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 December 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-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: 4,130,892
shares of $.008 par value common stock as of January 31, 1997.
Response USA, Inc. and Subsidiaries
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets for December 31, 1996
and June 30, 1996 1-2
Consolidated Statements of Operations for the Six
Months and Three Months ended December 31, 1996
and 1995 3
Consolidated Statement of Stockholders' Equity
for December 31, 1996 4
Consolidated Statement of Cash Flows for the Six
Months Ended December 31, 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)
<CAPTION>
ASSETS
December 31, June 30,
------------- -------------
1996 1996
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $377,623 $1,926,766
Marketable securities 43,750 100,000
Accounts receivable - Current portion
Trade - Net of allowance for doubtful accounts
of $399,792 and $327,072 respectively 1,755,825 1,461,911
Net investment in sales-type leases 102,952 125,385
Preferred stock subscription receivable 6,525,000
Inventory 865,028 652,551
Prepaid expenses and other current assets 408,585 118,689
------------- -------------
Total current assets 3,553,763 10,910,302
------------- -------------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $3,926,728 and $2,838,374 respectively 17,575,817 16,950,387
------------- -------------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $2,088,884 and
$1,862,915 respectively 1,526,830 1,261,007
------------- -------------
OTHER ASSETS
Accounts receivable - Noncurrent portion
Trade 20,039 29,421
Net investment in sales-type leases 230,775 323,817
Deposits 46,113 48,008
Deferred financing costs - Net of accumulated amortization
of $406,232 and $111,945 respectively 2,077,178 3,411,803
------------- -------------
2,374,105 3,813,049
------------- -------------
$25,030,515 $32,934,745
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<TABLE>
Response USA, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY?
December 31, June 30,
------------- -------------
1996 1996
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt
Notes payable $181,734 $194,914
Capitalized lease obligations 71,988 51,064
Accounts payable - Trade 492,889 424,921
Purchase holdbacks - Current portion 881,232 636,493
Accrued expenses and other current liabilities 852,199 2,033,701
Deferred revenue - Current portion 1,696,283 1,568,059
------------- -------------
Total current liabilities 4,176,325 4,909,152
------------- -------------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt
Notes payable 9,222,448 12,374,607
Capitalized lease obligations 110,791 31,189
Purchase holdbacks 10,483
Deferred revenue 27,658 23,044
Dividends payable 353,864
Put obligation payable 1,806,236 2,580,338
------------- -------------
11,520,997 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 6,890 shares - December 31, 1996 9,232,600 7,500,000
Common stock - Par value $.008
Authorized 12,500,000 shares
Issued and outstanding 3,854,944 shares - June 30, 1996
and 4,130,892 shares - December 31, 1996 33,047 30,840
Additional paid-in capital 20,297,914 19,056,240
Unrealized holding losses on available-for-sale securities (249,593) (193,343)
Accumulated deficit (19,980,775) (13,387,805)
------------- -------------
9,333,193 13,005,932
------------- -------------
$25,030,515 $32,934,745
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<TABLE>
RESPONSE USA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Six Months Ended Three Months Ended
December 31, December 31,
------------------------------ ------------------------------
1996 1995 1996 1995
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Product sales $1,278,042 $1,476,343 $621,914 $567,289
Services 3,810,320 3,113,006 1,872,492 1,490,478
Finance and rentals 897,611 910,856 449,200 441,224
------------- ------------- ------------ ------------
5,985,973 5,500,205 2,943,606 2,498,991
------------- ------------- ------------ ------------
COST OF REVENUES
Product sales 872,995 997,421 421,460 463,796
Services and rentals 1,012,785 711,797 502,743 438,083
------------- ------------- ------------ ------------
1,885,780 1,709,218 924,203 901,879
------------- ------------- ------------ ------------
GROSS PROFIT 4,100,193 3,790,987 2,019,403 1,597,112
------------- ------------- ------------ ------------
OPERATING EXPENSES
Selling,general and administrative 3,078,051 2,888,444 1,525,084 1,456,981
Compensation - Options (see Note 7) 142,284 142,284
Depreciation and amortization 1,338,341 1,026,043 675,622 484,412
Interest 889,635 1,465,843 408,040 765,468
------------- ------------- ------------ ------------
5,448,311 5,380,330 2,751,030 2,706,861
------------- ------------- ------------ ------------
LOSS FROM OPERATIONS (1,348,118) (1,589,343) (731,627) (1,109,749)
INTEREST INCOME 10,058 12,673 2,119 5,878
------------- ------------- ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (1,338,060) (1,576,670) (729,508) (1,103,871)
EXTRAORDINARY ITEM
Loss on debt extinguishment 2,549,708
------------- ------------- ------------ ------------
NET LOSS (3,887,768) (1,576,670) (729,508) (1,103,871)
============= ============= ============ ============
Loss per common share
Loss before extraordinary item ($0.33) ($1.70) ($0.18) ($1.07)
Extraordinary item ($0.64) - - -
------------- ------------- ------------ ------------
Net loss ($0.97) ($1.70) ($0.18) ($1.07)
============= ============= ============ ============
Weighted average number of shares outstanding 4,010,545 926,877 4,108,281 1,033,941
============= ============= ============ ============
</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 six months ended
December 31, 1996 (3,887,768) (3,887,768)
Unrealized holding loss on
available-for-sale securities (56,250) (56,250)
Conversion of convertible
subordinated promissory notes 11,110 89 44,843 44,932
Exercise of stock options
and warrants 124,500 996 474,379 475,375
Conversion of preferred stock (610) (817,400) 190,338 1,522 579,768 207,400 (28,710)
Preferred stock deemed dividends (362,602) (362,602)
Cancellation of common stock held
in escrow (see Note 7) (50,000) (400) 400 0
Issuance of stock options
(see Note 7) 142,284 142,284
Discount on convertible
preferred stock 2,550,000 (2,550,000) 0
------ ----------- ---------- -------- ------------ --------------- ------------- ------------
Balance - December 31, 1996 6,890 $9,232,600 4,130,892 $33,047 $20,297,914 ($249,593) ($19,980,775) $9,333,193
====== =========== ========== ======== ============ =============== ============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<TABLE>
RESPONSE USA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended
December 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ($3,887,767) ($1,576,670)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of monitoring contract costs 1,088,354 805,963
Depreciation and amortization of property and equipment 249,989 211,900
Amortization of deferred financing costs and debt discount 532,694 50,793
Loss on sale of property and equipment 8,319
Gain on sale of monitoring contracts (91,663)
Issuance of common stock for consulting fees 8,125
Compensation expense in connection with the issuance
of stock options (see Note 7) 142,284
(Increase) decrease in accounts receivable
Trade (312,620) (588,820)
Net investment in sales-type leases (11,007) 6,298
Decrease in notes receivable 45,399
Increase in inventory (212,477) (81,229)
Increase in prepaid expenses and other current assets (289,897) (54,771)
Decrease in deposits 1,895 21,721
Increase in accounts payable - Trade 67,356 290,395
Increase in purchase holdbacks 343,020 290,901
Decrease in accrued expenses and other current liabilities (1,149,015) (144,365)
Increase in deferred revenue 132,838 63,866
------------- -------------
Net cash used in operating activities (3,296,034) (742,157)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 23,000
Purchase of property and equipment (352,667) (209,739)
Proceeds from sale of monitoring contracts 233,548
Purchase of monitoring contracts (1,667,980) (2,576,079)
------------- -------------
Net cash used in investing activities (1,997,647) (2,552,270)
------------- -------------
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 (1,012,449)
Proceeds from the exercise of stock options and warrants 443,500 76,125
Proceeds from private placement 435,000
Proceeds from long-term debt
Notes payable 11,950,000 3,474,809
Capitalized lease obligations 43,933
Debt issue costs incurred 22,761 (27,441)
Principal payments on long-term debt
Notes payable (15,116,701) (716,699)
Capitalized lease obligations (42,573) (19,995)
------------- -------------
Net cash provided by financing activities 3,744,538 3,265,732
------------- -------------
NET DECREASE IN CASH ($1,549,143) ($28,695)
CASH - BEGINNING 1,926,766 159,445
------------- -------------
CASH - ENDING $377,623 $130,750
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
Response, USA, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 440,812 $1,407,371
Income Taxes $ 0 $ 0
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the six months ended December 31, 1996 and 1995,
convertible subordinated promissory notes of $50,000 and
$875,000, respectively, were converted to common stock. The
Company reduced deferred financing costs and additional paid-in
capital in the amount of $5,068 for 1996, in connection with the
conversion of the subordinated promissory notes.
During the six months ended December 31, 1996 and 1995, long-
term notes payable of $51,363 and $63,933, respectively, were
incurred for the purchase of property and equipment.
During the six months ended December 31, 1996 and 1995, the
Company reduced monitoring contract costs and the corresponding
purchase holdback liability in the amount of $108,764 and
$633,797, respectively.
During the six months ended December 31, 1996, the Company
reduced accrued expenses by $31,875 in connection with the
exercise of warrants.
During the six months ended December 31, 1996, the Company
reduced the put obligation payable and the corresponding charge
to deferred financing costs by $774,102.
During the six months ended December 31, 1996, the Company
recorded accretion to the preferred stock account of $2,550,000,
with a corresponding charge to accumulated deficit (see Note 6).
During the six months ended December 31, 1996, the Company
recorded a deemed dividend payable of $362,604 in connection with
the preferred stock agreement (see Note 6).
During the six months ended December 31, 1996, $610,000 of
preferred stock and $8,740 in deemed dividends payable were
converted to 190,338 shares of common stock. As a result, the
Company reduced the accretion to the preferred stock and reduced
accumulated deficit in the amount of $207,400.
During the six months ended December 31, 1996, capitalized
lease obligations of $143,100 were incurred for the acquisition
of property and equipment.
During the six months ended December 31, 1996, the Company
reduced accounts receivable and increased monitoring contract
costs in the amount of $154,570, in connection with the purchase
of monitoring contracts.
During the six months ended December 31, 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 six months ended December 31, 1995, the Company
issued 2,000 shares of its common stock, valued at $8,125 as
payment for consulting services.
See Accompanying Notes to Consolidated Financial Statements.
6
Response, USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(Unaudited)
1. Basis of Presentation
The accompanying interim balance sheet as of December 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
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 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 December 31,
1996, the cost of these securities was $293,343, and gross
unrealized losses were $249,593.
3. Inventory
December 31, June 30,
1996 1996
------------ ----------
(Unaudited)
Raw Materials $ 269,486 $ 145,098
Finished Goods 595,542 507,453
------------ ----------
$ 865,028 $ 652,551
============ ==========
4. Loss Per Common Share
For the three month and six month periods ended December 31, 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 $7,004
including interest at rates ranging from 3.90% to
11.83%; final payments due January, 1997 through Decem-
ber, 1999; collateralized by related equipment $ 112,619
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 62,500
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 8,950,000
__________
9,404,182
Less Current Portion 181,734
----------
$ 9,222,448
==========
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). As of June 30, 1996, the value of the
warrants were estimated at $5.75 per share of common stock based
on 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 December 31, 1996, the value of the warrants were
estimated at $5.00 per share of common stock. As a result, the
Company reduced the put obligation payable and corresponding
deferred financing costs by $774,102.
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 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
quarter ended September 30, 1996.
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 my be converted
beginning 70 days after closing. After June 1, 1999, the Company may
require conversion.
The Company, for the quarter ended September 30, 1996, recorded
accretion to the preferred stock account of $2,550,000,
representing the difference between the value of common stock
into which the preferred stock is convertible and the issue price
of the preferred stock on June 30, 1996, up to eligibility for
conversion of the preferred stock, as described above, with a
corresponding increase in accumulated deficit.
The Company, for the six months ended December 31, 1996, recorded
a deemed dividend of $362,604.
During the six months ended December 31, 1996, 610 shares of
Series A Convertible Preferred Stock, with a value of $610,000,
and $8,740 in deemed dividends payable were converted to 190,338
shares of common stock. As a result, the Company reduced the
accretion to the preferred stock and reduced the accumulated
deficit in the amount of $207,400.
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 six months ended December 31, 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 six months ended December 31, 1996, 124,500 shares of
common stock were issued as a result of the exercise of warrants
and stock options. The Company recorded common stock of $996 and
additional paid-in capital of $474,379.
The Company, on December 10, 1996, cancelled 50,000 shares of
Common Stock held in escrow, in connection with an acquisition.
On December 16, 1996, the Company granted 56,350 Non-Qualified
Stock Options to employees valued at $142,284. 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 20,500 Non-Qualified Stock Options and 8,500
Incentive Stock Options to employees at $2.625 or the prevailing
market price.
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 (92,000) $3.25
---------- --------------
Warrants outstanding at December 31, 1996 2,992,430 $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 minimum
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 $5.00 to
$17.34 [for two-year periods expiring at various dates through
February, 1997]. As of December 31, 1996, the Company's
contingent liabilities under these agreements aggregated
approximately $57,400, 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 an effective registration
statement for 94,402 shares of common stock which are expected to
be sufficient to satisfy the Company's obligation.
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 December 31, 1996, the Company
has available on its revolving credit facility the amount of
$6.05 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 extinguishment of debt.
The Company's working capital decreased by $6.6 million
from $6.0 million to a working capital deficiency of $.6 million
at December 31, 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 $3,296,034. A net loss
of $3,887,767 which included depreciation and amortization of
$1,338,341 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, accrued expenses and deferred revenue. At
December 31, 1996, accounts receivable increased by $324,000 from
fiscal June 30, 1996. The acquisition of approximately 8,000
subscriber accounts, during the past twelve months, resulted in
an increase in monthly monitoring and service billings in the
amount of $175,000, and an increase in the sale of 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
$400,000 at December 31, 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 $212,000
is attributable to an increase in future orders for PERS by both
private label resellers and home healthcare agencies. Accounts
payable and accrued expenses decreased by $1.1 million primarily
due to costs related to both the Mellon Bank, N.A. Line of Credit
Agreement (see Note 5) and the issuance of Preferred Stock (see
Note 6) having been accrued at June 30, 1996. Purchase holdbacks
increased by $343,000 and deferred revenues increased by $133,000
due to the acquisition of approximately 8,000 monitoring
contracts over the past twelve months.
Net cash used in investing activities for the six months ended
December 31, 1996 was $1,997,647. The purchase of monitoring
contracts during the six months ended December 31, 1996 accounted
for $1,667,980 of the cash used in investing activities. Other
investing activity included the purchase of property and
equipment of $352,667 (including equipment used for rentals in
the amount of $110,700), which was offset by the proceeds from
the sale of equipment of $23,000.
Net cash provided by financing activities was
$3,744,538 for the six month period ended December 31, 1996. Net
proceeds of $6,487,551 were received from the issuance of
Preferred Stock in July 1996. Proceeds from the exercise of
stock options and warrants totalled $443,500. Proceeds received
from a $10.5 million advance from the line of credit (see Note 5)
less debt issue costs of $668,616 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, totalling $3,086,606, were made during the six months
ended December 31, 1996.
The Company's wholly-owned subsidiary, Systems, filed a
petition for reorganization under Chapter 11 of the Federal
Bankruptcy Act in October 1987. Systems' Plan of Reorganization
became effective in February 1990. As of December 31, 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 cash flow
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--Notes to Consolidated
Financial Statements) 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.
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 $486,000 (9%) and
$445,000 (18%) for the six months and three months ended December
31, 1996 as compared to the same periods ended December 31, 1995.
Product sales accounted for a decrease of $198,000 (13%) and an
increase of $55,000 (10%) for the six months and three months
ended December 31, 1996. The decrease in product sales for the
six months 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 $429,000 for the six months ended December 31, 1996
as compared to the same period ended December 31, 1995. This
decrease was offset by the increase in revenues from the sale of
personal emergency response systems (PERS) by $231,000 for the
same period. The increase in product sales for the quarter ended
December 31, 1996 as compared to the same period ended December
31, 1995 was primarily due to the increase in sales of personal
emergency response systems to both home healthcare agencies and
private label wholesalers totalling $181,000. The significant
growth in PERS revenues was offset by a decrease in sales of
electronic security systems of approximately $126,000, due to the
Company's acquisition strategy. The significant growth in
monitoring and service revenues of $697,000 (22%) and $382,000
(26%) for the six and three month periods ended December 31,
1996, as compared to the same periods ended December 31, 1995,
were due to the acquisition of 8,000 monitoring contracts over
the past year and the success of the Company's extended warranty
program. Finance and rental income declined by $13,000 (1%) and
increased by $8,000 (2%) for the six and three months ended
December 31, 1996 as compared to the same periods ended December
31, 1995.
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 by a co-participant
specializing in direct sales to the consumer or home healthcare
agency. The Company currently distributes its PERS through
approximately 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,
decreased from 69% for the six months ended December 31, 1995, to
68% for the six months ended December 31, 1996. The decline in
the Gross Profit Margin was primarily due to the higher costs of
labor and parts in the performance of service calls to the
Company's expanding customer base. Cost of goods sold on product
sales remained at 68% for both the six months ended December 31,
1996 and 1995.
Selling, general, and administrative expenses rose to
$3.1 million and $1.5 million for the six months and for the
quarter ended December 31, 1996, which represents increases of
$190,000 (7%) and $68,000 (5%), over selling, general and
administrative expenses for the same periods ended December 31,
1995. Selling, general and administrative expenses, as a
percentage of total operating revenues, decreased from 53% and
58% to 51% and 52% for the six and three month periods ended
December 31, 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 increases in selling, general
and administrative expenses of 7% and 5%, for the six and three
month periods ended December 31, 1996, was significantly lower
than the 17% and 20% increases 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
$312,000 and $192,000 for the six and three months ended December
31, 1996, respectively. The increases in amortization expense is
the result of the Company's acquisitions of approximately 8,000
monitoring contracts during the past twelve months.
Interest expense decreased by $576,000 and $357,000 for
the six and three month ended December 31, 1996, as compared to
the same periods ended December 31, 1995. In July 1996 the
Company paid off notes payable with balances aggregating
$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 in the
Company's borrowing costs.
The net losses for the six and three month periods
ended December 31, 1996 were $1,338,060 and $729,508 (excluding
an extraordinary item for early extinguishment of debt of
$2,549,708), or ($.33) and ($.18) per share based on 4,010,595
and 4,108,281 shares outstanding, as compared to net losses of
$1,576,670, and $1,103,871 or ($1.70) and ($1.07) per share based
on 926,877 and 1,033,941 shares outstanding. The losses before
extraordinary items of $1,338,060 and $729,508 includes
depreciation and amortization and interest expense totalling
approximately $2.2 million and $1.1 million, for the six and
three month periods ended December 31, 1996, respectively.
Earnings before interest, taxes, depreciation, and amortization
(EBITDA), excluding loss on debt extinguishment and a non-
recurring charge for compensation from the issuance of stock
options, was $1,022,000 for the six months ended December 31,
1996 and $494,000 for the quarter ended December 31, 1996, as
compared to $903,000 and $137,000 for the six and three month
periods ended December 31, 1995.
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 - Filed on October 24, 1996.
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. February 7, 1997
------------------ ----------------
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
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