UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File Number 0-20770
RESPONSE USA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware #22-3088639
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
11-K Princess Road, Lawrenceville, New Jersey 08648
(Address of principal executive offices) (Zip code)
(609) 896-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date: 2,529,044 shares of $.008 par
value common stock as of May 2, 1996.
Response USA, Inc. and Subsidiaries
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets for March 31, 1996 and
June 30, 1995 1-2
Consolidated Statements of Operations for the
Nine Months and Three Months ended March 31, 1996 and 1995 3
Consolidated Statement of Stockholders' Equity
for March 31, 1996 4
Consolidated Statement of Cash Flows for the Nine Months
Ended March 31, 1996 and 1995 5-6
Notes to Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 14-16
PART II. OTHER INFORMATION 17-18
<TABLE>
Response USA, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
ASSETS
<CAPTION>
March 31, June 30,
------------- -------------
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $840,097 $159,445
Marketable securities 118,750 225,000
Accounts receivable - Current portion
Trade - Net of allowance for doubtful accounts
of $130,912 and $83,142 respectively 1,702,279 930,991
Net investment in sales-type leases 137,121 116,180
Current portion of note receivable 99,338 92,878
Inventory 730,315 652,380
Prepaid expenses and other current assets 231,891 105,486
------------- -------------
Total current assets 3,859,791 2,282,360
------------- -------------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $2,312,030 and $1,094,460 respectively 16,944,084 11,727,799
------------- -------------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $2,022,285 and
$1,696,012 respectively 1,222,162 1,179,666
------------- -------------
OTHER ASSETS
Accounts receivable - Noncurrent portion
Trade - Net of allowance for doubtful accounts
of $3,000 and $3,400 respectively 19,841 26,158
Net investment in sales-type leases 321,807 364,366
Notes receivable - Net of current portion
Related party 50,000 50,000
Other 35,142 110,475
Deposits 32,535 57,022
Deferred financing costs - Net of accumulated amortization
of $133,824 and $79,569 respectively 356,866 273,902
------------- -------------
816,191 881,923
------------- -------------
$22,842,228 $16,071,748
============= =============
See accompanying Notes to Consolidated Financial Statements.
1
</TABLE>
<TABLE>
Response USA, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
March 31, June 30,
------------- -------------
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt
Notes payable $3,517,285 $2,495,786
Capitalized lease obligations 54,869 36,590
Accounts payable - Trade 545,995 503,400
Purchase holdbacks 609,507 284,992
Accrued expenses and other current liabilities 1,281,165 1,147,989
Deferred revenue - Current portion 1,515,254 1,275,624
------------- -------------
Total current liabilities 7,524,075 5,744,381
------------- -------------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt
Notes payable 12,485,102 7,217,551
Capitalized lease obligations 40,077 43,718
Purchase holdbacks 72,619 652,611
Deferred revenue 10,252 12,991
------------- -------------
12,608,050 7,926,871
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - Par value $1
Authorized 250,000 shares
Issued and outstanding - none
Common stock - Par value $.008
Authorized 12,500,000 shares
Issued and outstanding 798,520 shares - June 30, 1995
and 1,939,478 shares - March 31, 1996 15,516 63,873
Additional paid-in capital 14,513,160 11,380,873
Unrealized holding loss on available-for-sale securities (174,593) (68,343)
Accumulated deficit (11,643,980) (8,975,907)
------------- -------------
2,710,103 2,400,496
------------- -------------
$22,842,228 $16,071,748
============= =============
See accompanying Notes to Consolidated Financial Statements.
2
</TABLE>
<TABLE>
Response USA, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
------------------------------ ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Product sales $1,984,146 $3,785,543 $507,803 $850,780
Services 4,689,132 2,412,469 1,576,126 882,857
Finance and rentals 1,361,762 745,243 450,906 410,584
------------ ------------ ------------ ------------
8,035,040 6,943,255 2,534,835 2,144,221
------------ ------------ ------------ ------------
COST OF REVENUES
Product sales 1,409,579 2,375,608 412,158 622,623
Services and rentals 1,098,089 626,933 386,292 194,705
------------ ------------ ------------ ------------
2,507,668 3,002,541 798,450 817,328
------------ ------------ ------------ ------------
GROSS PROFIT 5,527,372 3,940,714 1,736,385 1,326,893
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling,general and administrative 4,329,022 5,110,309 1,440,578 1,538,401
Depreciation and amortization 1,602,071 834,172 576,028 336,555
Termination benefits cost (392,699) 0 0
Interest 2,282,864 703,356 817,021 343,895
------------ ------------ ------------ ------------
8,213,957 6,255,138 2,833,627 2,218,851
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (2,686,585) (2,314,424) (1,097,242) (891,958)
INTEREST INCOME 18,512 33,082 5,839 11,815
------------ ------------ ------------ ------------
NET LOSS ($2,668,073) ($2,281,342) ($1,091,403) ($880,143)
============ ============ ============ ============
Net loss per common share ($2.37) ($4.00) ($0.72) ($1.34)
============ ============ ============ ============
Weighted average number of shares outstanding 1,123,536 570,742 1,521,176 658,608
============ ============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
3
</TABLE>
<TABLE>
RESPONSE USA, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
<CAPTION>
Common Stock Unrealized
---------------------- Additional Holding Loss on
Number of Paid-in Avaliable-For- Accumulated
Shares Amount Capital Sale Securities Deficit Total
----------- --------- ------------ --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1995 (see Note 6) 798,520 $6,388 $11,438,358 ($68,343) ($8,975,907) $2,400,496
Net loss for the nine months ended
March 31, 1996 (2,668,073) (2,668,073)
Unrealized holding loss on
available-for-sale securities (106,250) (106,250)
Conversion of convertible
subordinated promissory notes 447,495 3,580 894,866 898,446
Exercise of stock options
and warrants 357,800 2,862 1,205,138 1,208,000
Issuance of warrants 1,600 1,600
Consulting 2,000 16 8,109 8,125
Acquisitions 333,663 2,670 965,089 967,759
----------- --------- ------------ --------------- ------------- -----------
Balance - March 31, 1996 1,939,478 $15,516 $14,513,160 ($174,593) ($11,643,980) $2,710,103
=========== ========= ============ =============== ============= ===========
See accompanying Notes to Consolidated Financial Statements.
4
</TABLE>
<TABLE>
RESPONSE USA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended
March 31,
--------------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ($2,668,073) ($2,281,342)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of monitoring contract costs 1,239,398 572,479
Depreciation and amortzation of property and equipment 326,272 249,041
Amortization of deferred financing costs, debt discount
and debt issue costs 98,993 12,652
Decrease in termination benefits obligation (409,673)
Gain on sale of property and equipment (6,118)
Gain on sale of monitoring contracts (91,663)
Consulting fees recorded resulting from the issuance
of stock 8,125
(Increase) decrease in accounts receivable
Trade (764,971) 16,115
Related parties - Trade (88,270)
Net investment in sales-type leases 21,618 (46,878)
Increase in sundry receivables (67,311)
Decrease in income tax refund receivable 109,000
Decrease in notes receivable 68,873 64,851
(Increase) decrease in inventory (77,935) 164,255
(Increase) decrease in prepaid expenses and other
current assets (116,905) 46,239
Decrease in deposits 24,487 27,564
Increase (decrease) in accounts payable
Trade 42,596 198,339
Related parties - Trade (4,590)
Increase in purchase holdbacks 571,843 126,528
Decrease in accrued expenses and other current liabilities (356,756) (380,280)
Increase in deferred revenue 236,891 272,691
------------- -------------
Net cash used in operating activities (1,437,207) (1,424,708)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in cash held in escrow 582,220
Proceeds from sale of property and equipment 21,537
Purchase of property and equipment (304,835) (403,325)
Proceeds from sale of monitoring contracts 233,548
Purchase of monitoring contracts (3,027,232) (1,224,686)
Acquisitions (3,157,478) (1,626,942)
Investment in marketable securities (67,600)
Increase in notes receivable - Related party (50,000)
------------- -------------
Net cash used in investing activities (6,255,997) (2,768,796)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from private placement 1,960,000 750,000
Debt issue costs incurred (286,750) (121,286)
Proceeds from the exercise of stock options and warrants 1,198,500
Proceeds from long-term debt
Notes payable 6,924,809 4,299,413
Capitalized lease obligations 43,933 59,947
Principal payments on long-term debt
Notes payable (1,430,599) (686,491)
Capitalized lease obligations (36,037) (29,287)
------------- -------------
Net cash provided by financing activities 8,373,856 4,272,296
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $680,652 $78,792
CASH AND CASH EQUIVALENTS - BEGINNING 159,445 295,643
------------- -------------
CASH AND CASH EQUIVALENTS - ENDING $840,097 $374,435
============= =============
See accompanying Notes to Consolidated Financial Statements.
5
</TABLE>
Response USA, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C>
Cash paid during the period for
Interest $ 1,982,828 $ 615,145
Income taxes $ 0 $ 0
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended March 31, 1996 and 1995, the Company issued
152,868 and 11,000 shares of its common stock, valued at $750,276 and $110,000,
respectively, in connection with the purchase of monitoring contracts.
During the nine months ended March 31, 1996 and 1995, convertible subordinated
promissory notes of $1,075,000 and $2,462,500, respectively, were converted to
common stock.
During the nine months ended March 31, 1996 and 1995, long-term notes payable
of $63,933 and $37,843, respectively, were incurred for the purchase of property
and equipment.
During the nine months ended March 31, 1996 and 1995, the Company issued
61,941 and 331,617 shares of its common stock, respectively, in connection with
its acquisition of monitoring contracts, pursuant to a guarantee of stock
valuation.
During the nine months ended March 31, 1996, the Company issued 2,000 shares
of its common stock, valued at $8,125, as payment for consulting services.
During the nine months ended March 31, 1996, the Company issued 14,500 shares
of its common stock, valued at $70,282, as payment for purchase holdback
liabilities.
During the nine months ended March 31, 1996, the Company reduced monitoring
contract costs and the corresponding purchase holdback liability in the amount
of $776,038.
During the nine months ended March 31, 1996, the Company issued 32,000 shares
of its common stock, valued at $147,200, as payment on a note payable incurred
in connection with its acquisition of ERS.
During the nine months ended March 31, 1995, the Company incurred a note
payable of $150,000 and issued 95,689 shares of its common stock in connection
with its acquisitions of USS and ERS.
See accompanying Notes to Consolidated Financial Statements.
6
Response USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1996
(Unaudited)
1. Basis of Presentation
The accompanying interim balance sheet as of March 31, 1996, and the related
statements of operations, stockholders' equity and cash flows have been prepared
by management of the Company and are in conformity with generally accepted
accounting principles. In the opinion of management, all adjustments, comprising
normal recurring accruals necessary for a fair presentation of the results of
the Company's operations, are included.
These financial statements should be read in conjunction with the Company's
annual financial statements.
2. Marketable Securities
Effective July 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt
and Equity Securities." Accordingly, 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 common stock. At March 31, 1996, the cost of
this security was $293,343, and gross unrealized losses were $174,593.
3. Inventory
March 31, June 30,
1996 1995
--------- ---------
(Unaudited)
Raw materials $ 259,917 $ 385,010
Finished goods 470,398 267,370
--------- ---------
$ 730,315 $ 652,380
========= =========
4. Earnings (Loss) Per Common Share
For the three month and nine month periods ended March 31, 1996 and 1995,
loss per common share reflects the Reverse Stock Split (see Note 6) using
July 1, 1994 as the effective date, and is based solely on the weighted
7
Response USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1996
(Unaudited)
average number of common shares outstanding, because the effect of other
securities is antidilutive.
5. Long-Term Notes Payable
Equipment Financing
Payable in monthly installments aggregating $6,925 including
interest at rates ranging from 6.95% to 11.8%; final payments
due May, 1996, through October, 1998; collateralized by
related equipment $ 82,044
Payable in monthly installments aggregating $936 excluding
interest at 10%; final payments due December 1999; collateralized
by related equipment 42,084
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: 3.5% ($101,286) 1997, and 3% ($86,817)
each year - 1998 through 2000; interest imputed at 14%; net of
imputed interest of $96,085 265,652
Federal general tax claim balance of $12,321 is payable through
March, 2002 12,321
Other priority tax claims are payable over a period not to exceed
six years after the date of assessment of such claims plus interest
at 1% over the one-year Treasury Bond rate as published in the Wall
Street Journal as of February 8, 1990 (approximately 7.8%) 1,090
Other
7% convertible subordinated promissory notes due March 31, 1996 150,000
8
Response USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1996
(Unaudited)
5% convertible subordinated promissory notes due Nov. 30, 1996 162,269
12% convertible subordinated promissory notes due Dec. 31, 1996 36,826
13.8% convertible subordinated promissory notes due June 30, 1997
(see Note 6) 435,000
10% convertible subordinated promissory notes due Dec. 31, 1997
(see Note 6) 1,522,628
Note payable to stockholders/officers of the Company; interest
accrued at rates ranging from 12% to 15%; principal and accrued
interest due on or before June 30, 1996 508,071
Note payable in monthly installments of $28,250 through April,
1996, and declining monthly installments of $26,250 to $8,250
from May, 1996, through January, 1998, including interest at
23.6%; collateralized by related monitoring contracts 292,762
Note payable in monthly installments of $9,000 through March
1996, and increasing monthly installments of $11,600 to $13,750
from April 1996, through September 1998 including interest at
24.2%; collateralized by related monitoring contracts 274,597
Notes payable in monthly installments aggregating $431,136
including interest rates ranging from 24.1% to 28%; final
payments due June 1997, through January 2001; collateralized
by related monitoring contracts 11,353,021
Note payable with interest only due through August 1997 at
21.5%; monthly installments of $26,000 from September 1997
through December 1999 including interest at 23.75%;
collateralized by related monitoring contracts 414,022
Note payable in monthly installments of $11,500 through
March 1997, and increasing monthly installments of $13,500
to $17,500 from April 1997, through September 2000 including
interest at 25.1%; collateralized by related monitoring contracts 450,000
----------
16,002,387
Less current portion 3,517,285
----------
$ 12,485,102
==========
9
Response USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1996
(Unaudited)
6. Common Stock and Additional Paid-in Capital
In July 1995, the Company issued 25,000 shares of its common stock, valued
at $110,938, in connection with the purchase of monitoring contracts.
In July 1995, the Company issued 2,000 shares of its common stock, valued
at $8,125, as payment for consulting services.
During the months 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 on June 30, 1997, and Class C
Warrants to purchase 6,667 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.
Interest on the 13.8% notes is due and payable quarterly commencing on
September 30, 1995. All of the principal amount (but not a portion) of the
13.8% notes is convertible into the Company's common stock at the lower of
(a) 80% of the closing bid price of the common stock on the last trading day
prior to conversion ( the "market price") or (b) $3.26 per share (as such
shall be proportionately adjusted in the event of any stock split, dividend
or recapitalization).
Payment of the principal and accrued interest on the 13.8% notes is
subordinated to the payment in full of all principal and accrued interest on
all indebtedness now existing of the Company, which was or will be entered
into, on regular commercial terms, to banks and other institutional lenders
("Senior Indebtedness"). The Company may incur further Senior Indebtedness
for the sole purpose of acquiring other personal emergency response systems
or security systems accounts.
On or after the effective date, the principal amount of these 13.8% notes
may be prepaid by the Company, in whole or in part without premium or penalty,
at any time upon 10 days prior notice to the holders thereof, during which
period the holders may convert the 13.8% notes to common stock. Upon any
prepayment of the entire principal amount of these 13.8% notes, all accrued
but unpaid interest shall be paid to the holders on the date of prepayment.
In November 1995 the Board of Directors and Stockholders authorized and
approved a one-for-ten reverse stock split (the "Reverse Stock Split"). The
Reverse Stock Split became effective on the 20th of November 1995. The Reverse
Stock Split reduced the number of issued and outstanding shares from 10,699,222
10
Response USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1996
(Unaudited)
to 1,070,029; however, the number of authorized shares of common stock
(12,500,000 shares) will remain the same. The Company recorded additional
paid-in capital of $77,034 and a reduction of common stock of $77,034. The
financial statements give effect to this transaction effective 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.
All outstanding warrants and options entitling the holders to purchase
shares of common stock will entitle such holders to receive, upon exercise of
their options, one-tenth the number of shares of common stock.
During the nine months ended March 31, 1996, 357,800 shares of common stock
were issued as a result of warrants and stock options being exercised. The
Company recorded common stock of $2,862 and additional paid-in capital of
$1,205,138.
During the months of January 1996 and February 1996, the Company completed
a private placement of 61 units. Each unit consisted of a $25,000 10% con-
vertible subordinated promissory note due on December 31, 1997, and Class C
warrants to purchase 1,000 shares of the Company's common stock. The Company
recorded long-term debt of $1,525,000 debt discount of $2,711 and additional
paid-in capital of $2,711.
Interest on the 10% notes is due and payable quarterly commencing on
March 31, 1996. All of the principal amount (but not a portion) of the 10%
notes is convertible into the Company's common stock at the lower of (a) 75%
of the closing bid price of the common stock on the last trading day prior to
conversion (the "market price") or (b) $4.50 per share (the "conversion rate").
Payment of the principal and accrued interest on the 10% notes is subor-
dinated to the payment in full of all principal and accrued interest on all
indebtedness now existing of the Company, which was or will be entered into,
on regular commercial terms, to banks and other institutional lenders
("Senior Indebted-ness"). The Company may incur further Senior Indebtedness
for the sole purpose of acquiring other personal emergency response systems
or security systems accounts.
11
Response USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1996
(Unaudited)
On or after the effective date, the principal amount of these 10% notes
may be prepaid by the Company, in whole or in part without premium or penalty,
at any time upon 10 days prior notice to the holders thereof, during which
period the holders may convert the 10% notes to common stock. Upon any prepay-
ment of the entire principal amount of these 10% notes, all accrued but
unpaid interest shall be paid to the holders on the date of prepayment.
During the three months ended March 31, 1996 142,368 shares of common stock
valued at $709,621 were issued in connection with the purchases of monitoring
contracts and 61,941 shares of common stock valued at $178,263 were issued in
accordance with a stock value guarantee relating to previous acquisitions.
The following is a summary of warrant activity:
Number of Number of Exercise Price
Warrants Shares Per Share
--------- --------- --------------
Warrants outstanding at June 30, 1995 8,420,927 842,093 $3.75 - $5.50
Warrants issued in connection with
13.8% convertible notes - Class C 200,000 20,000 $3.75
Warrants issued in connection with 12%
convertible notes - Class A 92,000 92,000 $4.50
Warrants issued in connection with 10%
convertible notes - Class C 61,000 61,000 $5.625
Warrants exercised in connection with 12%
convertible notes - Class C (203,000) (20,300) $3.75
Warrants exercised in connection with 7%
convertible notes - Class B (71,071) (7,108) $5.50
Warrants exercised in connection with 5%
convertible notes - Class A (218,000) (21,800) $4.50
Warrants exercised in connection with 5%
convertible notes - Class B (218,000) (21,800) $5.50
--------- ------- --------------
Warrants outstanding at March 31, 1996 8,063,856 944,085 $3.75 - $5.625
========= ======= ==============
12
Response USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1996
(Unaudited)
7. Acquisitions
On February 26, 1996, the Company completed the acquisition of all the
outstanding common stock of MSG Security Systems. Inc., a Pennsylvania corpor-
ation ("MSG"), after giving effect to the Company's distribution to its stock-
holder substantially all of its net assets other than monitoring and service
contracts. MSG is engaged in the installation, servicing and monitoring of
electronic security systems. In consideration of the acquisition with a cost
of $429,541, the Company paid $331,415 in cash, incurred acquisition costs of
$37,515, and recorded purchase holdbacks of $60,611.
The following represents total asset purchases and liabilities assumed:
Assets
Autos $ 4,675
Monitoring contracts 404,071
Acquisition costs 37,515
-------
446,261
-------
Liabilities
Accrued expenses 665
Deferred income 16,055
-------
16,720
-------
Total purchase price $ 429,541
=======
On February 29, 1996, the Company completed the acquisition of substantially
all of the assets of Monitoring Acquisition Corp. a Pennsylvania corporation
("MAC"). In consideration of the acquisition with a cost of $2,253,785, the
Company paid $1,604,446 in cash, issued 127,868 shares of common stock valued
at $639,339 and incurred acquisition costs of $10,000.
The following represents total assets purchased:
Monitoring contracts $ 2,243,785
Acquisition costs 10,000
---------
$ 2,253,785
=========
On March 14, 1996, the Company completed the acquisition of all the out-
standing common stock of Shelton Security, Inc., a New Jersey corporation
("SSI"), after giving effect to the Company's distribution to its stockholders
substantially all of its net assets other than monitoring and service contracts.
SSI is engaged in the installation, servicing and monitoring of electronic
security systems. In consideration of the acquisition with a cost of $1,586,698,
the Company paid $1,221,617 in cash, incurred acquisition costs of $86,456,
and recorded purchase holdbacks of $278,625.
The following represents total asset purchases and liabilities assumed:
Assets
Inventory $ 13,000
Monitoring contracts 1,542,901
Acquisition costs 86,456
---------
1,642,357
---------
Liabilities
Accounts payable 21,704
Accrued expenses 5,702
Deferred income 28,253
---------
55,659
---------
Total purchase price $ 1,586,698
=========
During the nine months ended March 31, 1996, the Company purchased additional
monitoring contracts totalling $3,300,464. As consideration, the Company paid
$3,027,232 in cash, recorded purchase holdbacks of $232,607 and issued 10,000
shares of its common stock valued at $40,625. As part of the acquisitions,
the Company also issued 15,000 shares of restricted common stock as payment
of financing costs to the lender that financed the acquisition.
8. Commitments and Contingencies
In the normal course of business, the Company is subject to litigation, none
of which is expected to have a material effect on the consolidated financial
position, results of operations or cash flows of the Company.
As part of certain acquisitions, the Company has guaranteed the value of
its common stock at various prices ranging from $3.75 to $5.375 for two-year
periods expiring at various dates through February, 1997. As of March 31, 1996,
the Company's contingent liabilities under these agreements aggregated approx-
imately $17,191 which may be settled in cash or by the issuance of common stock.
13
Response USA, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION ON AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's working capital decreased by $202,263 from a deficit of
$3,462,021 at June 30, 1995 to a working capital deficiency of $3,664,284 at
March 31, 1996. The working capital deficiency is the result of the use of
cash and additional borrowings utilized to acquire monitoring contracts. The
Company anticipates that the deficiency in working capital will diminish as
the principal on the borrowings used to acquire monitoring contracts is repaid.
Such borrowing will primarily be paid from cash flow generated from the acquired
monitoring contracts. Any deficiency will be paid from the sale of debt or
equity or from additional borrowed funds.
Net cash used in operating activities was $1,437,207. The net loss of
$2,668,073, which included amortization and depreciation of $1,664,663,
accounted for $1,003,410 of the negative cash flow. The cash flow was affected
by other significant changes, including changes in accounts receivable, inven-
tory, deferred revenue, accrued expenses and other current liabilities, and
purchase holdbacks.
At March 31, 1996 accounts receivable increased by $743,353 from June 30,
1995. The increase in accounts receivable was due to increased product sales
to healthcare institutions and an increase in subscriber monitoring services.
The Company believes it has recorded adequate reserves for allowance for
doubtful accounts against all accounts receivable trade. Inventory increased
by $77,935 to supply additional service technicians employed to service and
upgrade customers acquired from other security alarm companies. Deferred revenue
increased by $236,891 as a result of the acquisition of approximately 11,000
security alarm customers, during the past twelve months. Accrued expenses and
other current liabilities decreased by $356,756 from June 30, 1995 to March 31,
1996. The decrease in accrued expenses was primarily due to the amortization
of accrued transition costs arising from the purchase of monitoring contracts.
Purchase holdbacks increased by $571,843, in connection with the acquisition
of approximately $7.0 million of monitoring contracts.
Net cash used in investing activities for the nine months ended March 31,
1996 was $6,255,997. The purchase of monitoring contracts during the nine
months ended March 31, 1996 accounted for $6,184,710 of the cash used in
investing activities. Other investing activity included the purchase of
14
Response USA, Inc. and Subsidiaries
property and equipment of $304,835 and proceeds from the sale of monitoring
contracts of $233,548.
Net cash provided by financing activities was $8,373,856 for the nine month
period ended March 31, 1996. Net proceeds of $1,673,250 were received through
two private placements: (1) commenced in July 1995 and was completed in Novem-
ber 1995, and (2) commenced in January 1996 and was completed in February 1996.
Proceeds from the exercise of stock options and Class C Warrants amounted to
$1,198,500. Proceeds of long-term debt totalled $6,968,742 which were used for
acquisitions and working capital. Principal payments on long-term debt of
$1,466,636 were made during the nine months ended March 31, 1996.
The Company has no material commitments for capital expenditures during the
next twelve months. In the event that the Company's marketing plans, which may
include the sale of security systems, acquisitions of monitoring contracts,
distribution through national chains, telemarketing sales and expansion of
home healthcare distribution are not successful, the Company may have to seek
additional financing to enable it to expand its marketing activities related
to PERS and its security products and related monitoring services.
Results of Operations
Operating revenues increased by $1,091,785 (16%) and $390,614 (18%) for the
nine months and three months ended March 31, 1996 as compared to the same
periods ended March 31, 1995. Product sales decreased by $1,801,397 (48%) and
$342,977 (40%) for the nine months and three months ended March 31, 1996 and
1995, respectively. The decrease in product sales was due to the Company's
primary strategy to expand through the acquisition of monitoring contracts, as
opposed to direct sales of security systems. Sales of electronic security
systems decreased by approximately $2.1 million for the nine months ended
March 31, 1996, as compared to the same period ended March 31, 1995. Revenues
from the sale of personal emergency response systems (PERS) increased by
approximately $300,000 for the nine month period ended March 31, 1996 as
compared to the same period for the prior year. The significant growth in
service revenues of $2,276,663 (94%) and $693,269 (79%) for the nine and three
month periods ended March 31, 1996 as compared to the same periods ended
March 31, 1995, was due to the acquisition of monitoring contracts and the
success of the Company's extended warranty program. Finance and rental income
increased by $616,519 (83%) and $40,322 (10%) for the nine and three months
ended March 31, 1996 as compared to the same periods ended March 31, 1995.
This was the result of the acquisition of the Medical Alert Systems Monitoring
Division of Emergency Response Systems, Inc. (ERS) in November 1994 and the
Company's distribution of its PERS through the pharmacy departments of national
retail chains such as Revco, Wal-mart and K-mart.
The Company is in the process of developing additional cooperative marketing
programs in which the Company's PERS products are distributed in conjunction
with another vendor's products or utilizing other marketing methods developed
by a co-participant specializing in direct sales to the consumer or home
healthcare. The Company currently distributes its PERS through approximately
4,000 pharmacy departments of national retail chains. The Company will continue
to acquire monitoring customers from other security system companies. The
Company believes the foregoing will result in a substantial increase in
service revenues.
15
Response USA, Inc. and Subsidiaries
Results of Operations (continued)
The gross profit margin increased for both the nine and three month periods
ended March 31, 1996 as compared to the same periods ended March 31, 1995 by 12%
and 7%, respectively. The decline in costs for services and rentals as a
percentage of revenues from 20% to 18% for the nine months ended March 31, 1996
as compared to the same period in the prior year, was due primarily to the
success of the extended warranty program and an increase in service call
revenues. The cost of product sales rose from 63% and 73% for the nine and three
months ended March 31, 1995 to 71% and 81% for the nine and three months ended
March 31, 1996. An increase in competition, including the advertisement of free
security systems, has resulted in a lower average selling price for the
Company's security system; therefore the gross profit margins of product sales
have declined.
Operating expenses, excluding termination benefits costs, as a percentage of
operating revenues, increased from 96% to 102% and 103% to 112% for the nine
and three months ended March 31, 1995 and 1996, respectively. The increase in
interest expense of approximately $1.6 million and $500,000 for the nine and
three months ended March 31, 1996, was the reason for the increase in operating
expenses as a percentage of revenues. The increase in interest expense was due
to additional long-term debt incurred by the Company in connection with the
purchase of monitoring contracts.
Selling, general and administrative expenses decreased by $781,287 (15%) and
$97,823 (6%) for the nine month and three month periods ended March 31, 1996
as compared to the same periods ended March 31, 1995. Payroll costs, hiring
and training expenses, telephone costs, and advertising and marketing expenses
decreased by approximately $380,000, for the nine month period ended March 31,
1996 as compared to march 31, 1995. This was the result of the Company's
strategy to expand its revenue by acquisition rather than through new system
installations. Costs related to customer changeover from monitoring contracts
acquired, are capitalized at time of purchase. During the nine months ended
March 31, 1996, transition costs of approximately $530,000 offset charges to
selling, general and administrative expenses. Additional payroll expenses and
operating costs of approximately $150,000 were incurred in connection with
the operation of ERS, which was acquired November 22, 1994.
Amortization and depreciation expenses increased by $767,899 and $239,473 for
the nine and three months ended March 31, 1996 as compared to the same periods
ended March 31, 1995. The significant increase in amortization was due to the
various acquisitions of monitoring contracts with a purchase price of approx-
imately $10.5 million during the past 12 months.
Selling, general and administrative expenses, as a percentage of revenues,
decreased from 74% to 54% and from 72% to 57% for the nine and three month
periods ended March 31, 1996 as compared to the same periods in the prior year.
The Company anticipates that its current level of selling, general and admini-
strative expenses, as a percentage of sales, will continue to decrease as a
result of the Company's operating revenues increasing substantially due to
increases in monitoring and service revenues by USS.
The net loss for the nine months ended March 31, 1996 was $2,668,073, or
$2.37 per share based on 1,123,536 shares outstanding, as compared to a net
loss of $2,281,342 or $4.00 per share based on 570,742 shares outstanding for
the same period ended March 31, 1995. The net loss for the current period is
primarily attributable to $2,282,864 in interest expense related to the
Company's acquisition of subscribers from other dealers.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
improved by $1,960,676 (264%) and $501,339 (251%) for the nine months and
three months ended March 31, 1996, as compared to the same periods in fiscal
1995. EBITDA is commonly used in the alarm industry to measure a company's
cash flow and operating efficiency.
The Company's alarm subscriber base grew to over 17,000 customers and its
PERS subscriber base stabilized at approximately 24,000 subscribers. The
substantial increase in operating revenues and monitoring service revenues
resulted primarily from acquisitions totaling over 7,000 subscribers during
the past nine months ended March 31, 1996, commencement of a wholesale
monitoring division for third party alarm dealers at its central monitoring
station, and increased sales of the Company's PERS to hospitals and home
healthcare agencies. The Company anticipates continued expansion of its
subscriber base during the next twelve months.
16
Response USA, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - In February 1996, the Company consented to the
issuance of an Order Instituting Proceedings pursuant to the Secur-
ities Act of 1933 (the "Securities Act") and the Securities Exchange
Act of 1934 and Findings and Order of the Securities and Exchange
Commission (the "Finding"), without admitting or denying any allega-
tions or facts contained therein. In July 1993, the Company sold
60,000 shares of Common Stock pursuant to what it claimed to be an
exemption from registration under Regulation S of the Securities Act.
The Finding stated that such sales were made under circumstances in
which the Company new 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.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K filed March 13, 1996 and March 29, 1996
17
Response USA, Inc. and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Response USA, Inc. May 9, 1996
Registrant
By /S/ Richard M. Brooks
Richard M. Brooks
President and Chief Executive and Financial Officer
Principal Financial Officer
Principal Accounting Officer
By /S/ Ronald A. Feldman
Chief Operating Officer
Vice President, Secretary
Treasurer
18
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 840
<SECURITIES> 119
<RECEIVABLES> 2315
<ALLOWANCES> 134
<INVENTORY> 730
<CURRENT-ASSETS> 3860
<PP&E> 3244
<DEPRECIATION> 2022
<TOTAL-ASSETS> 22842
<CURRENT-LIABILITIES> 7524
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 2695
<TOTAL-LIABILITY-AND-EQUITY> 22842
<SALES> 8035
<TOTAL-REVENUES> 8035
<CGS> 2508
<TOTAL-COSTS> 2508
<OTHER-EXPENSES> 5931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2283
<INCOME-PRETAX> (2668)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2668)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2668)
<EPS-PRIMARY> (2.37)
<EPS-DILUTED> (2.37)
</TABLE>
