of its common stock pursuant to guarantees of stock valuations, in connection with past acquisitions in monitoring contracts. During the three months ended September 30, 1996, convertible subordinated promissory notes of $50,000 were converted to common stock. As a result, the Company reduced deferred financing costs and additional paid-in capital in the amount of $5,068. F-12 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Response USA, Inc. (USA), its wholly-owned subsidiaries Response Ability Systems, Inc. (RAS), United Security Systems, Inc. (USS), and Emergency Response Systems, Inc. (ERS) (together, the "Company"). All significant intercompany transactions and balances have been eliminated. UNAUDITED INTERIM FINANCIAL INFORMATION The consolidated financial statements and related notes at September 30, 1997 and for the three months ended September 30, 1997 and 1996 are unaudited, but include all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position and results of operations for the interim periods. The results of operations for the three months ended September 30, 1997 are not necessarily indicative of the operating results to be expected for the full fiscal year. NATURE OF BUSINESS AND REVENUE RECOGNITION The Company is a fully-integrated security systems provider engaged in the monitoring, sale, installation and maintenance of residential and commercial security systems and Personal Emergency Response Systems (PERS). The Company is a regional provider of security alarm monitoring services for residential and small business subscribers operating in the states of New York, New Jersey, Pennsylvania, Delaware and Connecticut. The Company is also a nationwide provider of PERS products which enable individual users, such as elderly or disabled persons, to transmit a distress signal using a portable transmitter. Revenues from personal emergency response system sales are recognized upon shipment. Revenues under contracts for monitoring and service are deferred and recognized ratably over the contract period. Revenues from the sale of security and fire alarm systems are recognized when installed. The Company leases equipment to customers principally under sales-type leases. The lease payments to be received over the term of the leases are recorded as receivables at the inception of the lease. Interest income attributable to the lease contracts is initially recorded as unearned income and subsequently recognized as finance revenue using the interest method over the term of the leases. The lease contracts are generally for five-year terms and the residual value of the leased equipment is nominal at the end of the lease period. The Company also leases certain equipment to customers under month-to-month operating leases, with revenues recognized as income ratably over the lease terms. The Company sells extended warranty and product maintenance contracts to its customers. Revenues from these contracts are deferred and recorded as income using the straight-line method over the term of the contracts. The Company also provides for estimated future warranty costs as necessary. USE OF ESTIMATES The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-13 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK The Company's products are sold directly and through distributors in the United States to hospitals, home healthcare agencies and individual consumers. The Company performs ongoing credit evaluations of its customers and, in the case of sales-type leases, the leased equipment serves as collateral in the transactions. The Company maintains reserves for potential credit losses. MARKETABLE SECURITIES The Company's investments in marketable securities have been categorized as available-for-sale and are stated at fair value. Realized gains and losses, determined using the specific identification method, are included in operations; unrealized holding gains and losses are reported as a separate component of stockholders' equity. Marketable securities consist of an investment in the common stock of one company. During 1997, management concluded that a decline in the fair value of this common stock was not temporary and recorded a writedown of $218,343 which is included in selling, general and administrative expenses. ALLOWANCE FOR DOUBTFUL ACCOUNTS An allowance for doubtful accounts is provided by the Company based on historical collection experience and a review of the current status of existing receivables. INVENTORY Inventory is stated at the lower of cost (first-in, first-out method) or market. MONITORING CONTRACT COSTS AND AMORTIZATION Monitoring contracts acquired are stated at cost. The costs of acquired monitoring contracts includes the costs of accounts purchased and any contractual rights to related monitoring revenues purchased from alarm system dealers and emergency response system dealers, and the estimated fair value of the accounts acquired in business acquisitions, including an accrual for estimated acquisition transition costs of $162,703 and $68,645 for Fiscal 1996 and Fiscal 1997, respectively. The estimated transition costs include costs associated with transferring the customers to the Company's central monitoring station, notification of change in service provider, and service calls to customer premises. Costs related to sales, marketing and installation of systems for accounts internally generated are charged to expense as incurred. The Company records purchase holdbacks, in connection with its acquisitions of monitoring contracts, as a liability for delinquent accounts and for future cancellations within an agreed upon time period. Monitoring contract costs and the corresponding purchase holdback liabilities are reduced for delinquent accounts and cancellations as specified in each agreement. The costs of acquired monitoring contracts purchased from emergency response system dealers and alarm system dealers are amortized using the straight-line method over estimated lives ranging from five to ten years. It is the Company's policy to periodically review actual account attrition and, if necessary, to adjust downward the remaining estimated lives of acquired account pools to reflect their anticipated future revenue streams. F-14 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION Property and equipment are stated at cost. Expenditures for additions, renewals and betterments are capitalized; expenditures for maintenance and repairs are charged to expense as incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation or amortization are eliminated from the accounts and any resulting gain or loss is credited or charged to operations. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. DEFERRED FINANCING COSTS AND AMORTIZATION Costs incurred in connection with various financing have been deferred; amortization is provided using the straight-line method over the terms of the financing, and is included in interest expense. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long lived assets and intangbles for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company determines the value of subscriber accounts based on the cash flows from the monthly recurring revenue (MRR) stream using the most recent historical attrition rate and the aggregate MRR. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for transactions in which goods or services are received in return for the issuance of equity instruments based on the fair value of the equity instruments or the goods or services received, whichever is more reliably measured. NEW ACCOUNTING PRONOUNCEMENTS In December 1996, the Financial Accounting Standards Board issued SFAS No. 125, ACCOUNTING FOR THE TRANSFERS AND SERVICING OF FINANCIAL ASSETS, which the Company has adopted for its fiscal year ended June 30, 1997. SFAS No. 125 does not have any effect on the Company's financial position or results of operations for its year ended June 30, 1997, and does not anticipate any material impact on the financial statements of the registrant. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, STANDARDS FOR COMPUTING AND PRESENTING EARNINGS PER SHARE (EPS), which will be adopted by the Company in the year ended June 30, 1998, as required by this statement. When adopted, SFAS No. 128 will not have any effect on the Company's financial position or results of operations but will require the Company to provide expanded disclosure regarding EPS computations. In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME. This statement, which establishes standards for reporting and disclosure of comprehensive income, is effective for interim and annual periods beginning after December 15, 1997, although earlier adoption is permitted. Reclassification of financial information for earlier periods presented for comparative purposes is required under SFAS No. 130. As this statement only requires additional disclosures in the Company's financial statements, its adoption will not have any impact on the Company's financial position or results of operations. The Company expects to adopt SFAS No. 130 effective July 1, 1998. In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement, which establishes standards for the reporting of information about operating F-15 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) segments and requires the reporting of selected information about operating segments in financial statements, is effective for fiscal years beginning after December 15, 1997, although earlier application is permitted. Reclassification of segment information for earlier periods presented for comparative purposes is required under SFAS No. 131. As this statement only requires additional disclosures in the Company's financial statements, its adoption will not have any impact on the company's financial position or results of operations. The Company expects to adopt SFAS No. 131 effective July 1, 1998. INCOME TAXES The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Also, the tax benefits resulting from the utilization of net operating loss carryforwards are recorded as ordinary income. A valuation allowance is established for deferred tax assets not expected to be realized. Principal differences between the Company's financial reporting and tax bases include accounts receivable reserves, inventory reserves, depreciation and amortization of property and equipment, amortization of capitalized costs, and deferred revenue. LOSS PER COMMON SHARE Loss per common share is computed based on the weighted average number of common shares outstanding during each period after deducting dividends and accretion on preferred stock. The effect of common stock equivalents on loss per share is not applicable for loss periods. 2. ACQUISITIONS Under the terms of an agreement in connection with an acquisition in March 1994, during the year ended June 30, 1995, the Company issued an additional 40,000 shares of common stock valued at $477,137 based on performance. In November 1994, the Company acquired all of the outstanding common stock of Universal Security Systems, Inc. (USSI), a New Jersey corporation, in exchange for 25,257 shares of the Company's common stock, valued at $576,641, issued to the former stockholders of USSI. USSI was engaged in the installation, servicing and monitoring of electronic security systems. The Company also entered into an employment agreement with one of the former stockholders of USSI (see Note 14). The following represents the assets purchased and the liabilities assumed: ASSETS Cash.......................................................... $ 457 Accounts receivable........................................... 57,560 Inventory..................................................... 50,665 Prepaid expenses.............................................. 8,484 Property and equipment........................................ 50,454 Monitoring contracts.......................................... 995,643 Deposits...................................................... 3,000 --------- 1,166,263 --------- LIABILITIES Notes payable--Stockholders................................... 309,902 Accounts payable.............................................. 150,356 Accrued expenses.............................................. 84,690
F-16 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) Deferred revenue.............................................. 44,674 --------- 589,622 --------- Total purchase price............................................ $ 576,641 --------- ---------
Also in November 1994, the Company acquired substantially all of the assets (monitoring contracts) of the Medical Alert Systems Monitoring Division of Emergency Response Systems, Inc. (Division), a California corporation. The Division was engaged in the installation, servicing and monitoring of personal emergency response systems. In consideration of this acquisition with a cost of $1,882,930, the Company paid the Division an aggregate of $1,700,000 consisting of $1,550,000 in cash, issued a note payable over two years in the amount of $150,000 and issued 3,333 shares of common stock valued at $100,000 to the shareholders and principals of the Division, and incurred acquisition costs of $82,930. As part of this acquisition, the Company also issued 3,333 shares of restricted common stock as payment of financing costs to the lender that financed the acquisition. During the year ended June 30, 1995, the Company purchased additional monitoring contracts for an aggregate of $4,859,516. As consideration, the Company paid $3,668,944 in cash, recorded purchase holdbacks of $937,603 (which are payable over periods of up to eighteen months based on performance guarantees of the seller), and issued 16,167 shares of common stock valued at $252,969. During the year ended June 30, 1996, the Company purchased monitoring contracts for an aggregate of $7,996,459. As consideration, the Company paid $5,638,637 in cash, incurred acquisition costs of $525,647, recorded purchase holdbacks of $1,081,928 (which are payable over periods of up to 18 months based on performance guarantees of the seller), and issued 98,015 shares of common stock valued at $750,247. As part of the acquisitions, the Company also issued 5,000 shares of restricted common stock valued at $70,311 as payment of financing costs to the lender that financed the acquisitions. On March 27,1997, the Company completed the acquisition of all the outstanding common stock of Reliable-Hawk, Inc. (RHI), a New Jersey corporation, after giving effect to RHI's distribution to its stockholders of all of its net assets other than monitoring and service contracts. RHI is engaged in the installation, servicing and monitoring of electronic security systems. In consideration of the acquisition with a cost of $1,743,181, the Company paid $1,469,503 in cash, incurred acquisition costs of $35,400, recorded purchase holdbacks of $163,278 and issued 8,333 shares of its common stock valued at $75,000. The following represents total assets acquired and the liabilities assumed: ASSETS Monitoring Contracts.......................................... $1,707,781 Acquisition costs (assigned to monitoring contracts).......... 35,400 --------- Total Purchase Price............................................ $1,743,181 --------- ---------
During the year ended June 30, 1997, the Company purchased additional monitoring contracts for an aggregate of $2,425,344. As consideration, the Company paid $1,955,209 in cash, reduced amounts receivable by $154,570, incurred acquisition costs of $69,541 and recorded purchase holdbacks of $246,024 (which are payable over periods of up to twenty-one months based on performance guarantees of the seller). During the three months ended September 30, 1997, the Company purchased monitoring contracts for an aggregate of $267,004 (unaudited). As consideration, the Company paid $70,018 (unaudited) in cash, F-17 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) including acquisition costs of $7,426 (unaudited), and recorded purchase holdbacks of $196,986 (unaudited) (which are payable over periods of up to eighteen months based on performance guarantees of the seller). 3. INVESTMENT IN JOINT VENTURE On March 4, 1997, the Company entered into a purchase agreement with BKR, Inc. BKR, a Nevada corporation and HealthLink, Ltd. (HL), a Nevada limited liability company. The parties agreed to the purchase by the Company of a 50% interest in the assets of BKR, the contribution of BKR's remaining 50% interest in the assets to HL, and the contribution of the Company's 50% interest in BKR's assets to HL. HL is engaged in the sale and monitoring of PERS to the general public primarily through national retail and pharmacy chains. In consideration of the HL joint venture, the Company issued 364,721 shares of its common stock, valued at $3.3 million, to BKR for their 50% interest in HL. At the date of the Company's investment in HL, the investment in HL exceeded the Company's share of the underlying net assets by $1,500,000. The excess is being amortized by the straight line method over 10 years. The Company's investment in HL at June 30, 1997 is summarized as follows: Initial Investment.............................................. $3,312,809 Cumulative equity in net losses of HL........................... (123,325) Cumulative authorization of Goodwill............................ (50,000) --------- Total........................................................... $3,139,484 --------- ---------
The Company accounts for its investment in HL under the equity method. BKR, as part of the purchase agreement, is entitled to exercise warrants to purchase shares of the Company's common stock subject to the following provisions: (i) for each 10,000 PERS placed on-line by HL, 10,000 shares of common stock may be purchased at an exercise price of $9.00 per share, and (ii) in no event shall such warrant be exercisable for more than 150,000 shares of common stock. This warrant may be exercised in whole or in part at any time, or from time to time, commencing on March 4, 1997 and expiring on March 3, 2002. The following summary of financial data has been derived from the unaudited Financial Statements of HL for the four months ended June 30, 1997: Operating Revenues............................................. $ 305,750 Cost of Revenues............................................... 192,059 ---------- Gross Profit................................................... 113,691 Selling, general and administrative expense.................... 355,962 Interest expense............................................... 4,380 ---------- Net Loss....................................................... $ (246,651) ---------- ---------- Current Assets................................................. $ 117,870 Working capital (deficiency)................................... (117,391) Total Assets................................................... 3,568,176 Current Liabilities............................................ 235,621 Stockholders' equity........................................... 3,332,915
F-18 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. NET INVESTMENT IN SALES-TYPE LEASES Information pertaining to the Company's net investment in sales-type leases is as follows: Minimum lease payments receivable................................. $ 363,052 Less: Unearned Interest--Finance revenue.......................... (65,976) Allowance for doubtful accounts................................... (28,200) --------- Net Investment in sales-type leases............................... $ 268,876 --------- ---------
At June 30, 1997, minimum lease payments are receivable as follows:
YEAR ENDING JUNE 30, - ---------------------------------------------------------------------------------- 1998.............................................................................. $ 127,683 1999.............................................................................. 93,413 2000.............................................................................. 76,776 2001.............................................................................. 55,083 2002.............................................................................. 10,097 ---------- $ 363,052 ---------- ----------
5. INVENTORY
1996 1997 ---------- ---------- Parts Inventory....................................................... $ 145,098 $ 613,646 Finished Goods........................................................ 507,453 185,168 ---------- ---------- $ 652,551 $ 798,814 ---------- ---------- ---------- ----------
6. PROPERTY AND EQUIPMENT
ESTIMATED USEFUL LIVES 1996 1997 ----------- ------------ ------------ Office furniture and equipment....................... 5 years $ 2,080,588 $ 2,513,120 Equipment held for lease............................. 5 years 650,285 800,555 Automotive equipment................................. 3 years 297,944 343,576 Leasehold improvements............................... 5 years 95,105 217,893 ----------- ------------ ------------ 3,123,922 3,875,144 Less accumulated depreciation and amortization....... 1,862,915 2,363,067 ------------ ------------ $ 1,261,007 $ 1,512,077 ------------ ------------ ------------ ------------
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. F-19 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. LONG-TERM NOTES PAYABLE
SEPTEMBER 30, JUNE 30, JUNE 30, 1997 1996 1997 (UNAUDITED) ------------- ------------- ------------- LINE OF CREDIT AGREEMENT Note payable with interest only due through June 30, 2000 at Prime Plus 1-3/4% on the outstanding loan balance; a commitment fee of .5% is payable on the average daily unused credit; collateralized by all assets of the Company..................... -- $ 12,235,000 $ 12,660,000 EQUIPMENT FINANCING Payable in monthly installments aggregating $4,557, bearing interest at rates ranging from 3.90% to 11.83%; final payments due April, 1997 through March, 2000; collateralized by related equipment....................................................... $ 93,880 88,950 105,874 REORGANIZATION DEBT As part of the 1990 plan of reorganization of a 1987 bankruptcy, the U.S. Bankruptcy Court approved a 30.5% settlement on the total unsecured claims submitted; payments are due March 1 of each year, as follows: 3% ($86,817) each year--1998 through 2000; interest imputed at 14%; net of imputed interest of $58,894......................................................... 265,652 201,557 201,557 Federal priority tax claims payable in annual installments of $2,211 through March 1999 and $1,896 thereafter................. 12,321 10,109 10,109 CONVERTIBLE SUBORDINATED PROMISSORY NOTES 5% convertible subordinated promissory notes due November 30, 1996............................................................ 75,000 -- 10% convertible subordinated promissory notes due December 31, 1997............................................................ 50,000 -- OTHER Note payable in declining monthly installments of $23,500 to $8,250 from July 1996 through January 1998 including interest at 23.6%; collateralized by related monitoring contracts........... 240,536 -- Note payable in increasing monthly installments of $11,600 to $13,750 from July 1996 through September 1998 including interest at 24.2%; collateralized by related monitoring contracts........ 256,035 --
F-20 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. LONG-TERM NOTES PAYABLE (CONTINUED)
SEPTEMBER 30, JUNE 30, JUNE 30, 1997 1996 1997 (UNAUDITED) ------------- ------------- ------------- Notes payable in monthly installments of $431,136 including interest at rates ranging from 24.1% to 28%; final payments due June 1997 through February 2001; collateralized by related monitoring contracts............................................ 10,689,455 -- Note payable in monthly installments of $11,500 through March 1997, $13,500 from April 1997 through March 1998, $15,500 from April 1998 through March 1999, and $17,500 from April 1999 through October 2000, including interest at 25.1%; collateralized by related monitoring contracts.................. 443,551 -- Note payable; interest at 21.5% accrued monthly and added to the principal balance through August 1997; beginning in September 1997, payable in monthly installments of $26,000 including interest at 21.5%; final payment due in January 2000; collateralized by related monitoring contracts.................. 443,091 -- ------------- ------------- ------------- 12,569,521 12,535,616 12,977,540 Less Current Portion............................................ 194,914 100,329 104,956 ------------- ------------- ------------- $ 12,374,607 $ 12,435,287 $ 12,872,584 ------------- ------------- ------------- ------------- ------------- -------------
Principal payments on long-term notes payable for the next five years are due as follows: Years ending June 30, 1998--$100,329; 1999--$103,146; 2000--$12,228,020; 2001--$1,896; 2002 -$1,896. On June 30, 1996, the Company entered into a four-year $15,000,000 revolving bank line of credit agreement. Loans outstanding bear interest at prime plus 1 3/4%, are collateralized by all assets of the Company, and are subject to certain restrictive covenants. The Company was not in compliance with certain covenants as of September 30 and June 30, 1997 (see Note 16, Subsequent Events). The agreement also provides for a commitment fee payable monthly in arrears, of .5% based on the average daily unused credit. As of June 30, 1997, the Company has available on its revolving credit facility the amount of $2,765,000. The Company is prohibited from declaring dividends while any outstanding balance exists under the line of credit. In connection with obtaining the line of credit, the Company issued a stock purchase warrant (the Warrant) to an affiliate of the bank which provided the line of credit. The terms of this Warrant, which were subsequently modified (see below), included the following: (i) number of shares, 344,045; (ii) exercise price, $9.75 per share; (iii) put obligation feature, which the Holder of the warrant can require, during the period between July 1, 2000 and June 30, 2001 upon 10 days notice, the Company to purchase the Warrant for the difference between the market price of the Company's common stock and the exercise price times 344,045 shares. F-21 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. LONG-TERM NOTES PAYABLE (CONTINUED) The Company recorded deferred financing costs of approximately $6,800,000 related to this warrant (based on an independent valuation) and a related put obligation payable amount. The deferred financing costs were originally to be amortized over the life of the related line of credit (four years) using the straight-line method. The put obligation and the deferred financing costs were adjusted quarterly based upon the value (market price less exercise price of the obligation). On June 24, 1997, the Company, in return for the holder of the Warrant forgiving the put obligation feature, reduced the exercise price of the Warrant to $4.50. This resulted in the Company recording deferred financing costs for the market value of the revised Warrant ($2,800,000 based on an independent valuation), crediting additional paid-in capital for the same amount. The remaining deferred financing costs will be amortized using the straight-line method over the remaining life of the line of credit. On August 13, 1997 the Holder exercised the Warrant and received 107,263 shares of common stock and blank check preferred stock convertible into 102,319 shares of common stock. No cash was paid by the Warrant holder. Also in connection with this agreement, the Company issued warrants to a consultant to purchase 33,334 shares of the Company's common stock at an exercise price of $13.50 per share; these warrants expire June 30, 2000. The value of these warrants ($350,000) is being amortized over four years. With the proceeds received from the issuance of preferred stock (see Note 9) and a $10,500,000 advance on July 1, 1996, from a line of credit, the Company paid off notes payable with balances aggregating $12,072,668 at June 30, 1996 plus a prepayment penalty. The prepayment penalty of $2,415,877 and unamortized deferred financing costs of $133, 831 associated with the notes paid have been recorded as an extraordinary item during the year ended June 30, 1997. 8. CAPITALIZED LEASE OBLIGATIONS The Company leases office furniture and equipment with a cost of $245,808 and a net book value of $188,462 at June 30, 1997, under capital leases. The following is a schedule by years of future minimum lease payments under these leases together with the present value of the net minimum lease payments as of June 30, 1997.
YEAR ENDING JUNE 30, - ---------------------------------------------------------------------------------- 1998.............................................................................. $ 70,069 1999.............................................................................. 51,061 2000.............................................................................. 43,933 2001.............................................................................. -- 2002.............................................................................. -- ---------- Total minimum lease payments...................................................... 165,063 Less amount representing interest................................................. 22,175 ---------- Present value of net minimum lease payments....................................... $ 142,888 ---------- ----------
F-22 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. PREFERRED STOCK In May, 1996, the Company authorized the issuance of 7,500 shares of 1996--Series A Convertible Preferred Stock with a Par Value of $1,000 per share. The preferred shares are convertible into a number of common shares determined based on the premium plus $1,000, divided by the conversion price. The premium equates to an annual ten percent "deemed" dividend and the conversion price is equal to the lesser of $15.00 or 80% of the average closing bid price of the Company's common stock for the five days immediately preceding the date of conversion. The holders of Preferred Stock are not entitled to receive dividends and have no voting rights. Up to fifty percent of the preferred stock may be converted by the holder beginning 45 days after closing and the balance may be converted beginning 70 days after closing. Since the convertible preferred stock contained a beneficial conversion feature at the date of issue, the company allocated a portion of the proceeds equal to the value of that feature ($5,895,000) to additional paid-in capital. This amount was amortized over the 70 day minimum period the preferred shareholders were required to hold the shares before conversion was allowed. Preferred shares were then accreted to their face value by recording $5,895,000 as a charge to accumulated deficit. Due to an unexpectedly large volume of conversion requests, after 610 shares of the preferred stock were converted to common shares, the company suspended conversion of its Series A Convertible Preferred Stock due to the negative impact of the conversions on the common stock price. Subsequent to the suspension of the conversion of the preferred stock, three groups of preferred shareholders (Halifax Fund, L.P., Lake Management L.D.C. and KA Investments, L.D.C.) commenced legal action to force the company to resume conversion of the preferred stock. In order to settle the matters of litigation, the Company reached two separate agreements with the complainants. During June, 1997, all preferred shareholders, other than Halifax Fund, L.P. received 5,000 warrants to purchase common stock of the Company for $6.00 per share for each 100 shares of preferred stock held. Fifty percent of said warrants are exercisable after one year from issuance and the remaining fifty percent are exercisable after two years from issuance. In return for the filing by the Company of a registration statement with the SEC for the primary issuance by the Company of securities to generate approximately $8,750,000 of net proceeds for use by the Company to redeem all of the Preferred Stock (the "Registration Statement"), on or before October 11, 1997, the preferred shareholders agreed to refrain from all conversions of the preferred shares until November 30, 1997. The value of these warrants, $90,000, was recorded as a dividend to the preferred shareholders. On June 30, 1997 the company reached an agreement with Halifax Fund, L.P. where the company agreed to convert the 1,000 shares of preferred stock owned by this group into 300,000 shares of the company's common stock and assisted in locating a purchaser for the 300,000 shares from the preferred shareholders for a total of $1,500,000. The company also issued to these former preferred shareholders 5,000 warrants to purchase common stock of the company for $6.00 per share for each 100 shares of preferred stock held. Fifty percent of said warrants are exercisable after one year from issuance and the remaining fifty percent are exercisable after two years from issuance. The Company also agreed to reimburse these preferred shareholders $150,000 for legal fees. In the event that the Company settles with any other preferred shareholders on terms which these shareholders, in their sole discretion, believe are better than those they have received, these shareholders have the right to elect the alternative settlement. During the year ended June 30, 1997, the Company reclassified $5,895,000 which had been previously reported in the 1996 financial statements as Preferred Stock to Additional Paid-in Capital. This was a F-23 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. PREFERRED STOCK (CONTINUED) result of March, 1997 comments by the Staff of the Securities and Exchange Commission regarding the treatment of beneficial conversion features of preferred stock. During the year ended June 30, 1997, deemed convertible preferred stock dividends totaling $704,271 were recorded relating to the preferred shares. During July, 1997, 1,000 shares of Series A Preferred Stock and deemed dividends with a total book value of $1,125,000 (unaudited) were converted into 300,000 (unaudited) shares of the Company's common stock. As a result, the Company recorded common stock of $2,400 (unaudited), additional paid-in capital of $1,272,600 (unaudited), charged accumulated deficit $150,000 (unaudited), and reduced the preferred stock account for $1,125,000 (unaudited) which included a reduction of the discount on the outstanding preferred stock in the amount of $25,000 (unaudited). During the three months ended September 30, 1997, deemed convertible preferred stock dividends totaling $148,460 (unaudited) were recorded relating to the preferred shares. As a result of the beneficial conversion feature contained within the preferred stock dividend, the Company recorded a discount on preferred stock in the amount of $36,812 (unaudited). 10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL During January, 1995, through April, 1995, the Company completed a private placement of 36.5 units. Each unit consisted of a $25,000 12% Convertible Subordinated Promissory Note due December 31, 1996 (the "12% Notes") and Class C Redeemable Common Stock Purchase Warrants (the "Class C Warrants") to purchase 3,334 shares of the Company's common stock. After giving effect to commissions and other costs of the offering and an estimate as to the value of the warrants, the Company recorded long-term debt of $912,500, debt discount of $2,920, debt issue costs of $163,550 and additional paid-in capital of $2,920. Through June 30, 1997, all of these notes had been converted into common stock. During July, 1995, through November, 1995, the Company completed a private placement of three units. Each unit consisted of a $145,000 13.8% Convertible Subordinated Promissory Note due June 30, 1997 (the "13.8% Notes"), and Class C Warrants to purchase 2,222 shares of the Company's common stock. The Company recorded long-term debt of $435,000, debt discount of $1,600 and additional paid-in capital of $1,600. Through June 30, 1997, all of these notes had been converted to common stock. In November, 1995, the Board of Directors and Stockholders approved a one-for-ten reverse stock split (the "Reverse Stock Split"). The Reserve Stock Split became effective on November 20, 1995, and reduced the number of issued and outstanding shares of common stock from 10,699,222 to 1,070,029; however, the number of authorized shares of common stock (12,500,000 shares) will remain the same. The accompanying consolidated financial statements and related notes give effect to this transaction as of July 1, 1994. The Reverse Stock Split did not alter the percentage interests of any stockholder, except to the extent that the Reverse Stock Split results in a stockholder of the Company owning a fractional share. In lieu of issuing fractional shares, the Company issued an additional full share of common stock. The Company has an Incentive Stock Option Plan which provides for the grant of stock options to key employees of the Company to purchase a maximum of 13,334 shares of Common Stock, all of which have been granted. In addition, the Company has a Restricted Stock Option Plan which provides for the grant of stock options to officers, directors, employees, consultants or advisors of the Company to purchase a F-24 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED) maximum of 3,453 shares of Common Stock, all of which have been granted. The Company has issued Incentive Stock Options to employees in excess of the plan and will convert the 9,017 ISO's to Non-Qualified Stock Options during Fiscal 1998. On December 16, 1996, the Company granted 18,783 Non-Qualified Stock Options (NQO) outside of the Restricted Stock Option Plan at $.30 per share, expiring November 27, 2001 to employees. As a result, the Company recorded compensation expense and increased additional paid-in capital in the amount of $142,284. In addition, the Company granted 8,334 NQO's and 1,334 Incentive Stock Options to employees at $7.875, the prevailing market price, expiring November 27, 2001. As of June 30, 1997, 14,150 NQO's at $.30 and 834 NQO's at $11.625 were exercised. The Company recorded common stock of $120 and additional paid-in capital of $13,500. On June 15, 1997, the Company reduced the exercise price of options for 622,800 shares of common stock, granted to officers, directors and a key employee of the Company, from $7.50 to $4.50, the market price. On June 27, 1997, the Company further reduced the exercise price of options for 422,800 shares of common stock, granted to officers and a director of the Company, from $4.50 to $.03, which resulted in a compensation expense of $1,889,916. The following is a summary of stock option activity:
WEIGHTED AVERAGE NUMBER OF OPTION PRICE EXERCISE SHARES PER SHARE PRICE ---------- ---------------- ------------- Options outstanding at June 30, 1994............................... 331,100 $ 11.25-210.00 $ 51.24 Options granted.................................................. 387,667 $ 11.25-24.375 $ 17.49 Options canceled or expired...................................... (10,668) $ 48.75-157.50 $ 128.61 ---------- ---------------- ------------- Options outstanding at June 30, 1995............................... 708,099 $ 11.25-210.00 $ 14.94 Options granted.................................................. 43,083 $ 7.50-13.35 $ 12.159 Options exercised................................................ (17,500) $ 7.50-11.625 $ 7.695 Options canceled or expired...................................... (64,288) $ 15.00-210.00 $ 22.008 ---------- ---------------- ------------- Options outstanding at June 30, 1996............................... 669,394 $ 7.50-105.00 $ 7.911 Options granted.................................................. 28,450 $ 0.03-7.875 $ 2.874 Options exercised................................................ (14,983) $ 0.30-11.625 $ 0.93 Options canceled or expired...................................... (3,208) $ 11.625-105.00 $ 17.688 ---------- ---------------- ------------- Options outstanding at June 30, 1997............................... 679,653 $ 0.03-13.35 $ 2.061 ---------- ---------------- ------------- ---------- ---------------- -------------
The Company accounts for the Plans in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for stock option awards. Had compensation cost for the Plans been determined consistent with Statement of Financial Accounting Standards No. 123, F-25 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED) "Accounting for Stock--Based Compensation" (SFAS #123), the Company's pro forma net loss and loss per share for June 30, 1997 and 1996 would have been as follows:
REPORTED PRO-FORMA ------------- ------------- 1997 Net Loss.................................................. $ 11,177,623 $ 11,368,594 1997 Net Loss applicable to Common Shareholders................ 18,054,144 18,245,115 1997 Net Loss per Common Share................................. 12.14 12.27 1996 Net Loss.................................................. 4,411,898 8,558,764 1996 Net Loss per Share........................................ 8.61 16.71
The weighted average fair value of the stock options during the fiscal years ended June 30, 1996 and 1997 ranged from $3.51 to $11.43. The fair value of options granted under the Plans during fiscals 1996 and 1997 were estimated on the date of grant using the Black--Scholes option pricing model with the following weighted average assumptions used: (i) no dividend yield (ii) expected volatility of 81% and 75% for 1996 and 1997, respectively (iii) risk free interest rate of between 5.81% and 6.25% (iv) expected lives ranging from 2 to 10 years During the year ended June 30, 1996, the Company issued 103,015 shares of its common stock, valued at $820,558, in connection with acquisitions (see Note 2). During the year ended June 30, 1996, the Company issued 10,667 shares of its common stock, valued at $147,200, as payment of a note payable in connection with the acquisition of a division of Emergency Response Systems, Inc. (see Note 2), and issued 47,032 shares of its common stock, valued at $519,920, as payment of notes payable to stockholders and officers (including interest of $11,849). During the year ended June 30, 1996, the Company issued 667 shares of its common stock, valued at $8,125, as payment for consulting services. The Company, in December, 1996, canceled 16,667 shares of its common stock held in escrow, in connection with an acquisition. In March, 1997, the Company issued 8,333 shares of its common stock in connection with a purchase of monitoring contracts and 5,567 shares of its common stock pursuant to a guarantee of stock valuation in connection with an acquisition (see Note 2). As a result, the Company recorded common stock of $334 and additional paid-in capital of $74,934. On March 4, 1997, the Company issued 364,721 shares of its common stock, valued at $3.3 million in connection with a Joint Venture (see Note 3), pursuant to a guarantee of stock valuation. During January, 1996, and February, 1996, the Company completed a private placement of 61 units. Each unit consisted of a $25,000 10% Convertible Subordinated Promissory Note due December 31, 1997 (the "10% Notes"), and Class C Warrants to purchase 334 shares of the Company's common stock. Through June 30, 1997, all of these notes had been converted to common stock. F-26 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED) The Company, as part of a consulting agreement, issued warrants to purchase 66,667 shares of the Company's common stock at a price of $15.375; these warrants expire April 30, 1999. Also, as part of consulting agreements, the Company issued warrants to purchase 428,334 shares of the Company's common stock at prices ranging from $7.50 to $10.50; these warrants were exercised during the year ended June 30, 1996. In connection with the issuance of the preferred stock (see Note 9), the Company granted transferable warrants to purchase 166,667 shares of the Company's common stock at an exercise price of $18.39 per share and 83,334 shares of the Company's common stock at an exercise price of $24.00 per share; these warrants expire June 30, 2001. The Company also issued warrants to a consultant to purchase 25,000 shares of the Company's common stock at an exercise price of $13.50; these warrants expire June 30, 2000. During the months July, 1996, through September, 1996, 40,667 shares of the Company's common stock were issued as a result of the exercise of Class A and Class C Warrants. The Company recorded common stock of $325 and additional paid-in capital of $467,335. The following is a summary of warrant activity:
NUMBER OF EXERCISE PRICE SHARES PER SHARE ---------- ------------------ Warrants outstanding at June 30, 1994............................................ 744,398 $7.50-13.50 Warrants issued in connection with 12% Notes-Class C........................... 12,167 $11.25 Warrants issued to placement agents in connection with 13.8% Notes-Class C..... 6,667 $11.25 ---------- ------------------ Warrants outstanding at June 30, 1995............................................ 763,232 $7.50-13.50 Warrants issued in connection with 13.8% Notes-Class C......................... 6,667 $9.78 Warrants issued in connection with 12 % Notes--Class A......................... 10,223 $7.50 Warrants issued in connection with 10% Notes--Class C.......................... 20,333 $16.875 Warrants issued in connection with consulting agreements....................... 495,000 $7.50-15.375 Warrants issued in connection with preferred stock............................. 91,667 $13.50-24.00 Warrants issued in connection with line of credit agreement.................... 377,378 $4.50-13.50 Warrants exercised in connection with 12% Notes--Class C....................... (9,767) $11.25 Warrants exercised in connection with 10% Notes--Class C....................... (9,500) $16.875 Warrants exercised in connection with consulting agreements.................... (428,333) $7.50-10.50 ---------- ------------------ Warrants outstanding at June 30, 1996............................................ 1,316,900 $4.50-24.00 Warrants issued in connection with preferred stock litigation.................. 114,833 $6.00 Warrants exercised in connection with 12% Notes- Class A....................... (10,223) $7.50 Warrants exercised in connection with 10% Notes- Class C....................... (10,000) $16.875 ---------- ------------------ Warrants outstanding at June 30, 1997.......................................... 1,411,510 $4.50-24.00 ---------- ------------------ ---------- ------------------
F-27 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES The differences between the provision for income taxes and income taxes computed using the federal income statutory tax rate are as follows:
YEAR ENDED JUNE 30, ---------------------------- 1996 1997 ------------- ------------- Amount computed using the statutory rate............................................ ($ 1,500,050) ($ 3,800,392) Increase (decrease) in taxes resulting from Nondeductible expenses.................. 24,400 12,626 State taxes, net of federal taxes................................................. (216,900) 0 Federal tax valuation allowance................................................... 1,692,550 3,787,766 ------------- ------------- Income taxes (benefit)............................................................ $ 0 $ 0 ------------- ------------- ------------- -------------
At June 30, 1997, the cumulative temporary differences resulted in net deferred tax assets or liabilities consisting primarily of: Deferred tax assets: Accounts receivable reserves.................................... $ 186,163 Inventory reserves.............................................. 8,366 Property........................................................ 1,069,849 Warranty reserve................................................ 55,792 Accrued vacation accrual........................................ 45,564 Uncollected Interest Revenue.................................... 100,453 Deferred Expenses............................................... 973,600 Other........................................................... 49,330 Net operating loss carryforwards................................ 6,752,044 --------- 9,241,161 Less valuation allowance........................................ 9,241,161 --------- $ 0 --------- ---------
F-28 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES (CONTINUED) For income tax reporting, the Company has net operating loss carryforwards available to reduce future federal and state income taxes. If not used, the carryforwards will expire as follows:
YEAR ENDING JUNE 30, FEDERAL STATE - --------------------------------------------------------------- ------------- ------------- 2000........................................................... -- $ 1,191,025 2001........................................................... -- 3,253,300 2002........................................................... -- 3,206,000 2003........................................................... $ 254,200 3,491,200 2004........................................................... 23,100 2,433,632 2005........................................................... 2006........................................................... 15,000 2007........................................................... 2008........................................................... 136,300 2009........................................................... 3,605,100 390,100 2010........................................................... 2,997,000 147,800 2011........................................................... 3,504,400 160,100 2012........................................................... 6,897,226 260,490 ------------- ------------- $ 17,296,026 $ 14,669,947 ------------- ------------- ------------- -------------
The utilization of the federal net operating loss carryforwards aggregating $277,300 expiring June 30, 2003, and 2004, are subject to an annual limitation of $23,110 per year through June, 2004, in accordance with the provisions of the Internal Revenue Code. This annual limitation may be adjusted due to ownership changes in future years. 12. PROFIT SHARING PLAN Effective June 1, 1995, the Company established a qualified profit sharing plan under section 401(k) of the Internal Revenue Code, covering certain of its salaried employees. The Company contributes 50% of each participant's elective deferral up to maximum Company contributions of 2.50% of eligible salaries. Contributions to the plan by the Company for the years ended June 30, 1995, 1996 and 1997, were $2,216, $23,008 and $36,981, respectively. 13. RECOVERY OF RESTRUCTURING CHARGES In April, 1994, the Company initiated a plan of reorganization and restructuring designed to reduce costs, improve operating efficiency and increase overall future profitability as the Company refocuses its sales and marketing efforts on security and fire alarm systems for residential and commercial properties. As a result, the Company streamlined its organization and closed its manufacturing and monitoring facilities. During the year ended June 30, 1995, the Company recorded a recovery of $52,920 of these costs resulting from an overaccrual at June 30, 1994. F-29 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. COMMITMENTS AND CONTINGENCIES EMPLOYMENT AGREEMENTS The Company has employment contracts with certain key personnel for terms expiring in June 2000. The contracts provide for initial annual base salaries aggregating $375,000. The Company has employment contracts with certain key personnel of USS for terms expiring March, 1999. The contracts provide for initial base salaries aggregating $240,000 which are subject to incremental increases as determined by the Board of Directors on all payments provided the following conditions are realized: (i) if the Company increases its net alarm system subscriber accounts by at least 10,000 accounts before March 1999, the Company shall pay each employee $1.0 million dollars less the gross proceeds received from the sale or exercise of their options; (ii) if the Company increases its net alarm system subscriber accounts by at least 15,000 accounts before March, 1999, the Company shall pay each employee $1.5 million less the gross proceeds received from the sale or exercise of their options; and (iii) any increases in net alarm systems between 10,000 and 15,000 accounts shall entitle certain employees to a pro rated amount between $1.0 million and $1.5 million as determined in provisions (i) and (ii) above. As a result, the Company recorded compensation expense and a deferred liability at June 30, 1997 and September 30, 1997 relating to such contracts. CONSULTING AGREEMENT In April, 1996, the Company entered into a two-year consulting agreement which provides for a minimum annual fee of $42,000. In March 1997, the consulting agreement was terminated. As a result of the termination of the agreement, the Company recorded a charge of $63,000 to consulting fees for the fiscal year ended June 30, 1997. MONITORING AGREEMENT In April, 1994, the Company entered into a three-year monitoring agreement, which has been extended through April, 2000, providing for increases based on the number of subscribers as defined, for monitoring services previously provided directly by the Company. Total cost under this agreement was $435,000, $494,000 and $703,470 for the years ended June 30, 1995, 1996 and 1997, respectively. If the Company elects to continue its monitoring with its current monitoring facility, the minimum estimated monitoring costs for the following three years will be:
FISCAL YEAR ENDED - -------------------------------------------------------------------------------- June 30, 1998................................................................... $ 828,000 June 30, 1999................................................................... 856,500 June 30, 2000................................................................... 856,500 ------------ $ 2,541,000 ------------ ------------
F-30 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. COMMITMENTS AND CONTINGENCIES (CONTINUED) LEASE COMMITMENTS The Company leases its facilities and various equipment under operating leases expiring at various dates through December 2000. The following is a schedule of future minimum rental payments required under these leases:
YEAR ENDING JUNE 30, - -------------------------------------------------------------- 1998.......................................................... $ 321,074 1999.......................................................... 256,564 2000.......................................................... 40,038 2001.......................................................... 12,944 2002.......................................................... -- ---------- $ 630,620 ---------- ----------
The leases provide that the Company pay as additional rent taxes, insurance and other operating expenses applicable to the leased premises. Total rent expense under all operating leases aggregated $258,379, $369,852 and $344,117 for the years ended June 30, 1995, 1996 and 1997, respectively. CONTINGENCIES In the normal course of business, the Company is subject to litigation, none of which is expected to have a material effect on the consolidated financial position, results of operations or cash flows of the Company. As part of certain acquisitions and a joint venture, the Company has guaranteed the value of its common stock at various prices ranging from $9.03 to $15.00 for periods expiring at various dates through March 2000. As of June 30, 1997, the Company's contingent liabilities under these agreements aggregated approximately $20,000, which may be settled in cash or by the issuance of common stock; to the extent that settlement is in common stock, the holders are entitled to piggy-back registration rights and the Company has filed a registration statement for 31,467 shares of common stock which are expected to be sufficient to satisfy the Company's obligation. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash approximates its fair value because of its short maturity. The carrying amount of marketable securities, none of which are held for trading purposes, is fair value (see Note 1.) The carrying amount of the line of credit approximates its fair value because the interest rates on this obligation approximate market rates. It was not deemed practicable to estimate the fair value of the reorganization debt due to the nature of the financing arrangements. The carrying amount of equipment financing and capitalized lease obligations approximates its fair value because the interest rates on these obligations approximate market rates. F-31 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. SUBSEQUENT EVENTS On September 30, 1997, the Company, entered into an agreement, as amended, with Triple A Security Systems, Inc. ("Triple A"), a Pennsylvania corporation, and Robert L. May, an individual to acquire substantially all of the assets of Triple A Security Systems, Inc. Triple A is engaged in the installation, servicing and monitoring of electronic security systems. In consideration of the acquisition of approximately 14,000 subscriber accounts, the Company will pay Triple A an aggregate of approximately $13,000,000, consisting of $10,000,000 in cash and $2,250,000 in shares of its common stock; additionally the Company will assume certain liabilities totaling $750,000. In October 1997, the Company entered into an agreement to acquire all of the outstanding stock of Jupiter, a patrol service company. In consideration of the acquisition, the Company will pay Jupiter approximately $1,045,000 in the Company's common stock. Jupiter's patrol services are principally supplied in areas in which the Company believes that Triple A is a substantial provider of security systems services. The patrol service supplements the Company's alarm monitoring service by providing routine patrol of a subscriber's premises and neighborhood, response to alarm system activations and "special watch" services, such as picking up mail and newspapers and increased surveillance when the customer is on vacation. Summarized combined financial data of Triple A and Jupiter for the years ending December 31, 1995 and 1996 is as follows:
1995 1996 ------------ ------------ Revenues.......................................................... $ 6,459,965 $ 6,731,592 Cost of Revenues.................................................. 3,422,221 3,930,233 Gross Profit...................................................... 3,037,744 2,801,359 Operating Expenses................................................ 2,679,924 2,497,764 Interest Expense (net)............................................ 120,332 130,632 ------------ ------------ Net Income........................................................ $ 237,488 $ 172,963 ------------ ------------ ------------ ------------
On June 18, 1997, October 1, 1997 and November 13, 1997, Mellon amended certain financial covenants in the Loan and Security Agreement dated June 30, 1996, as follows: (i) ratio of cash flow to interest expense; (ii) ratio of senior funded debt to cash flow; (iii) net income (loss); and (iv) capital expenditures. The Company was in compliance with the terms of the amended debt covenants at June 30, 1997 and believes it will continue to be in compliance with the amended debt covenants during fiscal 1998. In October, 1997, the Company filed Form SB-2, Registration Statement under the Securities Act of 1933, offering 2,400,000 shares of Common Stock, par value $.008 per share. The Company has granted the Underwriters a 45-day option to purchase up to an additional 360,000 shares of Common Stock solely to cover over-allotments, if any. In connection with the offering, the Underwriters will receive warrants to purchase up to an aggregate of 240,000 shares of Common Stock from the Company. The net proceeds from the sale of Stock will be used for the acquisition of Triple A, to redeem the preferred stock and the remainder to pay down amounts outstanding under the credit line. The Company anticipates declaring a one-for-three reverse stock split prior to the effective date of the Form SB-2 Registration Statement. F-32 RESPONSE USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. SUBSEQUENT EVENTS (CONTINUED) On October 30, 1997, Mellon Bank agreed to increase the revolving credit facility from $15.0 million to $18.0 million under the same terms and conditions as the original Loan and Security Agreement except for the amortization of the outstanding loan. The amended amortization on the outstanding loan balance is interest only for one year, and the reduction of principal in the amount of $250,000 per quarter, thereafter. The increase in the line of credit is conditional upon net proceeds received, totaling at least $7.0 million, after the redemption of preferred shareholders and expenses, from the planned secondary offering. F-33 INDEPENDENT AUDITORS' REPORT To the Stockholder of Triple A Security Systems, Inc.: We have audited the accompanying balance sheets of Triple A Security Systems, Inc. as of December 31, 1996 and 1995, and the related statements of income and retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Triple A Security Systems, Inc. as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Terry H. Jones, CPA West Hazleton, PA March 27, 1997 F-34 TRIPLE A SECURITY SYSTEMS, INC. BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, ----------- -------------------- 1997 1996 1995 ----------- --------- --------- (UNAUDITED) (AUDITED) (AUDITED) ASSETS Current Assets: Cash..................................................... $ 69,328 $ 126,941 $ 235,963 Marketable securities.................................... 114,853 110,176 108,583 Accounts receivable, net of allowance for doubtful accounts of $30,000, $50,000 and $29,000, respectively........................................... 307,024 551,432 343,589 Employee advance......................................... 2,803 6,871 5,658 Inventory and work-in-progress........................... 523,383 483,875 384,553 Prepaid expenses......................................... 58,882 14,981 8,693 Deposits................................................. 31,845 7,950 7,370 Due from stockholder..................................... 8,562 9,857 14,068 Due from affiliate....................................... 76,465 84,169 103,135 Other current assets..................................... 11,405 5,951 -- ----------- --------- --------- Total Current Assets............................... 1,204,550 1,402,203 1,211,612 ----------- --------- --------- PROPERTY AND EQUIPMENT: Property and equipment, net of accumulated depreciation........................................... 1,133,561 1,185,326 821,916 Property and equipment held for lease, net of accumulated depreciation........................................... 720,479 611,251 542,624 ----------- --------- --------- 1,854,040 1,796,577 1,364,540 ----------- --------- --------- INTANGIBLE ASSETS, net................................... 230,312 210,980 281,304 ----------- --------- --------- $3,288,902 $3,409,760 $2,857,456 ----------- --------- --------- ----------- --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Demand notes payable..................................... $ 55,000 $ 65,000 $ -- Current portion of long-term............................. 356,452 344,224 259,582 Accounts payable......................................... 408,285 583,504 188,031 Deferred revenue......................................... 769,345 683,338 702,992 Accrued expenses......................................... 144,851 118,912 209,319 Payroll taxes withheld and accrued....................... 11,402 10,635 16,741 Sales and use tax payable................................ 3,456 2,555 2,881 ----------- --------- --------- Total Current Liabilities.......................... 1,748,791 1,808,168 1,379,546 LONG-TERM DEBT, net of current portion................... 1,105,149 1,215,348 1,121,678 ----------- --------- --------- Total Liabilities.................................. 2,853,940 3,023,516 2,501,224 ----------- --------- --------- COMMITMENT AND CONTINGENCY STOCKHOLDER'S EQUITY: Common stock, $100 par, 5,000 shares authorized, 1,250 issued and outstanding................................. 125,000 125,000 125,000 Additional paid-in capital............................... 215,814 215,814 215,814 Net unrealized loss on marketable securities............. 391 (4,286) (5,696) Retained earnings........................................ 93,757 49,716 21,114 ----------- --------- --------- Total Stockholder's Equity......................... 434,962 386,244 356,232 ----------- --------- --------- 3,288,902 $3,409,760 $2,857,456 ----------- --------- --------- ----------- --------- ---------
The accompanying notes are an integral part of the financial statements. F-35 TRIPLE A SECURITY SYSTEMS, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS FOR THE YEARS ENDED SEPTEMBER 30, ENDED DECEMBER 31, -------------------- -------------------- 1997 1996 1996 1995 --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) REVENUES..................................... $3,906,544 $3,637,204 $5,041,574 $5,158,440 COST OF REVENUES............................. 1,776,496 1,721,048 2,319,741 2,652,662 --------- --------- --------- --------- Gross Profit............................. 2,130,048 1,916,156 2,721,833 2,505,778 --------- --------- --------- --------- OPERATING EXPENSES: Selling expenses............................. 526,550 461,389 644,213 761,250 General and administrative expenses.......... 1,042,489 937,512 1,312,056 1,106,715 --------- --------- --------- --------- Total Operating Expenses................. 1,569,039 1,398,901 1,956,269 1,867,965 --------- --------- --------- --------- Income Before Depreciation and Amortization............................... 561,009 517,255 765,564 637,813 --------- --------- --------- --------- DEPRECIATION AND AMORTIZATION: Depreciation of property and equipment....... 325,109 252,338 380,375 325,230 Amortization of intangibles.................. 41,576 60,302 70,323 77,204 --------- --------- --------- --------- Total Depreciation and Amortization...... 366,685 312,640 450,698 402,434 --------- --------- --------- --------- Income From Operations....................... 194,324 204,615 314,866 235,379 --------- --------- --------- --------- OTHER INCOME (EXPENSE): Finance and service charge income............ 5,416 46,968 65,930 31,134 Miscellaneous income......................... 22,720 14,104 31,028 17,034 Interest income.............................. 3,650 10,471 14,303 22,310 Gain on sale of assets....................... -- -- 4,890 207 Dividend income.............................. 2,851 2,453 3,957 4,335 Interest expense............................. (92,475) (83,906) (120,219) (140,007) Loss on abandonment.......................... -- -- (55,783) -- Conversion costs............................. -- -- (41,214) (45,352) Relocation expense........................... (5,255) -- (29,130) -- --------- --------- --------- --------- Other Expense, Net....................... (63,093) (9,910) (126,238) (110,339) --------- --------- --------- --------- NET INCOME................................... 131,231 194,705 188,628 125,040 RETAINED EARNINGS: Beginning of year............................ 49,716 21,114 21,114 39,724 Distributions................................ (87,190) (136,800) (160,026) (143,650) --------- --------- --------- --------- End of year.................................. $ 93,757 $ 79,019 $ 49,716 $ 21,114 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements. F-36 TRIPLE A SECURITY SYSTEMS, INC. STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS FOR THE YEARS ENDED ENDED SEPTEMBER 30, DECEMBER 31, ------------------------ ------------------------ 1997 1996 1996 1995 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 131,231 $ 194,705 $ 188,628 $ 125,040 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................................. 325,105 252,338 380,375 325,230 Amortization of intangible assets......................... 41,576 60,302 70,323 77,204 Other amortization........................................ -- -- (182) (231) Gain on sale of assets.................................... (2,800) -- (4,890) (207) Loss on abandonment....................................... -- -- 55,783 -- Changes in assets and liabilities: (Increase) decrease in assets: Accounts receivable................................... 244,408 (84,511) (207,843) 100,408 Employee advances..................................... 4,068 3,175 (1,213) 12,566 Inventory and work-in-progress........................ (39,508) (74,254) (99,322) 100,591 Prepaid expenses...................................... (43,902) (7,692) (14,551) 52,563 Deposits.............................................. (23,895) (3,080) (580) 1,347 Due from affiliate.................................... 7,704 18,940 27,246 17,701 Other current assets.................................. (5,454) (20,785) (5,951) -- Increase (decrease) in liabilities: Accounts payable...................................... (175,219) 273,935 395,473 (108,596) Deferred revenue...................................... 85,907 19,913 (19,654) (47,954) Accrued expenses...................................... 23,733 (151,901) (90,407) 88,898 Payroll taxes withheld and accrued.................... 767 (1,561) (6,106) 2,043 Sales and use tax payable............................. 900 47 (326) (793) ----------- ----------- ----------- ----------- Net Cash Provided by Operating Activities................... 574,625 479,571 666,803 745,810 ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities......................... -- -- -- (3,200) Proceeds from sale of equipment........................... 2,800 -- 4,890 2,900 Capital expenditures...................................... (443,481) (489,565) (652,452) (354,199) Advances to stockholder................................... 1,295 (42,306) (52,216) (19,657) ----------- ----------- ----------- ----------- Net Cash Used in Investing Activities....................... 439,386 (531,871) (699,788) (374,156) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on demand notes................................ (10,000) -- 65,000 -- Proceeds from long-term debt.............................. 198,495 141,900 292,650 105,274 Payments on long-term debt................................ (294,157) (221,035) (330,097) (233,846) Distributions to stockholder.............................. (87,190) (95,800) (103,600) (70,900) ----------- ----------- ----------- ----------- Net Cash used in Financing Activities....................... (192,852) (174,935) (76,047) (199,472) ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH............................. (57,613) (227,235) (109,022) 172,182 CASH--BEGINNING............................................. 126,941 235,963 235,963 63,781 ----------- ----------- ----------- ----------- CASH--ENDING................................................ $ 69,328 $ 8,728 $ 126,941 $ 235,963 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest.................... $ 98,558 $ 83,906 $ 118,567 $ 140,076 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Fair value of property and equipment acquired and liabilities assumed..................................... -- $ 215,750 $ 215,750 $ 31,941 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Payment on stockholder loan through non-cash distributions........................................... -- -- 56,426 72,750 Payment on stockholder loan from personal assumption of note payable--unsecured................................. $ -- -- -- $ 148,254 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the financial statements. F-37 TRIPLE A SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS NATURE OF OPERATIONS Triple A Security Systems, Inc. (the company) is engaged in the sale, lease, installation, service and monitoring of security systems to commercial and residential customers. The company grants credit to customers throughout Northeastern Pennsylvania. Consequently, the company's ability to collect the amounts due from customers is affected by economic fluctuations within the geographic area. REVENUE RECOGNITIONS Rental, monitoring and service fees related to operating leases, monitoring and service contracts are recorded as income when earned. All contracts contain an initial noncancellable three or five year term with subsequent annual renewals cancellable within sixty days of the anniversary date. Advance billings are reflected as deferred revenue in the accompanying balance sheet. Installation fees are recognized when the leased equipment is installed. At December 31, 1996, the retail monthly recurring revenues were approximately $245,576 and the wholesale monthly recurring revenues were approximately $13,567. INVENTORY AND WORK-IN-PROGRESS Inventory consisting of equipment held for sale or lease and related repair parts is valued at the lower of cost or market determined on a first-in, first-out basis. Work-in-progress inventory is valued at cost. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation is computed primarily using the straight-line method over the following estimated useful lives:
YEARS --------- Monitoring equipment.................................................................. 10-12 Other equipment....................................................................... 3-12 Office furniture and fixtures......................................................... 5-12 Vehicles.............................................................................. 5 Leasehold improvements................................................................ 7-40
Expenditures for maintenance and repairs are charged to operations as incurred. Cost of replacement and renewals are capitalized. Upon sale or other disposition, the asset account and related deprecation account are relieved, and any gain or loss is included in operations. MARKETABLE SECURITIES Effective January 1, 1995, the company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The company's investment securities are classified as available-for-sale. Accordingly, unrealized gains and losses are F-38 TRIPLE A SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) excluded from earnings and reported as a separate component of stockholders' equity. Realized gains or losses are computed based on specific identification of the securities sold. SFAS No. 115 superseded SFAS No. 12, "Accounting for Certain Marketable Securities," under which investment securities were generally carried at the lower of aggregate market or amortized cost and unrealized gains were not recognized. The effect of the initial adoption of SFAS No. 115 was not material. INTANGIBLE ASSETS Costs incurred in connection with the organization of the company and purchases of contracts from predecessor entities are being amortized using the straight-line method over the following lives:
YEARS ----- Monitoring contracts................................................................... 7-8 Goodwill............................................................................... 5 Noncompete agreements.................................................................. 3-11 Loan origination fees.................................................................. 5-11 Deferred acquisition costs............................................................. 5
INCOME TAXES The company has elected to be taxed as an "S" Corporation as provided in the Federal and State Income Tax Codes. All income and losses are passed through to the stockholder and are taxed at the individual level. As such, no provision for federal or state income taxes is included in the financial statements. RECLASSIFICATIONS Certain accounts for the year ended December 31, 1995 have been reclassified for comparative purposes to conform with the year ended December 31, 1996. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. F-39 TRIPLE A SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 2: MARKETABLE SECURITIES The following tables reflect the amortized cost and estimated fair values of marketable debt and equity securities held at December 31, 1996 and 1995. All investments held by the company are classified as available-for-sale.
1996 ----------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ---------- ----------- ----------- ---------- Equity securities................................................ $ 7,805 $ 1,525 $ 16 $ 9,314 U.S. government obligations...................................... 12,292 2,873 -- 15,165 Mortgage-backed securities....................................... 40,664 -- 2,927 37,737 Mutual funds..................................................... 53,700 -- 5,740 47,960 ---------- ----------- ----------- ---------- $ 114,461 $ 4,398 $ 8,683 $ 110,176 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
1995 ----------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ---------- ----------- ----------- ---------- Equity securities................................................ $ 7,805 $ 588 $ 279 $ 8,114 U.S. government obligations...................................... 12,086 2,644 -- 14,730 Mortgage-backed securities....................................... 40,688 -- 3,266 37,422 Mutual funds..................................................... 53,700 -- 5,383 48,317 ---------- ----------- ----------- ---------- $ 114,279 $ 3,232 $ 8,928 $ 108,583 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
U.S. government obligations mature in 2024 and mortgage-backed securities mature in 2023. The change in net unrealized holding losses on marketable debt and equity securities in the amount of $1,359 and $11,632 has been charged to stockholder's equity for the years ended December 31, 1996 and 1995, respectively. NOTE 3: INVENTORY AND WORK-IN-PROGRESS Inventory and work-in-progress consists of the following at December 31:
1996 1995 ---------- ---------- Raw materials......................................................... $ 347,679 $ 264,942 Work-in-progress...................................................... 136,196 119,611 ---------- ---------- $ 483,875 $ 384,553 ---------- ---------- ---------- ----------
NOTE 4: RELATED PARTY TRANSACTIONS The balance due from stockholder is an unsecured loan requiring interest only at 5.65%. The balance at December 31, 1996 and 1995 due from affiliate of $84,169 and $103,135 represents money advanced to a F-40 TRIPLE A SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 4: RELATED PARTY TRANSACTIONS (CONTINUED) company which is substantially owned by the stockholder of Triple A Security Systems, Inc. Interest has been accrued on the 1996 and 1995 average balance at prime plus 1%. Interest accrued for the years ended December 31, 1996 and 1995 was $8,280 and $9,341, respectively. NOTE 5: PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
1996 1995 ----------- ----------- Monitoring equipment............................................... $ 686,851 $ 686,851 Other equipment.................................................... 1,266,810 1,378,284 Office furniture & fixtures........................................ 267,595 402,975 Vehicles........................................................... 470,447 355,615 Leasehold improvements............................................. 328,746 123,781 ----------- ----------- 3,020,449 2,947,506 Less accumulated depreciation...................................... (1,835,123) (2,125,590) ----------- ----------- $ 1,185,326 $ 821,916 ----------- ----------- ----------- -----------
NOTE 6: OPERATING LEASES LESSOR TRANSACTIONS The company is the lessor of security monitoring equipment under operating leases expiring in various years through 2001. Property on or held for lease consists of the following at December 31:
1996 1995 ------------ ------------ Monitoring equipment.............................................. $ 1,480,778 $ 1,303,611 Less accumulated depreciation..................................... (869,527) (760,987) ------------ ------------ $ 611,251 $ 542,624 ------------ ------------ ------------ ------------
LESSEE TRANSACTIONS The company is currently leasing its facilities under several one year or month-to-month renewable operating lease agreements. Annual rentals were $47,715 and $43,478, in 1996 and 1995, respectively. RELATED PARTY TRANSACTIONS The company leases two of its facilities from the stockholder on a triple net basis. One agreement is a noncancellable lease requiring payments that increase annually at predetermined amounts through June, 2000. Thereafter, payments are adjusted annually in accordance with the Consumer Price Index. The other F-41 TRIPLE A SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 6: OPERATING LEASES (CONTINUED) is a month-to-month lease at $1,070 per month. Rent expense for the year ended December 31, 1996 was $69,533. At December 31, 1996, minimum future lease payments under the noncancellable lease are as follows:
YEAR ENDING LEASE DECEMBER 31 OBLIGATION - -------------------------------------------------------------------------------- ------------ 1997............................................................................ $ 97,067 1998............................................................................ 109,867 1999............................................................................ 122,667 2000............................................................................ 128,000 2001............................................................................ 128,000 Thereafter...................................................................... 1,845,000 ------------ $ 2,430,601 ------------ ------------
NOTE 7: INTANGIBLE ASSETS Intangible assets, net of accumulated amortization consist of the following at December 31:
1996 1995 ---------- ---------- Monitoring contracts.................................................. $ 82,051 $ 112,507 Goodwill.............................................................. 605 1,815 Noncompete agreements................................................. 114,824 132,642 Loan origination fees................................................. 4,147 6,280 Deferred acquisition costs............................................ 9,353 28,060 ---------- ---------- $ 210,980 $ 281,304 ---------- ---------- ---------- ----------
F-42 TRIPLE A SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 8: DEMAND NOTES PAYABLE The company has available $130,000 under a line of credit agreement with Summit Bank, expiring June 30, 1997. The terms are interest payable monthly at prime plus 1% on the outstanding balance, with principal and interest due in full at the expiration of the term. This note is cross-collateralized with the company's other notes with Summit Bank. At December 31, 1996, the company had $55,000 outstanding on this line of credit. The company has available $158,000 under a revolving line of credit agreement with Summit Bank, expiring April, 1997. The terms are interest payable monthly at prime plus .25% on the outstanding balance, with principal and interest due in full at the expiration of the term. This note is cross- collateralized and cross-defaulted with the company's other notes with Summit Bank. At December 31, 1996, the company had $10,000 outstanding on this line of credit. NOTE 9: LONG-TERM DEBT Long-term debt consists of the following at December 31:
1996 1995 ------------ ------------ Summit Bank: Term loan payable in monthly installments of $15,946, including interest at 8.13%, maturing October, 2000. Pledged as collateral is accounts receivable. The loan is personally guaranteed by the stockholder. The loan has cross-default provisions with the other Summit Bank notes......................................................... $ 642,544 $ 774,783 Term loan payable in monthly installments of $1,200, including interest at 8.13%, maturing October, 2000. Pledged as collateral is accounts receivable. The loan is personally guaranteed by the stockholder. The loan has cross-default provisions with the other Summit Bank notes......................................................... 48,355 58,306 Revolving line of credit, payable monthly, at 1.67% of the outstanding principal balance plus interest at prime plus 1%, with a floor of 6% and a ceiling of 10%, maturing October, 1999. Maximum borrowing under this agreement is $500,000. Pledged as collateral are accounts receivable, inventory, machinery, equipment, furniture and fixtures. The loan is personally guaranteed by the stockholder. The note is cross-collateralized and has cross-default provisions with the other summit Bank notes............................................................................... 234,731 176,321 Term note payable in monthly installments of $1,670, including interest at 8.5%, maturing September, 1997. Pledged as collateral are accounts receivable, inventory, machinery, equipment, furniture and fixtures. The loan is personally guaranteed by the stockholder. The note is cross-collateralized and has cross-default provisions with the other Summit Bank notes.................................................... 16,428 34,204 Term note payable in monthly installments of $2,556, including interest at 8.35%, maturing October, 2001. Pledged as collateral are accounts receivable, inventory, machinery, equipment, furniture and fixtures. The loan is personally guaranteed by the stockholder. The note is cross-collateralized and has cross-default provisions with the other Summit Bank notes.................................................... 121,180 --
F-43 TRIPLE A SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 9: LONG-TERM DEBT (CONTINUED)
1996 1995 ------------ ------------ Former owner--Acquired Company: Promissory note payable in monthly installments of $3,744, including interest at 8% maturing October, 2003. Pledged as collateral are assets acquired in acquisition as well as the personal guarantee of the stockholder and the common stock of Triple A Security Systems, Inc............................................................... 233,757 258,886 Fidelity Bank: Two notes payable in monthly installments of $706, including interest at prime plus .5%, maturing in April, 1997 and January, 1998. Pledged as collateral are vehicles with a book value of $11,292........................................................ 7,340 14,781 Note payable in monthly installments of $1,707, including interest at prime plus .75%, maturing April, 1997. Pledged as collateral are vehicles with a book value of $20,660............................................................................. 6,237 25,176 First Heritage Bank: Note payable in monthly installments of $266, including interest at prime plus .5%, maturing December, 1998. Pledged as collateral is a vehicle with a book value of $3,917.............................................................................. 5,827 8,390 Note payable in monthly installments of $798, including interest at prime plus .5%, maturing January, 1999. Pledged as collateral are vehicles with book value of $19,690............................................................................. 18,173 25,734 Note payable in monthly installments of $6,252, including interest at 8.75%, maturing June, 2000. Interest of $1,640 was payable monthly through December, 1996. Pledged as collateral are vehicles with a book value of $193,934............................ 225,000 -- Lake Ariel Bank: Installment note payable matured November, 1996....................................... -- 4,679 ------------ ------------ 1,559,572 1,381,260 Less current portion.............................................................. 344,224 259,582 ------------ ------------ $ 1,215,348 $ 1,121,678 ------------ ------------ ------------ ------------
F-44 TRIPLE A SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 9: LONG-TERM DEBT (CONTINUED) The aggregate principal payments required on the long-term debt obligations at December 31, 1996 are as follows:
YEAR ENDING DECEMBER 31 AMOUNT - -------------------------------------------------------------------------------- ------------ 1997............................................................................ $ 344,224 1998............................................................................ 332,404 1999............................................................................ 465,758 2000............................................................................ 282,587 2001............................................................................ 61,433 Thereafter...................................................................... 73,166 ------------ $ 1,559,572 ------------ ------------
NOTE 10: COMMITMENT AND CONTINGENCY COMMITMENT--SUMMIT BANK LOAN COVENANTS Under the terms of the company's loan agreements with Summit Bank there are various covenants including minimum debt coverage ratio requirements, maximum officer salary, limitations on distributions to the stockholder, and limitations on acquisitions of other companies. The company must also maintain a primary depository relationship with Summit Bank. The company was in compliance with all covenants at December 31, 1996 and 1995. CONTINGENCY A customer, to which the company provides installation, repair and alarm monitoring service, incurred a loss of approximately $817,008, due to a burglary at its warehouse in October, 1993. Counsel for the company's customer has advised the company that it has considered the possibility of seeking contribution or indemnity from the company to the extent of its loss. Counsel for the company has advised that there is no litigation with regard to this matter at the time of the release of these financial statements. The company believes that any potential claim would be without merit and will defend its position vigorously. The company maintains $10 million of commercial general liability/errors and omissions insurance. NOTE 11: PROFIT SHARING PLAN The company maintains a voluntary 401K profit-sharing plan that covers substantially all of the employees. Contributions to the plan are at the discretion of the Board of Directors. For the years ended December 31, 1996 and 1995, contributions of $8,792 and $5,772 have been made to the plan. NOTE 12: SUBSEQUENT EVENT The company borrowed $50,000 from Summit Bank in February, 1997. The note requires monthly payments of $1,019, including interest at 8.22% through February, 2002. The note is cross-collateralized and has cross-default provisions with the other Summit Bank notes. F-45 INDEPENDENT AUDITORS' REPORT To the Stockholders of The Jupiter Group, Inc.: We have audited the accompanying balance sheets of The Jupiter Group, Inc. as of December 31, 1996 and 1995, and the related statements of income and retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Jupiter Group, Inc. as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Terry H. Jones, CPA West Hazleton, PA November 21, 1997 F-46 THE JUPITER GROUP, INC. BALANCE SHEETS
DECEMBER 31, ---------------------- 1996 1995 SEPT. 30, ---------- ---------- ----------- 1997 (AUDITED) (AUDITED) ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash...................................................................... $ 163,879 $ 70,010 $ 64,911 Accounts receivable, net of allowance for doubtful accounts of $9,000, $5,390, and $5,390, respectively: Trade................................................................... 149,426 132,716 129,497 Affiliate............................................................... 5,024 3,790 Prepaid expenses.......................................................... 13,333 16,398 16,939 ----------- ---------- ---------- Total Current Assets.................................................. 326,638 224,148 215,137 EQUIPMENT, net of accumulated depreciation.................................. 108,678 60,904 86,390 OTHER ASSETS: Intangible assets, net of amortization.................................... 23,769 33,727 47,006 Deposits.................................................................. 300 300 300 ----------- ---------- ---------- $ 459,385 $ 319,079 $ 348,833 ----------- ---------- ---------- ----------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt......................................... $ 77,494 $ 46,074 $ 51,577 Accounts payable.......................................................... 10,679 13,294 11,338 Accrued expenses.......................................................... 29,270 19,097 38,495 Payroll taxes withheld and accrued........................................ 13,788 12,175 7,452 Due to affiliate.......................................................... 76,465 84,169 103,135 ----------- ---------- ---------- Total Current Liabilities............................................. 207,686 174,809 211,997 LONG-TERM DEBT, net of current portion...................................... 59,444 52,746 68,235 ----------- ---------- ---------- Total Liabilities..................................................... 267,140 227,555 280,232 ----------- ---------- ---------- STOCKHOLDERS' EQUITY Common stock, $1 par, 10,000 shares authorized, 625 shares issued and outstanding............................................................. 625 625 625 Additional paid-in capital................................................ 22,375 22,375 22,375 Retained earnings......................................................... 169,245 68,524 45,601 ----------- ---------- ---------- Total Stockholders' Equity............................................ 192,245 91,524 68,601 ----------- ---------- ---------- $ 459,385 $ 319,079 $ 348,833 ----------- ---------- ---------- ----------- ---------- ----------
The accompanying notes are an integral part of the financial statements. F-47 THE JUPITER GROUP, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS
NINE MONTHS ENDED SEPT. 30, YEARS ENDED DECEMBER 31, -------------------------- -------------------------- 1997 1996 1996 1995 ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) REVENUES................................................. 1,339,872 1,153,108 $ 1,524,984 $ 1,321,433 COST OF REVENUES......................................... 1,080,798 940,442 1,277,571 1,102,480 ------------ ------------ ------------ ------------ Gross Profit........................................... 259,074 212,666 247,413 218,953 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Selling................................................ 5,095 5,178 8,068 4,948 General and administrative............................. 123,519 134,852 173,002 148,272 ------------ ------------ ------------ ------------ Total Operating Expenses............................. 128,614 140,030 181,070 153,220 ------------ ------------ ------------ ------------ Income From Operations............................... 130,460 72,636 66,343 65,733 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income........................................ 1,338 1,067 1,379 1,351 Gain (loss) on sale of asset........................... 1,800 (1,150) (1,150) 1,500 Interest expense....................................... (7,881) (14,707) (18,649) (19,724) ------------ ------------ ------------ ------------ Other Expense, Net................................... (4,743) (14,790) (18,420) (16,873) ------------ ------------ ------------ ------------ NET INCOME............................................... 125,717 57,846 47,923 48,860 RETAINED EARNINGS (DEFICIT): Beginning of year...................................... 68,526 45,601 45,601 (3,259) Distributions.......................................... (25,000) (25,000) (25,000) -- ------------ ------------ ------------ ------------ End of year............................................ 169,243 78,447 $ 68,524 $ 45,601 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements. F-48 THE JUPITER GROUP, INC. STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEAR ENDED DECEMBER SEPTEMBER 30, 31, ---------------------- ---------------------- 1997 1996 1996 1995 ---------- ---------- ---------- ---------- (UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................... 125,719 57,847 $ 47,923 $ 48,860 Adjustments to reconcile net income to net cash provided by operating activities....................................... Depreciation............................................... 49,752 52,838 70,451 60,837 Amortization............................................... 9,959 9,959 13,279 13,279 Gain (loss) on sale of assets.............................. 1,800 1,150 1,150 (1,500) Change in assets and liabilities: (Increase) decrease in assets: Accounts receivable.................................... (11,686) 2,542 (4,453) (44,774) Prepaid expenses....................................... 3,065 (12,548) 541 (4,236) Deposits............................................... -- (300) Increase (decrease) in liabilities: Accounts payable....................................... (2,615) 2,812 1,956 664 Accrued expenses....................................... 10,173 (17,692) (19,398) 29,088 Payroll taxes withheld and accrued..................... 1,614 3,412 4,723 4,473 Due to affiliate....................................... (7,704) (18,940) (18,966) (17,701) ---------- ---------- ---------- ---------- Net Cash Provided by Operating Activities.................. 180,077 81,380 97,206 88,690 ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets................................. 1,800 10,850 10,850 1,500 Capital expenditures......................................... (97,526) (11,005) (11,005) (47,055) ---------- ---------- ---------- ---------- Net Cash Used by Investing Activities........................ (95,726) (155) (155) (45,555) ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing on long-term debt.................................. 93,326 -- -- 42,259 Payment on long-term debt.................................... (58,808) (61,611) (66,952) (61,874) Distributions to stockholders................................ (25,000) (25,000) (25,000) -- ---------- ---------- ---------- ---------- Net Cash Used by Financing Activities........................ 9,518 (86,611) (91,952) (19,615) ---------- ---------- ---------- ---------- NET INCREASE IN CASH........................................... 93,869 (5,386) 5,099 23,520 CASH -- BEGINNING.............................................. 70,010 64,911 64,911 41,391 ---------- ---------- ---------- ---------- CASH -- ENDING................................................. $ 163,879 $ 59,525 $ 70,010 $ 64,911 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during year for interest........................... $ 7,881 $ 8,497 $ 10,369 $ 10,382 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Fair value of equipment acquired and liabilities assumed..... -- $ 46,758 $ 46,758 $ 27,851 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the financial statements. F-49 THE JUPITER GROUP, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS NATURE OF OPERATIONS The company provides guard and patrol service to commercial and residential customers. Operations are conducted from rented facilities in Hamlin, Pennsylvania. The company grants credit to commercial and residential customers throughout Northeastern Pennsylvania. Consequently, the company's ability to collect the amounts due from customers is affected by economic fluctuations within the geographic area. EQUIPMENT Equipment is carried at cost with depreciation computed primarily using the straight-line method over the following estimated useful lives:
YEARS --------- Vehicles.............................................................................. 2 Office equipment...................................................................... 3 - 7 Guard and patrol equipment............................................................ 5 - 7
Expenditures for maintenance and repairs are charged to operations as incurred. Cost of replacement and renewals are capitalized. Upon sale or other disposition, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. INTANGIBLE ASSETS Costs incurred in connection with the organization of the company and the purchase of the predecessor entity are being amortized on a straight-line basis over the following lives:
YEARS --------- Goodwill............................................................................. 5 Noncompete agreements................................................................ 5 - 11 Organization costs................................................................... 5
INCOME TAXES The company has elected to be taxed as an "S" Corporation as provided in the Federal and State Income Tax Codes. All income and losses are passed through to the stockholder and are taxed at the individual level. As such, no provision for federal or state income taxes is included in the financial statements. RECLASSIFICATIONS Certain accounts for the year ended December 31, 1995 have been reclassified for comparative purposes to conform with the year ended December 31, 1996. F-50 THE JUPITER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. NOTE 2: EQUIPMENT Equipment consists of the following at December 31:
1996 1995 ---------- ---------- Vehicles.............................................................. $ 184,244 $ 214,475 Office equipment...................................................... 23,063 12,308 Guard and patrol equipment............................................ 5,200 5,200 ---------- ---------- 212,507 231,983 ---------- ---------- Less accumulated depreciation......................................... 151,603 145,593 ---------- ---------- $ 60,904 $ 86,390 ---------- ---------- ---------- ----------
NOTE 3: INTANGIBLE ASSETS Intangible assets, net of accumulated amortization, consist of the following at December 31:
1996 1995 --------- --------- Goodwill................................................................ $ 349 $ 973 Noncompete agreements................................................... 30,310 37,674 Organization costs...................................................... 3,068 8,359 --------- --------- $ 33,727 $ 47,006 --------- --------- --------- ---------
F-51 THE JUPITER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 4: LONG-TERM DEBT Long-term debt consists of the following at December 31:
1996 1995 --------- --------- Former owner: Promissory note payable in monthly installments of $822, including interest at 8%, maturing December, 2002. Pledged as collateral is equipment with book value of $2,836, customer accounts and customer contracts. $ 51,313 $ 56,829 Bank: Installment notes payable in monthly installments of $2,592, including interest at prime plus .5%, maturing February through June, 1997. The notes contain a floor of 7% and a ceiling of 12%. Vehicles with a book value of $8,990 are pledged as collateral. 9,774 38,547 Installment note payable in monthly installments of $629, including interest at prime plus .5%, maturing December, 1997. The note contains a floor of 6.75% and a ceiling of 11.75%. A vehicle with a book value of $6,494 is pledged as collateral. 7,131 13,732 Installment note payable in monthly installments of $632, including interest at prime plus .5%, maturing March, 1998. The note contains a floor of 6.25% and a ceiling of 11.25%. A vehicle with a book value of $8,298 is pledged as collateral. 8,938 -- Installment note payable in monthly installments of $1,442, including interest at 8.25%, maturing April, 1998. Vehicles with a book value of $20,656 are pledged as collateral. 21,664 -- Installment note payable, matured December, 1996............................................ -- 5,554 Installment note payable, matured April, 1996............................................... -- 5,150 --------- --------- 98,820 119,812 Less current portion.................................................................... 46,074 51,577 --------- --------- $ 52,746 $ 68,235 --------- --------- --------- ---------
F-52 THE JUPITER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 4: LONG-TERM DEBT (CONTINUED) The aggregate principal payments required on the long-term debt obligations at December 31, 1996 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ----------------------------------------------------------------------------------- --------- 1997............................................................................... $ 46,074 1998............................................................................... 13,875 1999............................................................................... 7,007 2000............................................................................... 7,588 2001............................................................................... 8,218 Thereafter......................................................................... 16,058 --------- $ 98,820 --------- ---------
NOTE 5: DUE TO AFFILIATE At December 31, 1996 and 1995, the balance due to affiliate of $84,169 and $103,135, respectively, represents money advanced from a company which is wholly owned by the majority stockholder of the Jupiter Group, Inc. Interest has been accrued on the 1996 and 1995 average balance at prime plus 1%. Interest accrued for the years ended December 31, 1996 and 1995 was $8,280 and $9,341, respectively. NOTE 6: OPERATING LEASES For the years ended December 31, 1996 and 1995, total rental expense under a vehicle operating lease was $3,863 and $1,783, respectively. At December 31, 1996, the company was obligated under the noncancellable lease as follows:
YEAR ENDING LEASE DECEMBER 31, OBLIGATIONS - --------------------------------------------------------------------------------- ----------- 1997............................................................................. $ 1,783 ----------- -----------
TRANSACTIONS WITH RELATED PARTIES The company leases its offices from an affiliated company which is owned by the majority stockholder of The Jupiter Group, Inc. The lease is classified as a month-to-month operating lease and provides for rental of $500 per month. F-53 UNAUDITED PRO FORMA FINANCIAL STATEMENTS The Selected Financial Data presented below as of September 30, 1997, and for the three months ended September 30, 1997, are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position and the results of operations for this period, applied on a basis consistent with the audited financial statements. The following unaudited pro forma combined financial statements as of September 30, 1997 and for the three months and year ended September 30, 1997, and June 30, 1997, respectively, gives effect for the following: (i) the sale of 2,400,000 shares of common stock through a secondary offering and the use of the net proceeds therefrom to redeem preferred stock, (ii) a one-for-three reverse stock split, (iii) the Company's acquisition of Triple A Security Systems, Inc. (Triple A), and (iv) the Company's acquisition of The Jupiter Group, Inc. (Jupiter) as if such events had been completed at July 1, 1997 for purposes of the pro forma statements of operations and as of September 30, 1997 for purposes of the pro forma balance sheet. The pro forma information is based on the historical financial statements of the Company, Triple A, and Jupiter, giving effect to the transactions under the purchase method of accounting and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma financial statements. In the preparation of the pro forma combined balance sheet, the columns pertaining to Triple A and Jupiter contain information as to the assets and the liabilities acquired as of its date of acquisition. These pro forma statements of operations may not be indicative of the results that actually would have occurred if the acquisition had occurred on July 1, 1997. F-54 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1997
HISTORICAL PRO FORMA --------------------------------- ------------------------------ RESPONSE TRIPLE A JUPITER ADJUSTMENTS COMBINED ----------- ---------- -------- ---------------- ----------- ASSETS Current Assets Cash........................................................ $ 682,813 $ 69,328 $163,879 $17,820,000(a) $ 916,020 (10,000,000)(b) (7,820,000)(d) Marketable securities....................................... 56,250 114,853 171,103 Accounts receivable (net)................................... 1,669,234 307,024 149,426 2,125,684 Inventory................................................... 829,453 523,382 1,352,835 Prepaid expenses and other current assets................... 446,524 158,118 13,333 (85,027)(b) 532,948 ----------- ---------- -------- ---------------- ----------- Total current assets.................................. 3,684,274 1,172,705 326,638 (85,027) 5,098,590 ----------- ---------- -------- ---------------- ----------- Monitoring Contract Costs (net)............................. 18,045,284 230,312 (230,312)(b) 28,872,112 10,026,828(b) 800,000(c) ----------- ---------- -------- ---------------- ----------- Property and Equipment (net).................................. 1,522,023 1,854,040 108,678 3,484,741 ----------- ---------- -------- ---------------- ----------- Other Assets Accounts receivable (net)................................... 202,073 202,073 Deposits.................................................... 45,935 31,845 300 78,080 Investment in joint venture................................. 2,963,096 2,963,096 Intangible assets, net of amortization...................... 23,769 (23,769)(c) Deferred compensation expense............................... 517,500 517,500 Deferred financing costs (net).............................. 3,316,249 3,316,249 ----------- ---------- -------- ---------------- ----------- 7,044,853 31,845 24,069 (23,769) 7,076,998 ----------- ---------- -------- ---------------- ----------- $30,296,434 $3,288,902 $459,385 $10,487,720 $44,532,441 ----------- ---------- -------- ---------------- ----------- ----------- ---------- -------- ---------------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt........................... $ 157,815 $ 411,452 $ 77,494 $ (411,452)(b) $ 235,309 Accounts payable-Trade...................................... 738,909 408,285 10,679 (408,285)(b) 749,588 Purchase holdbacks.......................................... 571,120 571,120 Accrued expenses and other current liabilities.............. 1,076,485 159,809 43,058 (159,809)(b) 1,119,543 Due to affiliate............................................ 76,465 (76,465)(c) Deferred revenue 1,981,698 769,245 2,750,943 ----------- ---------- -------- ---------------- ----------- 4,526,027 1,748,791 207,696 (1,056,011) 5,426,503 ----------- ---------- -------- ---------------- ----------- Long term Liabilities Long-term debt.............................................. 12,944,996 1,105,149 59,444 (1,105,149)(b) 13,834,440 (7,820,000)(d) 8,650,000(e) Deferred compensation expense............................... 1,725,000 1,725,000 ----------- ---------- -------- ---------------- ----------- 14,669,996 1,105,149 59,444 (275,149) 15,559,440 ----------- ---------- -------- ---------------- ----------- Stockholders' Equity Preferred stock-Series A.................................... 6,818,055 (6,818,055)(e) Preferred stock-Series B.................................... 31 31 Common stock................................................ 17,514 125,000 625 (125,000)(b) 39,890 2,163(b) 19,200(a) (625)(c) 1,013(c) Additional paid-in capital.................................. 36,755,463 215,814 22,375 (215,814)(b) 55,996,838 2,228,592(b) 17,800,800(a) (1,831,945)(e) (22,375)(c) 1,043,928(c) Unrealized holding losses................................... (18,750) 391 (18,359) Accumulated Deficit......................................... (32,471,902) 93,757 169,245 (93,757)(b) (32,471,902) (169,245)(c) ----------- ---------- -------- ---------------- ----------- 11,100,411 434,962 192,245 11,818,880 23,546,498 ----------- ---------- -------- ---------------- ----------- $30,296,434 $3,288,902 $459,385 $10,487,720 $44,532,441 ----------- ---------- -------- ---------------- ----------- ----------- ---------- -------- ---------------- -----------
F-55 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
HISTORICAL PRO FORMA -------------------------------- ------------------------------- RESPONSE TRIPLE A JUPITER ADJUSTMENTS COMBINED ----------- --------- -------- ------------ -------------- Operating Revenues Product Sales............................................. $ 662,846 $ 408,596 $ 1,071,442 Monitoring and service.................................... 2,585,038 911,076 $535,949 4,032,063 ----------- --------- -------- ------------ -------------- 3,247,884 1,319,672 535,949 5,103,505 Cost of Revenues............................................ 1,167,181 560,273 432,319 2,159,773 ----------- --------- -------- ------------ -------------- Gross Profit................................................ 2,080,703 759,399 103,630 2,943,732 ----------- --------- -------- ------------ -------------- Operating Expenses Selling, general and administrative....................... 1,165,635 568,617 22,143 1,756,395 Depreciation and amortization............................. 837,539 128,120 19,705 ($17,199)(f) 1,238,836 270,671(g) Interest.................................................. 643,780 24,011 2,601 (24,011)(h) 667,650 21,269(i) ----------- --------- -------- ------------ -------------- 2,646,954 720,748 44,449 250,730 3,662,881 ----------- --------- -------- ------------ -------------- Income/(Loss) From Operations............................... (566,251) 38,651 59,181 (250,730) (719,149) ----------- --------- -------- ------------ -------------- Other Income/(Expense) Interest income........................................... 1,708 1,876 442 4,026 Joint venture loss........................................ (130,138) (130,138) ----------- --------- -------- ------------ -------------- (128,430) 1,876 442 0 (126,112) ----------- --------- -------- ------------ -------------- Net Income/(Loss)........................................... (694,681) 40,527 59,623 (250,730) (845,261) Dividends and accretion on preferred stock.................. (335,272) 335,272(j) 0 ----------- --------- -------- ------------ -------------- Net Loss Applicable to Common Shareholders.................. ($1,029,953) $ 40,527 $ 59,623 $ 84,542 ($ 845,261) ----------- --------- -------- ------------ -------------- ----------- --------- -------- ------------ -------------- Loss per common share Loss before extraordinary item............................ ($0.33) ($0.17) Extraordinary item........................................ $ 0.00 $ 0.00 ----------- -------------- Net loss ($0.33) ($0.17) ----------- -------------- ----------- -------------- Net loss applicable to common shareholders.................. ($0.48) ($0.17) ----------- -------------- ----------- -------------- Weighted average number of shares outstanding............... 2,132,533 2,797,055(k) 4,929,588 ----------- ------------ -------------- ----------- ------------ --------------
F-56 RESPONSE USA INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED JUNE 30, 1997
HISTORICAL PRO FORMA ------------------------------------------ ------------------------------ RESPONSE TRIPLE A JUPITER(L) ADJUSTMENTS COMBINED -------------- ------------ ------------ -------------- -------------- Operating Revenues Product Sales...................... $ 2,938,618 $ 1,787,897 $ 4,726,515 Monitoring and service............. 9,784,285 3,345,642 $ 1,646,808 14,776,735 -------------- ------------ ------------ -------------- -------------- 12,722,903 5,133,539 1,646,808 19,503,2502 Cost of Revenues..................... 4,097,415 2,353,190 1,352,105 7,802,710 -------------- ------------ ------------ -------------- -------------- Gross Profit......................... 8,625,488 2,780,349 294,703 11,700,540 -------------- ------------ ------------ -------------- -------------- Operating Expenses Selling, general and administrative..................... 9,126,641 2,044,430 95,914 11,266,985 Compensation--Options/ Employment contracts.......................... 3,689,700 3,689,700 Depreciation and amortization...... 2,976,433 463,914 81,274 (68,812 (f) 4,535,493 1,082,684(g) Interest........................... 1,349,480 128,574 14,525 (128,574 (h) 1,449,080 85,075(i) -------------- ------------ ------------ -------------- -------------- 17,142,254 2,636,918 191,713 970,373 20,941,258 -------------- ------------ ------------ -------------- -------------- Income/(Loss) From Operations........ (8,516,766) 143,431 102,990 (970,373) (9,240,718) -------------- ------------ ------------ -------------- -------------- Other Income/(Expense) Interest Income.................... 12,176 13,755 1,573 27,504 Joint Venture Loss................. (123,325) (123,325) -------------- ------------ ------------ -------------- -------------- (111,149) 13,755 1,573 0 (95,821) -------------- ------------ ------------ -------------- -------------- Income/Loss Before Extraordinary Item............................... (8,627,915) 157,186 104,563 (970,373) (9,336,539) Extraordinary Item Loss on debt extinguishment........ 2,549,708 2,549,708 -------------- ------------ ------------ -------------- -------------- Net Income/(Loss).................... (11,177,623) 157,186 104,563 (970,373) (11,886,247) Dividends and accretion on preferred stock.............................. (6,876,521) 6,876,521(j) 0 -------------- ------------ ------------ -------------- -------------- Net Loss Applicable to Common Shareholders....................... ($ 18,054,144) $ 157,186 $ 104,563 $ 5,906,148 $ (11,886,247) -------------- ------------ ------------ -------------- -------------- -------------- ------------ ------------ -------------- -------------- Loss per common share Loss before extraordinary item..... ($ 5.80) ($ 2.18) Extraordinary item................. ($ 1.71) ($ 0.59) -------------- -------------- Net loss........................... ($ 7.51) ($ 2.77) -------------- -------------- -------------- -------------- Net loss applicable to common shareholders....................... ($ 12.14) ($ 2.77) -------------- -------------- -------------- -------------- Weighted average number of shares outstanding........................ 1,487,574 2,797,055 (k) 4,284,629 -------------- -------------- -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the financial statements. F-57 RESPONSE USA INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS UNAUDITED PRO FORMA BALANCE SHEET (a) To reflect the net proceeds from the Secondary Offering as if it occurred on September 30, 1997 of $17,820,000 (b) To record the acquisition of Triple A. The purchase price of $13,000,000 (payable in cash of $10,000,000, stock valued at $2,230,755, and assumption of $769,245 in liabilities) which was allocated to the assets acquired and liabilities assumed based on their fair value with the remainder, $10,026,828, classified as Monitoring Contract Costs. (c) To record the acquisition of Jupiter. The purchase price of $1,044,941 (payable in stock) which was allocated to the assets acquired and liabilities assumed based on their fair value with the remainder, $800,000, classified as Monitoring Contract Costs. (d) To record principal paid on the line of credit from the remaining proceeds from the Secondary Offering of $7,820,000. (e) To record the redemption of the preferred stock for $8,650,000. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (f) To eliminate amortization of monitoring contracts purchased from Triple A and amortization of intangible assets not acquired from Jupiter previously recorded in Triple A's and Jupiter's historical financial statements. (g) To provide amortization on the net increase of purchased monitoring contracts. Monitoring contracts purchased from Triple A and Jupiter are amortized using the straight-line method over a ten-year estimated life. (h) To eliminate interest expense on debt not acquired from Triple A. (i) To record additional interest expense on the net increase in long-term debt as a result of additional borrowings needed to redeem the preferred stock after the acquisition of Triple A with the proceeds from the offering. (j) To eliminate dividends and accretion on preferred stock recorded during the quarter ended September 30, 1997, since this preferred stock is presumed to have been retired in these pro forma financial statements. (k) In calculating earnings per share, effect has been given to the shares issued in the acquisitions of Triple A (270,395 shares) and Jupiter (126,660 shares), and the Secondary Offering (2,400,000) shares.) (l) The historical information for Jupiter used in preparing the unaudited pro-forma condensed consolidated statement of operations for the fiscal year ended June 30, 1997 is derived from the audited statement of operations for the year ended December 31, 1996 and the unaudited statement of operations for the nine months ended September 30, 1997. F-58 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------ TABLE OF CONTENTS
PAGE --------- Prospectus Summary.............................. 3 Risk Factors.................................... 8 Use of Proceeds................................. 17 Price Range of Common Stock..................... 18 Dividend Policy................................. 18 Capitalization.................................. 19 Selected Financial Information.................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 23 Business........................................ 31 Management...................................... 46 Principal Stockholders.......................... 53 Certain Relationships and Related Transactions.................................. 54 Description of Securities....................... 55 Shares Eligible for Future Sale................. 60 Underwriting.................................... 61 Legal Matters................................... 63 Experts......................................... 63 Available Information........................... 63 Index to Financial Statements................... F-1
2,400,000 SHARES RESPONSE USA, INC. COMMON STOCK --------------------- PROSPECTUS --------------------- HAMPSHIRE SECURITIES CORPORATION , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS Delaware General Corporation Law, Section 102(b)(7), enables a corporation in its original certificate of incorporation, or an amendment thereto validly approved by stockholders, to eliminate or limit personal liability of members of its Board of Directors for violations of a director's fiduciary duty of care. However, the elimination or limitation shall not apply where there has been a breach of the duty of loyalty, failure to act in good faith, intentional misconduct or a knowing violation of a law, the payment of a dividend or approval of a stock repurchase which is deemed illegal or an improper personal benefit is obtained. The Company's Certificate of Incorporation includes the following language: "No director of the Corporation shall be liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director; PROVIDED that this provision does not eliminate the liability of the director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction from which the director derived an improper personal benefit." Article Ninth of the Certificate of Incorporation of the Company permits indemnification of directors of the Corporation. Such Article provides as follows: "A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this paragraph shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification. If the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the amended Delaware General Corporation Law. Any repeal or modification of this paragraph shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification." Additionally, the Company's Bylaws provide that the Company will indemnify each of its directors and officers with respect to all liability and loss suffered and expenses incurred by such person in any action, suit or proceeding in which such person was or is made or threatened to be made a party or is otherwise involved by reason of the fact that such person is or was a director or officer of the Company. The Company is also obligated to pay the expenses of the directors and officers incurred in defending such proceedings, subject to reimbursement if it is subsequently determined that such person is not entitled to indemnification. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is an itemization of all expenses (subject to future contingencies) incurred or expected to be incurred by the Company in connection with the issuance and distribution of the securities being offered hereby (items marked with an asterisk (*) represent estimated expenses): SEC Registration Fee.............................................. $ 10,053 Legal Fees and Expenses........................................... 125,000 Blue Sky Fees (including counsel fees)............................ 50,000 NASD Filing Fees.................................................. 3,818 NASDAQ National Market Fee........................................ 10,000 Accounting Fees and Expenses...................................... 100,000 Transfer Agent and Registrar Fees................................. 5,000 Printing and Engraving Expenses................................... 75,000 Underwriting Expense Allowance.................................... 594,000 Miscellaneous..................................................... 17,129 --------- Total............................................................. $ 990,000 --------- ---------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Set forth below in chronological order is information regarding the number of shares of Common Stock sold or issued by the Company, since December 1994, the consideration received by the Company for such shares, and information relating to the section of the Securities Act, or rule of the Commission under which exemption from registration was claimed. None of these securities was registered under the Securities Act. Except as set forth below no sales and/or issuance of securities involved the use of an underwriter and no commissions were paid in connection with the sale of any securities. In March 1997, the Company issued 8,333 shares of Common Stock to Reliable-Hawk, Inc. in connection with a purchase of monitoring contracts and 5,567 shares of Common Stock pursuant to a guarantee of stock valuation in connection with an acquisition. In March 1997, the Company issued 364,722 shares of Common Stock to BKR, Inc. in connection with a joint venture (see Note 3 of Notes to Consolidated Financial Statements of the Company). In December 1996 the Company issued 4,656 shares of Common Stock to the owner of an acquired company as payment for purchase holdbacks. During Fiscal 1996 and Fiscal 1997, the Company issued 103,015 shares of Common Stock in connection with certain acquisitions (see Note 2 of Notes to Consolidated Financial Statements of the Company). Such amount includes 5,000 shares of Common Stock issued as payment of deferred financing costs during Fiscal 1996. During Fiscal 1996, the Company issued 667 shares of Common Stock as payment for consulting services. During Fiscal 1996, the Company issued 10,667 shares of Common Stock as payment of a note payable in connection with the acquisition of a division of ERS and issued 47,032 shares of Common Stock as payment of notes payable to stockholders and officers. From June 30, 1996 to July 2, 1996, the Company issued 7,500 shares of Preferred Stock to accredited investors and received aggregate gross proceeds of $7,500,000. The Company paid the placement agent, Zannett Securities Corp., fees of $975,000. In July 1996, in connection with obtaining the Credit Line, the Company issued a warrant to an affiliate of the Bank to purchase 344,045 shares of Common Stock at an exercise price of $4.50 per share. II-2 On June 30, 1996, the Company, as part of a consulting agreement, issued warrants to purchase 66,667 shares of Common Stock at an exercise price of $15.375. On June 30, 1996, in connection with the issuance of the Preferred Stock, the Company issued warrants to accredited investors to purchase 166,667 shares of Common Stock at an exercise price of $18.39 per share and 83,334 shares of Common Stock at an exercise price of $24.00 per share. On June 30, 1996, the Company also issued warrants to a consultant to purchase 25,000 shares of Common Stock at an exercise price of $13.50. During January and February 1996, the Company completed a private placement of 61 units to accredited investors. Each unit consisted of a $25,000 10% Convertible Subordinated Promissory Note due December 31, 1997 and Class C Warrants to purchase 334 shares of Common Stock. The Company sold such securities through Lew Lieberbaum & Co., Inc., for which the Company paid fees of $219,745. In November 1995, as part of consulting agreements, the Company issued warrants to purchase 428,334 shares of Common Stock at exercise prices ranging from $7.50 to $10.50. During July through November 1995, the Company completed a private placement of three units to accredited investors. Each unit consisted of a $145,000 13.8% Convertible Subordinated Promissory Note due June 30, 1997 and Class C Warrants to purchase 2,223 shares of Common Stock. During January through April 1995, the Company completed a private placement of 36.5 units to accredited investors. Each unit consisted of a $25,000 12% Convertible Subordinated Promissory Note due December 31, 1996 and Class C Warrants to purchase 334 shares of Common Stock. The Company sold such securities through Lew Lieberbaum & Co., Inc., for which the Company paid fees of $121,825. The Company has issued shares under its NQO Plan and ISO Plan and non-qualified options outside of such plans during the last three fiscal years to employees, officers, directors and consultants. If the acquisitions of Triple A and Jupiter are consummated, the Company will issue shares of Common Stock valued at $3.295 million, based upon the lesser of the market (as defined) at closing or the price of the Common Stock pursuant to this offering. During November 1997, the Company issued 441,750 Additional Warrants which are exercisable at $10.125 per share. Each of the foregoing transactions was exempt from registration under the Securities Act by virtue of the provisions of Sections 3(a)(9), 3(b) or 4(2) of the Securities Act. None of such transactions involved any general solicitation. Each purchaser of the securities described above has represented that he understands that the securities acquired may not be sold or otherwise transferred absent registration under the Securities Act or the availability of an exemption from the registration requirements of the Securities Act, and each certificate evidencing the securities owned by each purchaser bears or will bear upon issuance a legend to that effect. ITEM 27. EXHIBITS (a) The following exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 1 Revised Form of Underwriting Agreement 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)
II-3
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 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(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) Revised Form of Representative's Warrants 4(h) Incentive Stock Option Plan of the Company adopted by the Company's Board on March 18, 1992, and approved by the Company's stockholders on March 1992(1) 4(i) Restricted Stock Option Plan of the Company adopted by the Company's Board on August 20, 1990, as amended August 30, 1991, January 2, 1992 and March 18, 1992(1) 4(j) 1997 Stock Option Plan of the Company adopted by the Company's Board in September 1997(3) 5 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP 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 R. 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 March 4, 1994, by and among the Company, USS and Todd Herman(2) 10(e) Employment Agreement dated March 4, 1994, by and among the Company, USS and John Colehower(2) 10(f) Agreement dated as of November 22, 1996 between Sloan Electronics, Incorporated and the Company(2) 10(g) Asset Purchase Agreement dated October 1, 1997 between the Company and Triple A Security Systems, Inc.(2) 10(h) Loan and Security Agreement dated as of June 30, 1996 between Mellon Bank, N.A. and the Company(2) 10(i) Purchase Agreement dated as of March 4, 1997, among BKR, Inc., the Company and HealthLink, Ltd.(2) 10(j) Operating Agreement of HealthLink, Ltd. dated as of March 4, 1997(2) 10(k) 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. 11 Statement re: computation of earnings (loss) per share(3) 21 Subsidiaries of the registrant(2) 23(a) Consent of Deloitte & Touche LLP 23(b) Consent of Fishbein & Company, PC 23(c) Consent of Terry H. Jones, CPA 23(d) Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the Opinion filed as Exhibit 5) 24 Power of Attorney (included on the signature pages hereto) 27 Financial Data Schedule(3)
II-4 - ------------------------ (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) Previously filed. ITEM 28. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; (iii) to include any additional or changed material information on the plan of distribution; (2) that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be treated as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The Registrant hereby undertakes that it will: (1) for determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective; and (2) for the purpose of determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement relating to the securities offered therein, and the offering of such securities at that time as the initial bona fide offering thereof. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Amendment No. 1 to Form SB-2 and authorized this Amendment No. 1 to this Registration Statement to be signed on its behalf by the undersigned, in the City of Lawrenceville, New Jersey, on December 19, 1997. RESPONSE USA, INC. By: /s/ RICHARD M. BROOKS ----------------------------------------- Richard M. Brooks CHIEF EXECUTIVE OFFICER, PRESIDENT, CHIEF FINANCIAL OFFICER AND CHAIRMAN OF THE BOARD
POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Brooks and Ronald A. Feldman, or either one of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign (i) any and all pre- or post-effective amendments to this Registration Statement, and to file the same with all exhibits thereto, and other documents in connection therewith, and (ii) any registration statements, and any and all amendments thereto, relating to the offering covered hereby filed pursuant to Rule 462(b) under the Securities Act, with the Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confiming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with to the requirements of the Securities Act, this Amendment No. 1 to this Registration Statement has been signed by the following persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------- ---------------------- Chief Executive Officer, President, Chief Financial /s/ RICHARD M. BROOKS Officer and Chairman of the ------------------------------------------- Board (Principal Executive December 19, 1997 Richard M. Brooks Officer) (Principal Accounting and Financial Officer) * Vice President, Chief Operating ------------------------------------------- Officer, Secretary, Treasurer December 19, 1997 Ronald A. Feldman and Director
II-6
SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------- ---------------------- /s/ ROBERT L. MAY ------------------------------------------- Director December 19, 1997 Robert L. May /s/ A. CLINTON ALLEN ------------------------------------------- Director December 19, 1997 A. Clinton Allen * ------------------------------------------- Director December 19, 1997 Robert M. Rubin * ------------------------------------------- Director December 19, 1997 Stuart Levin * ------------------------------------------- Director December 19, 1997 Todd E. Herman * ------------------------------------------- Director December 19, 1997 Bruce Luehrs * ------------------------------------------- Director December 19, 1997 Stuart R. Chalfin
*By: /s/ RICHARD M. BROOKS ----------------------------------- as Attorney-in-fact
II-7 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 1 Revised Form of Underwriting Agreement 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(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) Revised Form of Representative's Warrants 4(h) Incentive Stock Option Plan of the Company adopted by the Company's Board on March 18, 1992, and approved by the Company's stockholders on March 1992(1) 4(i) Restricted Stock Option Plan of the Company adopted by the Company's Board on August 20, 1990, as amended August 30, 1991, January 2, 1992 and March 18, 1992(1) 4(j) 1997 Stock Option Plan of the Company adopted by the Company's Board in September 1997(3) 5 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP 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 R. 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 March 4, 1994, by and among the Company, USS and Todd Herman(2) 10(e) Employment Agreement dated March 4, 1994, by and among the Company, USS and John Colehower(2) 10(f) Agreement dated as of November 22, 1996 between Sloan Electronics, Incorporated and the Company(2) 10(g) Asset Purchase Agreement dated October 1, 1997 between the Company and Triple A Security Systems, Inc.(2) 10(h) Loan and Security Agreement dated as of June 30, 1996 between Mellon Bank, N.A. and the Company(2) 10(i) Purchase Agreement dated as of March 4, 1997, among BKR, Inc., the Company and HealthLink, Ltd.(2) 10(j) Operating Agreement of HealthLink, Ltd. dated as of March 4, 1997(2) 10(k) 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 11 Statement re: computation of earnings (loss) per share(3) 21 Subsidiaries of the registrant(2) 23(a) Consent of Deloitte & Touche LLP 23(b) Consent of Fishbein & Company, PC 23(c) Consent of Terry H. Jones, CPA 23(d) Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the Opinion filed as Exhibit 5) 24 Power of Attorney (included on the signature pages hereto) 27 Financial Data Schedule(3)
- ------------------------ (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) Previously filed. EX-1 2 REVISED FORM OF UNDERWRITERS AGREEMENT Exhibit 1 2,400,000 SHARES OF COMMON STOCK RESPONSE USA, INC. UNDERWRITING AGREEMENT January ___, 1998 Hampshire Securities Corporation 640 Fifth Avenue New York, New York 10019 Gentlemen: The undersigned, Response USA, Inc., a Delaware corporation (the "Company"), hereby confirms its agreement with Hampshire Securities Corporation, as representative (individually, the "Representative") of the several underwriters identified in Schedule I hereto (together with the Representative, the "Underwriters") as follows: 1. INTRODUCTION. The Company proposes to issue and sell to the Underwriters an aggregate amount of 2,400,000 shares of common stock, par value $.008 per share (the "Common Stock"), of the Company. All references to share information in this Agreement gives effect to a proposed one-for-three reverse stock split of the Company's Common Stock. Such shares of Common Stock are hereinafter referred to as the "Stock." In addition, solely for the purpose of covering over-allotments, the Company proposes to grant to the Representative an option (the "Over-allotment Option") to purchase from it, in the aggregate, up to an additional 360,000 shares (the "Additional Stock") of Common Stock. The Common Stock is more fully described in the prospectus referred to below. 1 2. REPRESENTATIONS AND WARRANTIES. (a) The Company represents and warrants to, and agrees with, the Underwriters that: (1) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, and may have filed one or more amendments thereto, on Form SB-2 (Registration File No. 333-37595), including in such registration statement and each such amendment a related preliminary prospectus, for the registration of the Stock, the Additional Stock, the common stock purchase warrants referred to in Section 5(a)(16) (the "Representative's Warrants") and the shares of Common Stock underlying the Representative's Warrants (the "Warrant Stock") under the Securities Act of 1933, as amended (the "Act"). As used in this Agreement, the term "Registration Statement" shall refer to such registration statement, as amended, on file with the Commission at the time such registration statement becomes effective under the Act (including the prospectus, financial statements, exhibits, and all other documents filed as a part thereof, provided, however, that such registration statement, at the time it becomes effective, may omit such information as is permitted to be omitted from such registration statement when it becomes effective under the Act pursuant to Rule 430A of the General Rules and Regulations of the Commission under the Act (the "Regulations"), which information (the "Rule 430A Information") shall be deemed to be included in such registration statement when a final prospectus is filed with the Commission in accordance with Rules 430A and 424(b)(1) or (4) of the Regulations); the term "Preliminary Prospectus" shall refer to each prospectus included in the Registration Statement, or any amendments thereto, before the Registration Statement becomes effective under the Act, the form of prospectus omitting Rule 430A Information included in the Registration Statement when the Registration Statement becomes effective under the Act, if applicable (the "Rule 430A Prospectus"), and any prospectus filed by the Company with the Representative's consent pursuant to Rule 424(a) of the Regulations; and the term "Prospectus" shall refer to the final prospectus in the form 2 first filed pursuant to Rule 424(b)(1) or (4) of the Regulations or, if no such filing is required, the form of final prospectus included in the Registration Statement. (2) When the Registration Statement becomes effective under the Act, and at all times subsequent thereto up to and including the Closing Date (as defined in Section 3) and each Additional Closing Date (as defined in Section 3), and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or a dealer, and during such longer period until any post-effective amendment thereto shall become effective under the Act, the Registration Statement (and any post-effective amendment thereto) and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement to the Registration Statement or the Prospectus), respectively, will contain all statements which are required to be stated therein in accordance with the Act and the Regulations, will comply with the Act and the Regulations, and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and no event will have occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus which has not then been set forth in such an amendment or supplement; if a Rule 430A Prospectus is included in the Registration Statement at the time it becomes effective under the Act, the Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4) of the Regulations will contain all Rule 430A Information and all statements which are required to be stated therein in accordance with the Act or the Regulations, will comply with the Act and the Regulations, and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and each Preliminary Prospectus, as of the date filed with the Commission, contained all statements required to be stated therein in accordance with the Act and the Regulations, complied with the Act and the Regulations, and did not contain any untrue statement of a material fact or omit to state any material fact required to be 3 stated therein or necessary to make the statements therein not misleading; except that no representation or warranty is made in this Section 2(a)(2) with respect to statements or omissions made in reliance upon, and in conformity with, written information furnished to the Company as stated in Section 8(b) with respect to any Underwriter by or on behalf of such Underwriter through the Representative expressly for inclusion in the Registration Statement, any Preliminary Prospectus, or the Prospectus, or any amendment or supplement thereto. (3) The Company has filed with the Commission on a timely basis all filings required of a company whose securities have been registered under the Exchange Act (collectively, the "Exchange Act Filings"). None of the Company's Exchange Act Filings contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. For the purpose of this paragraph, filings pursuant to Rule 12b-25 of the Exchange Act shall be deemed timely. (4) Neither the Commission nor the "blue sky" or securities authority of any jurisdiction has issued an order (a "Stop Order") suspending the effectiveness of, or preventing or suspending the use of, the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, refusing to permit the effectiveness of the Registration Statement, or suspending the registration or qualification of the Stock, the Additional Stock, the Representative's Warrants or the Warrant Stock, nor has any of such authorities instituted or threatened to institute any proceedings with respect to a Stop Order. (5) Any contract, agreement, instrument, lease, or license required to be described in the Registration Statement or the Prospectus has been properly described therein. Any contract, agreement, instrument, lease, or license required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to the Registration Statement. 4 (6) The Company has no subsidiary or subsidiaries (as defined in the Regulations) other than as disclosed in the Registration Statement. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, with full power and authority, and all necessary consents, authorizations, approvals, orders, licenses, certificates, and permits of and from, and declarations and filings with, all federal, state, local, and other governmental authorities and all courts and other tribunals, to own, lease, license, and use its properties and assets and to conduct its business in the manner described in the Prospectus. The Company is duly qualified to do business as a foreign corporation and is in good standing as such in every jurisdiction in which its ownership, leasing, licensing, or use of property and assets or the conduct of its business makes such qualification necessary, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its subsidiaries taken as a whole. (7) The Company has authorized capital stock as disclosed in the Registration Statement, of which the Prospectus is a part. Except as disclosed in the Prospectus, each outstanding share of Common Stock is validly authorized and issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, has not been issued and is not owned or held in violation of any preemptive rights of stockholders. There is no commitment, plan, or arrangement to issue, and no outstanding option, warrant, or other right calling for the issuance of, any share of capital stock of the Company or any security or other instrument which by its terms is convertible into, or exercisable or exchangeable for, capital stock of the Company, except as may be properly described in the Prospectus. There is outstanding no security or other instrument which by its terms is convertible into, or exercisable or exchangeable for, capital stock of the Company, except as may be properly be described in the Prospectus. The certificates evidencing the Common Stock are in proper form. 5 (8) The consolidated financial statements of the Company included in the Registration Statement and the Prospectus fairly present, with respect to the Company and its combined subsidiaries, the financial position, the results of operations, the cash flows, and the other information purported to be shown therein at the respective dates and for the respective periods to which they apply. Such financial statements have been prepared in accordance with generally accepted accounting principles (except to the extent that certain footnote disclosures regarding any stub period may have been omitted in accordance with the applicable rules of the Commission under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act")) consistently applied throughout the periods involved, are correct and complete in all material respects, and are in accordance with the books and records of the Company and its combined subsidiaries. Deloitte & Touche, LLP, the accountants whose report on the audited financial statements is filed with the Commission as a part of the Registration Statement, are, and during the periods covered by their report(s) included in the Registration Statement and the Prospectus were, independent certified public accountants with respect to the Company within the meaning of the Act and the Regulations. No other financial statements are required by Form SB-2 or otherwise to be included in the Registration Statement or the Prospectus. There has at no time been a material adverse change in the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company from the latest information set forth in the Registration Statement or the Prospectus, except as may be properly described in the Prospectus. (9) There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation pending, or, to the best knowledge of the Company, threatened or in prospect (or any basis therefor) with respect to the Company or any of its operations, businesses, properties, or assets, except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have, and can not in the future reasonably be expected to have, a material adverse effect upon the operations, business, properties, or assets of the Company 6 and its subsidiaries taken as a whole. The Company is not in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree, except as may be properly described in the Prospectus or such as in the aggregate do not now have, and can not in the future reasonably be expected to have, a material adverse effect upon the operations, business, properties, or assets of the Company and its subsidiaries taken as a whole; nor is the Company currently required to take any action in order to avoid any such violation or default. (10) The Company has good title to all properties and assets which the Prospectus indicates are owned by it, free and clear of all liens, security interests, pledges, charges, encumbrances, and mortgages, except such as to not materially and adversely affect the value of such property and do not interfere with the use made or proposed to made of such property (or except as may be properly described in the Prospectus). No real property leased, licensed, or used by the Company lies in an area which is, or to the knowledge of the Company will be, subject to zoning, use, or building code restrictions which would prohibit, and no state of facts relating to the actions or inactions of another person or entity or his or its ownership, leasing, licensing, or use of any real or personal property exists or will exist which would prevent, the continued effective leasing, licensing, or use of such real property in the business of the Company as presently conducted or as the Prospectus indicates it contemplates conducting, with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company (or except as may be properly described in the Prospectus). (11) Neither the Company nor, to the knowledge of the Company, any other party, is now, or is expected by the Company to be, in violation or breach of, or in default with respect to, any material provision of any contract, agreement, instrument, lease, license, arrangement, or understanding which is material to the Company, and each such contract, agreement, instrument, lease, license, arrangement, and understanding is in full force and effect and is the legal, valid, and binding obligation of the parties thereto and is enforceable as to them in accordance 7 with its terms. The Company enjoys peaceful and undisturbed possession under all leases and licenses under which it is operating. Except as described in the Prospectus, the Company is not a party to, or bound by, any contract, agreement, instrument, lease, license, arrangement, or understanding, or subject to any charter or other restriction, which has had, or may in the future have, a material adverse effect on the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company and its subsidiaries taken as a whole. The Company is not in violation or breach of, or in default with respect to, any term of its certificate of incorporation, as amended, (or other charter document) or by-laws, as amended. (12) All United States and foreign patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, franchises, and other intangible properties and assets (all of the foregoing being herein called "Intangibles") that the Company owns or has pending, or under which it is licensed, are in good standing and uncontested, except as may be properly described in the Prospectus. There is no right under any Intangible necessary to the business of the Company as presently conducted or as the Prospectus indicates it contemplates conducting, except as may be so designated in the Prospectus. The Company has not infringed, is not infringing, or has not received notice of (or knows of any basis for) a third party claim of infringement with respect to asserted Intangibles of others, except as may be properly described in the Prospectus. To the knowledge of the Company, there is no infringement by others of Intangibles of the Company. To the knowledge of the Company, there is no Intangible of others which has had, or may in the future have a material adverse effect on the financial condition, results of operations, business, properties, assets, liabilities or future prospects of the Company, except as may be properly described in the Prospectus. (13) Neither the Company nor any director, officer, agent, employee, or other person associated with, or acting on behalf of, the Company has, directly or indirectly: used any corporate funds for unlawful contributions, gifts, entertainment, 8 or other unlawful expenses relating to political activity; made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback, or other unlawful payment. The Company's internal accounting controls and procedures are sufficient to cause the Company to comply in all respects with the Foreign Corrupt Practices Act of 1977, as amended. (14) The Company has all requisite power and authority to execute, deliver, and perform this Agreement and the Representative's Warrants. All necessary corporate proceedings of the Company have been duly taken to authorize the execution, delivery, and performance by the Company of this Agreement and the Representative's Warrants. This Agreement has been duly authorized, executed, and delivered by the Company, is the legal, valid, and binding obligation of the Company, and is enforceable as to the Company in accordance with its terms. The Representative's Warrants have been duly authorized by the Company and, when executed and delivered by the Company, will be legal, valid, and binding obligations of the Company, each enforceable as to the Company in accordance with its terms. No consent, authorization, approval, order, license, certificate, or permit of or from, or declaration or filing with, any federal, state, local, or other governmental authority or any court or other tribunal is required by the Company for the execution, delivery, or performance by the Company of this Agreement or the Representative's Warrants (except filings under the Act which have been or will be made before the Closing Date and filings and consents consisting only of filings and consents under "blue sky" or securities laws which have been obtained at or prior to the date of this Agreement). No consent of any party to any contract, agreement, instrument, lease, license, arrangement, or understanding to which the Company is a party, or to which any of their respective properties or assets are subject, is required for the execution, delivery, or performance of this Agreement and the Representative's Warrants; and the execution, delivery, and performance of this Agreement and the Representative's 9 Warrants will not violate, result in a breach of, conflict with, result in the creation or imposition of any lien, charge, or encumbrance upon any properties or assets of the Company pursuant to the terms of, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under, any such contract, agreement, instrument, lease, license, arrangement, or understanding, or violate, result in a breach of, or conflict with any term of the certificate of incorporation, as amended (or other charter document) or by-laws, as amended, of the Company, or violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment, or decree binding on the Company or to which any of its respective operations, businesses, properties, or assets are subject. (15) The Stock and the Additional Stock are validly authorized and, when issued and delivered in accordance with this Agreement, will be validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive or similar rights of stockholders, and the Underwriters will receive good title to the Stock and the Additional Stock, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements, and voting trusts. The Common Stock, the Stock, and the Additional Stock conform to all statements relating thereto contained in the Registration Statement or the Prospectus. (16) The Warrant Stock is validly authorized and has been duly and validly reserved for issuance and, when issued and delivered upon exercise of the Representative's Warrants in accordance with the terms thereof, will be validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of stockholders; and the holders of the Representative's Warrants will receive good title to the securities purchased by them upon the exercise of the Representative's Warrants, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements, and voting trusts. The Representative's 10 Warrants and the Warrant Stock conform to all statements relating thereto contained in the Registration Statement or the Prospectus. (17) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as may otherwise be properly described in the Prospectus, the Company has not (i) issued any securities or incurred any liability or obligation, primary or contingent, for borrowed money, (ii) entered into any transaction not in the ordinary course of business, (iii) declared or paid any dividend on its capital stock, or (iv) experienced any adverse changes or any development which may materially adversely effect the condition (financial or otherwise), net assets or stockholders' equity, results of operations, business, key personnel, assets, or properties of the Company and its subsidiaries taken as a whole. (18) Neither the Company nor any of its officers, directors, or affiliates (as defined in the Regulations), has taken or will take, directly or indirectly, prior to the termination of the offering contemplated by this Agreement, any action designed to stabilize or manipulate the price of any security of the Company, or which has caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of any of the Stock or the Additional Stock. (19) The Company has obtained from each of its directors, officers, and stockholders owning at least 5% of the outstanding Common Stock of the Company (hereinafter called the "Principal Stockholders"), a written agreement, in form and substance satisfactory to counsel for the Underwriters, that, for a period of 12 months from the date on which the Registration Statement shall become effective under the Act, he, she, or it will not, without the Representative's prior written consent, publicly offer, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock or any security or other instrument which by its terms is convertible into, or exercisable or exchangeable for, shares of Common Stock or other securities of the Company, 11 including, without limitation, any shares of Common Stock issuable pursuant to the terms of any employee stock options; provided, however, that such persons may offer, sell, contract to sell, grant an option for the sale of, or otherwise dispose of all or any part of his, her, or its shares of Common Stock or other such security or instrument of the Company during such period only if such transaction is private in nature and the transferee of such shares of Common Stock or other securities or instruments agrees, prior to such transaction, to be bound by all of the provisions of such agreement. (20) The Company is not, and does not intend to conduct its business in a manner in which it would become, an "investment company" as defined in Section 3(a) of the Investment Company Act of 1940, as amended (the "Investment Company Act"). (21) Except for the securities that are being registered pursuant to the Registration Statement, no person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement. (22) Except as may be set forth in the Prospectus, the Company has not incurred any liability for a fee, commission, or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement. (23) Neither the Company, nor any of its affiliates, is presently doing business with the government of Cuba or with any person or affiliate located in Cuba. If, at any time after the date on which the Registration Statement is declared effective under the Act or with the Florida Department of Banking and Finance (the "Florida Department"), whichever is later, and prior to the end of the period referred to in the first clause of Section 2(a)(2), the Company commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba, the Company will so inform the Florida Department within 90 days after such commencement of business in Cuba, and, during the period referred to in Section 2(a)(2), will inform 12 the Florida Department within 90 days after any change occurs with respect to previously reported information. (24) To the knowledge of the Company, no officer, director, or Principal Stockholder of the Company has any affiliation or association with the National Association of Securities Dealers, Inc. (the "NASD") or any member thereof. (25) Except as disclosed in the Prospectus, the Company has filed all necessary federal, state, local, and foreign income and franchise tax returns and other reports required to be filed and has paid all taxes shown as due thereon; and there is no tax deficiency which has been, or, to the knowledge of the Company, might be, asserted against the Company. (26) To the best knowledge of the Company, none of the activities or businesses of the Company is in violation of, or will cause the Company to violate, any law, rule, regulation, or order of the United States, any state, county, or locality, or of any agency or body of the United States or of any state, county, or locality, the violation of which would have a material adverse effect upon the condition (financial or otherwise), business, property, prospective results of operations, or net worth of the Company. The Common Stock has been designated for quotation on the NASD Automated Quotations National Market System (the "NNM"). 3. PURCHASE, SALE, AND DELIVERY OF THE STOCK AND THE ADDITIONAL STOCK. On the basis of the representations, warranties, covenants, and agreements of the Company herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Underwriters, and the Underwriters, severally and not jointly, agree to purchase from the Company, the numbers of shares of Stock set forth opposite the respective names of the Underwriters in Schedule I hereto. The purchase price per share of the Stock to be paid by the Underwriters shall be $__________. The public offering price per share of the Stock shall be $_______. 13 Payment for the Stock by the Underwriters shall be made by certified or official bank check in New York Clearing House funds payable to the order of the Company at the offices of Hampshire Securities Corporation, 640 Fifth Avenue, New York, New York 10019, or at such other place in the New York City metropolitan area as the Representative shall determine and advise the Company by at least two full days' notice in writing, upon delivery of the Stock to the Representative for the respective accounts of the Underwriters. Such delivery and payment shall be made by 12:00 p.m., New York City local time, on the third business day following the time of the public offering, as defined in Section 11(a) (unless such time and date is postponed in accordance with the provisions of Section 9(c)), or at such other time as shall be agreed upon between the Representative and the Company. The time and date of such delivery and payment are hereinafter referred to as the "Closing Date." Certificates for the Stock shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two full business days prior to the Closing Date. The Company shall permit the Representative to examine and package such certificates for delivery at least one full business day prior to the Closing Date. In addition, the Company hereby grants to the Representative, the Over-allotment Option to purchase all or a portion of the Additional Stock as may be necessary to cover over-allotments, at the same purchase price per share to be paid by the Underwriters to the Company for the Stock as provided for in this Section 3. The Over-allotment Option may be exercised only to cover over-allotments in the sale of shares by the Underwriters. The Over-allotment Option may be exercised by the Representative on the basis of the representations, warranties, covenants, and agreements of the Company herein contained, but subject to the terms and conditions herein set forth, at any time and from time to time on or before the forty-fifth (45th) day following the date on which the Registration Statement becomes effective under the Act, by written notice by the Representative to the Company. Such notice shall set forth the aggregate number of shares of Additional Stock as to which the Over-allotment Option is being exercised (which shall be allocated as to the Company and the Representative deem appropriate) and the time and date, as determined by the Representative, when such shares of Additional Stock are to be delivered (such time and date are hereinafter referred to as an "Additional Closing Date"); provided, however, that no Additional Closing Date shall be 14 earlier than the Closing Date nor earlier than the second business day after the date on which the notice of the exercise of the Over-allotment Option shall have been given nor later than the eighth business day after the date on which such notice shall have been given. In the event the Company declares or pays a dividend or a distribution on the Common Stock, whether in the form of cash, shares of Common Stock, or other consideration, prior to the Additional Closing Date, such dividend or distribution shall also be paid on the Additional Stock on the later of the Additional Closing Date and the date on which such dividend or distribution is payable. Payment for the shares of Additional Stock by the Representative shall be made by certified or official bank check in New York Clearing House funds payable to the order of the Company at the offices of Hampshire Securities Corporation, 640 Fifth Avenue, New York, New York 10019, or at such other place in the New York City metropolitan area as the Representative shall determine and advise the Company by at least two full days' notice in writing, upon delivery of the shares of Additional Stock to the Representative for the account of the Representative. Certificates for the shares of Additional Stock shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two full business days prior to the Additional Closing Date with respect thereto. The Company shall permit the Representative to examine and package such certificates for delivery at least one full business day prior to the Additional Closing Date with respect thereto. It is understood that the Representative, individually and not as Representative of the several Underwriters, may (but shall not be obligated to) make any and all the payments required pursuant to this Section 3 on behalf of any Underwriters whose check or checks shall not have been received by the Representative at the time of delivery of the Stock to be purchased by such Underwriter or Underwriters. Any such payment by the Representative shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. 4. OFFERING. The Underwriters are to make a public offering of the Stock as soon, on or after the date on which the Registration Statement becomes effective under the Act, as the Representative deem it advisable so to do. The Stock is to be initially offered to the public at the public offering price as provided for in Section 3 (such price being hereinafter referred to as the 15 "public offering price"). After the public offering, the Representative may from time to time increase or decrease the public offering price, in the Representative's sole discretion, by reason of changes in general market conditions or otherwise. 5. COVENANTS. (a) The Company covenants that it will: (1) Use its best efforts to cause the Registration Statement to become effective under the Act as promptly as possible and notify the Representative immediately, and confirm such notice in writing, (i) when the Registration Statement and any post-effective amendment thereto become effective under the Act, (ii) of the receipt of any comments from the Commission or the "blue sky" or securities authority of any jurisdiction regarding the Registration Statement, any post-effective amendment thereto, the Prospectus, or any amendment or supplement thereto, (iii) of the filing with the Commission of any supplement to the Prospectus, and (iv) of the receipt of any notification with respect to a Stop Order or the initiation or threatening of any proceeding with respect to a Stop Order. The Company will use its best efforts to prevent the issuance of any Stop Order and, if any Stop Order is issued, to obtain the lifting thereof as promptly as possible. If the Registration Statement has become or becomes effective under the Act with a form of prospectus omitting Rule 430A Information, or filing of the Prospectus with the Commission is otherwise required under Rule 424(b), the Company will file with the Commission the Prospectus, properly completed, pursuant to Rule 424(b) within the time period prescribed and will provide evidence satisfactory to the Representative of such timely filing. (2) During the time when a prospectus relating to the Stock or the Additional Stock is required to be delivered hereunder or under the Act or the Regulations, comply with all requirements imposed upon it by the Act, as now existing and as hereafter amended, and by the Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of, or dealings in, the Stock and the Additional Stock in accordance with the provisions hereof and the 16 Prospectus. If, at any time when a prospectus relating to the Stock or the Additional Stock is required to be delivered hereunder or under the Act or the Regulations, any event shall have occurred as a result of which, in the reasonable opinion of counsel for the Company or counsel for the Underwriters, the Registration Statement or the Prospectus as then amended or supplemented contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or if, in the opinion of either of such counsel, it is necessary at any time to amend or supplement the Registration Statement or the Prospectus to comply with the Act or the Regulations, the Company will immediately notify the Representative and promptly prepare and file with the Commission an appropriate amendment or supplement (in form and substance satisfactory to the Representative) which will correct such statement or omission or which will effect such compliance and will use its best efforts to have any such amendment declared effective under the Act as soon as possible. (3) Deliver without charge to each of the Underwriters such number of copies of each Preliminary Prospectus as Underwriters may reasonably request and, as soon as the Registration Statement, or any amendment thereto, becomes effective under the Act or a supplement is filed with the Commission, deliver without charge to the Representative two signed copies of the Registration Statement, including exhibits, or such amendment thereto, as the case may be, and two copies of any supplement thereto, and deliver without charge to each of the Underwriters such number of copies of the Prospectus, the Registration Statement, and amendments and supplements thereto, if any, without exhibits, as the Representative may request for the purposes contemplated by the Act. (4) Endeavor in good faith, in cooperation with the Representative, at or prior to the time the Registration Statement becomes effective under the Act, to qualify the Stock and the Additional Stock for offering and sale under the "blue sky" or securities laws of such jurisdictions as the Representative may designate; provided, however, that no such qualification shall be required in any jurisdiction 17 where, as a result thereof, the Company would be subject to service of general process or to taxation as a foreign corporation doing business in such jurisdiction to which it is not then subject. In each jurisdiction where such qualification shall be effected, the Company will, unless the Representative agree in writing that such action is not at the time necessary or advisable, file and make such statements or reports at such times as are or may be required by the laws of such jurisdiction. (5) Make generally available (within the meaning of Section 11(a) of the Act and the Regulations) to its securityholders as soon as practicable, but not later than 45 days after the end of the fiscal quarter in which the first anniversary date of the Registration Statement occurs, an earnings statement (which need not be certified by independent certified public accountants unless required by the Act or the Regulations, but which shall satisfy the provisions of Section 11(a) of the Act and the Regulations) covering a period of at least 12 months beginning after the effective date of the Registration Statement. (6) For a period of 18 months after the date on which the Registration Statement shall become effective under the Act, not, without the Representative's prior written consent, offer, issue, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock or other securities of the Company (or any security or other instrument which by its terms is convertible into, or exercisable or exchangeable for, shares of Common Stock), except as provided in Section 3 or as described in the Prospectus and except for (i) the issuance of shares of Common Stock issuable upon the exercise of stock options to purchase up to a aggregate of 500,000 shares of Common Stock which may be granted pursuant to the Company's 1997 Stock Option Plan (the "Plan"), as properly described in the Prospectus, (ii) the issuance of 240,000 shares of Warrant Stock issuable upon exercise of the Representative's Warrants, (iii) the issuance of Common Stock upon the exercise of currently outstanding options and warrants to purchase shares of Common Stock and shares issuable pursuant to stock price guarantees and other incentives in connection with previous 18 acquisitions, joint ventures and employment agreements, (iv) the issuance of shares of Common Stock at least at fair market value in connection with acquisitions by the Company and (v) the issuance of debt securities of the Company and warrants having an exercise price no less than fair market value to the debt holder thereof in connection with a debt financing by the Company. (7) For a period of five years after the effective date of the Registration Statement, furnish the Representative without charge the following: (i) within 105 days after the end of each fiscal year, three copies of financial statements certified by independent certified public accountants, including a balance sheet, statement of income, and statement of changes in cash flows of the Company, with supporting schedules, prepared in accordance with generally accepted accounting principles, as at the end of such fiscal year and for the 12 months then ended, which may be on a consolidated basis; (ii) as soon as practicable after they have been sent to stockholders of the Company or filed with, or furnished to, the Commission or the NASD, three copies of each annual and interim financial, proxy statements and other reports or communications sent by the Company to its stockholders or filed with, or furnished to, the Commission or the NASD; (iii) as soon as practicable, two copies of every press release and every material news item and article in respect of the Company or its affairs which was released by the Company; and (iv) such additional documents and information with respect to the Company and its affairs as the Representative may from time to time reasonably request; provided, however, that such additional documents and information shall be received by the Representative on a confidential basis, unless otherwise disclosed to the public, and shall not be used in violation of the Federal Securities laws and the Regulations. 19 (8) Apply the net proceeds received by it from the offering contemplated by this Agreement in the manner set forth under the heading "Use of Proceeds" in the Prospectus. (9) Furnish to the Representative as early as practicable prior to the Closing Date and any Additional Closing Date, as the case may be, but no less than two full business days prior thereto, a copy of the latest available unaudited interim consolidated financial statements of the Company which have been read by the Company's independent certified public accountants, as stated in their letters to be furnished pursuant to Sections 7(f), 7(g) and 7(h) hereof. (10) File no amendment or supplement to the Registration Statement or Prospectus at any time, whether before or after the date on which the Registration Statement becomes effective under the Act, unless such filing shall comply with the Act and the Regulations and unless the Representative shall previously have been advised of such filing and furnished with a copy thereof, and the Representative and counsel for the Underwriters shall have approved such filing in writing. Until the later of (i) the completion by the Underwriters of the distribution of the Stock (but in no event more than nine months after the date on which the Registration Statement shall have become effective under the Act) and (ii) 25 days after the date on which the Registration Statement becomes effective under the Act, the Company will prepare and file with the Commission, promptly upon the Representative's request, any amendments or supplements to the Registration Statement or the Prospectus which, in the Representative's sole opinion, may be necessary or advisable in connection with the distribution of the Stock. (11) Comply with all filing and reporting requirements of the Exchange Act, which may from time to time be applicable to the Company. (12) Comply with all provisions of all undertakings contained in the Registration Statement. (13) Prior to the Closing Date or any Additional Closing Date, as the case may be, issue no press release or other communication, directly or indirectly, and 20 hold no press conference with respect to the Company, the financial condition, results of operations, business, properties, assets, liabilities of any of them, or this offering, without the Representative's prior written consent. (14) If the Principal Stockholders, officers, or directors of the Company are required by the "blue sky" or securities authority of any jurisdiction selected by the Representative pursuant to Section 5(a)(4) to escrow or agree to restrict the sale of any security of the Company owned by them for the Company to qualify or register the Stock or the Additional Stock for sale under the "blue sky" or securities laws of any such jurisdiction, cause each such person to escrow or restrict the sale of such security on the terms and conditions and in the form specified by the securities administrator of such jurisdiction. (15) Make all filings required to maintain the inclusion of the Common Stock on the NNM for a least five years from the date of this Agreement. (16) On the Closing Date, sell to the Representative, individually and not as Representative of the Underwriters, at the price of $.001 per warrant, Representative's Warrants to purchase an aggregate of 10% of the Stock, exclusive of the exercise of any portion of the Over-allotment Option, which shall be substantially in the form set forth as an exhibit to the Registration Statement. Each Representative's Warrant shall entitle the holder thereof to purchase one share of Common Stock of the Company at a price equal to 120% of the public offering price per share of Common Stock for a four-year period, commencing one year after the Commission declares the Registration Statement effective. The Representative's Warrant may not be sold, transferred, assigned, pledged or hypothecated by any person for a period of one year commencing the date the Commission declares the Registration Statement effective, except that it may be transferred, in whole or in part, to (i) one or more officers and partners of the Representative or Underwriters, as the case may be, (ii) a successor to the Representative or Underwriters, as the case may be, (iii) a purchaser of 21 substantially all of the assets of the Representative or Underwriters, as the case may be, or (iv) by operation of law. (17) Until expiration of the Representative's Warrant, keep reserved sufficient shares of Common Stock for issuance upon exercise of the Representative's Warrants. (18) Deliver to the Representative, without charge, no later than six months after the last Additional Closing Date or the expiration of the period during which the Representative may exercise the Over-allotment Option, five (5) sets of bound volumes of the complete Registration Statement and all related materials to the individuals designated by the Representative or counsel to the Underwriters. (19) For a period of three years after the effective date of the Registration Statement, provide, at its sole expense, to the Representative copies of the Company's daily transfer sheets, if so requested by the Representative. (20) Maintain key-person life insurance from such life insurance Company as reasonably acceptable to the Representative, payable to the Company on the life of Mr. Richard M. Brooks, the Company's Chief Executive Officer, President, Chief Financial Officer and Chairman of the Board, and Mr. Ronald A. Feldman, the Company's Chief Operating Officer, Vice President, Secretary and Treasurer, in the amount of at least $3,000,000 and $1,000,000, respectively, for the period of time equal to the longer of (i) three years from the date on which the Registration Statement becomes effective under the Act and (ii) the terms of the employment agreement between the Company and such officer. (21) Use its best efforts, for a period of five years following the date on which the Registration Statement becomes effective under the Act, to cause two persons to be elected to the Company's Board of Directors who are deemed by the Representative, in the Representative's reasonable judgment, to be independent of the Company's management. (22) Until the expiration of three years from the date on which the Registration Statement becomes effective under the Act, not effect a change in the 22 independent certified public accountants for the Company unless either the Company has received the prior written consent of the Representative or such substitute independent certified public accountant is one of (i) Arthur Andersen & Co., (ii) Ernst & Young, (iii) Price Waterhouse, LLP, (iv) Coopers & Lybrand or (v) KPMG Peat Marwick. (23) For a period of three years from the date on which the Registration Statement becomes effective under the Act, the Representative shall have the right to appoint a designee as an observer of the Company's Board of Directors. Such observer will have the right to attend all meetings of the Board of Directors. Such observer shall be entitled to receive reimbursement for all out-of-pocket expenses incurred in attending such meetings, including, but not limited to, food, lodging, transportation, and any fees paid to directors for attending meetings. The Representative shall be given notice of such meetings at the same time and in the same manner as directors of the Company are informed. The Representative and such observer shall be indemnified to the same extent as the other directors. The Company will use its best efforts to purchase directors and officers insurance in an amount of not less than $2,000,000, with a deductible of not more than $50,000, provided, however, that the Company shall not be required to pay more than $50,000 per year in order to maintain such insurance, and if insurance in such amount is not available at such cost, the Company shall purchase that amount of such insurance which is available at a cost of $50,000 per year. The Company will use its best efforts to extend the coverage of such insurance to the observer. (24) For a period of three years from date on which the Registration Statement becomes effective under the Act, the Company, at its expense, shall cause its regularly engaged independent certified public accountants to review (but not audit) the Company's financial statements for each of the first three fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's Quarterly Report on Form 10-QSB, and the mailing of quarterly financial information to stockholders. 23 (25) Have in effect on the Closing Date the Plan, which will provide for the issuance of options to purchase no more than 500,000 shares of Common Stock of which no more than 10% of the amount of shares of Common Stock shall be outstanding pre-offering. The Company will not grant, for a period of three years following the date on which the Registration Statement becomes effective under the Act, any non-qualified options unless the exercise price thereof on the date of grant is at least equal to the fair market value of the Common Stock on such date. No option granted under such plan shall be exercisable during the first year following grant, and each option shall vest thereafter at the rate of 25% per year. (26) For a period of eighteen (18) months after the effective date of the Registration Statement, the Company shall grant the Representative a preferential right to sell in accordance with such stockholders' instructions, within seven (7) business days, for the account of any of the Company's stockholders owning at least five percent (5%) of the Company's Common Stock, any securities sold pursuant to Rule 144 promulgated under the Act. (27) During the four-year period commencing one year from the effective date of the Registration Statement, the Company will agree to use its best efforts to register the Representative's Warrants and the Warrant Stock when and if requested by the Representative. These best efforts shall include the preparation and filing of one demand registration statement with respect to the Warrant Stock during such four-year period and maintaining the effectiveness thereof, for nine (9) months or such shorter period as may be required for the sale of the Warrant Stock in the open market, at the Company's sole expense (other than underwriter or selling broker costs), including blue sky fees and expenses. The Company agrees that for the period starting at the beginning of the second year and concluding at the end of the seventh year after the effective date of the Registration Statement, the Company will notify all holders of the Representative's Warrants and Warrant Stock of the Company's intention to do another public offering of the Company's securities (whether by the Company or by any security holder of the Company) and, if requested by the holders 24 of the Representative's Warrants, include any Representative's Warrants and Warrant Stock in such offering at the Company's sole cost and expense and maintain the effectiveness thereof for at least twelve (12) months ("Piggyback Registration Rights"). (28) For the two-year period commencing on the effective date of the Registration Statement, the Company and all of its stockholders owning at least five percent (5%) of the shares of the Company's Common Stock either currently or immediately preceding the date of the offering, shall grant the Representative the right of first refusal (on terms at least as favorable as can be obtained from other sources) to act as lead manager, placement agent, or investment banker with respect to any proposed underwritten public distribution or private placement of the Company's securities or any merger, acquisition, or disposition of assets of the Company, if the Company uses a lead manager, placement agent or investment banker or person performing such functions for a fee. The Representative will advise the Company promptly (but in no event later than seven (7) days following the submission to the Representative in writing of any such proposed transaction(s)) of its election to exercise said right. If any such proposal is not accepted by the Representative, but later modified, the Company will resubmit such proposal to the Representative. Should the Representative elect, at any time, not to exercise said right, this will not affect preferential rights for future finances. 6. PAYMENT OF EXPENSES. The Company hereby agrees to pay all expenses (other than fees of counsel for the Underwriters, except as provided in Section 6(c)) in connection with the following: (a) the preparation, printing, filing, distribution, and mailing of the Registration Statement and the Prospectus and the printing, filing, distribution, and mailing of this Agreement, and other underwriting and related agreements and related documents, including the cost of all copies thereof and of the Preliminary Prospectuses and of the Prospectus and any amendments or supplements thereto supplied to the Underwriters in quantities as hereinabove stated; 25 (b) the issuance, sale, transfer, and delivery (as applicable) of the Stock and the Additional Stock, including any transfer or other taxes payable thereon; (c) the qualification of the Stock and the Additional Stock under state or foreign "blue sky" or securities laws, including the costs of printing and mailing the preliminary and final "Blue Sky Survey" and the fees for the Underwriters' counsel (in the amount of $35,000 ($50,000 if NNM listing is not obtained)) and the disbursements in connection therewith; (d) the filing fees payable to the Commission, the NASD, and the jurisdictions in which such qualification is sought; (e) any fees relating to the listing of the Common Stock on the NNM; (f) the cost of printing certificates representing the shares of Common Stock; (g) the fees of the transfer agent for the Common Stock; (h) the cost of publication of "tombstone" advertisements with respect to the offering, which expense shall not be in excess of $50,000 without the Company's consent; (i) due diligence expenses and shall pay the Representative $50,000 in connection therewith and (j) a non-accountable expense allowance equal to three percent of the gross proceeds of the sale of the Stock and, to the extent Additional Stock is sold, on the gross proceeds of the sale of the Additional Stock (less amounts, if any, previously paid to the Representative in respect of such non-accountable expense allowance) to the Representative on the Closing Date. 7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Stock and the Additional Stock, as provided herein, shall be subject, in their reasonable discretion, to the continuing accuracy of the representations and warranties of the Company contained herein in all material respects and in each certificate and document contemplated under this Agreement to be delivered to the Representative, as of the date hereof and as of the Closing Date (or any Additional Closing Date, as the case may be), to the performance by the Company of its obligations hereunder, and to the following conditions: (a) The Registration Statement shall have become effective under the Act not later than 6:00 p.m., New York City time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Representative; on or prior to the Closing Date, or any 26 Additional Closing Date, as the case may be, no Stop Order shall have been issued and no proceeding shall have been initiated or threatened with respect to a Stop Order; and any request by the Commission for additional information shall have been complied with by the Company to the reasonable satisfaction of counsel for the Underwriters. If required, the Prospectus shall have been filed with the Commission in the manner and within the time period required by Rule 424(b) under the Regulations. (b)At the Closing Date and any Additional Closing Date, as the case may be, the Representative shall have received the favorable opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP, counsel for the Company, dated the date of delivery, addressed to the Underwriters, and in form and scope reasonably satisfactory to counsel for the Underwriters, with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (1) the Company is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation, with full power and authority, and all necessary consents, authorizations, approvals, orders, licenses, certificates, and permits of and from, and declarations and filings with, all federal, state, local, and other governmental authorities and all courts and other tribunals, to own, lease, license, and use its properties and assets and to conduct its business in the manner described in the Prospectus. The Company is duly qualified to do business as a foreign corporation and is in good standing as such in every jurisdiction in which its ownership, leasing, licensing, or use of property and assets or the conduct of its business makes such qualification necessary, except where the failure to be so qualified does not amount to a material liability or disability to the Company; (2) the authorized capital stock of the Company is as reflected in the Registration Statement, of which the Prospectus is a part. Except as disclosed in the Prospectus, each outstanding share of Common Stock is validly authorized and issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, has not been issued and is not owned or held in violation of any statutory preemptive rights of stockholders. To the knowledge of such counsel, there is no commitment, plan, or arrangement to issue, and no outstanding option, warrant, or other right calling for the 27 issuance of, any share of capital stock of the Company or any security or other instrument which by its terms is convertible into, or exercisable or exchangeable for, capital stock of the Company, except as may be properly described in the Prospectus. To the knowledge of such counsel, there is outstanding no security or other instrument which by its terms is convertible into, or exercisable or exchangeable for, capital stock of the Company. The certificates evidencing the Common Stock are in proper form; (3) to the knowledge of such counsel, there is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation pending, threatened, or in prospect with respect to the Company and its subsidiaries or its operations, business, properties, or assets, except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have, and can not reasonably be expected in the future to have, a material adverse effect upon the operations, business, properties, or assets of the Company and its subsidiaries. To the knowledge of such counsel, the Company is not in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree, except as may be properly described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Company; nor is the Company required to take any action in order to avoid any such violation or default; (4) to the knowledge of such counsel, neither the Company nor any other party is now, or is expected by the Company to be in violation or breach of, or in default with respect to, any material provision of any contract, agreement, instrument, lease, license, arrangement, or understanding which is material to the Company, and, to the knowledge of such counsel, each such contract, agreement, instrument, lease, license, arrangement, or understanding is in full force and effect and is the valid, legal, and binding obligation of the parties thereto and is enforceable in accordance with its terms; (5) the Company is not in violation or breach of, or in default with respect to, any term of its certificate of incorporation (or other charter document) or by-laws, as those documents have been amended or restated; 28 (6) the Company has all requisite power and authority to execute, deliver, and perform this Agreement and the Representative's Warrants. All necessary corporate proceedings of the Company have been taken to authorize the execution, delivery, and performance by the Company of this Agreement and the Representative's Warrant. This Agreement has been duly authorized, executed, and delivered by the Company, is the legal, valid, and binding obligation of the Company, and, subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally, is enforceable as to the Company in accordance with its terms, subject to applicable bankruptcy, insolvency and other laws affecting the enforceability of creditors' rights generally. The Representative's Warrants have been duly authorized by the Company and, when executed and delivered by the Company, will be legal, valid, and binding obligations of the Company, each enforceable as to the Company in accordance with its terms. To the knowledge of such counsel, no consent, authorization, approval, order, license, certificate, or permit of or from, or declaration or filing with, any federal, state, local, or other governmental authority or any court or other tribunal is required by the Company for the execution, delivery, or performance by the Company of this Agreement or the Representative's Warrants (except filings under the Act which have been made or will be made before the Closing Date or Additional Closing Date, as the case may be, and filings and consents consisting only of filings and consents under "blue sky" or securities laws). No consent of any party to any material contract, agreement, instrument, lease, license, arrangement, or understanding known to such counsel to which the Company is a party, or to which any of its properties or assets are subject, is required for the execution, delivery, or performance of this Agreement and the Representative's Warrants; and the execution, delivery, and performance of this Agreement and the Representative's Warrants will not violate, result in a breach of, conflict with, result in the creation or imposition of any lien, charge, or encumbrance upon any properties or assets of the Company pursuant to the terms of, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under, any such contract, agreement, instrument, lease, license, arrangement, or understanding known to such counsel, violate or result in a breach of, or 29 conflict with any term of the certificate of incorporation (or other charter document) or by-laws of the Company. (7) to the knowledge of such counsel, the Company has filed with the Commission on a timely basis all filings required of a company whose securities have been registered under the Exchange Act. To the knowledge of such counsel, none of the Company's Exchange Act Filings contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. For the purpose of this paragraph, filings pursuant to Rule 12b-25 of the Exchange Act shall be deemed timely. (8) each share of Stock to be delivered on the Closing Date is validly authorized and, when issued and delivered in accordance with the terms hereof, will be validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, and is not issued in violation of any preemptive rights of stockholders, and assuming the Underwriters are "bona fide" purchasers under the Uniform Commercial Code as in effect in the State of New York, the Underwriters will receive good title to the shares of Stock purchased by them, from the Company, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements, and voting trusts. The Additional Stock is validly authorized and when issued and delivered in accordance with the terms hereof, will be fully paid and nonassessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of stockholders, and upon delivery of the Additional Stock in accordance with the terms of the Over-allotment option, assuming the Underwriters are "bona fide" purchasers under the Uniform Commercial Code as in effect in the state of New York, the Underwriters will receive good title to the shares of Additional Stock purchased by them, from the Company, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholder's agreements and voting trusts. The Common Stock, the Stock, and the Additional Stock conform in all material respects to all statements relating thereto contained in the Registration Statement or the Prospectus; 30 (9) the Warrant Stock is validly authorized and has been duly and validly reserved for issuance pursuant to the terms of the Representative's Warrants. The Representative's Warrants have been duly and validly executed and delivered. The Warrant Stock, when issued and delivered in accordance with the Representative's Warrants, will be validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, and will not have been issued in violation of any preemptive rights of stockholders. The Representative, and any other holders of the Representative's Warrants, assuming the Underwriters are "bona fide" purchasers under the Uniform Commercial Code as in effect in the State of New York, will receive good title to the securities purchased by them upon exercise of the Representative's Warrants, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements, and voting trusts. The Representative's Warrants and the Warrant Stock conform in all material respects to all statements relating thereto contained in the Registration Statement or the Prospectus; (10) to the knowledge of such counsel, each contract, agreement, instrument, lease, or license required to be described in the Registration Statement or the Prospectus has been properly described therein, and each contract, agreement, instrument, lease, or license required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to the Registration Statement; (11) insofar as statements in the Prospectus purport to summarize the status of litigation or the provisions of laws, rules, regulations, orders, judgments, decrees, contracts, agreements, instruments, leases, or licenses, such statements have been prepared or reviewed by such counsel and accurately reflect the status of such litigation and provisions purported to be summarized in all material respects; (12) the Company is not an "investment company" as defined in Section 3(a) of the Investment Company Act and, if the Company conducts its business as set forth in the Prospectus, will not become an "investment company" and will not be required to be registered under the Investment Company Act; 31 (13) to the knowledge of such counsel, no person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement except as described in the Prospectus; and (14) such counsel has been advised by the Commission that the Registration Statement has become effective under the Act, the Prospectus has been filed in accordance with Rule 424(b) of the Regulations, including the applicable time periods set forth therein, or such filing is not required. To the knowledge of such counsel, no Stop Order has been issued and no proceeding for that purpose has been instituted or threatened. On the basis of the participation of such counsel in conferences at which the contents of the Registration Statement and the Prospectus and related matters were discussed, but without independent verification by such counsel of the accuracy, completeness, or fairness of the statements contained in the Registration Statement, the Prospectus, or any amendment or supplement thereto, such counsel has no knowledge that (other than financial statements and other financial data and schedules which are or should be contained therein, as to which such counsel need express no opinion): (A) the Registration Statement, any Rule 430A Prospectus, and the Prospectus, and any amendment or supplement thereto, does not appear on its face to comply as to form in all material respects with the requirements of the Act and the Regulations; (B) any of the Registration Statement, any Rule 430A Prospectus, or the Prospectus, or any amendment or supplement thereto, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading; or (C) since the effective date of the Registration Statement, any event has occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus which has not been set forth in such an amendment or supplement. In rendering such opinion, counsel for the Company may rely (A) as to matters involving the application of laws other than the laws of the United States and the laws of the State of Delaware, to the extent counsel for the Company deems proper and to the extent specified in such opinion, upon an opinion or opinions (in form and substance satisfactory to counsel for the 32 Underwriters) of other counsel, acceptable to counsel for the Underwriters, familiar with the applicable laws, in which case the opinion of counsel for the Company shall state that the opinion or opinions of such other counsel are satisfactory in scope, form, and substance to counsel for the Company and that reliance thereon by counsel for the Company and the Underwriters is reasonable; (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company; and (C) to the extent they deem proper, upon written statements or certificates of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company; provided that copies of any such opinions, certificates, or statements shall be annexed as exhibits to the opinion of counsel for the Company. (c) On or prior to the Closing Date and any Additional Closing Date, as the case may be, the Representative shall have been furnished such information, documents, certificates, and opinions as it may reasonably require for the purpose of enabling it to review the matters referred to in Section 7(b), and in order to evidence the accuracy, completeness, or satisfaction of any of the representations, warranties, covenants, agreements, or conditions herein contained in all material respects, or as the Representative may reasonably request. (d) At the Closing Date or any Additional Closing Date, as the case may be, (i) the Registration Statement and the Prospectus and any amendments or supplements thereto shall contain all statements which are required to be stated therein in accordance with the Act and the Regulations, and in all material respects conform to the requirements thereof, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) there shall have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus, no material adverse change, or any development involving a prospective material adverse change, in the business, properties, or condition (financial or otherwise), results of operations, capital stock, long-term or short-term debt, or general affairs of the Company and its subsidiaries taken as a whole from that set forth in the Registration Statement and the Prospectus, except changes which the Registration Statement and Prospectus indicate might occur after the date on which the Registration Statement becomes effective under the Act, and the Company shall not have incurred 33 any material liabilities or entered into any agreements not in the ordinary course of business other than as referred to in the Registration Statement and Prospectus, (iii) except as set forth in the Prospectus, no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation shall be pending, threatened, or in prospect (or any basis therefor) with respect to the Company or any of its respective operations, businesses, properties, or assets which would be required to be set forth in the Registration Statement, wherein an unfavorable decision, ruling, or finding would materially adversely affect the business, property, condition (financial or otherwise), results of operations, or general affairs, of the Company and its subsidiaries taken as a whole and (iv) the Stock shall have been approved for listing on the NNM. (e) At the Closing Date and any Additional Closing Date, as the case may be, the Representative shall have received a certificate of the chief executive officer, the chief financial officer, and the chief accounting officer of the Company, dated the Closing Date or such Additional Closing Date, as the case may be, to the effect that among other things (i) the conditions set forth in Sections 7(a) and 7(d) have been satisfied, (ii) as of the date of this Agreement and as of the Closing Date or such Additional Closing Date, as the case may be, the representations and warranties of the Company contained herein were and are accurate and correct in all materials respects, and (iii) as of the Closing Date or such Additional Closing Date, as the case may be, the obligations to be performed by the Company hereunder on or prior thereto have been fully performed. (f) At the time this Agreement is executed and at the Closing Date and any Additional Closing Date, as the case may be, the Representative shall have received a letter, addressed to the Underwriters, and in form and substance satisfactory to the Representative, with reproduced copies or signed counterparts thereof for each of the Underwriters, from Deloitte & Touche, LLP, independent certified public accountants for the Company, dated the date of delivery: (1) confirming that they are, and during the period covered by their report(s) included in the Registration Statement and the Prospectus were, independent certified public accountants with respect to the Company within the meaning of the Act and the published Regulations and stating that the answer to Item 13 of the Registration Statement is correct insofar as it relates to them; 34 (2) stating that, in their opinion, the consolidated financial statements and schedules of the Company included in the Registration Statement examined by them comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (3) stating that, on the basis of procedures (but not an examination made in accordance with generally accepted auditing standards) consisting of a reading of the latest available unaudited consolidated interim financial statements of the Company (with an indication of the date of the latest available unaudited interim financial statements), a reading of the latest available minutes of the stockholders and Board of Directors of the Company and committees of such Board of Directors, inquiries to certain officers and other employees of the Company responsible for financial and accounting matters, and other specified procedures and inquiries, nothing has come to their attention that caused them to believe that: (A) the unaudited consolidated financial statements and schedules of the Company included in the Registration Statement and Prospectus do not comply in form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the Regulations or are not fairly presented in conformity with generally accepted accounting principles (except to the extent that certain footnote disclosures regarding any stub period may have been omitted in accordance with the applicable rules of the Commission under the Exchange Act) applied on a basis consistent with that of the audited financial statements appearing therein; (B) there was any change in the capital stock or long-term debt of the Company or any decrease in the net current assets or stockholders' equity of the Company as of the date of the latest available consolidated monthly financial statements of the Company or as of a specified date not more than five business days prior to the date of such letter, each as compared with the amounts shown in the most recent balance sheet included in the Registration Statement and Prospectus, other than as properly described in the Registration Statement and Prospectus or any change or decrease (which shall be set forth therein) which the Representative in its sole discretion shall accept, or (C) there was any decrease in consolidated net sales, net earnings, or net earnings per share of Common Stock of the Company, during the period from the date of such balance sheet to the date of the 35 latest available consolidated monthly financial statements of the Company or to a specified date not more than five business days prior to the date of such letter, each as compared with the corresponding period in the preceding fiscal year, other than as properly described in the Registration Statement and Prospectus or any decrease (which shall be set forth therein) which the Representative in its sole discretion shall accept; and (4) stating that they have compared specific numerical data and financial information pertaining to the Company set forth in the Registration Statement, which have been specified by the Representative prior to the date of this Agreement, to the extent that such data and information may be derived from the general accounting records of the Company, and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries, and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter, and found them to be in agreement. (g) At the time this Agreement is executed and at the Closing Date and any Additional Closing Date, as the case may be, the Representative shall have received a letter, addressed to the Underwriters, and in form and substance satisfactory to the Representative, with reproduced copies or signed counterparts thereof for each of the Underwriters, from Fishbein & Company, P.C., independent certified public accountants for the Company and its subsidiaries for each of the two years in the period ended June 30, 1996, dated the date of delivery: (1) confirming that they were, during the period covered by their report(s) included in the Registration Statement and the Prospectus, independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the published Regulations and stating that the answer to Item 13 of the Registration Statement is correct insofar as it relates to them; (2) stating that, in their opinion, the consolidated financial statements and schedules of the Company and it subsidiaries included in the Registration Statement examined by them comply in form in all material respects with the 36 applicable accounting requirements of the Act and the related published rules and regulations; (3) stating that there has at no time been a material adverse change in the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company or its subsidiaries on a consolidated basis from the latest information set forth in the Registration Statement or the Prospectus, except as may be properly described in the Prospectus. (h) At the time this Agreement is executed and at the Closing Date and any Additional Closing Date, as the case may be, the Representative shall have received a letter, addressed to the Underwriters, and in form and substance satisfactory to the Representative, with reproduced copies or signed counterparts thereof for each of the Underwriters, from Terry H. Jones, CPA, independent certified public accountants for the Triple A Security Systems, Inc., a company acquired by the Company on September 30, 1997 ("Triple A"), for each of the two years in the period ended December 31, 1996, dated the date of delivery: (1) confirming that they were, during the period covered by their report(s) included in the Registration Statement and the Prospectus, independent certified public accountants with respect to Triple A within the meaning of the Act and the published Regulations and stating that the answer to Item 13 of the Registration Statement is correct insofar as it relates to them; (2) stating that, in their opinion, the consolidated financial statements and schedules of Triple A included in the Registration Statement examined by them comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (3) stating that there has at no time been a material adverse change in the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of Triple A on a consolidated basis from the latest information set forth in the Registration Statement or the Prospectus, except as may be properly described in the Prospectus. 37 (i) All proceedings taken in connection with the issuance, sale, transfer, and delivery of the Stock and the Additional Stock shall be satisfactory in form and substance to the Representative and to counsel for the Underwriters, and the Representative shall have received from such counsel for the Underwriters a favorable opinion, dated as of the Closing Date and the Additional Closing Date, as the case may be, with respect to such of the matters set forth under Section 7(b), and with respect to such other related matters, as the Representative may reasonably request. (j) The NASD, upon review of the terms of the public offering of the Stock and the Additional Stock, shall not have objected to the Underwriters' participation in such offering. (k) Prior to or on the Closing Date, the Company shall have entered into the Representative's Warrants with the Representative. Any certificate or other document signed by any officer of the Company and delivered to the Representative or to counsel for the Underwriters shall be deemed a representation and warranty by the Company hereunder to the Underwriters as to the statements made therein. If any condition to the Underwriters' obligations hereunder to be fulfilled prior to or at the Closing Date or any Additional Closing Date, as the case may be, is not so fulfilled, the Representative may, on behalf of the Underwriters, may terminate this Agreement or, if the Representative so elect, in writing waive any such conditions which have not been fulfilled or extends the time for their fulfillment. 8. INDEMNIFICATION AND CONTRIBUTION. (a) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Underwriter, its officers, directors, partners, employees, agents, and counsel, and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all loss, liability, claim, damage, and expense whatsoever (which shall include, for all purposes of this Section 8, but not be limited to, reasonable attorneys' fees and any and all reasonable expenses incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claims and any and all amounts paid in settlement of any claim or litigation) as and when incurred arising out of, based upon, or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained in 38 (A) the Registration Statement, any Preliminary Prospectus, any Rule 430A Prospectus, or the Prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto or (B) any application or other document or communication (for purposes of this Section 8, collectively referred to as an "application") executed by, or on behalf of, the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Stock or the Additional Stock under the "blue sky" or securities laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company as stated in Section 8(b) with respect to any Underwriter by, or on behalf of, such Underwriter through the Representative expressly for inclusion in the Registration Statement, any Preliminary Prospectus, any Rule 430A Prospectus, or the Prospectus, or any amendment or supplement thereto, or in any application as the case may be, or (ii) any breach of any representation, warranty, covenant, or agreement of the Company contained in this Agreement. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Agreement. Notwithstanding the foregoing, in no event shall the indemnification agreement contained in this Section 8(a) inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any losses, claims, damages, liabilities or actions arising from the sale of the Stock upon the public offering to any person by such Underwriter if such losses, claims, damages, liabilities or actions arise out of, or are based upon, a statement or omission or alleged omission in a preliminary prospectus and if, in respect to such statement, omission or alleged omission, the Prospectus differs in a material respect from such preliminary prospectus and a copy of the Prospectus has not been sent or given to such person at or prior to the confirmation of such sale to such person, provided, however, that (i) sufficient quantities of such Prospectus have been delivered to the Underwriters to deliver to investors having had received a preliminary prospectus and (ii) the Company has advised in writing the Underwriters (A) that such Prospectus materially differs from such preliminary prospectus and (B) to deliver the Prospectus to such investors. 39 If any action is brought against an Underwriter or any of its officers, directors, partners, employees, agents, or counsel, or any controlling persons of an Underwriter (an "indemnified party") in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify the Company in writing of the institution of such action (but the failure so to notify shall not relieve the Company from any liability it may have other than pursuant to this Section 8(a)) and the Company shall promptly assume the defense of such action, including the employment of counsel (reasonably satisfactory to such indemnified party or parties) and payment of expenses. Such indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be one or more legal defenses available to it or them or to other indemnified parties which are different from or additional to those available to the Company, in any of which events such fees and expenses shall be borne by the Company, and the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties. Anything in this paragraph to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent, which shall not be unreasonably withheld. The Company shall not, without the prior written consent of each indemnified party that is not released as described in this sentence, settle or compromise any action, or permit a default or consent to the entry of judgment or otherwise seek to terminate any pending or threatened action, in respect of which indemnity may be sought hereunder (whether or not any indemnified party is a party thereto), unless such settlement, compromise, consent, or termination includes an unconditional release of each indemnified party from all liability in respect of such action. The Company agrees promptly to notify the Representative and Underwriters of the commencement of any litigation or proceedings against the Company or any of its officers or directors in connection with the sale of the Stock or the 40 Additional Stock, the Registration Statement, any Preliminary Prospectus, any Rule 430A Prospectus, or the Prospectus, or any amendment or supplement thereto, or any application. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed the Registration Statement, and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Underwriters in Section 8(a), but only with respect to statements or omissions, if any, made in the Registration Statement, any Preliminary Prospectus, any Rule 430A Prospectus, or the Prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or on any application in reliance upon, and in conformity with, written information furnished to the Company as stated in this Section 8(b) with respect to the Representative expressly for inclusion in the Registration Statement, any Preliminary Prospectus, any Rule 430A Prospectus, or the Prospectus, or any amendment or supplement thereto, or on any application, as the case may be; provided, however, that the obligation of the Representative to provide indemnity under the provisions of this Section 8(b) shall be limited to the amount which represents the product of the number of shares of Stock and Additional Stock underwritten by the Representative and the public offering price per share set forth on the cover page of the Prospectus. For all purposes of this Agreement, the amounts of the selling concession and reallowance set forth in the Prospectus constitute the only information furnished in writing by or on behalf of the Representative expressly for inclusion in the Registration Statement, any Preliminary Prospectus, any Rule 430A Prospectus, or the Prospectus (as from time to time amended or supplemented), or any amendment or supplement thereto, or in any application, as the case may be. If any action shall be brought against the Company or any other person so indemnified based on the Registration Statement, any Preliminary Prospectus, any Rule 430A Prospectus, or the Prospectus, or any amendment or supplement thereto, or on any application, and in respect of which indemnity may be sought against the Representative pursuant to this Section 8(b), the Representative shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of Section 8(a). 41 (c) To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 8(a) or 8(b) (subject to the limitations thereof) but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act, or otherwise, then the Company (including for this purpose any contribution made by or on behalf of any director of the Company, any officer of the Company who signed the Registration Statement, and any controlling person of the Company) as one entity and the Underwriters, in the aggregate (including for this purpose any contribution by or on behalf of an indemnified party) as a second entity shall contribute to the losses, liabilities, claims, damages, and expenses whatsoever to which any of them may be subject, so that the Underwriters are responsible for the proportion thereof equal to the percentage which the underwriting discount per share set forth on the cover page of the Prospectus represents of the initial public offering price per share set forth on the cover page of the Prospectus and the Company is responsible for the remaining portion; in such proportions as are appropriate to reflect the relative benefits received by the Company and the Underwriters in the aggregate; provided, however, that if applicable law does not permit such allocation, then other relevant equitable considerations such as the relative fault of the Company and the Underwriters in the aggregate in connection with the facts which resulted in such losses, liabilities, claims, damages, and expenses shall also be considered. The relative benefits received by the Company and the Underwriters in the aggregate shall be deemed to be in the same proportion as (x) the total proceeds from the offering of the Stock (net of underwriting discounts and commissions but before deducting expenses) received by the Company (y) the total proceeds of the offering of the Additional Stock (net of underwriting discounts and commissions but before deducting expenses), and (z) the underwriting discounts, commissions and expense reimbursements received by the Underwriters in the aggregate, in each case as set forth in the table on the cover page of the Prospectus and in the footnotes thereto. The relative fault, in the case of an untrue statement, alleged untrue statement, omission, or alleged omission, shall be determined by, among other things, whether such statement, alleged statement, omission, or alleged omission relates to information supplied by the Company or by the Underwriters, and the parties' relative 42 intent, knowledge, access to information, and opportunity to correct or prevent such statement, alleged statement, omission, or alleged omission. The Company and the Underwriters agree that it would be unjust and inequitable if the respective obligations of the Company and the Underwriters for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages, and expenses (even if the Underwriters and the other indemnified parties were treated as one entity for such purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 8(c). In no case shall any Underwriter be responsible for a portion of the contribution obligation imposed on all Underwriters in excess of its pro rata share based on the number of shares underwritten by it as compared to the number of shares underwritten by all Underwriters who do not default in their obligations under this Section 8(c). No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 8(c), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee, agent, and counsel of an Underwriter shall have the same rights to contribution as such Underwriter and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement, and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the provisions of this Section 8(c). Anything in this Section 8(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 8(c) is intended to supersede any right to contribution under the Act, the Exchange Act, or otherwise. 9. DEFAULT BY AN UNDERWRITER. (a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Stock or Additional Stock hereunder, and if the number of shares of Stock or Additional Stock to which the defaults of all Underwriters in the aggregate relate does not exceed 10% of the number of shares of Stock or Additional Stock, as the case may be, which all Underwriters have agreed to purchase hereunder, then such shares of Stock or Additional Stock to which such defaults 43 relate shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder. (b) If such defaults exceed in the aggregate 10% of the number of shares of Stock or Additional Stock, as the case may be, which all Underwriters have agreed to purchase hereunder, the Representative may, in the Representative's discretion, arrange for itself or for another party or parties to purchase such shares of Stock or Additional Stock, as the case may be, to which such default relates on the terms contained herein. If the Representative does not arrange for the purchase of such shares of Stock or Additional Stock, as the case may be, within five (5) business days after the occurrence of defaults relating to in excess of 10% of the Stock or the Additional Stock, as the case may be, then the Company shall be entitled to a further period of one business day within which to procure another party or parties reasonably satisfactory to the Representative to purchase such shares of Stock or Additional Stock, as the case may be, on such terms. If the Representative or the Company with respect to the Stock or Additional Stock do not arrange for the purchase of the shares of Stock or Additional Stock, as the case may be, to which such defaults relate as provided in this Section 9(b), this Agreement may be terminated by the Representative or by the Company with respect to the Stock or Additional Stock, in each case without liability on the part of the Company (except that the provisions of Sections 5(a)(1), 6, 8, 10, and 13 shall survive such termination) or the several Underwriters, but nothing in this Agreement shall relieve a defaulting Underwriter of its liability, if any, to the other several Underwriters and to the Company for any damages occasioned by its default hereunder. (c) If the shares of Stock or Additional Stock to which such defaults relate are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representative or the Company with respect to the Stock or Additional Stock or the Representative shall have the right to postpone the Closing Date or the Additional Closing Date, as the case may be, for a reasonable period but not in any event more than seven business days in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements with respect to the Stock or the Additional Stock, and the Company agrees to prepare and file promptly any amendment or supplement to the Registration Statement or the Prospectus which in the opinion of counsel for the Underwriters may 44 thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 9 as if such party had originally been a party to this Agreement and had been allocated the number of shares of Stock and Additional Stock actually purchased by it as a result of its original commitment to purchase Stock and Additional Stock and its purchase of shares of Stock or Additional Stock pursuant to this Section 9. 10. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, covenants, and agreements contained in this Agreement shall be deemed to be representations, warranties, covenants, and agreements at the Closing Date and any Additional Closing Date, and such representations, warranties, covenants, and agreements of the Underwriters and the Company, including the indemnity and contribution agreements contained in Section 8, shall remain operative and in full force and effect regardless of any investigation made by, or on behalf of, any Underwriter or any indemnified person, or by, or on behalf of, the Company or any person or entity which is entitled to be indemnified under Section 8(b), and shall survive termination of this Agreement or the delivery of the Stock and the Additional Stock to the several Underwriters. In addition, the provisions of Sections 5(a)(1), 6, 8, 10, 11, and 13 shall survive termination of this Agreement, whether such termination occurs before or after the Closing Date or any Additional Closing Date. 11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF. (a) This Agreement shall become effective at 9:30 A.M., New York City local time, on the first full business day following the day on which the Registration Statement becomes effective under the Act or at the time of the public offering by the Underwriters of the Stock, whichever is earlier. The time of the public offering shall mean the time, after the Registration Statement becomes effective under the Act, of the release by the Representative for publication of the first newspaper advertisement which is subsequently published relating to the Stock or the time, after the Registration Statement becomes effective under the Act, when the Stock is first released by the Representative for offering by the Underwriters or dealers by letter or telegram, whichever shall first occur. The Representative or the Company may prevent this Agreement from becoming effective without liability of any party to any other party, except as noted below in this Section 11, 45 by giving the notice indicated in Section 11(d) before the time this Agreement becomes effective under the Act. (b) If the purchase price of the Stock has not been determined as provided for in Section 3 prior to 4:30 p.m., New York City local time, on the third full business day after the date the Registration Statement becomes effective under the Act, this Agreement may be terminated at any time thereafter either by the Representative or by the Company by giving notice to the other unless before such termination the purchase price for the Stock has been so determined. If the purchase price of the Stock has not been so determined prior to 4:30 p.m., New York City local time, on the tenth full business day after the date the Registration Statement becomes effective under the Act, this Agreement shall automatically terminate forthwith. (c) In addition to the right to terminate this Agreement pursuant to Sections 7 and 9 hereof, the Representative shall have the right to terminate this Agreement at any time prior to the Closing Date by giving notice to the Company, and, if exercised, the Over-allotment Option, at any time prior to any Additional Closing Date, by giving notice to the Company, (i) if any domestic or international event, act, or occurrence has materially disrupted, or, in the Representative's opinion, will in the immediate future materially disrupt, the securities markets; or (ii) if there shall have been a general suspension of, or a general limitation on prices for, trading in securities on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter market; or (iii) if there shall have been an outbreak or increase in the level of major hostilities or other national or international calamity; or (iv) if a banking moratorium has been declared by a state or federal authority; or (v) if a moratorium in foreign exchange trading by major international banks or persons has been declared; or (vi) if there shall have been a material interruption in the mail service or other means of communication within the United States; or (vii) if the Company shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage, or other calamity or malicious act, whether or not such loss shall have been insured, or from any labor dispute or court or government action, order, or decree, which will, in the Representative's opinion, make it inadvisable to proceed with the offering, sale, or delivery of the Stock or the Additional Stock, as the case may be; or (viii) if any key person designated in Section 5(a)(20) is rendered disabled or dies or otherwise becomes unable to function in his official capacity at the Company; or (ix) if any 46 material governmental restrictions shall have been imposed on trading in securities in general, which restrictions are not in effect on the date hereof; or (x) if there shall be passed by the Congress of the United States or by any state legislature any act or measure, or adopted by any governmental body or authoritative accounting institute or board, or any governmental executive any orders, rules, or regulations, which the Representative believes likely to have a material adverse effect on the business, financial condition, or financial statements of the Company or the market for the Common Stock; or (xi) if there shall have been such change in the market for the Company's securities or securities in general or in political, financial, or economic conditions as in the Representative's judgment makes it inadvisable to proceed with the offering, sale, and delivery of the Stock or the Additional Stock, as the case may be, on the terms contemplated by the Prospectus. (d) If the Representative elects to prevent this Agreement from becoming effective, as provided in this Section 11, or to terminate this Agreement, the Representative shall notify the Company promptly by telephone, telex, or telegram, confirmed by letter. If, as so provided, the Company elects to prevent this Agreement from becoming effective or to terminate this Agreement, the Company shall notify the Representative promptly by telephone, telex, or telegram, confirmed by letter. (e) Anything in this Agreement to the contrary notwithstanding other than Section 11(f), if this Agreement shall not become effective by reason of an election by the Representative pursuant to this Section 11 the sole liability of the Company to the Underwriters, in addition to the obligations the Company assumed pursuant to Section 6, will be to reimburse the Underwriters for such out-of-pocket expenses (including the reasonable fees and disbursements of their counsel) as shall have been incurred by them in connection with this Agreement or the proposed offer, sale, and delivery of the Stock and the Additional Stock, and, upon demand, the Company agrees to pay promptly the full amount thereof to the Representative for the respective accounts of the Underwriters. Anything in this Agreement to the contrary notwithstanding other than Section 11(f), if this Agreement shall not be carried out within the time specified herein for any reason other than the failure on the part of the Company to perform any covenant or agreement or satisfy any condition of this Agreement by it to be performed or satisfied, the Company shall have no liability to the Underwriters other than for obligations assumed by the Company pursuant to Section 6. 47 (f) If the offering does not proceed as a result of a termination by the Company prior to the initial filing of the Registration Statement (a "Pre-Filing Termination"), the Company shall pay the Representative all of the Representative's reasonable and accountable expenses through such date up to a maximum of $125,000; provided, however, that if there shall be a Pre-Filing Termination and within a period ending one year after such termination, the Company shall file a registration statement with the Commission using an underwriter not currently affiliated with the Representative or shall effect a private placement of equity securities using a placement agent not currently affiliated with the Representative with unaffiliated investors of the Company (a "Financing Transaction"), the Company shall, in addition to the payment provided for in the first part of this sentence, use its best efforts to cause the Representatives to act as the co-managing underwriter or placement agent in such transaction. If, after the filing of the Registration Statement and before the declaration of effectiveness of the Registration Statement, the offering does not proceed for any reason (a "Post-Filing Termination"), the Company shall pay the Representative all of the Representative's reasonable and accountable expenses incurred through such date. (g) Notwithstanding any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Sections 5(a)(1), 6, 8, 10, and 13 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 12. NOTICES. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing and, if sent to any Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed by letter, to such Underwriter, c/o Hampshire Securities Corporation, 640 Fifth Avenue, New York, New York 10019, Attention: Mr. Richard Abbe, with a copy to Morrison Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, New York, New York 10022, Attention: Robert H. Cohen, Esq.; or if sent to the Company shall be mailed, delivered, or telexed or telegraphed and confirmed by letter, to the Company, Response USA, Inc., 11-H Princess Road, Lawrenceville, New Jersey 08648, Attention: Richard M. Brooks, Chief Executive Officer and President, with a copy to Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551 Fifth Avenue, New York, New York 10176, Attention: Kenneth R. Koch, Esq. All notices hereunder shall be effective upon receipt by the party to which it is addressed. 48 13. PARTIES. The Representative represents that it is authorized to act on behalf of the several Underwriters named in Schedule I hereto, and the Company shall be entitled to act and rely on any request, notice, consent, waiver, or agreement purportedly given on behalf of the Underwriters when the same shall have been given by the Representative on such behalf. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Underwriters and the Company, and the persons and entities referred to in Section 8 who are entitled to indemnification or contribution, and their respective successors, legal representatives, and assigns (which shall not include any buyer, as such, of the Stock or the Additional Stock), and no other person shall have, or be construed to have, any legal or equitable right, remedy, or claim under, in respect of, or by virtue of this Agreement or any provision herein contained. Notwithstanding anything contained in this Agreement to the contrary, all of the obligations of the Underwriters hereunder are several and not joint. 14. CONSTRUCTION. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS. TIME IS OF THE ESSENCE IN THIS AGREEMENT. 15. CONSENT TO JURISDICTION. The Company irrevocably consents to the jurisdiction of the courts of the State of New York and of any federal court located in such State in connection with any action or proceeding arising out of, or relating to, this Agreement, any document or instrument delivered pursuant to, in connection with, or simultaneously with this Agreement, or a breach of this Agreement or any such document or instrument. In any such action or proceeding, the Company waives personal service of any summons, complaint, or other process and agrees that service thereof may be made in accordance with Section 12. Within 30 days after such service, or such other time as may be mutually agreed upon in writing by the attorneys for the parties to such action or proceeding, the Company shall appear or answer such summons, complaint, or other process. Should the Company fail to appear or answer within such 30-day period or such extended period, as the case may be, the Company shall be deemed in default and judgment may be entered against the Company for the amount as demanded in any summons, complaint, or other process so served. 49 If the foregoing correctly sets forth the understanding between the Representative and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, RESPONSE USA, INC. By: ------------------------------------ Name: Title: ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN IN NEW YORK, NEW YORK HAMPSHIRE SECURITIES CORPORATION* By: ------------------------------------ Name: Title: *ON BEHALF OF ITSELF AND THE OTHER SEVERAL UNDERWRITERS NAMED IN SCHEDULE I HERETO. 50 SCHEDULE I Total Number of Shares of Common Stock to be Underwriter Purchased ----------- --------- Hampshire Securities Corporation . . . . . . . Total . . . . . . . . . . . . . . ========= 2,400,000 51 EX-3.(A) 3 CERTIFICATE OF INCORPORATION OF THE COMPANY Exhibit 3(a) CERTIFICATE OF INCORPORATION OF RESPONSE USA, INC. FIRST: The name of the Corporation is Response USA, Inc. SECOND: The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle, 19801. The name of the registered agent at such address is The Corporation Trust Company. THIRD: The nature of the business or purposes to be conducted or promoted by the Corporation is as follows: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The aggregate number of shares which this corporation shall have authority to issue is 12,500,000 shares of Common Stock, $.002 par value per share, and 250,000 shares of Undersigned Preferred Stock, $1.00 par value per share. The Undesignated Preferred Stock may be divided and issued from time to time in one or more series as may be designated by the Board of Directors of the Corporation, each of such series to be distinctly titled and to consist of the number of shares designated by the Board of Directors. All shares of any one series of Undesignated Preferred Stock as designated by the Board of Directors shall be alike in every particular, except that shares of any one series issued at different times may differ as to the date from which dividends thereon (if any) shall accrue or be cumulative (or both). The designations, preferences, qualifications, limitations, restrictions, options, and other optional, special participating or relative rights (if any), of any series of Undesignated Preferred Stock may differ from those of any and all other series at any time outstanding. The Board of Directors of the Corporation is hereby expressly vested with authority to fix by resolution the designations, preferences, qualifications, limitations, restrictions, options and other optional, special, participating or relative rights (if any), of the Undesignated Preferred Stock and each series thereof which may be designated by the Board of Directors, including, but without limiting the generality of the foregoing, the following: THE NUMBER OF SHARES TO CONSTITUTE SUCH SERIES AND THE DESIGNATION THEREOF; THE VOTING RIGHTS AND POWERS (IF ANY) OF SUCH UNDESIGNATED PREFERRED STOCK AND EACH SERIES THEREOF; THE RATES AND TIMES AT WHICH, AND THE TERMS AND CONDITIONS ON WHICH, DIVIDENDS (IF ANY) ON EACH SERIES OF UNDESIGNATED PREFERRED STOCK WILL BE PAID, AND ANY DIVIDEND PREFERENCE OR RIGHTS OF CUMULATION; THE RIGHTS (IF ANY) OF HOLDERS OF UNDESIGNATED PREFERRED STOCK, AND EACH SERIES THEREOF, TO CONVERT THE SAME INTO, OR EXCHANGE THE SAME FOR, SHARES OF OTHER CLASSES (OR SERIES OF CLASSES) OF CAPITAL STOCK OF THE CORPORATION AND THE TERMS AND CONDITIONS FOR SUCH CONVERSION OR EXCHANGE, INCLUDING PROVISIONS FOR ADJUSTMENT OR CONVERSION OR EXCHANGE PRICES OR RATES IN SUCH EVENT AS THE BOARD OF DIRECTORS SHALL DETERMINE; THE REDEMPTION RIGHTS (IF ANY) OF THE CORPORATION AND OF THE HOLDERS OF THE UNDESIGNATED PREFERRED STOCK AND EACH SERIES THEREOF AND THE TIMES AT WHICH, AND THE TERMS AND CONDITIONS ON WHICH, UNDESIGNATED PREFERRED STOCK, AND EACH SERIES THEREOF, MAY BE REDEEMED; AND THE RIGHTS AND PREFERENCES (IF ANY) OF THE HOLDERS OF UNDESIGNATED PREFERRED STOCK, AND EACH SERIES THEREOF, UPON THE VOLUNTARY OR INVOLUNTARY LIQUIDATION, DISSOLUTION OR WINDING UP OF THE CORPORATION. FIFTH: The name and mailing address of the persons who are to serve as directors of the Corporation until the first annual meeting of stockholders or until a successor is elected and qualified is as follows: Name Mailing Address ---- --------------- Richard M. Brooks 1300 Admiral Wilson Boulevard Camden, New Jersey 08101 Ronald A. Feldman 1300 Admiral Wilson Boulevard Camden, New Jersey 08101 Howard B. Levin 1300 Admiral Wilson Boulevard Camden, New Jersey 08101 SIXTH: The name and address of the sole incorporator is as follows: Name Mailing Address ---- --------------- Maxine M. DiRenza 1515 Market Street, 9th Floor Philadelphia, PA 19102 SEVENTH: In furtherance of and not in limitation of powers conferred by statute, it is further provided: Election of directors need not be by written ballot. The board of directors is expressly authorized to adopt, amend or repeal the By-laws of the Corporation. 2 EIGHTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute and the Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. NINTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this paragraph shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification. If the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the amended Delaware General Corporation Law. Any repeal or modification of this paragraph shall not adversely affect any right or protection of a director of the corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification. EXECUTED on MARCH 18, 1992 ------------------------- /s/ Maxine M. Direnza ------------------------- Maxine M. DiRenza Incorporator 3 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF RESPONSE USA, INC. The undersigned, being, respectively, Chief Executive Officer and Secretary of Response USA, Inc., a Delaware corporation (the "Corporation"), do hereby certify as follows: FIRST: That the Board of Directors of the Corporation adopted a resolution proposing and declaring advisable a reverse split of the Corporation's issued and outstanding Common Stock, $.008 par value per share, on a one-for-ten basis. SECOND: The foregoing amendment has been duly adopted by the stockholders of the Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Richard M. Brooks, its Chief Executive Officer, and attested Ronald A. Feldman, its Secretary, this 20th day of November, 1995. /s/ Richard M. Brooks ------------------------------- Richard M. Brooks, Chief Executive Officer ATTEST: /s/ Ronald A. Feldman - ----------------------------- Ronald A. Feldman, Secretary CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS 1996-SERIES A CONVERTIBLE PREFERRED STOCK OF - RESPONSE USA INC. - Response USA Inc., a corporation organized and existing under the laws of the State of Delaware (the "Company"), does by its President hereby certify: That pursuant to the authority vested in the Board of Directors by the Certificate of Incorporation, the Board, pursuant to the unanimous written consent dated as of May 30, 1996, adopted the following resolutions: RESOLVED, that pursuant to the authority so conferred upon it, the Board of Directors hereby authorizes the issuance of 7,500 shares of 1996-Series A Convertible Preferred Stock, pare value $.01 per share ("1996-Series A Convertible Preferred"), and RESOLVED, that the voting powers, preferences and relative rights and privileges and other rights granted to the 1996-Series A Convertible Preferred and the qualifications, limitations or restrictions imposed thereon be, and they hereby are, as follows: SECTION 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "1996-Series A Convertible Preferred Stock" (the "1996-Series A Convertible Preferred") and the number of shares constituting the 1996-Series A Convertible Preferred shall be 7,500. Such number of shares may be decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of 1996-Series A Convertible Preferred to a number less than the number of shares then outstanding. SECTION 2. RANK. The 1996-Series A Convertible Preferred shall rank: (i) prior to all of the Company's Common Stock, par value $0.008 per share ("Common Stock"); (ii) prior to any class or series of capital stock of the Company hereafter created (collectively, with the Common Stock, "Junior Securities"); (iii) on parity with any class or series of capital stock of the Company hereafter created specifically ranking by its terms on parity with the 1996-Series A Convertible Preferred Stock with the prior consent of the holders of 75% of the shares of then outstanding 1996-Series A Convertible Preferred ("Parity Securities"); (iv) after any class or series of capital stock of the Company hereafter created and specifically ranking by its terms senior to the 1996-Series A Convertible Preferred with the prior consent of the holders of 75% of the shares of then outstanding 1996-Series A Convertible Preferred (collectively, "Senior Securities"), in each case as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"). SECTION 3. DIVIDENDS. The 1996-Series A Convertible Preferred will bear no dividends, and the holders of the 1996-Series A Convertible ("Holders") shall not be entitled to receive dividends on the 1996-Series A Convertible. SECTION 4. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the Holders of shares of 1996-Series A Convertible Preferred shall be entitled to receive, immediately after any distributions to Senior Securities required by the Company's Certificate of Incorporation, and prior and in preference to any distribution to Junior Securities but in parity with any distribution of Parity Securities, an amount per share equal to the sum of (i) $1.250 for each outstanding share of 1996-Series A Convertible Preferred (the "Original 1996-Series A Issue Price") and (ii) an amount equal to 10% of the Original 1996-Series A Issue Price per annum for the period that has passed since the Escrow Date (as hereinafter defined). If upon the occurrence of such event, the assets and funds thus distributed among the Holders of the 1996-Series A Convertible Preferred and Parity Securities shall be insufficient to permit the payment to such holders of the full preferential amounts due to the holders of the 1996-Series A Convertible Preferred and the Parity Securities, respectively, then the entire assets and funds of the Company legally available for such distribution shall be distributed among the holders of the 1996-Series A Convertible Preferred and the Parity Securities, on a pro rata basis in proportion to the respective amounts that otherwise would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) Upon the completion of the distribution required by subsection 4(a), if assets remain in the Company, they shall be distributed to holders of Parity Securities (unless holders of Parity Securities have received distributions pursuant to subsection (a) above) and Junior Securities in accordance with the Company's Certificate of Incorporation. (c) A consolidation or merger of the Company with or into any other corporation or corporations, or a sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of, shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 4, but shall instead be treated pursuant to Section 5(d) hereof. 2 SECTION 5. CONVERSION. (a) HOLDER'S RIGHT TO CONVERT. (i) The record Holder of this 1996-Series A Convertible Preferred shall be entitled (at the times and in the amounts set forth below), subject to the Company's right to redeem the Premium (as defined herein) in accordance with Section 6(a), at the office of the Company or any transfer agent for the 1996-Series A Convertible Preferred , to convert portions of the 1996-Series A Convertible Preferred held by such Holder (but only in multiples of $10,000) into that number of fully-paid and non-assessable shares of the Common Stock at the Conversion Price as set forth below. The number of shares of Common Stock into which this 1996-Series A Convertible Preferred may be converted is hereinafter referred to as the "Conversion Number" for such 1996-Series A Convertible Preferred. The record Holder of this 1996-Series A Convertible Preferred shall be entitled to convert up to 50 percent of the number of shares of 1996-Series A Convertible Preferred held by such Holder beginning 45 days following the Escrow Date. The balance of the shares of 1996-Series A Convertible Preferred will become convertible at the option of such Holder commencing 70 days following the Escrow Date. The following formula sets forth the Conversion Number for each share of 1996-Series A Convertible Preferred in the event the Company does not redeem the Premium pursuant to Section 6(a): Conversion Number = The Premium + 1,000 -------------------- Conversion Price where the Premium is equal to: (.10)(N/365)(1,000) and the following formula sets forth the Conversion Number for each share of 1996-Series A Convertible Preferred in the event the Company redeems the Premium in accordance with Section 6(a): Conversion Number = 1,000 ---------------- Conversion Price where, N = the number of days between (i) the date (the "Escrow Date") that, in connection with the consummation of the initial purchase of this 1996-Series A Convertible Preferred from the Company, the escrow agent first has in its possessions, prior to 10:30 A.M., New York City time on such date (or after 10:30 A.M. on such date, if the escrow agent is able to deposit such funds in an interest bearing account in time for such funds to accrue interest for that day), funds representing full payment for the shares of 1996-Series A Convertible Preferred for which conversion is being elected, and (ii) the applicable date of conversion for the shares of 1996-Series A Convertible Preferred for which conversion is being elected, and 3 CONVERSION PRICE = Lesser of (a) 80% of the average closing bid price of the Company's Common Stock as reported by the NASDAQ Small Cap Stock Market ("NASDAQ") for the five trading days immediately preceding the date of closing; or (b) 80% of the Strike Price (as defined below) for the five trading days preceding the Date of Conversion. In no event shall the Conversion Price exceed $5.00 (subject to equitable adjustments from time to time for stock splits, stock dividends, recapitalisations, reorganisations, and similar transactions). For purposes hereof, the term "Strike Price" shall mean the average closing bid price of the Company's Common Stock as reported by NASDAQ (or, if not reported by NASDAQ as reported by such other exchange or market where traded). Notwithstanding anything herein to the contrary, in no event shall holders of shares of 1996-Series A Convertible Preferred be entitled to convert any such shares in excess of that number of shares upon conversion of which the sum of (x) the number of shares of Common Stock beneficially owned by the holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the shares of 1996-Series A Convertible Preferred ) and (y) the number of shares of Common Stock issuable upon conversion of the shares of 1996-Series A Convertible Preferred with respect to which the determination of this proviso is being made would result in beneficial ownership by the holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock. For purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13 D-G thereunder, except as otherwise provided in clause (x) of such proviso. (ii) MECHANICS OF CONVERSION. In order to convert 1996-Series A Convertible Preferred into full shares of Common Stock, the Holder shall (i) transmit facsimile copy of the fully executed notice of conversion in the form attached hereto ("Notice of Conversion") to the Company at such office that he elects to convert the same (Facsimile number (609) 896-3535), which notice shall specify the number of shares of 1996-Series A Convertible Preferred to be converted and shall contain a calculation of the Conversion Price (together with a copy of the first page of each certificate to be converted) to the Company or its designated transfer agent prior to midnight, New York City time (the "Conversion Notice Deadline") on the date of conversion specified on the Notice of Conversion and (ii) promptly surrender the original certificate or certificates therefor, duly endorsed, and deliver the original Notice of Conversion by either overnight courier or 2-day courier, to the office of the Company or of any transfer agent for the 1996-Series A Convertible Preferred; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless either the certificates evidencing such 1996-Series A Convertible Preferred are delivered to the Company or its transfer agent as provided above, or the Holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of the certificate or certificates ("Stock Certificates") representing shares of 1996-Series A Convertible Preferred, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of the Stock Certificate(s), if 4 mutilated, the Company shall execute and deliver new Stock Certificate(s) of like tenor and date. No fractional shares of Common Stock shall be issued upon conversion of this 1996-Series A Convertible Preferred. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall pay cash to such Holder in an amount equal to such fraction multiplied by the Conversion Price then in effect. In the case of a dispute as to the calculation of the Conversion Price, the Company's calculation shall be deemed conclusive absent manifest error. The Company shall issue and deliver within two (2) business days after delivery to the Company of such certificates (the "Delivery Period"), or after such agreement and indemnification, to such Holder of 1996-Series A Convertible Preferred at the address of the Holder on the books of the Company, (i) a certificate or certificates for the number of shares of Common Stock equal to the Conversion Number, for the shares of 1996-Series A Convertible Preferred being so converted and (ii) a certificate representing the balance of the shares of 1996-Series A Convertible Preferred not so converted, if any. The date on which conversion occurs (the "Date of Conversion") shall be deemed to be the date set forth in such Notice of Conversion, provided that the copy of the Notice of Conversion is faxed to the Company before midnight, New York City time, on the Date of Conversion. Upon a conversion of shares of 1996-Series A Convertible Preferred, the Holder shall promptly deliver original Stock Certificates representing the share of 1996-Series A Convertible Preferred to be converted to the transfer agent or the Company. The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. In addition to any other remedies available to a Holder, including actual damages and/or equitable relief, the Company shall pay to a holder $250 in cash for the first day beyond such Delivery Period that the Company fails to deliver Common Stock issuable upon surrender of shares of 1996-Series A Convertible Preferred with a Notice of Conversion and $500 per day in cash for each day thereafter until such time as the earlier of the date that the Company has delivered all such Common Stock and the tenth day beyond such Delivery Period. Such cash amount shall be paid to such holder by the fifth day of the month following the month in which it has accrued. In the event the Company fails to deliver such Common Stock prior to the expiration of the ten (10) business day period after the Delivery Period for any reason (whether due to a requirement of law or a stock exchange or otherwise), such holder shall be entitled to (in addition to any other remedies available to the holder) Conversion Default Payments in accordance with Section 5(c) hereof beginning on the expiration of such ten (10) business day period. (B) MANDATORY CONVERSION. On the Effective Mandatory Conversion Date (as defined below), all shares of 1996-Series A Convertible Preferred which have not previously been converted into shares of Common Stock shall automatically convert into that number of fully paid and non-assessable shares of Common Stock, computed pursuant to the applicable formula set forth in Section 5(a)(i) above. The Company shall effect such conversion by giving written notice to Holders at least two but not more than ten days prior to effectuating the conversion ("Effective Mandatory Conversion Date"); provided, however, that the Company may not designate a date as the Effective Mandatory Conversion Date prior to such date that is such number of days, if any, after June 1, 1999 as is equal to the number of days for which the Company is required to make payments under Section 2(c) or 5 11 of that certain Registration Rights Agreement executed in connection with the initial issuance of the 1996-Series A Convertible Preferred (the "Registration Rights Agreement"). Holders will thereupon be required to surrender their preferred stock certificates to the Company is order to receive certificates evidencing shares of the Company's Common Stock, and all rights of Holders, except the right to receive certificates evidencing Common Stock pursuant to the mandatory conversion, shall be extinguished as of the Effective Mandatory Conversion Date. Nothing herein shall prevent a Holder from converting shares of 1996-Series A Convertible Preferred pursuant to Section 5(a) after the Company delivers a notice hereunder and prior to the Effective Mandatory Conversion Date. (C) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the 1996-Series A Convertible Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding 1996-Series A Convertible Preferred; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of 1996-Series A Convertible Preferred, the Company will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. If, at any time a holder of shares of 1996-Series A Convertible Preferred submits a Notice of Conversion, the Company does not have sufficient authorized but unissued shares of Common Stock available to effect such conversion in accordance with the provisions of this Section 5 (a "Conversion Default"), the Company shall issue to the holder all of the shares of Common Stock which are available to effect such conversion. The number of shares of 1996-Series A Convertible Preferred included in the Notice of Conversion which exceeds the amount which is then convertible into available shares of Common Stock (the "Default Amount") shall, notwithstanding anything to the contrary contained herein, not be convertible into Common Stock in accordance with the terms hereof until (and at the Holder's option at any time after) the date additional shares of Common Stock are authorized by the Company to permit such conversion, at which time the Conversion Price in respect thereof shall be the lesser of (i) the Conversion Price on the Conversion Default Date (as defined below) and (ii) the Conversion Price on the Date of Conversion elected by the Holder in respect thereof. The Company shall pay to the Holder payments ("Conversion Default Payments") for a Conversion Default in the amount of (N/365), multiplied by the product of the Original 1996-Series A Issue Price with respect to each share of 1996-Series A Convertible Preferred, multiplied by the Default Amount multiplied by .25, where N = the number of days from the first day of the Conversion Default (the "Conversion Default Date") to the date (the "Authorization Date") that the Company authorizes a sufficient number of shares of Common Stock to effect Conversion of the full number of shares of 1996-Series A Convertible Preferred. The Company shall send notice to the holder of the authorization of additional shares of Common Stock, the Authorization Date and the amount of holder's accrued Conversion Default Payments. The accrued Conversion Default Payments for each calendar month shall be paid in cash or, subject to the limitations contained in Section 5(a), shall be convertible into Common Stock at the Conversion Price, at the holder's option, as follows: 6 (X) In the event holder elects to take such payment in cash, cash payment shall be made to holder by the fifth day of the month following the month in which it has accrued; (Y) In the event holder elects to take such payment in Common Stock, the holder may convert such payment amount into Common Stock at the Conversion Price (as in effect at the time of Conversion) at any time after the fifth day of the month following the month in which it has accrued in accordance with the terms of this Section 5(c). Nothing herein shall limit the holder's right to pursue actual damages for the Company's failure to maintain a sufficient number of authorized shares of Common Stock, and each holder shall have the right to pursue all remedies available at law or in equity (including a decree of specific performance and/or injunctive relief). (D) ADJUSTMENT TO CONVERSION PRICE. (i) If, prior to the conversion of all 1996-Series A Convertible Preferred, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, then the Holders of 1996-Series A Convertible Preferred shall thereafter have the right to purchase and receive upon conversion of 1996-Series A Convertible Preferred, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such shares of stock and/or securities as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore purchasable and receivable upon the conversion of 1996-Series A Convertible Preferred held by such Holders had such merger, consolidation, exchange of shares, recapitalization or reorganization not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holders of the 1996-Series A Convertible Preferred to the end that the provisions hereof (including, without limitation, provisions for adjustment of the number of shares issuable upon conversion of the 1996-Series A Convertible Preferred pursuant to Sections 5(a)(i) and 5(d) hereof) shall thereafter be applicable, as nearly as may be practicable in relation to any shares of stock or securities hereafter deliverable upon the exercise hereof. The Company shall not effect any transaction described in this subsection 5(d) unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Holders of the 1996-Series A Convertible Preferred such shares of stock and/or securities as, in accordance with the foregoing provisions, the Holders of the 1996-Series A Convertible Preferred may be entitled to purchase. (ii) If, any adjustment under this subsection 5(d) would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion shall be the next higher number of shares. 7 SECTION 6. CASH REDEMPTION OF PREMIUM BY COMPANY; NO REDEMPTION OF 1996-SERIES A CONVERTIBLE. (a) The Company shall have the right, in its sole discretion, upon receipt of a Notice of Conversion pursuant to Section 5(a)(ii) or in the event of a mandatory conversion effected in accordance with Section 5(b) hereof, to redeem any portion of the Premium subject to such conversion for a sum of cash equal to the amount of the Premium being so redeemed. All cash redemption payments hereunder shall be paid in lawful money of the United State of America at such address for the holder as appears on the record books of the Company (or at such other address as such holder shall hereafter give to the Company be written notice). In the event the Company elects, pursuant to this Section 6(a), to redeem all or any portion of the Premium in cash and fails to pay such holder the applicable redemption amount to which such holder is entitled by depositing a check in the U.S. Mail to such holder within three (3) business days of receipt by the Company of a Notice of Conversion (in the case of a redemption in connection with an optional conversion) or the Effective Mandatory Conversion Date (in the case of a redemption in connection with a mandatory conversion), the Company shall thereafter forfeit its right to redeem such Premium in cash and such Premium shall thereafter be converted into shares of Common Stock in accordance with Section 5(a)(i) hereof. (b) Each holder of 1996-Series A Convertible Preferred shall have the right to require the Company to provide advance notice to such Holder stating whether the Company will elect to redeem all or any portion of the Premium in cash pursuant to the Company's redemption rights discussed in subparagraph (a) of this Section 6 as set forth herein. A Holder may exercise such right from time to time by sending notice (an "Election Notice") to the Company, by facsimile, requesting that the Company disclose to such holder whether the Company would elect to redeem any portion of the Premium for cash in lieu of issuing Common Stock in accordance with Section 6(a) hereof if such Holder were to exercise his, her or its right of conversion pursuant to Section 5. The Company shall, no later than the fifth (5th) business day following receipt of an Election Notice, disclose to such holder, whether the Company would elect to redeem any portion of a Premium in connection with a conversion pursuant to a Notice of Conversion delivered over the subsequent ten (10) business day period. If the Company does not respond to such holder within such five (5) business day period via facsimile, the Company shall, with respect to any conversion pursuant to a Notice of Conversion delivered within the subsequent ten (10) business day period, forfeit its right to redeem such Premium in accordance with subparagraph (a) of this Section 6 and shall be required to convert such Premium into shares of Common Stock in accordance with Section 5 hereof. (c) The 1996-Series A Convertible Preferred is not subject to mandatory redemption. The Company shall have no right to redeem any shares of 1996-Series A Convertible Preferred for cash, whether upon conversion pursuant to Section 5 or otherwise. SECTION 7. VOTING RIGHTS. Except as otherwise provided by Delaware law, the Holders of the 1996-Series A Convertible Preferred shall have no voting power whatsoever, and no holder of 1996-Series A Convertible 8 Preferred shall vote or otherwise participate in any proceeding in which actions shall be taken by the Company or the shareholders thereof or be entitled to notification as to any meeting of the Board of Directors or the shareholders. To the extent that under Delaware law the vote of the Holders of the 1996-Series A Convertible Preferred, voting separately as a class, is required to authorize a given action of the Company, the affirmative vote or consent of the holders of at least seventy-five percent (75%) of the outstanding shares of the 1996-Series A Convertible Preferred shall constitute the approval of such action by the class. To the extent that under Delaware law the holders of the 1996-Series A Convertible Preferred are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of 1996-Series A Convertible Preferred shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of stockholders as the date as of which the Conversion Price is calculated. Holders of the 1996-Series A Convertible Preferred shall be entitled to notice of all stockholder meetings or written consents with respect to which they would be entitled to vote, which notice would be provided pursuant to the Company's by-laws and applicable statutes. SECTION 8. PROTECTIVE PROVISIONS. So long as any shares of 1996-Series A Convertible Preferred are outstanding, the Company shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least seventy-five percent (75%) of the then outstanding shares of 1996-Series A Convertible Preferred; (a) alter or change the rights, preferences or privileges of the shares of 1996-Series A Convertible Preferred or any other class of the Company's Capital Stock so as to affect adversely the 1996-Series A Convertible Preferred; or (b) create any new class or series of stock having a preference over or which is on a parity with the 1996-Series A Convertible Preferred with respect to Distributions (as defined in Section 2 above); or (c) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in taxation of the holders of shares of the 1996-Series A Convertible Preferred under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended); or (d) issue any shares of 1996-Series A Convertible Preferred after July 19, 1996. SECTION 9. STATUS OF CONVERTED STOCK. In the event any shares of 1996-Series A Convertible Preferred shall be converted pursuant to Section 5 hereof, the shares so converted or redeemed shall be canceled, shall return to the status of 9 authorized, but unissued preferred stock of no designated series, and shall not be issuable by the Company as 1996-Series A Convertible Preferred. FURTHER RESOLVED, that the statements contained in the foregoing resolutions creating and designating the said 1996-Series A Convertible Preferred and fixing the number, powers, preferences and relative, optional, participating, and other special rights and the qualifications, limitations, restrictions, and other distinguishing characteristics thereof shall, upon the effective date of said series, be deemed to be included in and be a part of the certificate of incorporation of the Company pursuant to the provisions of Delaware law. Signed on 28TH of JUNE 1996. -------- ---------------- /S/ Richard M. Brooks Chairman of the Board and CEO - ---------------------------- Richard M. Brooks /s/ Ronald A. Feldman Vice President and COO - ---------------------------- Ronald A. Feldman 10 EX-4.(G) 4 REVISED FORM OF REPRESENTATIVE'S WARRANTS Exhibit 4(g) REPRESENTATIVE'S WARRANT THE SECURITIES REPRESENTED HEREBY AND ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. HOWEVER, NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED OR SOLD EXCEPT PURSUANT TO (I) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION STATEMENT, (II) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (III) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT. THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN. EXERCISABLE AFTER JANUARY ___, 1999. VOID AFTER 5:00 P.M. NEW YORK CITY LOCAL TIME, JANUARY __, 2003. RESPONSE USA, INC. WARRANTS FOR THE PURCHASE OF 240,000 SHARES OF COMMON STOCK, $.008 PAR VALUE NO. _____ THIS CERTIFIES that, for receipt in hand of $________________ and other value received, HAMPSHIRE SECURITIES CORPORATION (the "Holder") is entitled to subscribe for, and purchase from, RESPONSE USA, INC., a Delaware corporation (the "Company"), upon the terms and conditions set forth herein, at any time or from time to time after January __, 1999 (the one year anniversary date of the the date the Securities and Exchange Commission (the "Commission") declares the Company's Registration Statement on Form SB-2 (File No.: 333-37595), in connection with which this Warrant is originally issued (the "Registration Statement"), effective (the "Effective Date"), New York City local time until 5:00 P.M. New York City local time on January __, 2003, the fifth anniversary of the Effective Date (the "Effective Period"), up to an aggregate of 240,000 shares of common stock, $.008 par value (the "Common Stock"), of the Company. This Warrant is initially exercisable at $________ per share; provided, however, that upon the occurrence of any of the events specified in Section 5 hereof, the rights granted by this Warrant, including the exercise price and the number of shares of Common Stock to be received upon such exercise, shall be adjusted as therein specified. The term "Exercise Price" shall mean, depending on the context, the initial exercise price (as set forth above) or the adjusted exercise price per share. This Warrant is the Representative's Warrant or one of the Representative's Warrants (collectively, including any Representative's Warrant issued upon the exercise or transfer of any such Representative's Warrants in whole or in part, the "Warrants") issued pursuant to the Underwriting Agreement, dated January __, 1998 (the "Underwriting Agreement"), among the Company and Hampshire Securities Corporation, as representative (the "Representative") of the several underwriters named therein. As used herein, the term "this Warrant" shall mean and include this Warrant and any Warrant or Warrants hereafter issued as a consequence of the exercise or transfer of this Warrant in whole or in part. This Warrant may not be sold, transferred, assigned, pledged or hypothecated until January __, 1999, the one year anniversary of the Effective Date, except that it may be transferred, in whole or in part, to (i) one or more officers or partners of the Holder (or the officers or partners of any such partner); (ii) any other underwriting firm or member of the selling group which participated in the public offering of shares of Common Stock which commenced on January __, 1998 (or the officers or partners of any such firm); (iii) a successor to the Holder, or the officers or partners of such successor; (iv) a purchaser of substantially all of the assets of the Holder; or (v) by operation of law. The term the "Holder" as used herein shall include any transferee to whom this Warrant has been transferred in accordance with the above. Each share of Common Stock issuable upon the exercise hereof shall be hereinafter referred to as a "Warrant Share." 1. (a) This Warrant may be exercised during the Exercise Period, either in whole or in part, by the surrender of this Warrant (with the election at the end hereof duly executed) to the Company at its principal office at Response USA, Inc. 11-H Princess Road, Lawrenceville, New Jersey 08642, or at such other place as is designated in writing by the Company, together with a certified or bank cashier's check payable to the order of the Company in an amount equal to the product of the Exercise Price and the number of Warrant Shares for which this Warrant is being exercised. (b) This Warrant may be also exercised by the surrender to the Company at its principal office mentioned above, or at such other place as is designated in writing by the Company, the Warrant certificate (with the election at the end thereof duly executed unless waived by the Company) and receiving in exchange therefor the number of Warrant Shares equal to the product of the Exercise Price and the number of Warrant Shares for which the Warrants are being exercised, multiplied by a fraction, the numerator of which is - 2 - the market price less the Exercise Price and the denominator of which is such market price. The market price shall be equal to the average closing price of the Common Stock for the five trading days preceding the notice of exercise. 2. Upon each exercise of the Holder's rights to purchase Warrant Shares, the Holder shall be deemed to be the holder of record of the Warrant Shares, notwithstanding that the transfer books of the Company shall then be closed or certificates representing the Warrant Shares with respect to which this Warrant was exercised shall not then have been actually delivered to the Holder. As soon as practicable after each such exercise of this Warrant, the Company shall issue and deliver to the Holder a certificate or certificates representing the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a Warrant identical in all respects to this Warrant but for the right of the Holder to purchase the balance of the aggregate number of Warrant Shares purchasable hereunder as to which this Warrant has not been exercised or assigned. 3. Any Warrants issued upon the transfer or exercise in part of this Warrant shall be numbered and shall be registered in a warrant register (the "Warrant Register") as they are issued. The Company shall be entitled to treat the registered holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes, and shall not be bound to recognize any equitable or other claim to, or interest in, such Warrant on the part of any other person, and shall not be liable for any registration or transfer of Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with the actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration or transfer, or with the knowledge of such facts that its participation therein amounts to bad faith. This Warrant shall be transferable on the books of the Company only upon delivery thereof duly endorsed by the Holder or by his duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment, or authority to transfer. In all cases of transfer by an attorney, executor, administrator, guardian, or other legal representative, duly authenticated evidence of his, her, or its authority shall be produced. Upon any registration of transfer, the Company shall deliver a new Warrant or Warrants to the person entitled thereto. This Warrant may be exchanged, at the option of the Holder thereof, for another Warrant, or other Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares (or portions thereof), upon surrender to the Company or its duly authorized agent. Notwithstanding the foregoing, the Company shall have no obligation to cause Warrants to be transferred on its books to any person if, in the opinion of counsel to the Company, such transfer does not comply with the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations thereunder. 4. The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of the Warrants, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. The Company represents that all shares of Common Stock issuable upon exercise of this Warrant are - 3 - duly authorized and, upon receipt by the Company of the full payment for such Warrant Shares, will be validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof and will not be issued in violation of any preemptive or similar rights of stockholders. 5. (a) The Exercise Price for the Warrant in effect from time to time, and the number of shares of Common Stock issuable upon exercise of the Warrant, shall be subject to adjustment, as follows: (i) In the event that the Company shall at any time after the date hereof (A) declare a dividend on the outstanding Common Stock payable in shares of its capital stock, (B) subdivide the outstanding Common Stock, (C) combine the outstanding Common Stock into a smaller number of shares, or (D) issue any shares of its capital stock by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the Exercise Price per Warrant Share in effect at the time of the record date for the determination of stockholders entitled to receive such dividend or distribution or of the effective date of such subdivision, combination, or reclassification shall be adjusted so that it shall equal the price determined by multiplying such Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action, and the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action. Such adjustment shall be made successively whenever any event listed above shall occur and shall become effective at the close of business on such record date or at the close of business on the date immediately preceding such effective date, as applicable. (ii) In the event that the Company shall fix a record date for the determination of stockholders entitled to receive issuance of rights or warrants to be issued to all holders of Common Stock entitling such stockholders to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price (the "Subscription Price") (or having a conversion price per share) less than the then Current Market Price (as defined below) per share of Common Stock on such record date, the Exercise Price in effect at the time of such record date shall be adjusted so that the same shall equal the price determined by multiplying such Exercise Price in effect immediately prior to the date of such issuance by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding on such record date and the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the convertible securities so offered) would purchase at such Current Market Price per share of the Common Stock, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding on such record date and the number of additional shares of Common Stock offered for subscription or purchase (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants; and, to the extent that shares of Common Stock are not delivered - 4 - (or securities convertible into Common Stock are not delivered) after the expiration of such rights or warrants, the Exercise Price shall be readjusted to the Exercise Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. (iii) In the event the Company shall fix a record date for the determination of stockholders entitled to receive (including any such distribution made to the stockholders of the Company in connection with a consolidation or merger in which the Company is the continuing corporation in a distribution to all holders of Common Stock) evidences of its indebtedness, cash, or assets (other than distributions and dividends payable in shares of Common Stock), or rights, options, or warrants to subscribe for or purchase shares of Common Stock, or securities convertible into, or exchangeable for, shares of Common Stock (excluding those referred to in paragraph (ii) above) in a distribution to all holders of Common Stock, then, in each case, the Exercise Price in effect at the time of such record date shall be adjusted by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the Current Market Price per share of Common Stock on such record date, less the fair market value (as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error) of the portion of the evidences of indebtedness or assets so to be distributed, or of such rights, options, or warrants, or convertible or exchangeable securities, or the amount of such cash, applicable to one share of Common Stock, and the denominator of which shall be such Current Market Price per share of Common Stock on such record date. Such adjustment shall be made successively whenever any event listed above shall occur and become effective at the close of business on such record date. (iv) In case the Company shall issue shares of Common Stock for a consideration per share (the "Offering Price") less than the Current Market Price per share of Common Stock on the date the Company fixes the offering price of such additional shares, the Exercise Price shall be adjusted immediately thereafter so that it shall equal the price determined by multiplying such Exercise Price by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares and the number of shares of Common Stock which the aggregate consideration received (determined as provided in Subsection (i) below) for the issuance of such additional shares would purchase at such Current Market Price per share of Common Stock, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after the issuance of such additional shares. Such adjustment shall be made successively whenever such an issuance is made. Notwithstanding anything herein to the contrary, no adjustment pursuant to this paragraph (a)(iv) of Section 5 shall take place as a result of this issuance of shares of Common Stock pursuant to an employee, officer, or director securities ownership or compensation plan duly adopted by the Board of Directors of the Company. (v) In case the Company shall issue any securities convertible into, or exchangeable for, Common Stock (excluding securities issued in transactions described in Subsections (ii) and (iii) - 5 - above) for a consideration per share of Common Stock (the "Conversion Price") initially deliverable upon conversion or exchange of such securities (determined as provided in Subsection (i) below) less than the Current Market Price per share of Common Stock in effect immediately prior to the issuance of such securities, the Exercise Price in effect immediately prior to the date of such issuance shall be adjusted immediately thereafter so that it shall equal the price determined by multiplying such Exercise Price by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the issuance of such securities and the number of shares of Common Stock which the aggregate consideration received (determined as provided in Subsection (i) below) for such securities would purchase at such Current Market Price per share of Common Stock, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance and the maximum number of shares of Common Stock deliverable upon conversion of, or in exchange for, such securities at the initial conversion or exchange price or rate. Such adjustment shall be made successively whenever such an issuance is made. Notwithstanding anything herein to the contrary, no adjustment pursuant to this paragraph (a)(v) of Section 5 shall take place as a result of the issuance of securities convertible into, or exchangeable for, shares of Common Stock pursuant to an employee, officer, or director securities ownership or compensation plan duly adopted by the Board of Directors of the Company. (b) The Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices for the 30 consecutive trading days immediately preceding the date in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the closing bid price regular way, in either case on the principal national securities exchange (including, for purposes hereof, the NASDAQ National Market System) on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the highest reported bid price for the Common Stock as furnished by the National Association of Securities Dealers, Inc. through the Nasdaq SmallCap Market or a similar organization if the Nasdaq SmallCap Market is no longer reporting such information. If, on any such date, the Common Stock is not listed or admitted to trading on any national securities exchange and is not quoted on the Nasdaq SmallCap Market or any similar organization, the fair value of a share of Common Stock on such date, as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error, shall be used. (c) All calculations under this Section 5 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (d) In any case in which this Section 5 shall require that an adjustment in the number of Warrant Shares be made effective as of a record date for a specified event, the Company may elect to defer, until the occurrence of such event, issuing to the Holder, if the Holder exercised this Warrant after such record date, the Warrant Shares, if any, issuable upon such exercise over and above the number of Warrant Shares issuable upon such exercise upon such exercise on the basis - 6 - of the number of shares of Common Stock included such Units in effect prior to such adjustment; provided, however, that the Company shall deliver to the Holder a due bill or other appropriate instrument evidencing the Holder's right to receive such additional shares of Common Stock upon the occurrence of the event requiring such adjustment. (e) Whenever there shall be an adjustment as provided in this Section 5, the Company shall within 15 days thereafter cause written notice thereof to be sent by registered mail, postage prepaid, to the Holder, at its address as it shall appear in the Warrant Register, which notice shall be accompanied by an officer's certificate setting forth the number of Warrant Shares issuable and the Exercise Price thereof after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the computation thereof, which officer's certificate shall be conclusive evidence of the correctness of any such adjustment absent manifest error. (f) The Company shall not be required to issue fractions of shares of Common Stock or other capital stock of the Company upon the exercise of this Warrant. If any fraction of a share of Common Stock would be issuable on the exercise of this Warrant (or specified portions thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the Current Market Price of such share of Common Stock on the date of exercise of this Warrant. (g) No adjustment in the Exercise Price per Warrant Share shall be required if such adjustment is less than $.05; provided, however, that any adjustments which by reason of this Section 5 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. Notwithstanding anything to the contrary contained herein, no adjustment to the Exercise Price or the number of shares issuable upon exercise of the Warrants shall be made as a result of or in connection with (i) the issuance of stock options pursuant to the Company's 1997 Stock Option Plan, (ii) the issuance or sale of shares of Common Stock referred to in clause (i) above or outstanding options or warrants as of the date hereof, (iii) the issuance of shares of Common Stock in connection with price guarantees with respect to prior acquisitions or joint ventures, (iv) the issuance of shares of Common Stock in connection with current employment agreements or (v) the issuance or sale of shares of Common Stock, valued no less than fair market value, in connection with acquisitions by the Company. (h) Whenever the Exercise Price payable upon exercise of this Warrant is adjusted pursuant to Subsections (a)(i), (a)(ii), (a)(iii), (a)(iv), or (a)(v) above, the number of Warrant Shares issuable upon exercise of this Warrant shall simultaneously be adjusted by multiplying the number of Warrant Shares theretofore issuable upon exercise of this Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (i) For purposes of any computation respecting consideration received pursuant to Subsections (a)(iv) and (a)(v) above, the following shall apply: - 7 - (i) in the case of the issuance of shares of Common Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts, or other expenses incurred by the Company for any underwriting of the issue or otherwise in connection therewith; (ii) in the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the board of directors of the Company (irrespective of the accounting treatment thereof), the determination of which shall be a conclusive absent manifest error; and (iii) in the case of the issuance of securities convertible into, or exchangeable for, shares of Common Stock, the aggregate consideration received therefor shall be deemed to be the consideration received by the Company for the issuance of such securities plus the additional minimum consideration, if any, to be received by the Company upon the conversion or exchange thereof (the consideration in each case to be determined in the same manner as provided in clauses (i) and (ii) of this Subsection (i)). (j) Notwithstanding anything herein to the contrary, if any adjustment under this Section 5 of the Exercise Price or the number of shares of Common Stock or other securities issuable upon exercise of this Warrant shall be determined by the National Association of Securities Dealers, Inc. (the "NASD") to violate either or both of Section (c)(6)(B)(vii)(g) or Section (c)(6)(B)(vii)(h) of Rule 2710 of the Conduct Rules of the NASD, and such determination shall not be subject to further appeal or review, the violative provisions or provisions shall be deemed to be amended to the minimum extent necessary to cause each such provision to comply with the applicable violated paragraph of Rule 2710 of the NASD Conduct Rules. 6. (a) In case of any capital reorganization, other than in the cases referred to in Section 5(a) hereof, or the consolidation or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the continuing corporation and which does not result in any reclassification of the outstanding shares of Common Stock or the conversion of such outstanding shares of Common Stock into shares of other stock or other securities or property), or in the case of any sale, lease, or conveyance to another corporation of the property and assets of any nature of the Company as an entirety or substantially as an entirety (such actions being hereinafter collectively referred to as "Reorganizations"), there shall thereafter be deliverable upon exercise of this Warrant (in lieu of the number of Warrant Shares theretofore deliverable) the number of shares of stock or other securities or property to which a holder of the respective number of Warrant Shares which would otherwise have been deliverable upon the exercise of this Warrant would have been entitled upon such Reorganization if this Warrant had been exercised in full immediately prior to such Reorganization. In case of any Reorganization, - 8 - appropriate adjustment, as determined in good faith by the board of directors of the Company, shall be made in the application of the provisions herein set forth with respect to the rights and interests of the Holder so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares or other property thereafter deliverable upon exercise of this Warrant. Any such adjustment shall be made by, and set forth in, a supplemental agreement between the Company, or any successor thereto, and the Holder, with respect to this Warrant, and shall for all purposes hereof conclusively be deemed to be an appropriate adjustment. The Company shall not effect any such Reorganization unless, upon or prior to the consummation thereof, the successor corporation, or if the Company shall be the surviving corporation in any such Reorganization and is not the issuer of the shares of stock or other securities or property to be delivered to holders of shares of the Common Stock outstanding at the effective time thereof, then such issuer, shall assume by written instrument the obligation to deliver to the Holder such shares of stock, securities, cash, or other property as such holder shall be entitled to purchase in accordance with the foregoing provisions. In the event of sale, lease, or conveyance or other transfer of all or substantially all of the assets of the Company as part of a plan for liquidation of the Company, all rights to exercise this Warrant shall terminate 30 days after the Company gives written notice to the Holder and each registered holder of a Warrant that such sale or conveyance or other transfer has been consummated. (b) In case of any reclassification or change of the shares of Common Stock issuable upon exercise of this Warrant (other than a change in par value or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), or in case of any consolidation or merger of another corporation into the Company in which the Company is the continuing corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), the Holder or holders of this Warrant shall have the right thereafter to receive upon exercise of this Warrant solely the kind and amount of shares of stock and other securities, property, cash, or any combination thereof receivable upon such reclassification, change, consolidation, or merger by a holder of the number of Warrant Shares for which this Warrant might have been exercised immediately prior to such reclassification, change, consolidation, or merger. Thereafter, appropriate provision shall be made for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 5. (c) The above provisions of this Section 6 shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales, leases, or conveyances. 7. In case at any time the Company shall propose: (a) to pay any dividend or make any distribution on shares of Common Stock in shares of Common Stock or make any other distribution (other than regularly scheduled cash - 9 - dividends which are not in a greater amount per share than the most recent such cash dividend) to all holders of Common Stock; or (b) to issue any rights, warrants, or other securities to all holders of Common Stock entitling them to purchase any additional shares of Common Stock or any other rights, warrants, or other securities; or (c) to effect any reclassification or change of outstanding shares of Common Stock or any consolidation, merger, sale, lease, or conveyance of property, as described in Section 6; or (d) to effect any liquidation, dissolution, or winding-up of the Company; or (e) to take any other action which would cause an adjustment to the Exercise Price per Warrant Share; then, and in any one or more of such cases, the Company shall give written notice thereof by registered mail, postage prepaid, to the Holder at the Holder's address as it shall appear in the Warrant Register, mailed at least 15 days prior to (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividend, distribution, rights, warrants, or other securities are to be determined, (ii) the date on which any such reclassification, change of outstanding shares of Common Stock, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up is expected to become effective and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, change of outstanding shares, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up, or (iii) the date of such action which would require an adjustment to the Exercise Price per Warrant Share. 8. The issuance of any shares or other securities upon the exercise of this Warrant and the delivery of certificates or other instruments representing such shares or other securities shall be made without charge to the Holder for any tax or other charge in respect of such issuance. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 9. (a) If, at any time for the period starting at the beginning of the second year and concluding at the end of the seven-year commencing on the Effective Date, the Company shall file a registration statement (other than on Form S-4, Form S-8 or any successor form) with the Securities and Exchange Commission (the "Commission") while any Registrable Securities (as hereinafter defined) are outstanding, the Company shall give all the then holders of - 10 - any Registrable Securities (the "Eligible Holders") at least 45 days prior written notice of the filing of such registration statement. If requested by any Eligible Holder in writing within 30 days after receipt of any such notice, the Company shall, at the Company's sole expense (other than the fees and disbursements of counsel for the Eligible Holders and the underwriting discounts, if any, payable in respect of the Registrable Securities sold by any Eligible Holder), register or qualify all or, at each Eligible Holder's option, any portion of the Registrable Securities of any Eligible Holders who shall have made such request, concurrently with the registration of such other securities, all to the extent requisite to permit the public offering and sale of the Registrable Securities through the facilities of all appropriate securities exchanges and the over-the-counter market, and will use its best efforts through its officers, directors, auditors, and counsel to cause such registration statement to become effective as promptly as practicable. Notwithstanding the foregoing, if the managing underwriter of any such offering shall advise the Company in writing that, in its opinion, the distribution of all or a portion of the Registrable Securities requested to be included in the registration concurrently with the securities being registered by the Company would materially adversely affect the distribution of such securities by the Company for its own account, then any Eligible Holder who shall have requested registration of his, her, or its Registrable Securities shall delay the offering and sale of such Registrable Securities (or the portions thereof so designated by such managing underwriter) for such period, not to exceed 180 days (the "Delay Period"), as the managing underwriter shall request, provided that no such delay shall be required as to any Registrable Securities if any securities of the Company are included in such registration statement and eligible for sale during the Delay Period for the account of any person other than the Company and any Eligible Holder unless the securities included in such registration statement and eligible for sale during the Delay Period for such other person shall have been reduced pro rata to the reduction of the Registrable Securities which were requested to be included and eligible for sale during the Delay Period in such registration. As used herein, "Registrable Securities" shall mean the Warrants and the Warrant Shares which, in each case, have not been previously sold pursuant to a registration statement or Rule 144 promulgated under the Act. (b) If, on any one occasion during the four-year period commencing one year from the Effective Date, the Company shall receive a written request from Eligible Holders who in the aggregate own (or upon exercise of all Warrants or Warrants then outstanding would own) a majority of the total number of shares of Common Stock then included (or upon such exercises would be included) in the Registrable Securities (the "Majority Holders"), to register the sale of all or part of such Registrable Securities, the Company shall, as promptly as practicable, prepare and file with the Commission a registration statement sufficient to permit the public offering and sale of the Registrable Securities through the facilities of all appropriate securities exchanges and the over-the-counter market, and will use its best efforts through its officers, directors, auditors, and counsel to cause such registration statement to become effective as promptly as practicable; provided, that the Company shall only be obligated to file one such registration statement pursuant to this Section 9(b) for which all expenses incurred in connection with such registration (other than the fees and disbursements of counsel for the Eligible Holders and underwriting discounts, if any, payable in respect of the Registrable Securities sold by the Eligible Holders) shall be borne by the Company. Within five business days after receiving any request contemplated by this Section - 11 - 9(b), the Company shall give written notice to all the other Eligible Holders, advising each of them that the Company is proceeding with such registration and offering to include therein all or any portion of any such other Eligible Holder's Registrable Securities, provided that the Company receives a written request to do so from such Eligible Holder within 30 days after receipt by him, her, or it of the Company's notice. (c) In the event of a registration pursuant to the provisions of this Section 9, the Company shall use its best efforts to cause the Registrable Securities so registered to be registered or qualified for sale under the securities or blue sky laws of such jurisdictions as the Holder or such holders may reasonably request; provided, however, that the Company shall not be required by reason of this Section 9(c) to register or qualify the Registrable Securities in any jurisdiction where, as a result thereof, the Company would be subject to service of general process or to taxation as a foreign corporation doing business in such jurisdiction to which the Company is not then subject. (d) The Company shall keep effective any registration or qualification contemplated by Section 9 (a) for a period of 12 months and any registration statement or qualification contemplated by Section 9(b) for a period of nine months, or in either case, such shorter period as such securities may be sold in the open market pursuant to Rule 144 promulgated under the Act and shall from time to time amend or supplement each applicable registration statement, preliminary prospectus, final prospectus, application, document, and communication for such period of time as shall be required to permit the Eligible Holders to complete the offer and sale of the Registrable Securities covered thereby. The Company shall in no event be required to keep any such registration or qualification in effect for a period in excess of nine months from the date on which the Eligible Holders are first free to sell such Registrable Securities; provided, however, that, if the Company is required to keep any such registration or qualification in effect with respect to securities other than the Registrable Securities beyond such period, the Company shall keep such registration or qualification in effect as it relates to the Registrable Securities for so long as such registration or qualification remains or is required to remain in effect in respect of such other securities. (e) In the event of a registration pursuant to the provisions of this Section 9, the Company shall furnish to each Eligible Holder such number of copies of the registration statement and of each amendment and supplement thereto (in each case, including all exhibits), such reasonable number of copies of each prospectus contained in such registration statement and each supplement or amendment thereto (including each preliminary prospectus), all of which shall conform to the requirements of the Act and the rules and regulations thereunder, and such other documents, as any Eligible Holder may reasonably request to facilitate the disposition of the Registrable Securities included in such registration. (f) In the event of a registration pursuant to the provisions of this Section 9, the Company shall furnish each Eligible Holder of any Registrable Securities so registered with an opinion of its counsel (reasonably acceptable to the Eligible Holders) to the effect that (i) the registration statement has become effective under the Act and no order suspending the effectiveness - 12 - of the registration statement, or preventing or suspending the use of the registration statement, any preliminary prospectus, any final prospectus or any amendment or supplement thereto, has been issued, nor has the Commission or any securities or blue sky authority of any jurisdiction instituted or threatened to institute any proceedings with respect to such an order, (ii) the registration statement and each prospectus forming a part thereof (including each preliminary prospectus), and any amendment or supplement thereto, complies as to form with the Act and the rules and regulations thereunder, and (iii) such counsel has no knowledge of any material misstatement or omission in such registration statement or any prospectus, as amended or supplemented. Such opinion shall also state the jurisdictions in which the Registrable Securities have been registered or qualified for sale pursuant to the provisions of Section 9(c). (g) In the event of a registration pursuant to the provision of this Section 9, the Company shall enter into a cross-indemnity agreement and a contribution agreement, each in customary form, with each underwriter, if any, and, if requested, enter into an underwriting agreement containing conventional representations, warranties, allocation of expenses, and customary closing conditions, including, without limitation, opinions of counsel and accountants' cold comfort letters, with any underwriter who acquires any Registrable Securities. (h) The Company agrees that until all the Registrable Securities have been sold under a registration statement or pursuant to Rule 144 under the Act, it shall keep current in filing all reports, statements, and other materials required to be filed with the Commission to permit holders of the Registrable Securities to sell such securities under Rule 144 under the Act. (i) The Company's obligation to register the Warrant Shares of any Eligible Holder shall be conditioned on its receiving such information as it shall reasonably request from such Eligible Holder for use in the registration statement. - 13 - 10. (a) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Eligible Holder, its officers, directors, partners, employees, agents, and counsel, and each person, if any, who controls any such person within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all loss, liability, charge, claim, damage, and expense whatsoever (which shall include, for all purposes of this Section 10, without limitation, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), as and when incurred, arising out of, based upon, or in connection with, (i) any untrue statement or alleged untrue statement of a material fact contained in (A) any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, relating to the offer and sale of any of the Registrable Securities, or (B) any application or other document or communication (in this Section 10, referred to collectively as an "application") executed by, or on behalf of, the Company or based upon written information furnished by, or on behalf of, the Company filed in any jurisdiction in order to register or qualify any of the Registrable Securities under the securities or "blue sky" laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company with respect to such Eligible Holder by, or on behalf of, such person expressly for inclusion in any registration statement, preliminary prospectus or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be, or (ii) any breach of any representation, warranty, covenant, or agreement of the Company contained in this Warrant. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Warrant. If any action is brought against any Eligible Holder or any of its officers, directors, partners, employees, agents, or counsel, or any controlling persons of such person (an "indemnified party") in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify the Company in writing of the institution of such action (but the failure so to notify shall not relieve the Company from any liability other than pursuant to this Section 10(a)) and the Company shall promptly assume the defense of such action, including, without limitation, the employment of counsel reasonably satisfactory to such indemnified party or parties) and payment of expenses. Such indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the - 14 - employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action or the named parties to such action include both the indemnified and the indemnifying parties and such indemnified party or parties shall have reasonably concluded that there may be one or more legal defenses available to it or them or to other indemnified parties which are different from, or in addition to, those available to the Company, in any of which events such fees and expenses shall be borne by the Company and the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties. Anything in this Section 10 to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent, which consent shall not be unreasonably withheld. The Company shall not, without the prior written consent of each indemnified party that is not released as described in this sentence, settle or compromise any action, or permit a default or consent to the entry of judgment in, or otherwise seek to terminate, any pending or threatened action, in respect of which indemnity may be sought hereunder (whether or not any indemnified party is a party thereto), unless such settlement, compromise, consent, or termination includes an unconditional release of each indemnified party from all liability in respect of such action. The Company agrees promptly to notify the Eligible Holders of the commencement of any litigation or proceedings against the Company or any of its officers or directors in connection with the sale of any Registrable Securities or any preliminary prospectus, prospectus, registration statement, or amendment or supplement thereto, or any application relating to any sale of any Registrable Securities. (b) Each Eligible Holder severally agrees to indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed any registration statement covering Registrable Securities held by such Eligible Holder, each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, and its or their respective counsel, to the same extent as the foregoing indemnity from the Company to the Eligible Holders in Section 10(a), but only with respect to statements or omissions, if any, made in any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon, and in conformity with, written information furnished to the Company with respect to any Eligible Holder by, or on behalf of, such Eligible Holder expressly for inclusion in any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be. If any action shall be brought against the Company or any other person so indemnified based on any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or any application, and in respect of which indemnity may be sought against any Eligible Holder pursuant to this Section 10(b), such Eligible Holder shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of Section 10(a). - 15 - (c) To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 10(a) or 10(b) (subject to the limitations thereof), but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act, or otherwise, then the Company (including for this purpose any contribution made by, or on behalf of, any director of the Company, any officer of the Company who signed any such registration statement, any controlling person of the Company, and its or their respective counsel), as one entity, and the Eligible Holders of the Registrable Securities included in such registration in the aggregate (including for this purpose any contribution by, or on behalf of, an indemnified party), as a second entity, shall contribute to the losses, liabilities, claims, damages, and expenses whatsoever to which any of them may be subject, on the basis of relevant equitable considerations such as the relative fault of the Company and such Eligible Holders in connection with the facts which resulted in such losses, liabilities, claims, damages, and expenses. The relative fault, in the case of an untrue statement, alleged untrue statement, omission, or alleged omission, shall be determined by, among other things, whether such statement, alleged statement, omission, or alleged omission relates to information supplied by the Company or by such Eligible Holders, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement, alleged statement, omission, or alleged omission. The Company and the Eligible Holders agree that it would be unjust and inequitable if the respective obligations of the Company and the Eligible Holders for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages, and expenses (even if the Eligible Holders and the other indemnified parties were treated as one entity for such purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 10(c). In no case shall any Eligible Holder be responsible for a portion of the contribution obligation imposed on all Eligible Holders in excess of its pro rata share based on the number of shares of Common Stock owned (or which would be owned upon exercise of all Registrable Securities) by it and included in such registration as compared to the number of shares of Common Stock owned (or which would be owned upon exercise of all Registrable Securities) by all Eligible Holders and included in such registration. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 10(c), each person, if any, who controls any Eligible Holder within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee, agent, and counsel of each such Eligible Holder or control person shall have the same rights to contribution as such Eligible Holder or control person and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed any such registration statement, each director of the Company, and its or their respective counsel shall have the same rights to contribution as the Company, subject in each case to the provisions of this Section 10(c). Anything in this Section 10(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 10(c) is intended to supersede any right to contribution under the Act, the Exchange Act, or otherwise. - 16 - (d) Notwithstanding the foregoing, in no event shall the indemnification agreement contained in this Section 10 inure to the benefit of any Eligible Holder (or to the benefit of any person controlling such Eligible Holder) on account of any losses, claims, damages, liabilities or actions arising from the sale of the Registrable Securities to any person by such Eligible Holder if such losses, claims, damages, liabilities or actions arise out of, or are based upon, a statement or omission or alleged omission in a preliminary prospectus relating to the offer and sale of any of the Registrable Securities and if, in respect to such statement, omission or alleged omission, the final prospectus differs in a material respect from such preliminary prospectus and a copy of the final prospectus has not been sent or given to such person at or prior to the confirmation of such sale such person; provided, however, that (i) sufficient quantities of such final prospectus have been delivered to the Eligible Holder to deliver to such persons having had received a preliminary prospectus and (ii) the Company has (A) advised in writing the Eligible Holder that such final prospectus materially differs from such preliminary prospectus and (B) instructed in writing the Eligible Holder to deliver the final prospectus to such purchasers. 11. Unless registered pursuant to the provisions of Section 9 hereof, the Warrant Shares issued on exercise of the Warrants shall be subject to a stop transfer order and the certificate or certificates representing the Warrant Shares shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. HOWEVER, SUCH SECURITIES MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (I) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION STATEMENT, (II) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (III) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT." 12. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant (and upon surrender of any Warrant if mutilated), and upon receipt by the Company of reasonably satisfactory indemnification, the Company shall execute and deliver to the Holder thereof a new Warrant of like date, tenor, and denomination. 13. The Holder of any Warrant shall not have, solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Warrant. - 17 - 14. This Warrant shall be construed in accordance with the laws of the State of New York applicable to contracts made and performed within such State, without regard to principles of conflicts of law. 15. The Company irrevocably consents to the jurisdiction of the courts of the State of New York and of any federal court located in such State in connection with any action or proceeding arising out of, or relating to, this Warrant, any document or instrument delivered pursuant to, in connection with, or simultaneously with, this Warrant, or a breach of this Warrant or any such document or instrument. In any such action or proceeding, the Company waives personal service of any summons, complaint, or other process and agrees that service thereof may be made in accordance with Section 12 of the Underwriting Agreement. Within 30 days after such service, or such other time as may be mutually agreed upon in writing by the attorneys for the parties to such action or proceeding, the Company shall appear to answer such summons, complaint, or other process. Should the Company so served fail to appear or answer within such 30-day period or such extended period, as the case may be, the Company shall be deemed in default and judgment may be entered against the Company for the amount as demanded in any summons, complaint, or other process so served. 16. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing and, if sent to any Eligible Holder, shall be mailed, delivered, or telexed or telegraphed and confirmed by letter, to such Eligible Holder, c/o Hampshire Securities Corporation, 640 Fifth Avenue, New York, New York 10019, Attention: Mr. Richard Abbe, with a copy to Morrison Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, New York, New York 10022, Attention: Robert H. Cohen, Esq.; or if sent to the Company shall be mailed, delivered, or telexed or telegraphed and confirmed by letter, to the Company, Response USA, Inc., 11-H Princess Road, Lawrenceville, New Jersey 08648, Attention: Richard M. Brooks, Chief Executive Officer and President, with a copy to Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551 Fifth Avenue, New York, New York 10176, Attention: Kenneth R. Koch, Esq. All notices hereunder shall be effective upon receipt by the party to which it is addressed. Dated: January __, 1998 RESPONSE USA, INC. By: ------------------------------- Name: Title: [Seal] - ------------------------- Secretary - 18 - FORM OF ASSIGNMENT To be executed by the registered holder if such holder desires to transfer the attached Warrant.) FOR VALUE RECEIVED, ______________________ hereby sells, assigns, and transfers unto _________________ a Warrant to purchase __________ shares of Common Stock, $.008 par value, of Response USA, Inc., a Delaware corporation (the "Company"), and does hereby irrevocably constitute and appoint ___________ attorney to transfer such Warrant on the books of the Company, with full power of substitution. Dated: ------------------ ------------------------------ Signature NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever. - 19 - ELECTION TO EXERCISE To: Response USA, Inc. 11-H Princess Road Lawrenceville, New Jersey 08648 The undersigned hereby exercises his, her, or its rights to purchase shares of Common Stock, $.008 par value ("the Common Stock"), of Response USA, Inc., a Delaware corporation (the "Company"), covered by the within Warrant and tenders payment herewith in the amount of $________ in accordance with the terms thereof, and requests that certificates for the securities constituting such shares of Common Stock be issued in the name of, and delivered to: ___________________________________________ ___________________________________________ ___________________________________________ ___________________________________________ (Print Name, Address, and Social Security or Tax Identification Number) and, if such number of shares of Common Stock shall not constitute all such shares of Common Stock covered by the within Warrant, that a new Warrant for the balance of the shares of Common Stock covered by the within Warrant shall be registered in the name of, and delivered to, the undersigned at the address stated below. Dated: Name ------------------ ------------------------------- (Print) Address: --------------------------------- (Signature) - 20 - EX-5 5 OPINION OF SQUADRON, ELLENOFF, PLESENT EXHIBIT 5.1 [Squadron, Ellenoff, Plesent & Sheinfeld, LLP Letterhead] December __, 1997 Response USA, Inc. 11-H Princess Road Lawrenceville, New Jersey 08648 Re: Registration Statement on Form SB-2 (Registration No. 333-37593) ---------------------------------------------------------------- Ladies and Gentlemen: You have requested our opinion, as counsel for Response USA, Inc., a Delaware corporation (the "Company"), in connection with the registration statement on Form SB-2 (No. 333-37593) (the "Registration Statement"), filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"). The Registration Statement relates to the offering by the Company of 2,400,000 shares of common stock, par value $.008 per share, of the Company (the "Common Stock"), up to 360,000 shares of Common Stock to be issued solely to cover over-allotments, 240,000 warrants to be issued to the underwriter (the "Warrants") and 240,000 shares of Common Stock issuable upon exercise of the Warrants (collectively, the "Shares"). We have examined such records and documents and made such examinations of law as we have deemed relevant in connection with this opinion. Based upon such examinations, it is our opinion that when there has been compliance with the Act and the applicable state securities laws, the Shares to be sold by the Company, when issued, delivered, and paid for in the manner described in the form of Underwriting Agreement filed as Exhibit 1 to the Registration Statement, will be validly issued, and the Shares, when so issued, delivered and paid for will also be fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Registration Statement. In so doing, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, /s/ Squadron, Ellenoff, Plesent & Sheinfeld, LLP EX-10.(K) 6 AGREEMENT DATED JUNE 18, 1997 Exhibit 10(k) AGREEMENT THIS AGREEMENT (the "Agreement") effective as of June 18, 1997, by and among Response USA, Inc., a Delaware corporation (the "Company") and each of the undersigned holders (the "Holders") of the Company's 1996-Series A Convertible Preferred Stock (the "Preferred Stock"). The Company and each of the Holders are hereinafter collectively referred to as the "Parties." BACKGROUND The Company and each of the Holders have agreed in principle to the terms set forth herein in connection with the amendment to the Certificate of Designations, Preferences and Rights: 1996-Series A Convertible Preferred Stock ("Certificate of Designations"), which provides for the redemption of the Preferred Stock, as well as certain other revisions to the terms of conversion (the "Amendment"), as set forth in the Consent and Proxy Solicitation Statement delivered simultaneously herewith in the form attached hereto as Exhibit A (the "Solicitation Statement") and the forms of proxy and consent attached hereto as Exhibits B and C, respectively. To effectuate the Amendment, and in consideration of the premises hereof and the agreements set forth below, the Parties hereto, intending to be legally bound, hereby agree as follows: 1. ISSUANCE OF WARRANTS, FORBEARANCE OF CONVERSION AND OTHER CONSIDERATION. (a) Subject to the terms and conditions herein, the Company agrees to issue and sell to each Holder, and each Holder agrees to purchase, as of the date first set forth above, 5000 warrants, each warrant exercisable to purchase one share of the Company's common stock, .008 par value per share (the "Common Stock"), pursuant to the terms set forth in the form of warrant attached hereto as Exhibit D (the "Warrants"), for each 100 shares of Preferred Stock held by such Holder as of June 18, 1997 (except for Halifax Fund, L.P.). (b) In consideration of the issuance of the Warrants, and subject to the terms and conditions set forth herein, each Holder hereby agrees (a) to give its proxy and its consent in favor of the Amendment in the forms of Exhibit B and Exhibit C respectively, attached hereto, and (b) to refrain from any and all conversions of such Holder's Preferred Stock, pursuant to the terms of the Certificate of Designations, until the earlier of November 30, 1997 or upon the occurrence of a First Conversion Date (as defined below) following the Company's failure to perform any one of the certain obligations ("Company Obligation(s)") on or before the dates ("Trigger Dates") set forth on Exhibit E to this Agreement and incorporated by reference herein; provided however, that the Company's failure to satisfy a Company Obligation on or before any Trigger Date pursuant to the terms of Exhibit E shall not result in an activation of a Holder's right to convert its Preferred Stock if on or before ten (10) days following such Trigger Date ("Cure Period") the Company complies with the Company Obligation. If the Company fails to comply with the Company Obligation by the Trigger Date and during the Cure Period, the Holders' right to convert its Preferred Stock shall be activated if and only if a majority of the Holders as of such Trigger Date have collectively provided the Company with written notice in accordance with the notice provisions set forth in Section 10(b) herein, describing the Company's noncompliance with the Company Obligation and the activation of the Holders' conversion rights (the date such notice is received by the Company is the "First Conversion Date"). Notwithstanding the foregoing, in the event that the Company satisfies a Company Obligation after the Cure Period but prior to the Holders giving notice as provided above, hereof, the Company's failure to comply with a Company Obligation shall not result in a First Conversion Date. (c) In the event of a First Conversion Date, the Company shall thereafter and until such time as the Amendment shall have been effected in accordance with the requirements of the Delaware General Corporate Law, issue to a Holder upon each conversion of Preferred Stock by such Holder (in addition to the number of shares of Common Stock to which such Holder is entitled pursuant to the Certificate of Designations (the "Conversion Shares")) such number of additional shares of Common Stock (the "Trigger Date Shares") so that the sum of the number of Trigger Date Shares plus the number of Conversion Shares issuable with respect to such conversion equals the number of Conversion Shares which would have been issuable upon conversion of such Preferred Stock had the Amendment been effective for such conversion. The Company and each of the Holders agree that the Trigger Date Shares shall constitute Registrable Securities under that certain Registration Rights Agreement executed by the Company and the Holders in connection with the initial issuance of the Preferred Stock (the "Original Registration Rights Agreement"). 2. DELIVERIES. 2.1 DELIVERIES BY THE COMPANY. The Company shall deliver to each Holder or the Lead Legal Representative (as defined in Section 10(b) hereof) the following documents within one (1) day of receipt by the Company of this Agreement, fully and properly executed by all Holders (the "Closing"): (a) a Registration Rights Agreement in the form attached as Exhibit F executed by the Company; (b) an Escrow Agreement in the form attached hereto as Exhibit G executed by the Company and the escrow agent; (c) such number of Warrants in the form attached hereto as Exhibit D to which such Holder is entitled as provided herein, executed by the Company; and (d) an opinion of the Company's legal counsel, Schneck, Weltman & Hashmall LLP, in the form of Exhibit H hereto. -2- 2.2 DELIVERIES BY THE HOLDERS AT CLOSING. Each Holder shall deliver to the Company the following at Closing: (a) a Registration Rights Agreement in the form attached hereto as Exhibit F executed by each Holder; and (b) an executed Escrow Agreement in the form attached hereto as Exhibit G executed by each Holder. 2.3 SUBSEQUENT DELIVERIES BY HOLDERS. Within ten (10) days from Closing, and after receipt of the Solicitation Statement, each Holder shall deliver to the Company an executed proxy and consent (in the forms attached hereto as Exhibits B and C, respectively,) in favor of the Amendment. 3. WARRANTS. Prior to the exercise of the Warrants by each Holder, such Holder shall not be entitled to voting rights or other rights provided by law to stockholders of the Company. 3.1 RESTRICTED SECURITIES. The Warrants and the shares of Common Stock issuable upon exercise of the Warrants (the "Exercise Shares") constitute "Restricted Securities," as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the "Act"), and accordingly, may not be offered for sale or sold, or otherwise transferred in any transaction which would constitute a sale thereof within the meaning of the Act, unless (i) such security has been registered for sale under the Act and registered or qualified under applicable state securities laws relating to the offer and sale of securities, or (ii) exemptions from the registration requirements of the Act and the registration or qualification requirements of all such state securities laws are available and the Company shall have received an opinion from counsel reasonably satisfactory to the Company, in form, scope and substance customary for legal opinions covering such matters, that the proposed sale or other disposition of such securities may be effected without registration under the Act and would not result in any violation of any applicable state securities laws relating to the registration or qualification of securities for sale, such counsel and such opinion to be satisfactory to counsel to the Company; or (iii) such security may be disposed of by the Holder thereof pursuant to Rule 144 of the Act. 3.2 REGISTRATION RIGHTS. Each Holder shall have certain registration rights with regard to the Exercise Shares as set forth in the Registration Rights Agreement by and among the Parties attached hereto and made a part hereof as Exhibit F. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each of the Holders as follows: 4.1 ORGANIZATION AND STANDING OF THE COMPANY. The Company and each of its subsidiaries is a duly organized and validly existing corporation in good standing under the laws of the state of its incorporation with the power and authority to conduct the business in which it is now engaged, and is in good standing in and qualified to do business in such other states or jurisdictions as is necessary to enable it to carry on its business, except where failure to so qualify would not have a material adverse effect on the operations, properties, financial condition -3- or prospects of the Company or on the transactions contemplated hereby (a "Material Adverse Effect"). 4.2 CAPITALIZATION. The capitalization of the Company as of the date hereof, including the authorized capital stock, the number of shares issued and outstanding, the number of shares reserved for issuance pursuant to the Company's stock option plans, the number of shares reserved for issuance pursuant to securities (other than the Preferred Stock and Warrants) exercisable for, or convertible into or exchangeable for any shares of Common Stock and the number of shares reserved for issuance upon conversion of the Preferred Stock and exercise of the Warrants, is set forth on Schedule 4.2 and in the Solicitation Statement. All of such outstanding shares of capital stock have been, or upon issuance will be, validly issued, fully paid and nonassessable. No shares of capital stock of the Company (including the Preferred Stock, the Exercise Shares or the shares issuable upon conversion of the Preferred Stock) are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances. Except as disclosed in Schedule 4.2, the Solicitation Statement or as contemplated herein, as of the date of this Agreement, (i) there are no outstanding options, warrants, script, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any of its subsidiaries, or arrangements by which the Company or any of its subsidiaries, or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries, and (ii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of its or their securities under the Securities Act (except the Registration Rights Agreement and the Halifax Registration Rights Agreement). The Company has previously furnished to each Purchaser true and correct copies of the Company's Certificate of Incorporation as in effect on the date hereof ("Certificate of Incorporation"), the Company's By-laws as in effect on the date hereof (the "By-laws"), and all other instruments and agreements governing securities convertible into or exercisable or exchangeable for Common Stock of the Company. 4.3 CORPORATE POWER AND AUTHORITY. Except as set forth in the Solicitation Statement, the execution and delivery of this Agreement, the Registration Rights Agreement, the Warrant and the Escrow Agreement and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of the Company. No other corporate act or proceeding on the part of the Company is necessary to authorize this Agreement, the Registration Rights Agreement, the Warrants or the Escrow Agreement or the consummation of the transactions contemplated hereby and thereby, and when duly executed and delivered by the Parties hereto, this Agreement, the Registration Rights Agreement, the Warrants and the Escrow Agreement will constitute valid and legally binding obligations of the Company enforceable against it in accordance with their terms. 4.4 WARRANTS. Each of the Warrants, when issued, sold and delivered in accordance with the terms of this Agreement, will be duly and validly issued. Subject to the authorization of additional shares of Common Stock, the Common Stock issuable upon the exercise of the Warrants and pursuant to Section 1(c) hereof has been duly and validly reserved -4- and, upon issuance, in accordance with the exercise provisions of the Warrants and payment of the exercise price, will be duly and validly issued, fully paid and nonassessable and free from all taxes, liens, claims and encumbrances and will not be subject to preemptive or other similar rights of stockholders of the Company. 4.5 APPROVALS. Except as disclosed in the Solicitation Statement, no authorization, approval or consent of any court, governmental body, regulatory agency, or stock exchange or market is required for the execution and delivery of this Agreement, the Registration Rights Agreement, the Warrants or the Escrow Agreement or the transactions contemplated hereby or thereby (including, without limitation), the issuance and exercise of the Warrants as contemplated by this Agreement and the issuance of the Company's Common Stock as contemplated by Section 1(c) hereof, other than the approval of the Common Stockholders to authorize additional shares of Common Stock. 4.6 INFORMATION PROVIDED. The information provided by or on behalf of the Company to the Holder does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 4.7 ABSENCE OF CERTAIN CHANGES. Since March 31, 1997, there has been no material adverse change and no material adverse development in the business, properties, operations, financial conditions, results of operations or prospects of the Company or any of its subsidiaries, except as disclosed in the Company's reports filed pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), filed prior to the date hereof. 4.8 ABSENCE OF LITIGATION. Except as disclosed in the Solicitation Statement, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending, or to the knowledge of the Company, threatened against or affecting the Company or any of its subsidiaries wherein an adverse ruling finding or decision would have a Material Adverse Effect on the Company or the transactions contemplated by this Agreement or any of the documents contemplated hereby or which would adversely affect the validity or enforceability of, or the authority of the Company to perform, its obligations under this Agreement or under any of such other documents. 4.9 NO CONFLICTS. The execution, delivery and performance of this Agreement, the Warrants, the Registration Rights Agreement and the Escrow Agreement by the Company, the performance by the Company of its obligations under the Certificate of Designation, and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance and reservation for issuance, as applicable, of the Preferred Shares, Warrants, Exercise Shares or shares issuable upon the conversion of the Preferred Stock) will not (i) result in a violation of the Certificate of Incorporation or By-laws; or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, or result in a violation of any law, rule, regulation, order, -5- judgment or decree (including U.S. federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Except as disclosed in the Solicitation Statement, neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation, By-laws or other organizational documents and is not in default (and no event has occurred which, with notice or lapse of time or both, would put the Company or any of its subsidiaries in default) under, nor has there occurred any event giving others (with notice or lapse of time or both) any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, except for possible defaults or rights as would not, individually or in the aggregate, have a Material Adverse Effect. The business of the Company and its subsidiaries is not being conducted, and shall not be conducted so long as a Holder owns any of the Preferred Stock, in violation of any law, ordinance or regulation of any regulation of any governmental entity, except for possible violations the sanctions for which either singly or in the aggregate would not have an Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self regulatory agency in order for it to execute, deliver or perform any of its obligations under this Agreement, the Registration Rights Agreement, the Escrow Agreement or the Warrants, or to perform its obligations under the Certificate of Designation, in each case in accordance with the terms hereof or thereof. The Company is not in violation of the listing requirements of the NASDAQ Small Cap Market ("NASDAQ") and does not reasonably anticipate that the Common Stock will be delisted by NASDAQ for the foreseeable future. 4.10 COMPLIANCE WITH LAWS. The Company is not in violation of any law where such violation would have a Material Adverse Effect on the Company. 4.11 REGISTRATION FORM. The Company is currently eligible to register the resale of its Common Stock on Registration Form S-3 under the Securities Act of 1933 (the "Act"). 4.12 SEC DOCUMENTS, FINANCIAL STATEMENTS. The Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof, and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits) incorporated by reference therein, being hereinafter referred to herein as the "SEC Documents"). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the -6- SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the financial statements of the Company included in the SEC Documents filed prior to the date hereof, the Company has no liabilities contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to March 31, 1997 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such financial statements, which liabilities and obligations referred to in clauses (i) and (ii), individually or in the aggregate, are not material to the financial condition or operating results of the Company. 4.13 HALIFAX SETTLEMENT. Halifax shall receive no more than 900,000 shares of Common Stock upon conversion of its Preferred Stock in accordance with the terms of the Halifax Settlement provided in the agreement attached to the Solicitation Statement as Exhibit A. 5. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. Each Holder represents and warrants to the Company as follows: 5.1 The Holder is purchasing the Warrants for its own account for investment only and not with a view toward the public sale or distribution thereof and not with a view to or for sale in connection with any distribution thereof. 5.2 The Holder is (i) an accredited investor as that term is defined in Rule 501 of the General Rules and Regulations under the Act by reason of Rule 501(a)(3), (ii) experienced in making investments of the kind described in this Agreement, and the related documents, (iii) able, by reason of the business and financial experience of its officers and professional advisors (who are not affiliated with or compensated in any way by the Company or any of its affiliates or selling agents), to protect its own interests in connection with the transactions described in this Agreement, and the related documents, and (iv) able to afford the entire loss of its investment in the Warrants. 5.3 Each Holder understands that the Warrants are being offered and issued to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Holder's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Holder set forth herein in order to determine the availability of such exemptions and the eligibility of the Holder to acquire the Warrants. -7- 5.4 Each Holder and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and issuance of the Warrants which have been requested by the Holder. The Holder and its advisors, if any, have been afforded the opportunity to ask questions of the Company and have received what it believes to be complete and satisfactory answers to any such inquiries. Without limiting the generality of the foregoing, the Holder has had the opportunity to obtain and to review the Company's (1) Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996, as amended, (2) Quarterly Reports on Forms 10-QSB for the fiscal quarters ended September 30, 1996, December 31, 1996 and March 31, 1997, (3) Current Report on Form 8-K, dated March 20, 1997, (4) the Solicitation Statement, (5) Registration Statement as declared effective by the SEC on September 6, 1996, in each case as filed with the SEC. The filings with the SEC described in items (1), (2), (3) and (5) are hereinafter collectively referred to as the "SEC Filings." 5.5 The Holder understands that its investment in the Warrants and the Preferred Stock involves a high degree of risk. 5.6 The Holder understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Warrants or the Preferred Stock. 5.7 This Agreement has been duly and validly authorized, executed and delivered on behalf of each of the Holders and is the valid and binding agreement of each Holder enforceable in accordance with its terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally. 6. CERTAIN COVENANTS AND ACKNOWLEDGMENTS. 6.1 By execution of this Agreement, each Holder hereby acknowledges that he or she has received the Solicitation Statement, has had adequate time and opportunity to consider the disclosure contained therein, and has reviewed such Solicitation Statement with the Lead Legal Representative. 6.2 The Warrants, the Trigger Date Shares and the Exercise Shares, have not been registered under the Act or any state securities laws and are being issued and sold in reliance upon certain of the exemptions contained in the Act. 6.3 The Warrants, the Trigger Date Shares and Exercise Shares are "restricted securities" as that term is defined in Rule 144 promulgated under the Act. 6.4 The Warrants, the Trigger Date Shares and Exercise Shares cannot be sold or transferred without registration under the Act and applicable state securities laws, or unless the Company receives from counsel reasonably satisfactory to the Company, an opinion in form, scope and substance customary for opinions in such circumstances that such registration is not necessary, or unless sold or transferred pursuant to Rule 144 under the Act. -8- 6.5 Each Holder understands and acknowledges that (i) except as provided in the Registration Rights Agreement, neither the Warrants nor the Exercise Shares have been, and neither the Warrants nor the Exercise Shares nor the Trigger Date Shares are being, registered under the Act or any state securities laws, and may not be transferred unless (a) subsequently registered thereunder, or (b) Holder shall have delivered to the Company an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the Warrants or Exercise Shares or Trigger Date Shares, as applicable, to be sold or transferred may be sold or transferred pursuant to an exemption from such registration or (c) sold pursuant to Rule 144 promulgated under the Act (or a successor rule); (ii) any sale of such securities made in reliance on Rule 144 may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Act) may require compliance with some other exemption under the Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such securities under the Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder (in each case, other than pursuant to the Registration Rights Agreement). 6.6 Holder understands that the Warrants and, until such time as the Exercise Shares and Trigger Date Shares have been registered under the Act and presented for transfer as contemplated by the Registration Rights Agreement or otherwise may be sold by Holder pursuant to Rule 144, the certificates for the Exercise Shares and Trigger Date Shares may bear a restrictive legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. The legend set forth above shall be removed, and the Company shall issue a certificate without such legend to the holder of any security upon which it is stamped, if, unless otherwise required by state securities laws, (a) the Security is registered for resale under the Act and is presented for transfer, or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Security may be made without registration under the Act or (c) such holder provides the Company with reasonable assurances that such security can be sold pursuant to Rule 144. -9- 6.7 The Company undertakes and agrees to make all necessary filings in connection with the sale of the Preferred Stock as required by United States laws and regulations, or by any domestic securities exchange or market, and to provide a copy thereof to the Holder promptly after such filing. 6.8 The Company shall promptly secure the listing of the Trigger Date Shares and Exercise Shares upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing. The Company will take all action necessary to continue the listing and trading of its Common Stock on the NASDAQ, will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. 6.9 The Company shall file its Registration Statement on Form S-3 or other appropriate form, with respect to the registration for resale of all of the Exercise Shares and Trigger Date Shares, and at least 150% of the shares of Common Stock issuable upon conversion of the Preferred Stock on or before the close of business on August 21, 1997. Such Registration Statement shall indicate the new terms of the Preferred Stock as contemplated by the Amended and Restated Certificate of Designations and shall state that such Registration Statement covers pursuant to Rule 416 under the Act such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of the Preferred Stock, exercise of Warrants and under this Agreement (i) to prevent dilution resulting from stock splits, stock dividends or similar transactions or (ii) by reason of changes in the conversion price of the Preferred Stock or exercise price of the Warrants in accordance with the terms thereof. In the event that the Company fails to file such Registration Statement by the close of business on August 21, 1997, the Holder shall be entitled to exercise its conversion rights as set forth in the Certificate of Designations. 6.10 Subject to the approval of the Company's stockholders at the joint meeting of Common Stock holders and Holders scheduled for September 17, 1997, the Company shall at all times thereafter have authorized, and reserved for issuance, a sufficient number of shares of Common Stock to provide for the full exercise of the outstanding Warrants and the issuance of the Exercise Shares in connection therewith, and the issuance of the Trigger Date Shares hereunder. The Company shall not reduce the number of shares of Common Stock reserved for issuance upon exercise of the Warrants without the consent of the Holder, which consent shall not be unreasonable withheld. 6.11 The Company agrees that in the event that the Company settles or reaches agreement with Halifax Fund L.P. ("Halifax") on terms substantively more favorable than those attached as Exhibit A to the Solicitation Statement, and on terms more favorable than those set forth herein and in the Amendment, such Holder shall have the right to receive, in lieu of the rights set forth herein, the substantively more favorable terms provided to Halifax. In the event a Holder elects to receive such terms, such Holder agrees to return the Warrants granted hereunder (or the Exercise Shares) to the Company. Notwithstanding the foregoing, each Holder hereby -10- acknowledges that the terms of the settlement executed, by and between the Company and Halifax as attached to the Solicitation Statement as Exhibit A, are not deemed, for purposes of this Section 6.11, to be substantively more favorable than the terms provided to the Holders herein and in the Amendment. 6.12 The Company shall (i) on or before July 10, 1997, file with the SEC a preliminary proxy statement for a meeting of its Common Stock holders scheduled for September 17, 1997, soliciting the approval of the holders of its Common Stock of the Amendment and an increase in the Company's authorized Common Stock to at least 37,500,000 shares (collectively, the "Proposals") and (ii) hold a meeting of its stockholders no later than September 17, 1997 and use its reasonable best efforts to obtain at such meeting such approvals of the Company's stockholders as may be required to approve the Proposals. The Company shall comply with the filing and disclosure requirements of Section 14 promulgated under the Exchange Act in connection with the solicitation, acquisition and disclosure of such stockholder approval. Upon approval of either or both of the Proposals, the Company shall, as soon as practicable thereafter (but in any event within two (2) business days), make such filings (and provide copies thereof to each Holder or the Lead Legal Representative) with the Secretary of State of Delaware or as may otherwise be required to effect such Proposals. Upon the completion of such filings, the Company shall cause Schneck, Weltman & Hashmall LLP to deliver an opinion to the Holders substantially in the form of Exhibit I attached hereto with respect to the Amendment. In the event the Company's stockholders fail to approve the Proposals, the Company shall continue to use its best efforts to increase the Company's authorized shares of Common Stock to enable the Company to satisfy its obligations hereunder and under the Stock Purchase Agreement dated as of July 1, 1996 and the Certificate of Designations. 7. RELEASES. 7.1 Effective upon Closing, each Holder, for himself and his heirs, executors, administrators, representatives, successors and assigns or for itself and its present and former affiliates, hereby releases, settles, cancels, acquits and discharges the Company and its respective predecessor and successor corporations, partnerships and affiliates, and its respective present and former officers, directors, employees, employers, agents, partners, attorneys, insurers, shareholders, subsidiary corporations, parent corporations, partnerships and affiliated entities, and its present and former officers, directors, employees, employers, agents, partners, attorneys, insurers, shareholders, subsidiary corporations and parent corporations (collectively, the "Company's Released Parties"), from any and all rights, actions, claims, demands, costs, debts, accounts, contracts, covenants, agreements, promises, losses, reimbursements, compensation, expenses (including without limitation attorneys' fees), allegations, liabilities, obligations, trusts, damages and causes of action, of any and every kind, nature or description whatsoever, whether known, suspected, doubted, contingent, accrued, unaccrued or unknown, whether in law or in equity (collectively "Claims"), which each such Holder had or now has or may claim to have had or now have or asserts against the Company by reason of any matter or thing whatsoever from the beginning of time up to and including the date hereof including, but not limited to: (a) the Company's alleged failure to honor the conversions of Preferred Stock prior to the date hereof; -11- (b) the Company's alleged failure to have a sufficient number of shares of Common Stock reserved for issuance upon conversion of the Preferred Stock as required by the Certificate of Designations or the Stock Purchase Agreement dated July 1, 1996 (the "Stock Purchase Agreement"); or (c) the Company's alleged failure to register all of the Registrable Securities under the Original Registration Rights Agreement as required thereunder; provided, however, that in the event that the Company shall fail to redeem all of the Preferred Stock on or before November 30, 1997 pursuant to the terms of the Amendment, this Section 7.1 shall be void and of no further effect and each Holder shall have all rights and remedies which it had prior to the execution of this release. Nothing in this Section 7.1 shall release the Company or any of the Company's Released Parties from any Claims a Holder may have under this Agreement or the exhibits annexed hereto (including the Registration Rights Agreement, the Warrants, the Escrow Agreement, the Amendment (upon filing with the Department of State of Delaware) and the Consent and Proxy Solicitation Statement). 7.2 Effective upon Closing, the Company, for itself and its present and former affiliates, successors and assigns, hereby releases, settles, cancels, acquits and discharges each Holder, and his respective heirs, executors, administrators, representatives, successors, assigns or its respective predecessor and successor corporations, partnerships and affiliates, and its respective present and former officers, directors, employees, employers, agents, partners, attorneys, insurers, shareholders, subsidiary corporations, parent corporations, partnerships and affiliated entities, and its present and former officers, directors, employees, employers, agents, partners, attorneys, insurers, shareholders, subsidiary corporations and parent corporations (collectively, the "Holder's Released Parties"), from any and all Claims, which the Company had or now has or may claim to have had or now have or asserts against any such Holder by reason of any matter or thing whatsoever from the beginning of time up to and including the date hereof including, but not limited to: (a) the Company's alleged failure to honor the conversions of Preferred Stock prior to the date hereof; (b) the Company's alleged failure to have a sufficient number of shares of Common Stock reserved for issuance upon conversion of the Preferred Stock as required by the Certificate of Designations or the Stock Purchase Agreement dated July 1, 1996 (the "Stock Purchase Agreement"); or (c) the Company's alleged failure to register all of the Registrable Securities under the Original Registration Rights Agreement as required thereunder; provided, however, that in the event that the Company shall fail to redeem all of the Preferred Stock on or before November 30, 1997 pursuant to the terms of the Amendment, this Section 7.2 shall be void and of no further effect and the Company shall have all rights and remedies which it had prior to the execution of this release. Nothing in this Section 7.2 shall release any Holder or any of the Holder's Released Parties from any Claims which the Company may have under this Agreement or the exhibits annexed hereto (including the Registration Rights Agreement, the Warrants, the Escrow Agreement, the Amendment (upon filing with the Department of State of Delaware) and the Consent and Proxy Solicitation Statement). 8. CONDITIONS TO THE COMPANY'S OBLIGATIONS. 8.1 Each Holder understands and acknowledges that the Company's obligation to issue the Warrants to the Holder pursuant to this Agreement is conditioned upon: (a) The receipt by the Company of the consent and proxy, executed by the Holder of even date herewith. (b) The accuracy on the date hereof of the representations and warranties of the Holder contained in this Agreement. (c) The absence of any law, rule or regulation, prohibiting or restricting the transactions contemplated hereby, or requiring the consent or approval which shall not have been obtained. -12- 9. LEAD LEGAL REPRESENTATIVE AND LEGAL FEES. Each Holder hereby acknowledges and authorizes Klehr, Harrison, Harvey, Branzburg & Ellers ("Klehr Harrison") as the lead legal representative in connection with the negotiation, preparation, review, delivery and performance of this Agreement and the other agreements to be executed in connection herewith (including the Registration Rights Agreement, Warrants and Escrow Agreement) and all exhibits hereto (the "Lead Legal Representative"). The Company shall be responsible for the legal fees incurred by Klehr Harrison in its role as the Lead Legal Representative, as described herein and those legal fees payable to the Lead Legal Representative hereunder shall be paid by the Company up to $10,000 within 10 days and the remainder within 30 days after the Company's receipt of each itemized bill for services rendered by the Lead Legal Representative and only for the services described herein in its role as the Lead Legal Representative. 10. NOTICES. (a) All notices, requests, consents or other communications required or permitted hereunder shall be in writing and shall be hand delivered or mailed first class postage prepaid, registered or certified mail, to the following addresses: If to the Company: RESPONSE USA, INC. 11-H Princess Road Lawrenceville, NJ 08648 Facsimile: (609) 896-3535 Attention: Richard M. Brooks, President With a copy to: JoEllen Lyons, Esquire Buchanan Ingersoll, P.C. One Oxford Centre 301 Grant Street, 20th Floor Pittsburgh, PA 15219-1410 Facsimile: (412) 562-1041 and an additional copy to: Thomas A. Rose, Esquire Schneck Weltman & Hashmall LLP 1285 Avenue of the Americas New York, NY 10019 Facsimile: (212) 956-3252 -13- If to a Holder: To each Holder at the address and facsimile number set forth in Exhibit J attached hereto and incorporated by reference herein. With a copy to: Todd Silverberg, Esquire Klehr, Harrison, Harvey, Branzburg, & Ellers 1401 Walnut Street Philadelphia, PA 19102 Facsimile: (215) 568-6603 Such notices and other communications shall for all purposes of this Agreement (except for the notice provisions set forth in Section 1(b) hereof) be treated as being effective upon being delivered personally or, if sent by mail, five days after it has been deposited in a regularly maintained receptacle for the deposit of United States Mail, addressed as set forth above, and postage prepaid, registered or certified to the address set forth above. (b) Notice of a First Conversion Date as set forth in Section 1(b) shall be effective only upon receipt by the Company as provided in Section 1(b) and shall be delivered to the Company at the address for the Company and its representatives as set forth in Section 10(a). 11. PARTIES IN INTEREST. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and permitted assigns of the parties hereto, provided that this Agreement and the interests herein may not be assigned by either party without the express written consent of the other party. 12. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts made in and to be performed in the State of Delaware, without regard to that State's conflict of laws provisions. The Parties irrevocably consent to the jurisdiction of the United States federal courts located in Delaware in any suit or proceeding based on or arising under this Agreement and irrevocably agrees that all claims in respect of such suit or proceeding may be determined in such courts. The Parties irrevocably waive the defense of an inconvenient forum to the maintenance of such suit or proceeding. The Parties further agree that service of process upon the Parties mailed by first class mail shall be deemed in every respect effective service of process upon the Parties in any suit or proceeding based on or arising under this Agreement. The Parties agree that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. 13. SECTIONS AND OTHER HEADINGS. The section and other headings contained in this Agreement are for the convenience of reference only, do not constitute part of this Agreement or otherwise affect any of the provisions hereof. -14- 14. COUNTERPART SIGNATURES. This Agreement may be signed in counterpart and all counterparts together shall become effective only when the counterpart(s) have been executed and delivered by and on behalf of the Company and each of the Holders. 15. NON ASSIGNABILITY. This Agreement is not assignable by either of the Parties hereto. 16. ENTIRE AGREEMENT. This Agreement, the Registration Rights Agreement, the Warrants and the Escrow Agreement represent the entire agreement between the Parties with respect to the subject matter hereof and supersede all prior arrangements or understandings with respect thereto. For the avoidance of doubt, the Stock Purchase Agreement and the Original Registration Rights Agreement constitute separate and distinct agreements and, except as expressly provided in Section 7 hereof, all agreements and representations contained therein shall survive the execution of this Agreement. 17. SURVIVAL. The representations and warranties of the Company and the agreements and covenants set forth herein shall survive the closings hereunder for a period of three (3) years from Closing notwithstanding any due diligence investigation conducted by or on behalf of any of the Holders. Moreover, none of the representations and warranties made by the Company herein shall act as a waiver of any rights or remedies a Holder may have under applicable federal or state securities laws. 18. FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. (INTENTIONALLY LEFT BLANK) -15- IN WITNESS WHEREOF, intending to be legally bound, the parties hereto have caused this Agreement to be signed by their duly authorized officers. RESPONSE USA, INC. By: ------------------------------ Richard M. Brooks President HOLDERS: A. J. Gesundheit By: ___________________________________ Title: ___________________________________ Deer Park Partners, L.P. By: ___________________________________ Title: ___________________________________ Leonardo, LP By: ___________________________________ Title: ___________________________________ Raphael, LP By: ___________________________________ Title: ___________________________________ AG Superfund International Partners By: ___________________________________ Title: ___________________________________ -16- GAM Arbitrage Investments Inc. By: ___________________________________ Title: ___________________________________ Capital Ventures International By: ___________________________________ Title: ___________________________________ The OTATO Limited Partnership By: ___________________________________ Title: ___________________________________ Zanett Lombardier By: ___________________________________ Title: ___________________________________ UC Financial Ltd. By: ___________________________________ Title: ___________________________________ Lake Management By: ___________________________________ Title: ___________________________________ KA Investments By: ___________________________________ Title: ___________________________________ -17- Charles B. Krusen By: ___________________________________ Title: ___________________________________ Wood Gundy London Ltd. By: ___________________________________ Title: ___________________________________ Ailouros Ltd. By: ___________________________________ Title: ___________________________________ Darissco Diversified Investments By: ___________________________________ Title: ___________________________________ -18- EXHIBIT INDEX Description Exhibit - ----------- ------- Consent and Proxy Solicitation Statement A Form of Proxy B Form of Consent C Warrant D Trigger Dates E Registration Rights Agreement F Escrow Agreement G Opinion of Schneck, Weltman & Hashmall (Section 2(d)) H Form of Opinion of Schneck, Weltman & Hashmall (Issued I upon filing of the Amendment) Addresses of Holders J EXHIBIT E TRIGGER DATES Company Obligation Trigger Date - ---------------------------------------- --------------------------------------- Filing with the Securities Exchange July 10, 1997 Commission ("SEC") of a preliminary proxy statement for the Company's joint meeting of the Common Stock Shareholders and the Holders scheduled for September 17, 1997 (the "Stockholders' Meeting"). Mailing of definitive proxy statement August 4, 1997, notwithstanding the to the Company's stockholders for the Company Obligation, in the event that Stockholders' Meeting. the SEC determines to review the preliminary proxy materials, the August 4, 1997 date shall be automatically extended after August 4, 1997 by that number of days during which the SEC conducts its review and until the SEC gives no further comment to the Company ("Review Period") plus five (5) days following the conclusion of such Review Period, if the Company is proceeding in good faith to respond to the SEC during such Review Period. The Company shall file a registration August 21, 1997 statement on Form S-3 or other appropriate form, with respect to the registration for resale of all of the Exercise Shares, the Trigger Date Shares and the shares issuable upon conversion of the Preferred Stock. Filing of the Amendment and an September 18, 1997, notwithstanding the amendment to the Company's Company Obligation, in the event that Certificate of Incorporation to the SEC determines to review the increase the Company's authorized definitive proxy statement, the Common Stock to at least 37,500,000 September 18, 1997 date shall be shares. automatically extended by that number of days after September 18, 1997 as shall constitute the Review Period plus five (5) days following the conclusion of such Review Period, if the Company is proceeding in good faith to respond to the SEC during such Review Period. Filing by the Company of a October 1, 1997 registration statement with the SEC for the primary issuance by the Company of securities to generate approximately $ 8,750,000 of net proceeds for use by the Company to redeem all of the Preferred Stock ("the Registration Statement"). In the event that the Company Such applicable date. abandons or withdraws the Registration Statement prior to the Registration Statement being declared effective for use by the Company on November 30, 1997. EXHIBIT J ADDRESSES OF HOLDERS A. J. Gesundheit Deere Park Partners, LP c/o Mr. Reuben Taub c/o Mr. Doug Gerrard Bear Stearns Deere Park Equities 245 Park Avenue 650 Dundee Road New York, NY 10167 North Brook, IL 60062 Facsimile: (212) 272-9738 Facsimile: (847) 509-8529 Leonardo, LP; Raphael, LP; AG Lake Management; KA Investments Superfund International c/o Mr. Tom Frei Partners; GAM Arbitrage Kessler Asher Group Investments, Inc. 333 West Wacker c/o Mr. Gary I. Wolf Chicago, IL 60606 Angelo, Gordon & Co. Facsimile: (312) 362-4500 245 Park Avenue New York, NY 10167 Facsimile: (212) 867-6449 Capital Ventures International Charles B. Krusen c/o Mr. Michael Spolan c/o Carlyle International Heights Capital Management 11th Floor 425 California Street 712 Fifth Avenue Suite 1100 New York, NY 10019 San Francisco, CA 94104 Facsimile:(212) 765-3843 Facsimile: (415) 403-6525 The OTATO Limited Partnership Wood Gundy London Ltd. c/o Mr. Paul Masters c/o Mr. Steve Rider OTA Limited Partnership CIBC Wood Gundy PLC 1 Manhattanville Cottons Lane, Cotton Centre Purchase, NY 10577 London, ENGLAND SE12QA Facsimile: (914) 694-5831 Facsimile: 011-44-171-234-7220 Zanett Lombardier Ailouros Ltd. c/o Mr. Claudio M. Guazzoni c/o Mr. Michael Katz Zanett Capital, Inc. c/o Isis, 767 Fifth Avenue, 23rd Floor 153 C. Fulham Road New York, NY 10153 London, ENGLAND SW3 6SN Facsimile: (212) 588-0205 Facsimile: 011-44-171-581-4851 UC Financial Ltd. Darissco Diversified Investments c/o Mr. Seymour Braun c/o Mr. David Katznelson Braun & Goldberg Place du Canada 110 East 59th Street Suite 1020 New York, NY 10022 Montreal, Quebec, Canada H3B 2N2 Facsimile: (212) 826-9315 Facsimile: (514) 878-9195 AMENDMENT TO AGREEMENT dated as of June 18, 1997 by and among Response USA, Inc. and each of the Holders of the 1996-Series A Convertible Preferred Stock The undersigned ("Undersigned") parties hereto each hereby agree as of November 30, 1997 (1) to amend that certain agreement, dated as of June 18, 1997 (the "Agreement") by and among Response USA, Inc., a Delaware corporation (the "Company") and each of the holders (the "Holders") of the Company's 1996-Series A Convertible Preferred Stock (the "Preferred Stock"), and (2) to amend the Amended and Restated Certificate of Designations, Preferences and Rights, 1996-Series A Convertible Preferred Stock (the "Certificate of Designations") (Exhibit C to the Proxy and Consent Solicitation Statement dated July 8, 1997 (the "Solicitation Statement," attached as Exhibit A to the Agreement), as follows: I. THE AGREEMENT A. SECTION 1(A) - WARRANTS 1. Section 1(a) of the Agreement is hereby amended to replace the defined term "Warrants" with the defined term "June Warrants." 2. Section 1(a) of the Agreement is hereby amended to add the following paragraph 1(a)(i): "1(a)(i). Subject to the terms and conditions herein, the Company agrees to issue and sell to each Holder, and each Holder agrees to purchase, as of the date first set forth above, an additional 7500 warrants, each warrant exercisable to purchase one share of Common Stock pursuant to the terms set forth in the form of warrant attached hereto as Exhibit D-1 (the "November Warrants" and, together with the June Warrants, the "Warrants"), for each 100 shares of Preferred Stock held by such Holder as of November 18, 1997." B. SECTION 1(B) - FORBEARANCE FROM CONVERSION AND TRIGGER DATES 1. Section 1(b) of the Agreement is hereby amended and restated in its entirety as follows: "1(b)(i). In consideration of the issuance of the Warrants, and subject to the terms and conditions set forth herein, each Holder hereby agrees (a) to give its proxy and its consent in favor of the Amendment in the forms of Exhibit B-1 and Exhibit C-1 respectively, attached hereto, and (b) to refrain from any and all conversions of such Holder's Preferred Stock, pursuant to the terms of the Certificate of Designations, until the earlier of the Redemption Date (as hereinafter defined) or upon the occurrence of a First Conversion Date (as defined below) following the Company's failure to perform any one of the certain obligations ("Company Obligations(s)") on or before the dates ("Trigger Dates") set forth on Exhibit E-1 to this Agreement and incorporated by reference herein; provided however, if the Company fails to comply with the Company Obligation by the Trigger Date, the Holders' right to convert its Preferred Stock shall be activated if and only if a majority in interest of the Holders as of such Trigger Date have collectively provided the Company with written notice in accordance with the notice provisions set forth in Section 10(b) herein, describing the Company's noncompliance with the Company Obligation and the activation of the Holders' conversion rights (the date such notice is received by the Company is the "First Conversion Date"). Notwithstanding the foregoing, in the event that the Company satisfies a Company Obligation after the Trigger Date but prior to the Holders giving notice as provided above, the Company's failure to comply with a Company Obligation shall not result in a First Conversion Date. 2. Section (1)(b) of the Agreement is hereby amended to add the following paragraph 1(b))(ii): 1(b)(ii). (x) The Company shall repurchase that number of shares of the Preferred Stock that is equivalent to an aggregate of 20% of the Preferred Stock outstanding as of December 15, 1997, fifty percent (50%) of such amount to be repurchased and paid for (an aggregate of ten percent (10%) of the outstanding on December 15, 1997) on each of December 15, 1997 (the "December Repurchase") and January 15, 1998 (the "January Repurchase," together with the December Repurchase, the "Repurchases"), from all Holders on a pro rata basis based on the number of shares of Preferred Stock held by each Holder compared to the number of shares held by all Holders as of December 15, 1997, for a per share purchase price of One Thousand Three Hundred and Fifty Dollars ($1,350) and an aggregate purchase price of One Million, Five Hundred Ninety Thousand, Three Hundred Dollars ($1,590,300 ) (the "Purchase Price"). In any event, the Company shall repurchase 589 shares of Preferred Stock in each of the December Repurchase and the January Repurchase. The Company shall use its best efforts to obtain third-party financing to be privately arranged by the Company for the purpose of funding the Repurchases. In the event the Company fails to conduct any of the Repurchases (including because of the Company's failure to obtain third party financing), such failure shall constitute a First Conversion Date. (y) On February 2, 1998, the outstanding Preferred Stock as of such date shall be redeemed in its entirety pursuant to the terms of the Certificate of Designations ("February Redemption"). 2 C. SECTIONS 7.1 AND 7.2 - DATE Sections 7.1 and 7.2 of the Agreement are each hereby amended to change each and every reference to the date "November 30, 1997" to "February 2, 1998." D. SECTIONS 6.9, 6.10, 6.11 AND 6.13- BEST EFFORTS, DATES AND COVENANT TO COMMENCE OFFERING TO GENERATE NOT LESS THAN $18,000,000 1. Section 6.9 of the Agreement is hereby amended to add the following sentence to the end of the paragraph: "In all cases, including the occurrence of a First Conversion Date, the Company shall use reasonable best efforts to obtain the effectiveness of the Registration Statement as soon as practicable." 2. Section 6.10 of the Agreement is hereby amended to change each and every reference to the "September 17, 1997" date to "January 7, 1998." 3. Section 6.12 of the Agreement is hereby amended to change each and every reference to the "September 17, 1997" date to "January 7, 1998." 4. Section 6 of the Agreement shall be amended to add the following Section 6.13 to read in its entirety as follows: "6.13. The Company shall effectuate the underwritten primary issuance of a sufficient number of its securities, pursuant to its Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on October 10, 1997 (the "Underwritten Primary Issuance"), to generate gross proceeds of $18,000,000 (less that aggregate amount which was previously paid for by the Company pursuant to a repurchase or redemption of shares of Preferred Stock by the Company), regardless of the price at which such securities are sold, subject only to the underwriter's best efforts to place the securities. The Company shall use the proceeds of the Underwritten Primary Issuance to redeem the Preferred Stock. In the event that Company complies with the Repurchases or at any time redeems or repurchases the Preferred Stock from the Holders such that no Preferred Stock is outstanding as of or prior to January 7, 1998, the Company shall thereafter immediately be under no obligation to effectuate the Underwritten Primary Issuance or to comply with the Trigger Dates related thereto as set forth on Exhibit E-1. In the event that the Company redeems or repurchases all of the Preferred Stock from the Holders after January 7, 1998, the Company shall immediately be under no further obligation to effect the Underwritten Primary Issuance or to comply with the Trigger Dates related thereto as set forth on Exhibit E-1 as of such date of redemption or repurchase." 3 E. SECTION 9 - LEAD LEGAL REPRESENTATIVE AND LEGAL FEES Section 9 of the Agreement is hereby amended and restated in its entirety as follows: "9. LEAD LEGAL REPRESENTATIVE AND LEGAL FEES. Each Holder hereby acknowledges and authorizes Klehr, Harrison, Harvey, Branzburg & Ellers ("Klehr Harrison") as the lead legal representative in connection with the negotiation, preparation, review, delivery and performance of this Agreement and the other agreements to be executed in connection herewith (including the Registration Rights Agreement, Warrants and Escrow Agreement), any and all amendments hereto and thereto and all exhibits hereto and thereto (the "Lead Legal Representative"). The Company shall be responsible for the legal fees incurred by Klehr Harrison in its role as the Lead Legal Representative, as described herein and those legal fees payable to the Lead Legal Representative hereunder shall be paid by the Company up to $10,000 within 10 days and the remainder within 30 days after the Company's receipt of each itemized bill for services rendered by the Lead Legal Representative and only for the services described herein in its role as the Lead Legal Representative." II. CERTIFICATE OF DESIGNATIONS The Certificate of Designations, is hereby restated and amended in its entirety in the form attached hereto as Exhibit A (the "Amended and Restated Certificate of Designations"). Each and every reference in the Agreement to the Certificate of Designations shall hereby be deemed to be reference to the Amended and Restated Certificate of Designations. III. BINDING OBLIGATION/EFFECTIVENESS This Amendment to Agreement shall become binding upon such Holder's execution and delivery thereof to the Company and shall become effective and binding upon all Holders upon execution and delivery to the Company by the Holders of all of the outstanding shares of the Preferred Stock. IV. DEFINED TERMS Capitalized terms used herein and not defined herein shall have the meanings ascribed to such terms in the Agreement. 4 V. GENERAL Except as hereby amended, in all other respects the Agreement is hereby restated, ratified, confirmed and all of the terms and conditions thereof are incorporated by reference herein, and each shall remain in full force and effect. [INTENTIONALLY LEFT BLANK] 5 IN WITNESS WHEREOF, the Undersigned have executed this Amendment to Agreement as of this ____ day of November, 1997. RESPONSE USA, INC. By: __________________________ Title: _________________________ HOLDERS: A. J. Gesundheit By: __________________________ Title: _________________________ Deer Park Partners, L.P. By: __________________________ Title: _________________________ Leonardo, LP By: __________________________ Title: _________________________ Raphael, LP By: __________________________ Title: _________________________ AG Superfund International Partners By: __________________________ Title: _________________________ 6 GAM Arbitrage Investments Inc. By: __________________________ Title: _________________________ Capital Ventures International By: __________________________ Title: _________________________ The OTATO Limited Partnership By: __________________________ Title: _________________________ Zanett Lombardier By: __________________________ Title: _________________________ UC Financial Ltd. By: __________________________ Title: _________________________ Lake Management By: __________________________ Title: _________________________ 7 KA Investments By: __________________________ Title: _________________________ Charles B. Krusen By: __________________________ Title: _________________________ Wood Gundy London Ltd. By: __________________________ Title: _________________________ Ailouros Ltd. By: __________________________ Title: _________________________ Darissco Diversified Investments By: __________________________ Title: _________________________ 8 EXHIBIT E-1 TO AMENDED AGREEMENT REVISED TRIGGER DATES COMPANY OBLIGATION TRIGGER DATE - --------------------------------------- --------------------------------------- Repurchase of 10% of the aggregate DECEMBER 15, 1997 number of shares of Preferred Stock outstanding as of December 15, 1997. Printing of red herring prospectus JANUARY 7, 1998, notwithstanding the relating to the Company's offering of Company Obligation, in the event that securities (the "Offering") to the Company files a response to generate approximately $18,000,000 of comments with the SEC by Tuesday, gross proceeds (less the aggregate December 2, 1997 and receives further amount which was previously paid for additional comments from the SEC with upon a repurchase or redemption) for respect to its review of the Company's use by the Company to redeem all of the Form 10-KSB, the January 7, 1998 date Preferred Stock ("the Registration shall be automatically extended after Statement"). January 7, 1998 by that number of days equal to the number of days from Tuesday, December 2, 1997 until the date on which the SEC gives no further comment to the Company ("Review Period"), if the Company is proceeding in good faith to respond to the SEC during such Review Period. Holding of the Company's joint meeting JANUARY 7, 1998, notwithstanding the of the Common Stock Shareholders and Company Obligation, in the event that the Holders (the "Stockholders' the Company files a response to Meeting"). comments with the SEC by Tuesday, December 2, 1997 and receives further additional comments from the SEC with respect to its review of the Company's Form 10-KSB, the January 7, 1998 date shall be automatically extended after January 7, 1998 by the Review Period, if the Company is proceeding in good faith to respond to the SEC during such Review Period. Filing of the Amendment and an JANUARY 7, 1998, notwithstanding the amendment to the Company's Certificate Company Obligation, in the event that of Incorporation to increase the the Company files a response to Company's authorized Common Stock to at comments with the SEC by Tuesday, least 37,500,000 shares. December 2, 1997 and receives further additional comments from the SEC with respect to its review of the Company's Form 10-KSB, the January 7, 1998 date shall be automatically extended after January 7, 1998 by the Review Period, if the Company is proceeding in good faith to respond to the SEC during such Review Period. Commencement of road show relating JANUARY 16, 1998, notwithstanding the to the Offering Company Obligation, in the event that the Company files a response to comments with the SEC by Tuesday, December 2, 1997 and receives further additional comments from the SEC with respect to its review of the Company's Form 10-KSB, the January 16, 1998 date shall be automatically extended after January 16, 1998 by the Review Period, if the Company is proceeding in good faith to respond to the SEC during such Review Period. Repurchase of 10% of the aggregate JANUARY 15, 1998 shares of Preferred Stock outstanding as of December 15, 1997. Redemption of remaining shares of FEBRUARY 2, 1998, notwithstanding the Preferred Stock outstanding as of Company Obligation, in the event that February 2, 1998. the Company files a response to comments with the SEC by Tuesday, December 2, 1997, and receives further additional comments from the SEC with respect to its review of the Company's Form 10-KSB, the February 2, 1998 date shall be automatically extended by the Review Period, if the Company is proceeding in good faith to respond to the SEC during such Review Period. Notwithstanding the foregoing, for purposes of the February 2, 1998 Trigger Date, the Review Period shall in no event extend beyond February 12, 1998. In the event that the Company abandons SUCH APPLICABLE DATE. or withdraws (in accordance with the last sentence of Section 6.13 of the Amended Agreement) the Registration Statement prior to the Registration Statement being declared effective for use by the Company EX-23.(A) 7 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23(a) INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to the Registration Statement of Response USA, Inc. on Form SB-2 of our report dated October 8, 1997 appearing in the Prospectus, which is part of this Registration Statement and to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania December 19, 1997 EX-23.(B) 8 CONSENT OF FISHBEIN & COMPANY, PC EXHIBIT 23(b) CONSENT OF INDEPENDENT AUDITORS We hereby consent to the use in this Amendment No. 1 to the Registration Statement on Form SB-2 of Response USA, Inc. of our report dated August 22, 1996 (January , 1998 as to the last paragraph thereof) on the consolidated financial statements of Response USA, Inc. contained in such Registration Statement, and to the reference to use, as appearing under the headings "Selected Financial Data" and "Experts" in the Prospectus, which is a part of such Registration Statement. FISHBEIN & COMPANY, P.C. Elkins Park, PA December 17, 1997 EX-23.(C) 9 CONSENT OF TERRY H. JONES, CPA EXHIBIT 23(c) INDEPENDENT AUDITOR'S CONSENT We consent to the use in this Amendment No. 1 to the Registration Statement on Form SB-2 of our report dated March 27, 1997, relating to the financial statements of Triple A Security Systems, Inc. and our report dated November 21, 1997, relating to the financial statements of The Jupiter Group, Inc. We also consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" in the Registration. TERRY H. JONES, CPA West Hazelton, Pennsylvania December 17, 1997 -----END PRIVACY-ENHANCED MESSAGE-----