UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
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
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 Statements of Cash Flows for the Six
Months and Three Months ended December 31, 1996
and 1995 5-7
Notes to Consolidated Financial Statements 8-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-18
PART II. OTHER INFORMATION 19-20
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1996 1996
------------ ------------
(Restated)
ASSETS
------
CURRENT ASSETS
Cash $377,623 $1,926,766
Marketable securities 43,750 100,000
Accounts receivable - Current portion
Trade - Net of allowance for doubtful
account 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 $3,924,199 and $2,838,374,
respectively 17,455,313 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 compensation expense 675,000
Deferred financing costs - Net of
accumulated amortization of $565,516
and $111,945, respectivel 3,898,699 3,411,803
----------- ------------
4,870,626 3,813,049
----------- ------------
$27,406,532 $32,934,745
============ ============
See notes to consolidated financial statements
-1-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1996 1996
------------ ----------
(Restated)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
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 881,232 646,976
Accrued expenses and other current
liabilities 852,199 2,033,701
Deferred revenue 1,723,941 1,591,103
----------- -----------
Total current liabilities 4,203,983 4,942,679
----------- -----------
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
Deferred compensation expense 1,500,000
----------- -----------
10,833,239 12,405,796
----------- -----------
PUT OBLIGATION PAYABLE 3,437,041 2,580,338
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY
Preferred stock - Series A - Par value $1,000
Authorized 250,000 shares
Issued and outstanding 7,500 shares -
June 30, 1996 and 6,890 shares -
December 31, 1996 7,329,989 1,605,000
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 27,231,914 24,951,240
Unrealized holding losses on available-for-
sale securities (249,593) (193,343)
Accumulated deficit (25,413,088) (13,387,805)
------------ ------------
8,932,269 13,005,932
------------ ------------
$27,406,532 $32,934,745
============ ============
See notes to consolidated financial statements
-2-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
December 31, December 31,
1996 1995 1996 1995
-------- -------- ------- ---------
(Restated) (Restated)
OPERATING REVENUES
Product sales $1,278,042 $1,476,343 $621,914 $567,289
Monitoring and service 4,707,931 4,023,862 2,321,692 1,931,702
---------- --------- --------- ---------
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
Monitoring and service 1,488,622 1,129,103 741,597 656,198
---------- --------- --------- ---------
2,361,617 2,126,524 1,163,057 1,119,994
---------- --------- --------- ---------
GROSS PROFIT 3,624,356 3,373,681 1,780,549 1,378,997
---------- --------- --------- ---------
OPERATING EXPENSES
Selling, general and
administrative 3,414,247 2,471,138 1,992,263 1,238,866
Compensation - Options/
Employment contracts 967,284 104,784
Depreciation and
amortization 1,335,812 1,026,043 673,093 484,412
Interest 1,048,919 1,465,843 545,449 765,468
---------- ---------- --------- ---------
6,766,262 4,963,024 3,315,589 2,488,746
---------- ---------- --------- ---------
LOSS FROM OPERATIONS (3,141,906) (1,589,343) (1,535,040) (1,109,749)
INTEREST INCOME 10,058 12,673 2,119 5,878
---------- ---------- --------- ----------
LOSS BEFORE EXTRAORDINARY
ITEM (3,131,848) (1,576,670) (1,532,921) (1,103,871)
EXTRAORDINARY ITEM
Loss on debt extinguishment 2,549,708
---------- ---------- ---------- ---------
NET LOSS (5,681,556) (1,576,670) (1,532,921) (1,103,871)
Dividends and accretion
on preferred stock (6,343,727) (218,178)
---------- ---------- ---------- ---------
NET LOSS APPLICABLE TO
COMMON SHAREHOLDERS ($12,025,283)($1,576,670)($1,751,099) ($1,103,871)
============ =========== ========== ==========
Loss per common share
Loss before extraordinary
item ($0.78) ($1.70) ($0.37) ($1.07)
Extraordinary item (0.64) 0.00 0.00 0.00
------- ------- ------- -------
Net loss ($1.42) ($1.70) ($0.37) ($1.07)
======= ======= ======= =======
Net loss applicable to
common shareholders ($3.00) ($1.70) ($0.43) ($1.07)
======= ======= ======= =======
Weighted average number of
shares outstanding 4,010,553 926,877 4,108,281 1,033,941
========= ======= ========= =========
See notes to consolidated financial statements
-3-
<TABLE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (RESTATED)
(Unaudited)
<CAPTION> Unrealized
Holding
Preferred Stock Losses on
Series - A Common Stock Additional Available-
Number Number Paid-In For-Sale Accumulated
of Shares Amount of Shares Amount Capital Securities Deficit Total
----- --------- --------- ------ ---------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1996 7,500 $1,605,000 3,854,944 $30,840 $24,951,240 ($193,343) ($13,387,805) $13,005,932
Conversion of convertible
subordinated promissory
notes - Net of related
costs of $5,068 11,110 89 44,843 44,932
Issuance of warrants to
consultants 689,000 689,000
Exercise of stock options
and warrants 124,500 996 436,931 437,927
Accretion on preferred
stock due to intrinsic
value of conversion
feature 5,895,000 (5,895,000) 0
Discount on and deemed
dividends on preferred
stock 448,727 (448,727) 0
Conversion of preferred
stock (610) (618,738) 190,338 1,522 617,216 0
Issuance of warrants in
connection with
obtaining lines of credit 350,000 350,000
Issuance of stock options 142,284 142,284
Cancellation of common
stock held in escrow (50,000) (400) 400 0
Unrealized holding losses
on available-for-sale
securities (56,250) (56,250)
Net loss (5,681,556) (5,681,556)
----- --------- --------- ------ ---------- ------- ---------- ---------
Balance - December 31, 1996 6,890 $7,329,989 4,130,892 $33,047 $27,231,914 ($249,593) ($25,413,088) $8,932,269
===== ========= ========= ====== ========== ======= ========== =========
</TABLE>
See notes to consolidated fiancial statements
-4-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended December 31,
1996 1995
---------- ----------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($5,681,556) ($1,576,670)
Adjustments to reconcile net loss
to net cash used in operating activities
Amortization of monitoring contract costs 1,085,825 805,963
Depreciation and amortization of property
and equipment 249,989 211,900
Loss on sale of property and equipment 8,319
Gain on sale of monitoring contracts (91,663)
Amortization of deferred financing costs
and debt discount 691,978 50,793
Issuance of common stock and warrants for
consulting fees 689,000 8,125
Compensation expense in connection with
the issuance of stock options and
employment contracts 967,284
(Increase) decrease in accounts receivable
Trade (312,620) (543,421)
Net investment in sales-type leases (11,007) 6,298
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
Decrease in accrued expenses and other
current liabilities (1,149,015) (144,365)
Increase in deferred revenues 132,838 63,866
---------- ----------
Net cash used in operating activities (3,762,088) (1,033,058)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of monitoring contracts (net of
purchase holdbacks) (1,201,926) (2,285,178)
Proceeds from the sale of monitoring
contracts 233,548
Proceeds from the sale of property and
equipment 23,000
Purchase of property and equipment (352,667) (209,739)
---------- ----------
Net cash used in investing activities (1,531,593) (2,261,369)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of preferred
stock 7,500,000
Costs incurred in connection with the
preferred stock issuance (1,012,449)
Proceeds from private placement 435,000
Deferred financing costs incurred 22,761 (27,441)
Proceeds from long-term debt
Notes payable 11,950,000 3,474,809
Capitalized lease obligations 43,933
Principal payments on long-term debt
Notes payable (15,116,701) (716,699)
Capitalized lease obligations (42,573) (19,995)
Net proceeds from the exercise of
stock options and warrants 443,500 76,125
----------- ----------
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
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $440,812 $1,407,371
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 six months ended December 31, 1996 and 1995,
convertible subordinated promissory notes of $50,000 and
$875,000, respectively, 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 and
$168,951 for the six months ended December 31, 1996 and
1995, respectively.
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,
capitalized lease obligations of $143,100 were incurred for
the acquisition of property and equipment.
During the six months ended December 31, 1996 and 1995,
the Company reduced monitoring contract costs and the
corresponding purchase holdbacks in the amount of $108,764
and $633,797, respectively.
During the six months ended December 31, 1996, the
Company reduced amounts 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, 1996, the
Company increased the put obligation payable and the
corresponding charge to deferred financing costs by
$856,703, in connection with the refinancing at June 30,
1996 (see Note 5).
During the six months ended December 31, 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 (see Note 6).
During the six months ended December 31, 1996, the
Company recorded deemed dividends and accretion on such
deemed dividends totaling $448,727 in connection with the
preferred stock issuance, with a corresponding charge to
accumulated deficit (see Note 6).
During the six months ended December 31, 1996, $610,000
of preferred stock and $8,738 in deemed dividends were
converted into 190,338 shares of common stock.
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 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 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.
Certain amounts in the 1995 quarterly financial
statements have been reclassified to conform with the 1996
presentation.
These financial statements should be read in
conjunction with the Company's annual financial statements.
2. Restatements
The Company has restated the quarterly results, for the
quarter ended December 31, 1996, from those previously
reported relating to the following matters:
Financial Amount
Statement Previously Restated
Caption Reported Amount
---------- ---------- ---------
1)Deemed Dividends and $141,116 $218,178
dividends and accretion on
accretion on preferred
preferred stock
stock
2)Bonus agreement with Compensation - 142,284 104,784
management; and Options/Employment
compensation in connection contracts
with the issuance of stock
options
3)Consulting agreements Selling, general 1,286,230 1,992,263
paid through the issuance and administrative
of warrants; and acquisition Depreciation and 675,622 673,093
payroll previously capitalized amortization
4)Valuation of Warrant Interest expense 408,040 545,449
with Put Obligation and a
consulting fee paid with
the issuance of warrants
in connection with obtaining
the line of credit
-8-
2. Restatements (Continued)
The Company has restated the year-to-date results, for
the six months ended December 31, 1996, from those
previously reported relating to the following matters:
Financial Amount
Statement Previously Restated
Caption Reported Amount
---------- ---------- --------
1)Deemed Dividends and $2,705,202 $6,343,727
dividends and accretion on
accretion on preferred
preferred stock
stock
2)Bonus agreement with Compensation - 142,284 967,284
management; and Options/Employment
compensation in connection contracts
with the issuance of stock
options
3)Consulting agreements Selling, general 2,602,214 3,414,247
paid through the issuance and administrative
of warrants; and acquisition Depreciation and
payroll previously capitalized amortization 1,338,341 1,335,812
4)Valuation of Warrant Interest expense 889,635 1,048,919
with Put Obligation and a
consulting fee paid with
the issuance of warrants
in connection with obtaining
the line of credit
5)Bonus agreement with Deferred compensation 0 675,000
management expense (Asset)
Deferred compensation 0 1,500,000
expense (Liability)
6)Acquisition paroll Monitoring Contract 17,575,817 17,455,313
previously capitalized Costs
7)Valuation of Warrant Put obligation 1,806,236 3,437,041
with Put Obligation and a payable
consulting fee paid with Deferred financing 2,077,178 3,898,699
the issuance of warrants costs
in connection with obtaining
the line of credit
8)Deemed dividends and Dividends payable 353,864 0
accretion on preferred Preferred stock 9,232,600 7,329,989
stock Additional paid-in 20,297,917 27,231,914
capital
9)Impact of all entries above Accumulated deficit (19,980,775) (25,413,088)
-9-
2. Restatements (Continued)
As a result of the above restatements net loss per common share
has changed as follows:
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
December December December December
31, 1996 31,1996 31, 1996 31, 1996
Amount Amount
Previously Amount Previously Amount
Reported Restated Reported Restated
----------- -------- ---------- ----------
Loss per common share
Loss before ($.33) ($.78) ($.18) ($.37)
extraordinary item
Extraordinary item (.64) (.64) - -
Net loss (.97) (1.42) (.18) (.37)
Net loss applicable to (1.64) (3.00) (.21) (.43)
to common shareholders
3. Inventory
December 31, June30,
1996 1996
------------ -------
(Unaudited)
Parts Inventory $ 608,436 $ 500,437
Finished Goods 256,592 152,114
--------- --------
$ 865,028 $ 652,551
========= ========
4. Acquisitions
During the six months ended December 31, 1996, the
Company purchased monitoring contracts for an aggregate of
$2,482,088. As consideration, the Company paid $1,544,947 in
cash, including acquisition costs of $34,130, issued 25,000
shares of its Common Stock valued at $110, 937, recorded
purchase holdbacks of $671,634 (which are payable over
periods of up to eighteen months based on performance
guarantees of the seller), and reduced amounts receivable by
$154,570.
5. 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 $ 8,950,000
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 December, 1999; collateralized
by related equipment 112,619
-10-
5. Long-Term Notes Payable (Continued)
Convertible Subordinated Promissory Notes
-----------------------------------------
5% convertible subordinated promissory notes
due on November 30, 1996 62,500
Reorganization Debt
-------------------
As part of the 1990 plan of reorganization of a
1987 bankruptcy, the U.S. Bankruptcy Court
approved a 30.5% settlement on the total
unsecured claims submitted; payments are due
March 1 of each year, as follows: 3.5% ($101,286)
-- 1997, and 3% ($86,817) each year -- 1998
through 2000; interest imputed at 14%; net of
imputed interest of $94,995 266,742
Federal priority tax claims payable in annual
installments of $2,211 through March, 1999, and
$ 1,896 thereafter 12,321
--------
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. As of December
31, 1996, the Company has available on its revolving credit
facility the amount of $6,050,000.
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 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. 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 December 31, 1996, the value of
the warrants were estimated at $6.58 per share of common
stock. As a result, the Company increased the put obligation
payable and the corresponding deferred financing costs by
$856,703.
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 notes paid have been recorded as an
extraordinary item during the quarter ended September 30,
1996.
-11-
6. Preferred Stock (Restated)
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 ended September 30,
1996, 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.
The Company, for the six months ended December 31,
1996, recorded deemed dividends and accretion on such deemed
dividends totaling $448,727 in connection with the preferred
stock issuance.
During the six months ended December 31, 1996 610
shares of Series A Convertible Preferred Stock, with a value
of $610,000, and $8,738 in deemed dividends were converted
to 190,338 shares of common stock.
On September 30, 1996, the Company suspended conversion
of its 1996 series A Convertible Preferred Stock. The
Company renegotiated the terms and conditions of the
preferred stock (see Note 9 -- Subsequent Events).
7. Common Stock and Additional Paid-in Capital
During the six months ended December 31, 1996,
convertible subordinated promissory notes of $50,000, were
converted into 11,110 shares of common stock.
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
$436,931.
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 at $.10 per share, expiring on
November 27, 2001 to key employees. As a result, the Company
recorded compensation expense and increased additional paid-
in capital in the amount of $142,284. In addition , the
Company granted 20,500 Non-Qualified Stock Options and 8,500
Incentive Stock Options to employees at $2.625 per share,
the prevailing market price, expiring on November 27, 2001.
-12-
7. Common Stock and Additional Paid-in Capital (Continued)
The following is a summary of stock option activity:
Number Option Price Weighted Average
of Shares Per Share(Range) Exercise Price
--------- ---------------- ----------------
Options outstanding
at June 30, 1996 2,008,183 $2.50 - $35.00 $2.637
Options granted 85,350 $ .10 - $2.625 $ .958
Options exercised (2,500) $3.75 $3.75
Options canceled or
expired -- $ -- $ --
----------- --------------- --------
Options outstanding
at December 31, 1996 2,091,033 $ .10 - $35.00 $2.568
=========== =============== ========
Options exercisable
at December 31, 1996 2,091,033 $ .10 - $35.00 $2.568
=========== =============== ========
The following is a summary of warrant activity:
Number Exercise Price
of Shares Per Share
----------- --------------
Warrants outstanding at
June 30, 1996 3,950,697 $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 3,828,697 $2.50 - $8.00
========== =============
8. COMMITMENTS AND CONTINGENCIES
Employment Agreements (Restated)
---------------------------------
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 December 31, 1996 the increase in net alarm systems
exceeded 15,000, as a result, the Company recorded
compensation expense and a deferred compensation liability
at December 31, 1996 in the amount of $825,000.
Contingencies
-------------
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 periods expiring at various
dates through February 1997.
-13-
8. COMMITMENTS AND CONTINGENCIES (Continued)
Contingencies (Continued)
------------------------
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 a registration statement
for 94,402 shares of common stock which are expected to be
sufficient to satisfy the Company's obligation.
9. Subsequent Events
In January and February 1997, three groups of preferred
shareholders (Halifax Fund, L.P., Lake Management L.D.C. and
KA Investments, L.D.C.) commenced legal action to force the
company to resume conversion of the preferred stock. In
order to settle the matters of litigation, the Company
reached two separate agreements with the complainants.
On June 26, 1997, all preferred shareholders, other
than Halifax Fund, L.P. received five thousand warrants (the
"Warrants") to purchase common stock of the Company for
$2.00 per share for each 100 shares of Preferred Stock held.
Fifty percent (50%) of the Warrants are exercisable after
one (1) year from issuance and the remaining fifty percent
(50%) are exercisable after two (2) years from issuance. In return
for the filing by the Company of a registration statement with
the SEC for the primary issuance by the Company of
securities to generate approximately $8,750,000 of net
proceeds for use by the Company to redeem all of the
Preferred Stock (the "Registration Statement"), on or before
October 11, 1997, the preferred shareholders agreed to
refrain from all conversions of the preferred shares until
November 30, 1997.
On June 30, 1997, the Company reached an agreement with
Halifax Fund, L.P. where the Company agreed to convert 1,000
shares of preferred stock owned by this group into 900,000
shares of the company's common stock and assisted in
locating a purchaser for the 900,000 shares from the
preferred shareholders for a total of $1,500,000, which
included the reimbursement of legal fees of $150,000. The
Company also issued to these former preferred shareholders
5,000 Warrants to purchase common stock of the company for
$2.00 per share for each 100 shares of preferred stock held.
Fifty percent (50%) of the Warrants are exercisable after
one (1) year from issuance and the remaining fifty percent
(50%) are exercisable after two (2) years from issuance. In
the event that the Company settles with any other preferred
shareholder on terms which these shareholders, in their sole
discretion, believe are better than those they have
received, these shareholders have the right to elect the
alternative settlement.
On November 30, 1997 an amendment was executed, in
which each Holder received an additional 7,500 Warrants (the
"Additional Warrants") for each 100 shares of Preferred
Stock held as of November 30, 1997. The Additional Warrants,
which are redeemable by the Company, are exercisable at a
price per share of $3.375 and entitle the holder thereof to
purchase one share of Common Stock per Additional Warrant.
Fifty percent (50%) of the Additional Warrants are
exercisable after December 1, 1998 and fifty percent (50%)
are exercisable after December 1, 1999. The Additional
Warrants expire after November 30, 2007. In consideration of
the issuance of the Warrants and Additional Warrants each
Holder agreed to refrain from any conversions until February
2, 1998.
-14-
Response USA, Inc. and Subsidiaries
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/A 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.
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 $485,768 or 9% and
$444,615 or 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
$198,301 or 13% and an increase of $54,625 or 10% for the
six months and three months ended December 31, 1996 as
compared to the same periods ended December 31, 1995. The
decrease in product sales for the six months was due to the
Company's primary strategy to expand through the acquisition
of monitoring contracts, as opposed to direct sales of
security systems. Sales of electronic security systems
decreased by approximately $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 an increase
in revenues from the sale of PERS to private label
wholesalers and home healthcare agencies totaling
approximately $231,000, for the same period. The increase in
product sales for the quarter ended December 31, 1996 as
compared to the quarter ended December 31, 1995, was
primarily due to the increase in sales of PERS to private
label wholesalers and home healthcare agencies. The
significant growth in monitoring and service revenues of
$684,069 or 17% and $389,990 or 20% 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 approximately 8,000 monitoring contracts
during the past twelve months and the success of the
Company's extended warranty program.
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
-15-
Results of Operations (Continued)
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 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 ("GPM"), as a percentage
of sales, was 61% for both the six months ended December 31,
1996 and 1995. The GPM, as a percentage of sales, improved
from 49% for the quarter ended December 31, 1995, to 60% for
the quarter ended December 31, 1996. The increase is
primarily attributable to the increase in the GPM on product
sales from 18% for Fiscal 1996 to 32% for Fiscal 1997. The
significant improvement in the GPM on product sales, was the
result of a decline in direct sales of electronic security
systems, as a percentage of revenues, from 58% for the
three months ended December 31, 1995 to 31% for the three
months ended December 31, 1996. Sales of electronic security
systems have significantly lower profit margins than other
product sales, due to a very competitive market, including
the advertisement of free security systems.
Selling, general and administrative expenses
(excluding consulting fees resulting from the issuance of
warrants in connection with obtaining the line of credit of
$689,000 and $583,000 for the six and three months ended
December 31, 1996) grew to $2,725,247 and $1,409,263 for the
six and three months ended December 31, 1996, which
represents increases of $254,109 or 10% and $170,397 or 14%,
over selling, general and administrative expenses for the
six and three months ended December 31, 1995. Selling,
general and administrative expenses, as a percentage of
total operating revenues, increased from 45% to 46% for the
six months ended December 31, 1995 and 1996, respectively.
The slight 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, and to support
the larger subscriber base. While selling, general and
administrative expenses, as a percentage of revenues,
increased by 1%, monitoring and service revenues increased
by 17% 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 six months and three months ended
December 31, 1996, the Company recorded a deferred
compensation liability (asset) with a corresponding charge
(benefit) to operating expenses in the amount of $825,000
and ($37,500), pursuant to employment contracts. The
Company, in December 1996, granted Non-Qualified Stock
Options to key employees at an exercise price below market
price, as a result the Company recorded compensation expense
of $142,284.
Amortization and depreciation expenses increased by
$309,769 or 30% and $188,681 or 39% for the six and three
months ended December 31, 1996, as compared to the same
periods ended December 31, 1995. The increases in
amortization and depreciation expense is due to the
Company's acquisition of monitoring contracts, totaling
approximately $8 million, during the fiscal year ended June
30, 1996.
Interest expense decreased by $416,924 or 28% and
$220,019 or 29% for the six and three months 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 from the
issuance of preferred stock and an advance from the line of
credit, resulting in a substantial decrease in the Company's
borrowing costs (see Notes 5 and 6 of Notes to Consolidated
Financial Statements).
The net losses for the six and three months ended
December 31, 1996 (excluding an extraordinary
-16-
Results of Operations (Continued)
item for early extinguishment of debt of $2,549,708) were
$3,131,848 or ($.78) per share based on 4,010,553 shares
outstanding; and $1,532,921 or ($.37) per share based on
4,108,281 shares outstanding; as compared to net losses of
$1,576,670 or ($1.70) per share based on 926,877 shares
outstanding; and $1,103,871 or ($1.07) per share based on
1,033,941 shares outstanding for the six and three months
ended December 31, 1995. The net losses applicable to common
shareholders (net losses adjusted for dividends and
accretion on preferred stock) for the six and three months
ended December 31, 1996 were $12,025,283 or ($3.00) per
share based on 4,010,553 shares outstanding; and $1,751,099
or ($.43) per share based on 4,108,281 shares outstanding;
as compared to net losses of $1,576,670 or ($1.70) per share
based on 926,877 shares outstanding; and $1,103,871 or
($1.07) per share based on 1,033,941 shares outstanding for
the six and three month periods ended December 31, 1995,
respectively. Earnings before interest, taxes, depreciation
and amortization (EBITDA), excluding charges for the loss on
debt extinguishment, compensation expense -
options/employment agreements, and consulting fees from the
issuance of warrants were $899,109 and $371,286 for the six
months and three months ended December 31, 1996 as compared
to $902,543 and $140,131 for the six months and three months
ended December 31, 1995.
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 during the quarter ended September
30, 1996. As of December 31, 1996, the Company has available
on its revolving credit facility the amount of $6,050,000.
The credit facility bears interest at the Prime Rate, plus 1
3/4%.
The Company's working capital decreased by $6,617,843
from $5,967,623 at June 30, 1996, to a working capital
deficiency of $650,220 at December 31, 1996. On June 30,
1996, the Company recorded a preferred stock subscription
receivable for $6,525,000, from 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 approximately $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 for the six
months ended December 31, 1996 was $3,762,088. A net loss of
$5,681,556 including noncash transactions totaling
$3,684,074, accounted for $1,997,482 of the cash used in
operating activities. The noncash transactions are as
follows: (i) depreciation and amortization of $2,027,790;
(ii) compensation expense - options/employment agreements of
$967,284; and (iii) consulting fees through the issuance of
warrants of $689,000. Other significant changes included
changes in accounts receivable, inventory, prepaid expenses
and other current assets, accrued expenses, and deferred
revenues totaling $1,842,178. The increase in accounts
receivable of $323,627 was primarily due to the increase in
monthly monitoring and service billings, as a result of the
acquisition of approximately 8,000 subscriber accounts
during the past twelve months. Increases in product sales of
personal emergency response systems (PERS) to both private
label wholesalers and home healthcare agencies, resulted in
higher accounts receivable too. The provision for doubtful
accounts increased to $399,792 at December 31, 1996, from
$327,072 at June 30, 1996. The increase reflects an
-17-
Liquidity and Capital Resources (Continued)
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 increase in inventory of
$212,477 is attributable to an increase in future orders for
PERS by both private label wholesalers and home healthcare
agencies. Prepaid expenses and other current assets
increased by $289,897. The decrease in accrued expenses of
$1,149,015 was primarily due to liabilities accrued at June
30, 1996, in connection with obtaining the line of credit
and the sale of preferred stock, being paid from the
proceeds of such refinancing. Accrued assimilation costs
amortized over the six months and a decrease in the balance
of an accrued litigation settlement accounted for the
balance of the decrease in accrued expenses. Deferred
revenues increased by $132,838 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 $1,531,593. The purchases
of monitoring contracts (including purchase holdback
payments) accounted for $1,201,926 of the cash used in
investing activities. Other investing activity included the
purchase of property and equipment of $352,667, 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 months ended December 31, 1996.
Proceeds from the exercise of stock options and warrants
totaled $443,500. Net proceeds received from the line of
credit and the preferred stock issuance totaling $18,460,312
were used primarily to pay off notes payable totaling
$12,072,668, prepayment fees on the early extinguishment of
debt of $2,549,708, and the acquisition of monitoring
contracts. Principal payments on long-term debt, excluding
notes payable paid off with the line of credit and preferred
stock proceeds, totalled $3,086,606 were made during the six
months ended December 31, 1996.
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.
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.
-18-
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
(b) Report on Form 8-K - Filed on October 24, 1996
-19-
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. February 13, 1998
------------------ -----------------
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
EARNINGS PER SHARE COMPUTATIONS:
MODIFIED TREASURY STOCK METHOD:
QUARTER ENDED DECEMBER 31, 1996
TOTAL EXERCISE PROCEEDS $19,824,444
PERIOD-END OUTSTANDING SHARES 4,130,892
20% OF PERIOD-END OUTSTANDING SHARES 826,178
AVERAGE SHARE PRICE DURING PERIOD $3.81
PROCEEDS USED TO PURCHASE SHARES $3,147,740
REMAINING PROCEEDS $16,676,705
PROCEEDS USED TO RETIRE AVERAGE DEBT $8,939,246
REMAINING PROCEEDS INVESTED $7,737,459
ADJUSTED INCOME (LOSS):
NET INCOME (LOSS) ($1,532,921)
ACCRETION AND DEEMED DIVIDENDS ON PREFERRED STOCK ($218,178)
ADJUSTED INCOME (LOSS) ($1,751,099)
INTEREST (EXPENSE) ON RETIRED DEBT (10.25%) $229,068
INTEREST INCOME ON PROCEEDS INVESTED (2.5%) $48,359
TAX EFFECT OF INTEREST ADJUSTMENTS (40%) ($110,971)
NET INCOME (LOSS) FOR EARNINGS PER SHARE PURPOSES ($1,584,643)
SHARES:
WEIGHTED AVERAGE SHARES OUTSTANDING 4,108,281
WEIGHTED AVERAGE EQUIVALENT SHARES OUTSTANDING 5,081,029
20% OF PERIOD-END OUTSTANDING SHARES (826,178)
TOTAL SHARES FOR EARNINGS PER SHARE PURPOSES 8,363,131
NET INCOME (LOSS) PER SHARE ($0.19)
==========
MAXIMUM INCOME (MINIMUM LOSS) PER SHARE:
ADJUSTED INCOME (LOSS) ($1,751,099)
WEIGHTED AVERAGE SHARES OUTSTANDING 4,108,281
NET INCOME (LOSS) PER SHARE ($0.43)
========
EARNINGS PER SHARE COMPUTATIONS:
MODIFIED TREASURY STOCK METHOD:
SIX MONTHS ENDED DECEMBER 31, 1996
TOTAL EXERCISE PROCEEDS $20,029,413
PERIOD-END OUTSTANDING SHARES 4,130,892
20% OF PERIOD-END OUTSTANDING SHARES 826,178
AVERAGE SHARE PRICE DURING PERIOD $4.97
PROCEEDS USED TO PURCHASE SHARES $4,106,107
REMAINING PROCEEDS $15,923,307
PROCEEDS USED TO RETIRE AVERAGE DEBT $9,244,996
REMAINING PROCEEDS INVESTED $6,678,311
ADJUSTED INCOME (LOSS):
NET INCOME (LOSS) ($5,681,556)
ACCRETION AND DEEMED DIVIDENDS ON PREFERRED STOCK ($6,343,727)
ADJUSTED INCOME (LOSS) ($12,025,283)
INTEREST (EXPENSE) ON RETIRED DEBT (10.25%) $236,903
INTEREST INCOME ON PROCEEDS INVESTED (2.5%) $41,739
TAX EFFECT OF INTEREST ADJUSTMENTS (40%) ($111,457)
NET INCOME (LOSS) FOR EARNINGS PER SHARE PURPOSES ($12,192,468)
SHARES:
WEIGHTED AVERAGE SHARES OUTSTANDING 4,010,553
WEIGHTED AVERAGE EQUIVALENT SHARES OUTSTANDING 5,081,454
20% OF PERIOD-END OUTSTANDING SHARES (826,178)
TOTAL SHARES FOR EARNINGS PER SHARE PURPOSES 8,265,828
NET INCOME (LOSS) PER SHARE ($1.43)
=========
MAXIMUM INCOME (MINIMUM LOSS) PER SHARE:
ADJUSTED INCOME (LOSS) ($12,025,283)
WEIGHTED AVERAGE SHARES OUTSTANDING 4,010,553
NET INCOME (LOSS) PER SHARE ($3.00)
=========
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 377
<SECURITIES> 44
<RECEIVABLES> 2510
<ALLOWANCES> 400
<INVENTORY> 865
<CURRENT-ASSETS> 3554
<PP&E> 3616
<DEPRECIATION> 2089
<TOTAL-ASSETS> 27407
<CURRENT-LIABILITIES> 4204
<BONDS> 0
0
7330
<COMMON> 33
<OTHER-SE> 1569
<TOTAL-LIABILITY-AND-EQUITY> 27407
<SALES> 1278
<TOTAL-REVENUES> 5986
<CGS> 873
<TOTAL-COSTS> 2362
<OTHER-EXPENSES> 4342
<LOSS-PROVISION> 66
<INTEREST-EXPENSE> 3132
<INCOME-PRETAX> (3132)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3132)
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