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, 1997
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
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: 6,596,589 shares of $.008 par value common stock as of
October 31, 1997.
Response USA, Inc. and Subsidiaries
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets for September 30, 1997
and June 30, 1997 1-2
Consolidated Statements of Operations for the Three
Months ended September 30, 1996 and 1997 3
Consolidated Statement of Stockholders' Equity for
September 30, 1997 4
Consolidated Statements of Cash Flows for the Three
Months ended September 30, 1996 and 1997 5-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
PART II. OTHER INFORMATION 16-17
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
1997 1997
------------ --------
(Unaudited)
ASSETS
------
CURRENT ASSETS
Cash $682,813 $698,551
Marketable securities 56,250 75,000
Accounts receivable - Current portion
Trade - Net of allowance for doubtful
accounts of $373,932 and $437,208,
respectively 1,580,791 1,443,203
Net investment in sales-type leases 88,443 89,124
Inventory 829,453 798,814
Prepaid expenses and other current assets 446,524 271,087
--------- ---------
Total current assets 3,684,274 3,375,779
--------- ---------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $5,872,197 and $5,217,345,
respectively 18,045,284 18,433,133
---------- ----------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $2,466,951
and $2,363,067, respectively 1,522,023 1,512,077
---------- ----------
OTHER ASSETS
Accounts receivable - Noncurrent portion
Trade 37,006 49,046
Net investment in sales-type leases 165,067 179,752
Deposits 45,935 45,310
Investment in joint venture 2,963,096 3,139,484
Deferred compensation expense 517,500 892,500
Deferred financing costs - Net of
accumulated amortization of $556,131
and $254,654, respectively 3,316,249 3,612,727
--------- ---------
7,044,853 7,918,819
--------- ---------
$30,296,434 $31,239,808
========== ==========
See notes to consolidated financial statements
-1-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
1997 1997
------------ --------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt
Notes payable $104,956 $100,329
Capitalized lease obligations 52,859 57,453
Accounts payable - Trade 738,909 556,205
Purchase holdbacks 571,120 415,765
Accrued expenses and other current
liabilities 1,076,485 1,288,332
Deferred revenue 1,981,698 1,981,500
--------- ---------
Total current liabilities 4,526,027 4,399,584
--------- ---------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt
Notes payable 12,872,584 12,435,287
Capitalized lease obligations 72,412 85,435
Deferred compensation expense 1,725,000 2,550,000
---------- ----------
14,669,996 15,070,722
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY
Preferred stock - Series A - Par value $1,000
Authorized 250,000 shares
Issued and outstanding 6,890 shares -
June 30, 1997 and 5,890 shares -
September 30, 1997 6,818,055 7,757,783
Preferred stock - Series B - Par value $.01
Authorized 3,069.58 shares
Issued and outstanding 3,069.58 shares 31
Common stock - Par value $.008
Authorized 12,500,000 shares
Issued and outstanding 5,309,206 shares -
June 30, 1997 and 6,567,903 shares -
September 30, 1997 52,543 42,474
Additional paid-in capital 36,720,434 35,411,194
Unrealized holding losses on available-
for-sale securities (18,750
Accumulated deficit (32,471,902) (31,441,949)
----------- -----------
11,100,411 11,769,502
----------- -----------
$30,296,434 $31,239,808
=========== ===========
See notes to consolidated financial statements
-2-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended September 30,
1996 1997
---------- ----------
OPERATING REVENUES
Product sales $656,128 $662,846
Monitoring and service 2,386,239 2,585,038
--------- ---------
3,042,367 3,247,884
--------- ---------
COST OF REVENUES
Product sales 451,535 398,442
Monitoring and service 747,025 768,739
--------- ---------
1,198,560 1,167,181
--------- ---------
GROSS PROFIT 1,843,807 2,080,703
--------- ---------
OPERATING EXPENSES
Selling, general and administrative 2,284,484 1,165,635
Depreciation and amortization 662,719 837,539
Interest 503,470 643,780
--------- ---------
3,450,673 2,646,954
--------- ---------
LOSS FROM OPERATIONS (1,606,866) (566,251)
--------- ---------
OTHER INCOME/(EXPENSE)
Interest income 7,939 1,708
Joint venture loss (130,138)
--------- ---------
7,939 (128,430)
--------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (1,598,927) (694,681)
EXTRAORDINARY ITEM
Loss on debt extinguishment 2,549,708
--------- ---------
NET LOSS (4,148,635) (694,681)
Dividends and accretion on preferred stock (6,125,549) (335,272)
---------- ---------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $(10,274,184) $(1,029,953)
========== =========
Loss per common share
Loss before extraordinary item ($0.41) ($0.11)
Extraordinary item (0.65) 0.00
---- ----
Net loss ($1.06) ($0.11)
==== ====
Net loss applicable to common shareholders ($2.63) ($0.16)
==== ====
Weighted average number of shares outstanding 3,906,851 6,397,598
========= =========
See notes to consolidated financial statements
-3-
<TABLE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
Unrealized
Preferred Stock Preferred Stock Holding
Series - A Series - B Common Stock Losses on
----------------- -------------- ----------------- Additional Available-
Number Number Number Paid-In For-Sale Accumulated
of Shares Amount of Shares Amount of Shares Amount Capital Securities Deficit Total
----- ---------- ----- ------ --------- ------- ----------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 6,890 $7,757,783 - $ - 5,309,206 $42,474 $35,411,194 $ - $(31,441,949) $11,769,502
Exercise of stock options 36,208 290 82,131 82,421
Exercise of warrants to
lender 3,070 31 321,789 2,574 (2,605) 0
Discount on and deemed
dividends on preferred
stock 185,272 (185,272) 0
Conversion of preferred
stock (1,000) (1,125,000) 900,000 7,200 1,267,800 (150,000) 0
Issuance costs incurred
in connection with the
preferred stock
settlement (38,081) (38,081)
Acquisitions - pursuant
to stock price
guarantees 700 5 (5) 0
Unrealized holding
losses on available-
for-sale securities (18,750) (18,750)
Net loss (694,681) (694,681)
----- ---------- ----- ------ --------- ------- ----------- -------- ------------ -----------
Balance -
September 30, 1997 5,890 $6,818,055 3,070 $31 6,567,903 $52,543 $36,720,434 $(18,750) $(32,471,902) $11,100,411
===== ========== ===== ====== ========= ======= =========== ======== ============ ===========
See notes to consolidated financial statements
-4-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended September 30,
--------------------------------
1996 1997
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(4,148,635) $(694,681)
Adjustments to reconcile net loss
to net cash used in operating activities
Amortization of monitoring contract costs 546,024 654,851
Depreciation and amortization of property
and equipment 116,695 136,438
(Gain) loss on sale of property and equipment 11,319 (2,489)
Amortization of deferred financing costs and
debt discount 401,264 301,477
Amortization of goodwill 46,250
Loss on joint venture 130,138
Issuance of warrants for consulting fees 106,000
Compensation expense (benefit) in connection
with employment contracts 862,500 (450,000)
(Increase) decrease in accounts receivable
Trade (445,179) (125,546)
Net investment in sales-type leases (3,006) 15,365
Increase in inventory (155,712) (30,639)
(Increase) decrease in prepaid expenses and
other current assets 3,869 (175,436)
Increase in deposits (3,702) (625)
Increase in accounts payable - Trade 101,575 4,331
Increase (decrease) in accrued expenses and
other current liabilities 200,477 (33,473)
Increase (decrease) in deferred revenues (46,005) 198
----------- ---------
Net cash used in operating activities (2,452,516) (223,841)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of monitoring contracts (net
of purchase holdbacks) (482,183) (111,648)
Proceeds from the sale of property and
equipment 20,000
Purchase of property and equipment (120,730) (114,431)
----------- ---------
Net cash used in investing activities (582,913) (226,079)
----------- ---------
See notes to consolidated financial statements
-5-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended September 30,
--------------------------------
1996 1997
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of preferred
stock 7,500,000
Costs incurred in connection with the
preferred stock issuance (1,146,924) (38,081)
Deferred financing costs incurred (691,377) (5,000)
Proceeds of long-term notes payable 10,750,000 425,000
Principal payments on long-term debt
Notes payable (15,076,982) (12,542)
Capitalized lease obligations (21,224) (17,616)
Net proceeds from the exercise of stock
options and warrants 190,000 82,421
----------- --------
Net cash provided by financing activities 1,503,493 434,182
----------- --------
NET DECREASE IN CASH (1,531,936) (15,738)
CASH - BEGINNING 1,926,766 698,551
--------- -------
CASH - ENDING $394,830 $682,813
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $199,857 $434,692
Cash paid during the year for income taxes -- --
See notes to consolidated financial statements
-6-
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
Supplemental Disclosures of Noncash Investing and Financial Activities
During the three months ended September 30, 1996 and
1997, long-term notes payable of $19,049 and $29,464,
respectively, were incurred for the purchase of property and
equipment. In July 1996, capitalized lease obligations of
$143,100 were incurred for the acquisition of property and
equipment.
During the three months ended September 30, 1996, the
Company recorded accretion to preferred stock in the amount
of $5,895,000 with a corresponding charge to accumulated
deficit. The accretion represents the intrinsic value of the
beneficial conversion feature contained within the preferred
stock.
During the three months ended September 30, 1996 and
1997, the Company recorded deemed dividends and accretion on
such dividends in the amount of $230,549 and $185,272,
respectively, in connection with the preferred stock
issuance, with a corresponding charge to accumulated deficit
(see Note 4).
During the three months ended September 30, 1996 and
1997, $510,000 and $1,000,000 of preferred stock, and $4,767
and $100,000 in deemed dividends were converted into 151,071
and 900,000 shares of common stock, respectively.
During the three months ended September 30, 1996, the
Company increased the put obligation payable associated with
warrants issued to the Company's lender and the corresponding
charge to deferred financing costs by $585,065 in connection
with the refinancing at June 30, 1996. On June 24, 1997, the
Company, in return for the holder of the warrants forgiving
the put obligation feature, reduced the exercise price of such
warrants from $3.25 to $1.50. On August 13, 1997, the Holder
exercised the warrants and received 321,789 shares of common
stock and blank check preferred stock convertible into 306,958
shares of common stock (see Note 3).
During the three months ended September 30, 1997, the
Company issued 8,700 shares of its common stock and canceled
8,000 shares of its common stock pursuant to guarantees of
stock valuations, in connection with past acquisitions of
monitoring contracts.
During the three months ended September 30, 1996,
convertible subordinated promissory notes of $50,000 were
converted to common stock. As a result, the Company reduced
deferred financing costs and additional paid-in capital in
the amount of $5,068.
See notes to consolidated financial statements
-7-
RESPONSE USA, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Basis of Presentation
The accompanying interim balance sheet as of September
30, 1997, 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.
Certain amounts in the 1996 quarterly financial
statements have been reclassified to conform with the 1997
presentation.
These financial statements should be read in
conjunction with the Company's annual financial statements.
2. Acquisitions and Pending Acquisitions
Acquisitions
------------
During the three months ended September 30, 1997,
the Company purchased monitoring contracts for an aggregate
of $267,004. As consideration, the Company paid $70,018 in
cash, including acquisition costs of $7,426, and recorded
purchase holdbacks of $196,986 (which are payable over
periods of up to eighteen months based on performance
guarantees of the seller).
Pending Acquisitions
--------------------
On July 31, 1997, the Company entered into an Agreement
with 4R Security to acquire approximately 2,000 alarm
monitoring subscriber accounts and certain assets of 4R
Security for a purchase price of approximately $1,600,000,
substantially all of which is payable in cash and a portion
of which is payable in stock, subject to certain adjustments
and holdbacks. Since 4R Security has filed for protection under
the United States Bankruptcy Code, the acquisition is conditioned
upon the approval by the United States Bankruptcy Court for the
Eastern District of New York. Pursuant to the agreement, 4R
Security has agreed not to solicit or otherwise communicate
with any customer whose account was purchased by the Company
for the purpose of inducing such customer to discontinue its
relationship with the Company. If the acquisition is consummated,
the Company will assume the balance of 4R Security's lease for
its premises in Patchogue, New York.
On September 30, 1997, the Company, entered into an
agreement with Triple A Security Systems, Inc. ("Triple A"),
a Pennsylvania corporation, and Robert L. May, an individual
to acquire substantially all of the assets of Triple A
Security Systems, Inc. Triple A is engaged in the
installation, servicing and monitoring of electronic
security systems. In consideration of the acquisition of
approximately 14,000 subscriber accounts, the Company will
pay Triple A an aggregate of approximately $12,500,000,
consisting of $10,000,000 in cash and $1,750,000 in shares
of its common stock; additionally the Company will assume
certain liabilities totaling $750,000.
In October 1997, the Company entered into an agreement
to acquire all of the outstanding stock of Jupiter, a patrol
service company. Jupiter's patrol services are principally
supplied in areas in which the Company believes that Triple
A is a substantial provider of security systems services.
The patrol service supplements the Company's alarm
monitoring service by providing routine patrol of a
subscriber's premises and neighborhood, response to alarm
system activations and "special Watch" services, such as
picking up mail and newspapers and increased surveillance
when the customer is on vacation.
-8-
3. LONG-TERM NOTES PAYABLE
Line of Credit Agreement
------------------------
Note payable with interest only due through June
30, 2000 at prime plus 1-3/4% on the outstanding
loan balance; a commitment fee of .5% is payable
on the average daily unused credit; collateralized
by all assets of the Company $ 12,660,000
Equipment Financing
-------------------
Payable in monthly installments aggregating $4,200
including interest at rates ranging from 2.94% to
11.83%; final payments due September, 1997 through
August, 2002; collateralized by related equipment 105,874
Reorganization Debt
-------------------
As part of the 1990 plan of reorganization of a
1987 bankruptcy, the U.S. Bankruptcy Court approved
a 30.5% settlement on the total unsecured claims
submitted; payments are due March 1 of each year,
as follows: 3% ($86,817) each year -- 1998 through
2000; interest imputed at 14%; net of imputed
interest of $58,894 201,557
Federal priority tax claims payable in annual
installments of $2,211 through March, 1999, and
$1,896 thereafter 10,109
----------
12,977,540
Less Current Portion 104,956
----------
$12,872,584
===========
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. As of
September 30, 1997, the Company has available on its
revolving credit facility the amount of $2,340,000.
On June 30, 1996, in connection with obtaining a line
of credit, the Company issued a stock purchase warrant (the
Warrant) to an affiliate of the bank which provided the line
of credit. The terms of this Warrant, which were
subsequently modified (see below), included the following:
(i) number of shares, 1,032,135; (ii) exercise price, $3.25
per share; (iii) expiration date, June 30, 2006; and (iv) put
obligation feature, which the Holder of the warrant can
require, during the period between July 1, 2000 and June 30,
2001 upon 10 days notice, the Company to purchase the Warrant
for the difference between the market price of the Company's
common stock and the exercise price times 1,032,135 shares.
On June 24, 1997, the Company, in return for the holder
of the Warrant forgiving the put obligation feature, reduced
the exercise price of the Warrant to $1.50.
-9-
3. LONG-TERM NOTES PAYABLE (CONTINUED)
On August 13, 1997 the Holder exercised the Warrant
and received 321,789 shares of common stock and blank check
preferred stock convertible into 306,958 shares of common
stock, taking advantage of its noncash conversion feature
whereby the number of shares issued was reduced from
1,032,135 to 628,747 and no cash was paid by the Warrant
holder.
4. PREFERRED STOCK
During July, 1997, 1,000 shares of Series A Preferred
Stock and deemed dividends with a total book value of
$1,125,000 were converted into 900,000 shares of the
Company's common stock. As a result, the Company recorded
common stock of $7,200, additional paid-in capital of
$1,267,800, charged accumulated deficit $150,000, and
reduced the preferred stock account for $1,125,000, which
included a reduction of the discount on the outstanding
preferred stock in the amount of $25,000.
During the three months ended September 30, 1997,
deemed convertible preferred stock dividends totaling
$148,460 were recorded relating to the preferred shares. As
a result of the beneficial conversion feature contained
within the preferred stock dividend, the Company recorded a
discount on preferred stock in the amount of $36,812.
5. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
During the three months ended September 30, 1997, the
following stock options were exercised: (i) 5,000
nonqualified stock options with an exercise price of $.10;
(ii) 30,208 nonqualified stock options with an exercise
price of $2.625; and (iii) 1,000 incentive stock options
with an exercise price of $2.625. As a result, the Company
recorded common stock of $290 and additional paid-in capital
of $82,131.
During the three months ended September 30, 1997, the
Company issued 8,700 shares of its common stock and canceled
8,000 shares of its common stock pursuant to a guarantee of
stock valuation in connection with past acquisitions.
The following is a summary of stock option activity:
Option Weighted
Price Average
Number Per Share Exercise
of Shares (Range) Price
--------- ----------- -----
Options outstanding at June 30, 1997 2,038,958 $.01 - $4.45 $ .687
Options granted -- $ -- $ --
Options exercised (36,208) $.10 - $2.625 $2.276
Options canceled or expired -- $ -- $ --
--------- ------------ -----
Options outstanding at September 30, 1997 2,002,750 $.01 - $4.45 $ .658
========= ============ =====
Options exercisable at September 30, 1997 2,002,750 $.01 - $4.45 $ .658
========= ============ =====
The following is a summary of warrant activity:
Number Exercise Price
of Shares Per Share
--------- -------------
Warrants outstanding at June 30, 1997 4,234,530 $1.50 - $8.00
Warrants exercised in connection with
refinancing (628,747) $1.50
Warrants canceled in connection with
refinancing (403,388) $1.50
--------- -------------
Warrants outstanding at September 30, 1997 3,202,395 $2.00 - $8.00
========= =============
-10-
6. COMMITMENTS AND CONTINGENCIES
The Company has employment contracts with certain key
personnel of USS for terms expiring March, 1999. The
contracts provide for initial base salaries aggregating
$240,000 which are subject to incremental increases as
determined by the Board of Directors. Additional
compensation is due provided the following conditions are
realized: (i) if the Company increases its net alarm system
subscriber accounts by at least 10,000 accounts before March
1999, the Company shall pay each employee $1.0 million less
the gross proceeds from the sale or exercise of their
options; (ii) if the Company increases its net alarm system
subscriber accounts by at least 15,000 accounts before
March, 1999, the Company shall pay each employee $1.5
million less the gross proceeds from the sale or exercise of
their options; (iii) any increases in net alarm systems
between 10,000 and 15,000 accounts shall entitle certain
employees to a pro rated amount between $1.0 million and
$1.5 million as determined in provisions (i) and (ii) above.
At September 30, 1996 and 1997 the increase in net alarm
systems exceeded 15,000 accounts. As a result, the Company
recorded compensation expense (benefit) and a deferred
compensation liability at September 30, 1996 and 1997 of
$862,500 and $(450,000), respectively. Increases in the
Company's stock price result in a decreasing obligation on
behalf of the Company and also are the cause for the
compensation benefit in 1997.
7. SUBSEQUENT EVENTS
In October, 1997, the Company filed a Form SB-2
Registration Statement under the Securities Act of 1933,
offering 7,200,000 shares of Common Stock, par value $.008
per share. The Company has granted the Underwriters a 45-day
option to purchase up to an additional 1,080,000 shares of
Common Stock solely to cover over-allotments, if any. In
connection with the offering, the Underwriters will receive
warrants to purchase up to an aggregate of 720,000 shares of
Common Stock from the Company.
The Company anticipates declaring a one-for-three
reverse stock split prior to the effective date of the Form
SB-2 Registration Statement.
The net proceeds from the sale of Stock will be used
for the acquisition of Triple A (see Note 2), to redeem the
Series A preferred stock and the remainder to pay down
amounts outstanding under the credit line.
On October 1 and November 13, 1997, Mellon Bank amended
certain financial covenants in the Loan and Security
Agreement dated June 30, 1996, as follows: (i) ratio of cash
flow to interest expense; (ii) ratio of senior funded debt
to cash flow; (iii) net income (loss); and (iv) capital
expenditures. The Company believes it will be in compliance
with the terms of the amended covenants, during the remainder
of Fiscal 1998.
On October 30, 1997, Mellon Bank agreed to increase the
revolving credit facility from $15.0 million to $18.0
million under the same terms and conditions as the original
Loan and Security Agreement except for the amortization of
the outstanding loan. The amended amortization on the
outstanding loan balance is interest only for one year, and
the reduction of principal in the amount of $250,000 per
quarter, thereafter. The increase in the line of credit is
conditional upon net proceeds received, totaling at least
$7.0 million, after the redemption of preferred shareholders
and expenses, from the planned secondary offering.
-11-
Item 6. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations
-----------------------------------
The following discussion should be read in
conjunction with the Consolidated Financial Statements and
related notes thereto.
Forward Looking Information.
The Private Securities Litigation Reform Act of 1995
(the "Reform Act") provides a "safe harbor" for forward-
looking statements to encourage companies to provide
prospective information 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 10-QSB 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 can 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 restructuring of its long-term debt. The Company
obtained a $15 million revolving credit facility from Mellon
Bank, N.A. and issued $7.5 million 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 resulted in a substantial decrease in
the Company's borrowing costs. The restructuring resulted in
an extraordinary charge of $2,549,708 for early
extinguishment of debt in fiscal 1997. As of September 30,
1997, the Company has available on its revolving credit
facility the amount of $2,340,000. The credit facility bears
interest at the Prime Rate, plus 1 3/4%. On October 30,
1997, Mellon Bank agreed to increase the revolving credit
facility from $15.0 million to $18.0 million under the same
terms and conditions as the original Loan and Security
Agreement except for the amortization of the outstanding
loan. The amended amortization on the outstanding loan
balance is interest only for one year, and the reduction of
principal in the amount of $250,000 per quarter, thereafter.
The increase in the line of credit is conditional upon net
proceeds received, after the redemption of preferred
shareholders and expenses, from the planned secondary
offering. The Company's working capital improved by $182,052
from a working capital deficiency of $1,023,805 to a working
capital deficiency of $841,753 at September 30, 1997. 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 for the
three months ended September 30, 1997 was $223,841. A net
loss of $694,681 including noncash transactions totaling
$816,665, provided cash from operating activities in the
amount of $121,984. The noncash transactions are as follows:
(i) depreciation and amortization of $1,139,016; (ii)
compensation benefit in connection with employment
agreements of $450,000; (iii) a loss on joint venture of
$130,138; and (iv) a gain on sale of equipment of $2,489.
Cash used in operating activities included changes in
accounts receivable, and prepaid expenses and other current
assets totaling $285,617. The increase in accounts
receivable of $110,181 was primarily due to the increase in
monthly monitoring and service billings, as a result of the
acquisition of approximately 5,000 subscriber accounts
during the past twelve months. Prepaid expenses and other
current assets increased by $175,436, due primarily to
expenditures in connection with the planned secondary
offering and a security deposit on a pending acquisition.
-12-
Liquidity and Capital Resources (Continued)
Net cash used in investing activities for the three
months ended September 30, 1997 was $226,079. Purchases of
monitoring contracts, and property and equipment accounted
for $111,648 and $114,431 (including equipment used for
rentals in the amount of $52,075), respectively, of the cash
used in investing activities.
Net cash provided by financing activities was
$434,182 for the three months ended September 30, 1997.
Proceeds from the exercise of stock options and warrants
totaled $82,421. Net proceeds received from a line of credit
of $425,000 were used primarily for the acquisition of
monitoring contracts, and expenses incurred in connection
with the planned secondary offering. Costs incurred in
connection with the prior years refinancing totaled $43,081.
Principal payments on long-term debt totaling $30,158 were
made during the three months ended September 30, 1997.
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 working
capital needs for twelve months.
In October, 1997, the Company filed a Form SB-2
Registration Statement under the Securities Act of 1933. The
Company anticipates declaring a one-for-three reverse stock
split prior to the effective date of the Form SB-2
Registration Statement. Such Registration Statement is
offering 7,200,000 shares of Common Stock, par value $.008
per share. The Company has granted the Underwriters a 45-day
option to purchase up to an additional 1,080,000 shares of
Common Stock solely to cover over-allotments, if any. In
connection with the offering, the Underwriters will receive
warrants to purchase up to an aggregate of 720,000 shares of
Common Stock from the Company.
The Company intends to use borrowings under the
revolving bank line of credit together with the remaining
cash flow from operations to continue to acquire monitoring
contracts. Additional funds beyond those currently available
will be required to continue the acquisition program, and
there can be no assurance that the Company will be able to
obtain such financing.
Results of Operations
A majority of the Company's revenues are derived
from monthly recurring payments for the monitoring, rental
and servicing of both electronic security systems and PERS,
pursuant to contracts with initial terms up to five years.
Service revenues are derived from payments under extended
warranty contracts and for service calls performed on a time
and material basis. The remainder of the Company's revenues
are generated from the sale and installation of security
systems and PERS. Monitoring and service revenues are
recognized as the service is provided. Sale and installation
revenues are recognized when the required work is completed.
All direct installation costs, which include materials, labor
and installation overhead, and selling and marketing costs are
expensed in the period incurred. Alarm monitoring and rental
services generate significantly higher gross margins than do
the other services provided by the Company.
Operating revenues increased by $205,517 or 7% for the
quarter ended September 30, 1997 ("Fiscal 1998") as compared
to the quarter ended September 30, 1996 ("Fiscal 1997"). An
increase in sales of electronic security systems to both
residential and commercial customers totaling approximately
$45,000, was offset by a decrease in sales of personal
emergency response systems (PERS) to private label
wholesalers of approximately $45,000. The growth in
monitoring and service revenues of $198,799 or 8% for Fiscal
1998 as compared to Fiscal 1997, was due to the acquisition
of monitoring contracts and the success of the Company's
extended warranty program.
-13-
Results of Operations (Continued)
In November 1996, the Company entered into a two-year
agreement granting it exclusive worldwide distribution
rights to WanderWatch, a monitoring system designed to
assist in the care of patients with Alzheimer's disease,
autism, head injury, dementia or other diseases or injuries
which may involve memory loss. It enables the Company to
distribute a new product through its existing network of
subscribers, hospitals, home healthcare agencies, and its
dealer network. The Company will monitor the WanderWatch
System at its central monitoring station. WanderWatch is
currently being test-marketed by the Company and the Company
does not anticipate commencing distribution of the product
until fiscal 1999.
In March 1997, the Company acquired a 50% interest
in Healthlink Ltd ("HealthLink"). Healthlink markets a low-
cost PERS product containing basic one-way transmission
features (the "HealthLink System"). The HealthLink System is
distributed nationally through retail stores, including
Target Stores, Long's Drugs, Fred Myer's, Fry's and Bergen
Brunswick's west-coast Good Neighbor Pharmacies, accounting
for distribution through a total of approximately 1,700
stores. The Company is negotiating with several other chain
stores to further increase distribution. The Company
provides monitoring and related services to Healthlink
System customers, is responsible for billing and collecting
from such customers, and receives a portion of the recurring
revenue as a fee providing these services.
Gross Profit for Fiscal 1998 was $2,080,703, which
represents an increase of $236,896, or 13%, over the
$1,843,807 of gross profit recognized in Fiscal 1997. The
increase was due primarily to an increase in monitoring and
service revenues, and the success of the extended warranty
program, which is concurrent with the increase in the
Company's subscriber base. The Gross Profit Margin (GPM), as
a percentage of sales, was 61% for the quarter ended
September 30, 1996, as compared to 64% for the quarter ended
September 30, 1997. The GPM on product sales rose from 31%
in Fiscal 1997 to 40% for Fiscal 1998. The increase is due
to increased revenues derived from the installation of
electronic security systems to commercial customers as
opposed to residential customers and the utilization of in-
house labor in lieu of subcontractors for the installation
of electronic security systems. The GPM on monitoring and
service revenues increased slightly from 69% to 70% for the
periods ended September 30, 1996 and 1997, respectively.
Selling, general and administrative expenses
(excluding compensation expense (benefit) in connection with
employment agreements of $862,500 and $(450,000), and the
amortization of transition costs of $91,047 and $11,178, for
Fiscal 1997 and Fiscal 1998, respectively) grew to
$1,626,813 for the three months ended September 30, 1997,
which represents an increase of $113,782 or 7%, over
selling, general and administrative expenses for the three
months ended September 30, 1996. Selling, general and
administrative expenses, as a percentage of total operating
revenues, remained at 50% for the comparative periods ended
September 30, 1996 and 1997. The increase in selling, general
and administrative expenses was primarily due to increases in
corporate overhead expenses incurred to assimilate newly
acquired customers into the Company's customer base, to support
the larger subscriber base, and sales and marketing expenses
associated with the test-marketing of WanderWatch. While selling,
general and administrative expenses, as a percentage of revenues,
remained the same for Fiscals 1997 and 1998, monitoring and
service revenues increased by 8% between comparable periods,
reflecting efficiencies realized in the Company's corporate
offices. The Company anticipates that its current level of
selling, general and administrative expenses, as a percentage of
sales, will decrease as a result of the Company's operating
revenues growing substantially due to increases in monitoring
and service revenues from ongoing acquisitions.
During the quarter ended September 30, 1996, the
Company recorded a deferred compensation liability with a
corresponding charge to selling, general and administrative
expense in the amount of $862,500, pursuant to employment
contracts. As of September 30, 1997, due to increases in the
-14-
Results of Operations (Continued)
market value of the Company's common stock, which impacts
the final payment due the employees, the Company reduced both
the deferred compensation liability and selling, general and
administrative expense by $450,000 pursuant to the same
employment contracts. Increases in the Company's stock price
result in a decreasing obligation on behalf of the Company
and also are the cause for the compensation benefit in 1997.
(See Note 6 of Notes to Consolidated Financial Statements).
Amortization and depreciation expenses increased by
$174,820, from $662,719 to $837,539 for the three months
ended September 30, 1996 and 1997, respectively. This
increase in amortization and depreciation expense is the
result of the Company's acquisition of approximately 5,000
monitoring contracts and the purchase of property and
equipment of approximately $630,000 (including equipment
used for rentals) during the past twelve months.
Interest expense increased by $140,310 or 28% for
the three months ended September 30, 1997, as compared to
the same period ended September 30, 1996. The increase in
interest expense is due to an increase in borrowings of
approximately $4.7 million during the past twelve months,
which was used primarily for acquisitions and other capital
expenditures.
On March 4, 1997, the Company entered into a joint
venture agreement with BKR, Inc. to acquire a 50% interest
in HealthLink Ltd. Healthlink Ltd. subcontracts its
production of the HealthLink System to a third-party foreign
manufacturer. The HealthLink System, a low cost PERS product,
will be distributed nationally through retail stores. For the
quarter ended September 30, 1997, the Company has realized a
loss from joint venture of $130,138.
The net loss for the three months ended September
30, 1997 was $694,681 or ($.11) per share based on 6,397,598
shares outstanding, as compared to a net loss of $4,148,635
or ($1.06) per share based on 3,906,851 shares outstanding
for the three months ended September 30, 1996. The net loss
applicable to common shareholders (net loss adjusted for
dividends and accretion on preferred stock) for the periods
ended September 30, 1996 and 1997 were $10,274,184 or
($2.63) per share based on 3,906,851 shares outstanding; and
$1,029,953 or ($.16) per share based on 6,397,598 shares
outstanding, respectively. Earnings before interest, taxes,
depreciation and amortization (EBITDA), excluding charges
for the loss on debt extinguishment, compensation expense
(benefit) - employment agreements, and the loss on joint
venture was $421,823 for the quarter ended September 30,
1996 as compared to $465,068 for the quarter ended September
30, 1997.
-15-
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 -
(11) Computation of Loss per Common Share
(27) Financial data schedule
(b) Report on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities
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, 1997
------------------ -----------------
Registrant
By: /s/ Richard M. Brooks
---------------------
Richard M. Brooks
President, 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
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 683
<SECURITIES> 56
<RECEIVABLES> 2,245
<ALLOWANCES> 374
<INVENTORY> 829
<CURRENT-ASSETS> 3,684
<PP&E> 3,989
<DEPRECIATION> 2,467
<TOTAL-ASSETS> 30,296
<CURRENT-LIABILITIES> 4,526
<BONDS> 0
0
6,818
<COMMON> 53
<OTHER-SE> 4,229
<TOTAL-LIABILITY-AND-EQUITY> 30,296
<SALES> 663
<TOTAL-REVENUES> 3,247
<CGS> 398
<TOTAL-COSTS> 1,167
<OTHER-EXPENSES> 1,924
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 643
<INCOME-PRETAX> (695)
<INCOME-TAX> 0
<INCOME-CONTINUING> (695)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (695)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
EARNINGS PER SHARE COMPUTATIONS:
MODIFIED TREASURY STOCK METHOD:
Total exercise proceeds $12,712,869
----------
Period - end outstanding shares 6,567,903
----------
20% of period - end outstanding shares 1,313,581
x
Average share price during period $3.4375
----------
Proceeds used to purchase shares 4,515,435
----------
Remaining proceeds 8,197,434
Proceeds used to retire average debt 12,813,451
----------
Remaining proceeds to be invested ($4,616,017)
==========
Adjusted Income (Loss):
Net income(loss) ($694,681)
Dividends and accretion to preferred stock (335,272)
----------
Adjusted Income (Loss) (1,029,953)
Interest expense on retired debt (10.25%) 328,345
Interest income on proceeds invested (2.5%) 0
Tax effect of interest adjustments (40%) (131,338)
----------
Net income (loss) for E.P.S. purposes (832,946)
----------
Shares:
Weighted average shares outstanding 6,397,598
Weighted average equivalent shares outstanding 5,706,804
20% of period - end outstanding shares (1,313,581)
---------
Total shares for E.P.S. purposes 10,790,821
==========
Net income (loss) per share ($0.08)
==========
Maximum income (minimum loss) per share:
Adjusted Income (Loss) ($1,029,953)
divide by
Weighted average shares outstanding 6,397,598
----------
Net income (loss) per share ($0.16)
==========
