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 September 30, 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-H 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: 4,141,625 shares of
$.008 par value common stock as of October 31, 1996.
Response USA, Inc. and Subsidiaries
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets for September 30, 1996
and June 30, 1996 1-2
Consolidated Statements of Operations for the Three
Months ended September 30, 1996 and 1995 3
Consolidated Statement of Stockholders' Equity for
September 30, 1996 4
Consolidated Statement of Cash Flows for the Three
Months Ended September 30, 1996 and 1995 5-6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
PART II. OTHER INFORMATION 15-16
<TABLE>
Response USA, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
ASSETS
<CAPTION>
September 30, June 30,
------------- -------------
1996 1996
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $394,830 $1,926,766
Marketable securities 68,750 100,000
Accounts receivable - Current portion
Trade - Net of allowance for doubtful accounts
of $355,508 and $327,072 respectively 1,825,407 1,360,321
Net investment in sales-type leases 134,748 125,385
Preferred stock subscription receivable 6,525,000
Current portion of note receivable 94,169 101,590
Inventory 808,263 652,551
Prepaid expenses and other current assets 207,159 118,689
------------- -------------
Total current assets 3,533,326 10,910,302
------------- -------------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $3,384,398 and $2,838,374 respectively 16,675,237 16,950,387
------------- -------------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $1,955,594 and
$1,862,915 respectively 1,395,869 1,261,007
------------- -------------
OTHER ASSETS
Accounts receivable - Noncurrent portion
Trade 21,348 20,537
Net investment in sales-type leases 317,460 323,817
Notes receivable - Net of current portion 8,884
Deposits 51,710 48,008
Deferred financing costs - Net of accumulated amortization
of $252,929 and $111,945 respectively 1,937,410 3,411,803
------------- -------------
2,327,928 3,813,049
------------- -------------
$23,932,360 $32,934,745
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<TABLE>
Response USA, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
September 30, June 30,
------------- -------------
1996 1996
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt
Notes payable $194,803 $194,914
Capitalized lease obligations 78,238 51,064
Accounts payable - Trade 563,740 424,921
Purchase holdbacks - Current portion 464,667 636,493
Accrued expenses and other current liabilities 1,414,419 2,033,701
Deferred revenue - Current portion 1,491,171 1,568,059
------------- -------------
Total current liabilities 4,207,038 4,909,152
------------- -------------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt
Notes payable 8,006,945 12,374,607
Capitalized lease obligations 125,888 31,189
Purchase holdbacks 10,483
Deferred revenue 27,657 23,044
Dividends payable 182,719
Put obligation payable 1,490,403 2,580,338
------------- -------------
9,833,612 15,019,661
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - Par value $1,000
Authorized 250,000 shares
Issued and outstanding 7,500 - June 30, 1996
and 6,990 shares - September 30, 1996 9,366,600 7,500,000
Common stock - Par value $.008
Authorized 12,500,000 shares
Issued and outstanding 3,854,944 shares - June 30, 1996
and 4,063,625 shares - September 30, 1996 32,509 30,840
Additional paid-in capital 20,000,745 19,056,240
Unrealized holding losses on available-for-sale securities (224,593) (193,343)
Accumulated deficit (19,283,551) (13,387,805)
------------- -------------
9,891,710 13,005,932
------------- -------------
$23,932,360 $32,934,745
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<TABLE>
Response USA, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
OPERATING REVENUES
Product sales $656,128 $909,054
Services 1,937,828 1,622,528
Finance and rentals 448,411 469,632
------------- -------------
3,042,367 3,001,214
------------- -------------
COST OF REVENUES
Product sales 451,535 533,625
Services and rentals 510,042 273,714
------------- -------------
961,577 807,339
------------- -------------
GROSS PROFIT 2,080,790 2,193,875
------------- -------------
OPERATING EXPENSES
Selling,general and administrative 1,552,967 1,431,463
Depreciation and amortization 662,719 541,631
Interest 481,595 700,375
------------- -------------
2,697,281 2,673,469
------------- -------------
LOSS FROM OPERATIONS (616,491) (479,594)
INTEREST INCOME 7,939 6,795
------------- -------------
LOSS BEFORE EXTRAORDINARY ITEM ($608,552) ($472,799)
EXTRAORDINARY ITEM
Loss on debt extinguishment 2,549,708
------------- -------------
NET LOSS (3,158,260) (472,799)
============= =============
Loss per common share
Loss before extraordinary item ($0.16) ($0.58)
Extraordinary item ($0.65) -
------------- -------------
Net loss ($0.81) ($0.58)
============= =============
Weighted average number of shares outstanding 3,906,835 819,709
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<TABLE>
RESPONSE USA, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
<CAPTION>
Preferred Stock Common Stock Unrealized
------------------- -------------------- Additional Holding Loss on
Number of Number of Paid-in Avaliable-For- Accumulated
Shares Amount Shares Amount Capital Sale Securities Deficit Total
------- ----------- ---------- -------- ------------ --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1996 7,500 $7,500,000 3,854,944 $30,840 $19,056,240 ($193,343) ($13,387,805) $13,005,932
Net loss for the three months
ended September 30, 1996 (3,158,260) (3,158,260)
Unrealized holding loss on
available-for-sale securities (31,250) (31,250)
Conversion of convertible
subordinated promissory notes 11,110 89 44,843 44,932
Exercise of stock options
and warrants 46,500 372 221,503 221,875
Conversion of preferred stock (510) (683,400) 151,071 1,208 678,159 (4,033)
Preferred stock deemed dividends (187,486) (187,486)
Discount on convertible
preferred stock 2,550,000 (2,550,000) 0
------- ----------- ---------- -------- ------------ --------------- ------------- ------------
Balance - September 30, 1996 6,990 $9,366,600 4,063,625 $32,509 $20,000,745 ($224,593) ($19,283,551) $9,891,710
======= =========== ========== ======== ============ =============== ============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<TABLE>
RESPONSE USA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ($3,158,259) ($472,799)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of monitoring contract costs 546,024 388,307
Depreciation and amortization of property and equipment 116,695 99,834
Amortization of deferred financing costs and debt discount 379,389 67,747
Loss on sale of property and equipment 11,319
Issuance of common stock for consulting fees 8,125
(Increase) decrease in accounts receivable
Trade (461,484) (634,397)
Net investment in sales-type leases (3,006) 5,825
Decrease in notes receivable 16,305 22,445
(Increase) decrease in inventory (155,712) 40,248
(Increase) decrease in prepaid expenses and other
current assets 3,868 (43,112)
(Increase) decrease in deposits (3,702) 20,933
Increase in accounts payable - Trade 101,575 223,712
Increase (decrease) in purchase holdbacks (211,309) 334,815
Increase (decrease) in accrued expenses and other
current liabilities 200,477 (134,806)
Increase (decrease) in deferred revenue (46,005) 15,445
------------- -------------
Net cash used in operating activities (2,663,825) (57,678)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 20,000
Purchase of property and equipment (120,730) (80,523)
Purchase of monitoring contracts (270,874) (2,475,524)
------------- -------------
Net cash used in investing activities (371,604) (2,556,047)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of preferred stock 7,500,000
Costs incurred in connection with the issuance of
preferred stock (1,146,924)
Proceeds from the exercise of stock options and warrants 190,000
Proceeds from private placement 145,000
Proceeds from long-term notes payable 10,750,000 2,792,500
Debt issue costs incurred (691,377) (27,441)
Principal payments on long-term debt
Notes payable (15,076,982) (326,541)
Capitalized lease obligations (21,224) (6,999)
------------- -------------
Net cash provided by financing activities 1,503,493 2,576,519
------------- -------------
NET DECREASE IN CASH ($1,531,936) ($37,206)
CASH - BEGINNING 1,926,766 159,445
------------- -------------
CASH - ENDING $394,830 $122,239
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<TABLE>
Response USA, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
<CAPTION>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $199,857 $637,031
Income taxes $ 0 $ 0
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the three months ended September 30, 1996, convertible subordinated
promissory notes of $50,000 were converted to common stock. The Company
reduced deferred financing costs and additional paid-in capital in the
amount of $5,068 in connection with the conversion of the subordinated
promissory notes.
During the three months ended September 30, 1996, the Company reduced
accrued expenses by $31,875 in connection with the exercise of warrants.
During the three months ended September 30, 1996, the Company reduced the
put obligation payable and the corresponding charge to deferred financing
costs by $1,089,935 (see Note 5).
During the three months ended September 30, 1996, the Company recorded
accretion to the preferred stock account of $2,550,000, with a correspond-
ing charge to accumulated deficit (see Note 6).
During the three months ended September 30, 1996, the Company recorded
a deemed dividend payable of $187,486 in connection with the preferred
stock agreement (see Note 6).
During the three months ended September 30, 1996, $510,000 of preferred
stock and $4,767 in deemed dividends payable were converted to 151,071
shares of common stock. As a result, the Company reduced the accretion
to the preferred stock and increased additional paid-in capital in the
amount of $173,400.
During the three months ended September 30, 1996, capitalized lease
obligations of $143,100 were incurred for the acquisition of property
and equipment.
During the three months ended September 30, 1996, long-term notes payable
of $19,049 were incurred for the purchase of property and equipment.
During the three months ended September 30, 1995, the Company issued
25,000 shares of its common stock, valued at $110,937, in connection with
the purchase of monitoring contracts.
During the three months ended September 30, 1995, the Company issued
2,000 shares of its common stock, valued at $8,125 as payment for con-
sulting services.
During the three months ended September 30, 1995, the Company reduced
monitoring contract costs and the corresponding purchase holdback
liability in the amount of $306,977.
See accompanying Notes to Consolidated Financial Statements.
6
Response USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1996
(Unaudited)
1. Basis of Presentation
The accompanying interim balance sheet as of September 30, 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
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 opera-
tions; unrealized holding gains and losses are reported as a separate com-
ponent of stockholders' equity.
Marketable securities consist of common stock. At September 30, 1996, the
cost of these securities was $293,343, and gross unrealized losses were
$224,593.
3. Inventory
September 30, June 30,
1996 1996
------------- ----------
(Unaudited)
Raw Materials $ 181,747 $ 145,098
Finished Goods 626,516 507,453
------------- ----------
$ 808,263 $ 652,551
============= ==========
4. Loss Per Common Share
For the three month periods ended September 30, 1996 and 1995, loss per
common share is based solely on the weighted average number of common shares
outstanding, because the effect of common stock equivalents and other
securities is antidilutive.
5. Long-Term Notes Payable
Equipment Financing
Payable in monthly installments aggregating $5,986
including interest at rates ranging from 6.95% to
11.83%; final payments due January, 1997 through
December, 1999; collateralized by related equipment $ 97,685
7
Response USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1996
(Unaudited)
5. Long-Term Notes Payable (continued)
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 every 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 $94,995 266,742
Federal priority tax claims payable in annual
installments of $2,211 through March, 1999, and
$1,896 thereafter 12,321
Convertible Subordinated Promissory Notes
5% convertible subordinated promissory notes due
November 30, 1996 75,000
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 7,750,000
__________
8,201,748
Less Current Portion 194,803
----------
$ 8,006,945
==========
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 agreement also provides for a commitment
fee, payable monthly in arrears, of .5% based on the average daily unused
credit.
In connection with the line of credit agreement, the Company issued warrants
to an affiliate of the bank to purchase 1,032,135 shares of the Company's
common stock at an exercise price of $3.25. The warrants expire June 30, 2006.
Under the terms of the agreement, the Company may be required to purchase the
warrants (put obligation) upon 10 days' notice, at a price equal to the excess
of the market price on the delivery date over the exercise price ($3.25). At
June 30, 1996, the value of the warrants were estimated at $5.75 per share of
common stock based upon a discounted market value of the average price of the
Company's common stock, resulting in a put obligation payable of $2,580,338,
with a corresponding charge to deferred financing costs. At september 30, 1996,
the value of the warrants were estimated at $4.694 per share of common stock.
As a result, the Company reduced the put obligation payable and the correspond-
ing deferred financing costs by $1,089,935.
Deferred financing costs associated with this agreement are being amortized
using the effective interest method over the four-year term of the agreement.
With the proceeds received from the issuance of preferred stock (see Note 6)
and a $10,500,000 advance on July 1, 1996, from the 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 quarter ended September 30, 1996.
8
Response USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1996
(Unaudited)
6. Preferred Stock
On July 2, 1996 the Company issued 7,500 shares of 1996 Series-A Convertible
Preferred Stock with a par value of $1,000 per share.(The Company recorded a
preferred stock subscription receivable of $6,525,000 at June 30, 1996; which
was received on July 2, 1996). The holders of the preferred stock are not
entitled to receive dividends and have no voting rights. The preferred shares
are convertible into a number of common shares 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 $5.00 or 80% of the average closing bid price of the
Company's common stock for the five days immediately preceding the date of
conversion. Up to 50% of the preferred stock may be converted beginning 45 days
after closing and the balance may be converted beginning 70 days after closing.
After June 1, 1999, the Company may require conversion.
The Company, during the quarter ending September 30, 1996, recorded accretion
to the preferredstock account of $2,550,000, representing the difference be-
tween the value of common stock into which the preferred stock is convertible
and the issue price of the preferred stock on June30, 1996, up to eligibility
for conversion of the preferred stock, as described above, with a corresponding
increase in accumulated deficit.
The Company, for the three months ended September 30, 1996, recorded a deemed
dividend of $187,486.
During the months August 1996 and September 1996, 510 shares of Series-A
Convertible Preferred Stock, with a value of $510,000, and $4,767 in deemed
dividends payable were converted to 151,071 shares of common stock. As a
result, the Company reduced the accretion to the preferred stock and increased
additional paid-in capital in the amount of $173,400.
On September 30,1996, the Company suspended conversion of its 1996 Series-A
Convertible Preferred Stock. The Company intends to renegotiate the terms and
conditions of the preferred stock.
7. Common Stock and Additional Paid-in Capital
During the quarter ended September 30, 1996, 11,110 shares of common stock,
with a value of $50,000, were issued in connection with the conversion of 10%
convertible subordinated promissory notes.
During the three months ended September 30, 1996, 46,500 shares of common
stock were issued as aresult of the exercise of warrants and stock options.
The Company recorded common stock of $372 and additional paid-in capital of
$221,503.
9
Response USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1996
(Unaudited)
7. Common Stock and Additional Paid-in Capital (continued)
The following is a summary of warrant activity:
Number of Exercise Price
Shares Per Share
----------- ----------------
Warrants outstanding at June 30, 1996 3,114,430 $2.50 - $8.00
Warrants exercised in connection with
10% notes - Class C (30,000) $3.875 - $6.00
Warrants exercised in connection with
12% notes - Class A (14,000) $3.25
------------ ---------------
Warrants outstanding at September 30, 1996 3,070,430 $2.50 - $8.00
============ ===============
8. Commitments and Contingencies
Consulting Agreement
In April, 1996, the Company entered into a two-year consulting agreement
commencing October, 1996, which provides for a minimal annual fee of $42,000.
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 $17.34 for two-year periods
expiring at various dates through February, 1997. As of September 30, 1996,
the Company's contingent liabilities under these agreements aggregated aprox-
imately $104,100, 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 94,402 shares of common stock which are expected
to be sufficient to satisfy the Company's obligation.
10
Response USA, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION ON AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward looking Information
The Private Securities Litigation Reform Act of 1995 (the "Reform Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that would cause actual
results to differ materially from those discussed in the statement. The Company
desires to take advantage of the "safe harbor" provisions of the Reform Act.
Except for the historical information contained herein, the matters discussed
in this Form 10QSB quarterly report are forward-looking statements which
involve risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
achieved. Important factors that could cause actual results to differ materially
from the Company's expectations are disclosed in conjunction with the forward-
looking statements or elsewhere herein.
Liquidity and Capital Resources
On June 30, 1996 through July 3, 1996, the Company completed a complete
restructuring of its long-term debt. The Company obtained a $15.0 million
dollar revolving credit facility from Mellon Bank, N.A. and issued $7.5 million
dollars of its 1996 Series-A Convertible Preferred Stock to institutional and
individual domestic and foreign investors. The proceeds of the financing were
utilized to repay the Company's existing long-term indebtedness and will result
in a substantial decrease of the Company's borrowing costs. as of September 30,
1996, the Company has available on its revolving credit facility the amount of
$7.25 million dollars. The credit facility bears interest at the Prime Rate,
plus 1-3/4 %. The restructuring resulted in an extraordinary charge of
$2,549,708 for the first quarter ended September 30, 1996 for early extinguish-
ment of debt.
The Company's working capital decreased by $6.7 million from $6.0 million to
a working capital deficiency of $.7 million at September 30, 1996. On June 30,
1996, the Company recorded a preferred stock subscription receivable for
$6,525,000, from a Series-A Convertible Preferred Stock subscribed with a par
value of $7,500,000, net of related placement fees of $975,000 paid from the
proceeds at the closing. On July 1, 1996, the Company entered into a four-year
$15 million revolving bank line of credit agreement (see Note 5 of Notes to
the Consolidated Financial Statements). With the proceeds received from the
issuance of preferred stock on July 2, 1996 and $10,500,000 from the revolving
line of credit, the Company paid off notes payable used to finance its growth
through acquisitions, with balances aggregating $12.1 million. The Company
believes its cash flows from operations will be sufficient to fund the Company's
interest payments on its debt and capital expenditures, which are the Company's
principal uses of cash other than the acquisitions of portfolios of subscriber
accounts.
Net cash used in operating activities was $2,663,825. A net loss of
$3,158,259, which included depreciationand amortization of $1,042,108 and
prepayment fees on early extinguishment of debt of $2,549,708, were the primary
reasons for cash used in operating activities. Other significant changes
included changes in accounts receivable, inventory, purchase holdbacks, accounts
payable trade and accrued expenses. At September 30, 1996, accounts receivable
increased by $464,490 from fiscal June 30, 1996. The acquisition of approx-
imately 8,000 subscriber accounts, during the past year, has caused an increase
in monitoring and service revenues billed, and an increase in the sale of
11
Response USA, Inc. and Subsidiaries
Liquidity and Capital Resources (continued)
personal emergency response systems (PERS) to both private label resellers
and home healthcare agencies have resulted in higher accounts receivable. The
provision for doubtful accounts increased to $355,000 at September 30, 1996
from $327,000 for fiscal 1996, reflecting an increase in the Company's average
subscriber base and the Company's willingness to work with subscribers
experiencing credit difficulties in order to maintain long-term subscriber
relationships. The Company believes it has recorded adequate reserves for
allowance for doubtful accounts against all accounts receivable trade. The
increase in inventory of $155,000 is attributable to an increase in future
orders for PERS by both private label resellers and home healthcare agencies.
The increase in accounts payable and accrued expenses totalling $302,000 was
due to both the additional finished goods inventory required to meet future
orders and other operating expenses related to the acquisitions of approxi-
mately 8,000 monitoring contracts. Payments of purchase holdbacks totalled
$211,000 during the quarter ended September 30, 1996.
Net cash used in investing activities for the three months ended
September 30, 1996 was $371,604. The purchase of monitoring contracts during
the three months ended September 30, 1996 accounted for $270,974 of the cash
used in investing activities. Other investing activity included the purchase
of property and equipment of $120,730, which was offset by the proceeds from
the sale of equipment of $20,000.
Net cash provided by financing activities was $1,503,493 for the three month
period ended September 30, 1996. Net proceeds of $6,353,076 were received from
the issuance of Preferred Stock in July 1996. Proceeds from the exercise of
stock options and warrants totalled $190,000. Proceeds received from a $10.75
million advance from the line of credit (see Note 5) less debt issue costs of
$691,377 were used, along with the proceeds from the preferred stock issuance,
to pay off notes payable totalling $12,072,668 and the purchase of monitoring
contracts. Principal payments on long-term debt, excluding notes payable paid
off with the line of credit and preferred stock proceeds, totalled $3,025,538,
were made during the three months ended September 30, 1996.
The Company's wholly-owned subsidiary Systems, filed a petition for reorgani-
zation under Chapter 11 of the Federal Bankruptcy Act in October 1987. Systems'
Plan of Reorganization became effective in February 1990. As of September 30,
1996, deferred payment obligations to such pre-reorganization creditors
totalled $374,058, which is payable in varying installments through the year
2000.
The Company has no material commitments for capital expenditures during the
next twelve months and believes that its current cash and working capital
position and future income from operations will be sufficient to meet its cash
and working capital needs for twelve months.
The Company intends to use borrowings under the revolving bank line of credit
(see Note 5) together with the remaining cash flow from operations to continue
to acquire monitoring contracts. Additional funds beyond those currently
available may be required to continue the acquisition program, and there can
be no assurance that the Company will be able to obtain such financing.
12
Response USA, Inc. and Subsidiaries
Results of Operations
A majority of the Company's revenues are derived from 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.
Operating revenues increased by $41,000 or 1% for the quarter ended Septem-
ber 30, 1996 as compared to the quarter ended September 30, 1995. Product sales
decreased by $253,000 or 28% for the period ended September 30, 1996, as com-
pared to the prior period ended September 30, 1995. The decrease in product
sales was due to the Company's primary strategy to expand through acquisition
of monitoring contracts, as opposed to direct sales of security systems. Sales
of electronic security systems decreased by $295,000 for the three months ended
September 30, 1996 as compared to the same period in the prior year. Revenues
from the sale of personal emergency response systems (PERS) increased by
$42,000 for the quarter ended September 30, 1996, as compared to the same
period ended September 30, 1995. The significant growth in monitoring and
service revenues of $315,000 or 19% for the period ended September 30, 1996,
as compared to the same period ended September 30, 1995, was due to the
acquisition of monitoring contracts and the success of the Company's extended
warranty program. Finance and rental income declined by $22,000 or 5%.
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 agency. The Company currently distributes its PERS through approxi-
mately 3,000 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
monitoring and service revenues.
The Gross Profit Margin, as a percentage of sales, was 73% and 68% for the
quarter ended September 30, 1995 and 1996, respectively. The decline is pri-
marily attributable to lower gross profit margins recognized on the sale of
personal emergency response systems for the three month period ended Septem-
ber 30, 1996 as compared to the three month period ended September 30, 1995.
Private label sales accounted for 47% and 13% and home healthcare agency sales
accounted for 51% and 81% of PERS sales for the quarter ended September 30, 1996
and 1995, respectively. Therefore, profit margins on sales of PERS decreased
from 41% for the quarter ended September 30, 1995 to 31% for the quarter ended
September 30, 1996, due to significantly lower margins realized on private
label sales as opposed to PERS sales to home healthcare agencies. Gross profit
margins significantly decreased from 32% to 7% on sales of electronic security
systems for the quarter ended September 30, 1995 and 1996, respectively. An
increase in competition, including the advertisement of free security systems,
has resulted in a lower average selling price for the Company's security
systems; therefore increasing the costs of electronic security systems sold.
13
Response USA, Inc. and Subsidiaries
Results of Operations (continued)
Selling, general, and administrative expenses rose to $1.55 million for the
quarter ended September 30, 1996, which represents an increase of $120,000 or
8.4%, over selling, general and administrative expenses, for the quarter ended
September 30, 1995. Selling, general and administrative expenses, as a per-
centage of total operating revenues, increased from 48% to 51% for the period
ended September 30, 1995 and 1996, respectively. Sales and marketing expenses
declined due to the Company's strategy to grow through acquisitions as opposed
to new system installations. An increase in general and administrative expenses
was caused by increases in corporate overhead expenses incurred to support a
larger subscriber base. The percentage increase in selling, general and
administrative expenses of 8.4% was lower than the 14% increase in monitoring,
service, and rental revenues 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 continue to decrease as a result of the Company's operating
revenues increasing substantially due to increases in monitoring and service
revenues.
Amortization and depreciation expenses increased by $121,000 from $542,000
to $663,000 for the three months ended September 30, 1995 and 1996, respec-
tively. This increase in amortization expense is the result of the Company's
purchases of monitoring contracts totalling approximately $8 million during
the fiscal year ended June 30, 1996.
Interest expense decreased by $218,000 or 31% from $700,000 for the quarter
ended September 30, 1995 to $482,000 for the same period ended September 30,
1996. In July 1996, the Company paid off notes payable with balances aggregat-
ing $12,072,688 with proceeds received from the issuance of preferred stock
(see Note 6) and an advance from the line of credit (see Note 5), which
resulted in a substantial decrease of the Company's borrowing costs.
The net loss for the quarter ended September 30, 1996 was $608,552 (excluding
an extraordinary item for early extinguishment of debt of $2,549,708), or
($.16) per share based on 3,906,835 shares outstanding, as compared to a net
loss of $472,799 or ($.58) per share based on 819,709 shares outstanding. The
loss before extraordinary item of $608,552 includes depreciation and amorti-
zation and interest expense totalling approximately $1.1 million. Earnings
before interest, taxes, depreciation, and amortization (EBITDA), excluding
loss on debt extinguishment, improved by approximately $175,000 to $527,823
for the three months ended September 30, 1996, as compared to the average
quarterly EBITDA for the prior fiscal year ended June 30, 1996.
14
Response USA, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
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) Report on Form 8-K - None
15
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. November 13, 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
--------------------
Ronald A. Feldman
Chief Operating Officer
Vice President, Secretary
Treasurer
16
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