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, 1998
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: 7,620,019 shares of $.008 par
value common stock as of November 4, 1998.
Response USA, Inc. and Subsidiaries
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets for September 30, 1998
and June 30, 1998 1-2
Consolidated Statements of Operations for the Three Months
ended September 30, 1998 and 1997 3
Consolidated Statement of Stockholders' Equity for
September 30, 1998 4
Consolidated Statements of Cash Flows for the Three Months
ended September 30, 1998 and 1997 5-7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-21
PART II. OTHER INFORMATION 22
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
1998 1998
------------ ----------
(Unaudited)
ASSETS
------
CURRENT ASSETS
Cash $4,403,135 $966,140
Marketable securities 25,000 25,000
Accounts receivable
Trade - Net of allowance for doubtful
accounts of $598,618 and $547,969,
respectivel 2,483,123 2,338,359
Inventory 1,637,474 1,648,250
Prepaid expenses and other current assets 787,197 581,627
---------- ----------
Total current assets 9,335,929 5,559,376
---------- ----------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $3,974,673 and $8,566,717,
respectivel 33,409,574 31,280,805
---------- ----------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $3,318,644
and $3,102,367, respectively 3,395,674 2,892,181
---------- ----------
OTHER ASSETS
Deferred financing costs - Net of accumulated
amortization of $115,801 and $1,594,379,
respectivel 3,853,567 2,679,450
Other noncurrent assets 263,451 275,084
---------- ----------
4,117,018 2,954,534
---------- ----------
$50,258,195 $42,686,896
========== ==========
See notes to consolidated financial statements
-1-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(Unaudited)
September 30, June 30,
1998 1998
------------ ----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt
Notes payable $663,461 $682,418
Capitalized lease obligations 51,257 54,194
Accounts payable - Trade 734,106 917,316
Purchase holdbacks 648,503 431,378
Accrued expenses and other current liabilities 1,811,405 1,931,419
Deferred revenue 3,360,302 3,051,053
---------- ----------
Total current liabilities 7,269,034 7,067,778
---------- ----------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt
Notes payable 26,678,090 16,434,961
Capitalized lease obligations 42,627 55,195
Purchase holdbacks 169,242
Deferred compensation expense 2,950,000 2,562,500
---------- ----------
29,670,717 19,221,898
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock - Par value $.008
Authorized 37,500,000 shares
Issued and outstanding 6,721,608 shares -
September 30, 1998 and 6,317,023 shares -
June 30, 199 53,773 50,537
Additional paid-in capital 62,189,085 60,664,468
Accumulated deficit (48,924,414)(44,317,785)
---------- ----------
13,318,444 16,397,220
---------- ----------
$50,258,195 $42,686,896
========== ==========
See notes to consolidated financial statements
-2-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months ended September 30,
1998 1997
-------------- ------------
OPERATING REVENUES
Product sales $1,202,723 $662,846
Monitoring and service 4,142,769 2,585,038
Security patrol 670,177
---------- ----------
6,015,669 3,247,884
---------- ----------
COST OF REVENUES
Product sales 1,003,071 398,442
Monitoring and service 1,318,585 768,739
Security patrol 502,041
---------- ----------
2,823,697 1,167,181
---------- ----------
GROSS PROFIT 3,191,972 2,080,703
---------- ----------
OPERATING EXPENSES
Selling, general and administrativ 2,416,721 1,615,635
Compensation - Employment contracts 387,500 (450,000)
Depreciation and amortization 1,395,998 837,539
Nonrecurring charges (see Note 6) 309,631
---------- ----------
4,509,850 2,003,174
---------- ----------
LOSS FROM OPERATIONS (1,317,878) 77,529
---------- ----------
OTHER INCOME/(EXPENSE)
Interest expense, net (720,945) (642,072)
Joint venture loss (130,138)
---------- ----------
(720,945) (772,210)
---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM (2,038,823) (694,681)
EXTRAORDINARY ITEM
Loss on debt extinguishment (2,567,806)
---------- ----------
NET LOSS (4,606,629) (694,681)
Dividends and accretion on preferred stock (335,272)
---------- ----------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $(4,606,629) $(1,029,953)
========== ==========
Loss per common share - Basic and diluted
Loss before extraordinary item ($0.31) ($0.32)
Extraordinary item ($0.40) $0.00
------- -------
Net loss ($0.71) ($0.32)
======= =======
Net loss applicable to common shareholders ($0.71) ($0.48)
======= =======
Weighted average number of shares outstanding 6,472,049 2,138,173
========= =========
See notes to consolidated financial statements
-3-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional
Number Paid-In Accumulated
of Shares Amount Capital Deficit Total
--------- ------- ----------- ------------ -----------
Balance-June 30,1998 6,317,023 $50,537 $60,664,468 ($44,317,785) $16,397,220
Acquisitions 284,953 2,279 726,747 729,026
Issuance of shares
of common stock
in connection with
the refinancing 119,632 957 779,043 780,000
Refund of payments
made in connection
with the issuance
of warrants and
common stock 18,827 18,827
Net loss (4,606,629) (4,606,629)
---------- ------- ---------- ------------ ----------
Balance-Sept 30,1998 6,721,608 $53,773 $62,189,085 $(48,924,414) $13,318,444
========== ======= ========== ============ ==========
See notes to consolidated financial statements
-4-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months ended September 30,
1998 1997
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(4,606,629) $(694,681)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities
Depreciation and amortization 1,395,998 837,539
Amortization of deferred financing
costs and debt discount 227,445 301,477
Loss on debt extinguishment 2,567,806
(Gain) loss on sale of property and
equipment 2,947 (2,489)
Loss on joint venture 130,138
Compensation expense in connection
with employment agreements 387,500 (450,000)
Increase in accounts receivable - Trade (18,075) (125,546)
(Increase) decrease in inventory 40,068 (30,639)
Increase in prepaid expenses and other
current assets (185,805) (160,071)
Increase in deposits (2,553) (625)
Increase (decrease) in accounts payable-Trade (243,492) 4,331
Decrease in accrued expenses and other
current liabilities (257,219) (33,473)
Increase (decrease) in deferred revenues (42,855) 198
---------- ---------
Net cash used in operating activities (734,864) (223,841)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of monitoring contracts
(net of purchase holdbacks) (1,508,584) (111,648)
Proceeds from the sale of property and
equipment 852
Purchase of property and equipment (523,090) (114,431)
----------- ---------
Net cash used in investing activities (2,030,822) (226,079)
----------- ---------
See notes to consolidated financial statements
-5-
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
(Unaudited)
Three Months ended September 30,
1998 1997
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of long-term notes payable 24,455,000 425,000
Deferred financing costs incurred (69,368) (5,000)
Principal payments on long-term debt
Notes payable (18,186,273) (12,542)
Capitalized lease obligations (15,505) (17,616)
Net proceeds from the exercise of
stock options and warrants 82,421
Refund of payments made in connection
with common stock issuances 18,827
Costs incurred in connection with the
preferred stock issuance (38,081)
---------- ----------
Net cash provided by financing activities 6,202,681 434,182
---------- ----------
NET INCREASE (DECREASE) IN CASH 3,436,995 (15,738)
CASH - BEGINNING 966,140 698,551
---------- ----------
CASH - ENDING $4,403,135 $682,813
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $676,196 $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, 1997 and 1998, long-term notes
payable of $29,464 and $160,672, respectively, were incurred for the purchase
of property and equipment.
During the three months ended September 30, 1998, the Company issued 284,953
shares of its common stock, valued at $729,026, of which 163,043 shares of its
common stock valued at $975,000 was placed in escrow to guarantee a note
payable and purchase holdback (the "Escrow Shares"), in connection
with an acquisition (see Note 2 of Notes to Consolidated Financial Statements).
The Company recorded common stock and charged additional paid-in capital
$1,304, as the result of the Escrow Shares. The Company issued 2,900 shares
of its common stock, during the three months ended September 30, 1997,
pursuant to guarantees of stock valuations, in connection with past
acquisitions of monitoring contracts. The Company canceled 2,666 shares of
its common stock pursuant to guarantees of stock valuations, during the three
months ended September 30, 1997.
During the three months ended September 30, 1998, the Company increased
monitoring contract costs and the corresponding transition costs liability
(included in accrued expenses and other current liabilities) in the amount of
$70,000.
During the three months ended September 30, 1998, the Company issued 119,632
shares of its common stock to a lender, in connection with the refinancing of
the Company's indebtedness (see Note 3 of Notes to Consolidated Financial
Statements). As a result, the Company recorded debt discount in the amount of
$780,000, common stock of $957, and additional paid-in capital of $779,043.
During the three months ended September 30, 1997, the Company recorded deemed
dividends and accretion on such deemed dividends totaling $185,272 in
connection with the preferred stock issuance, with a corresponding charge to
accumulated deficit.
During the three months ended September 30, 1997, $1,000,000 of preferred
stock, and $125,000 in deemed dividends and accretion on such deemed dividends
were converted into 300,000 shares of common stock.
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, 1998, 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 1997 quarterly financial statements have been
reclassified to conform to the 1998 presentation.
These financial statements should be read in conjunction with the Company's
annual financial statements.
2. Acquisitions
During the three months ended September 30, 1998, the Company acquired
additional monitoring contracts for an aggregate purchase price of $2,855,494.
As consideration, the Company paid $1,508,584 in cash, including acquisition
and assimilation costs of $164,032, a note payable of $500,000 payable over
five years, issued 121,910 shares of the Company's common stock valued at
$729,026, recorded purchase holdbacks of $47,884 (which are payable over
periods of up to two years based on performance guarantees of the seller),
and accrued transition costs of $70,000. As part of a certain acquisition,
the Company issued 163,043 shares of its common stock to be held in escrow to
guarantee a note payable and a purchase holdback. The purchase price was
allocated based on the fair market value of the assets acquired and liabilities
assumed. The pro forma effects of these acquisitions are not considered
material.
3. Long-Term Notes Payable
Receivable Financing Agreement
------------------------------
Principal payments payable in monthly installments
totaling $132,699 - fiscal year 1999, $326,875 -
fiscal year 2000, $2,360,609 - fiscal year 2001,
$3,597,866 - fiscal year 2002, $4,545,881 -
fiscal year 2003, and $15,036,070 - fiscal year 2004;
plus interest at 8% on the outstanding loan balance;
collateralized by related monitoring contracts; $25,976,589
Equipment Financing
-------------------
Payable in monthly installments aggregating $22,248
including interest at rates ranging from 2.94% to
11.83%; final payments due October, 1998 through
October, 2002; collateralized by related equipment 507,111
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 -- 1999 through
2000; interest imputed at 14%; net of imputed
interest of $ 30,676. Additionally, federal priority
tax claims payable in annual installments of $2,211
through March, 1999, and $ 1,896 thereafter are due. 150,856
-8-
3. Long-Term Notes Payable (Continued)
Other
-----
Note payable in monthly installments of $10,258
including interest at 8.5%; final payment due
July, 2003 485,033
Notes payable in monthly installments aggregating
$3,731 including interest at 10.0%; final payments
due December, 1998 through February, 2002 77,038
Notes payable in monthly installments of $9,046
including interest at 8%; final payments due
March 2000 144,924
----------
27,346,551
Less Current Portion 663,461
----------
$26,678,090
==========
On July 30, 1998, the Company completed a restructuring of its long-term
indebtedness with McGinn, Smith Capital Holdings Corp. ("MSCH"). In connection
with the refinancing the Company incurred a charge for loss on debt
extinguishment of $2,567,806, during the quarter ended September 30, 1998. As
part of such restructuring, USS sold certain of its alarm monitoring contracts
(the "Purchased Contracts") to its newly created, wholly-owned subsidiary,
Response Acquisition Corp. ("RAC"), for aggregate consideration of $26,000,000
pursuant to a Purchase Agreement dated as of July 30, 1998 (the "Purchase
Agreement"), between USS and RAC. Also on July 30, 1998, in a related
transaction, RAC entered into a Receivable Financing Agreement dated as of
July 30, 1998 (the "Financing Agreement"), among RAC, USS and MSCH. Pursuant
to the terms of the Financing Agreement, RAC received initial financing from
MSCH in the amount of $26,000,000 (the "Initial Loan") and granted MSCH a
first priority perfected security interest in the receivables derived from the
Purchased Contracts (the "Receivables"). The Initial Loan has a term of five
years and bears interest at a rate of 8% per annum. Principal payments on
the Initial Loan are due as follows: years ending June 30, 1999 - $132,699;
2000 - $326,875; 2001 - $2,360,609; 2002 - $3,597,866; 2003 - $4,545,881 and
2004 - $15,036,070 . The Receivables are paid directly into a lockbox
administered by USS as Collection Agent under the Financing Agreement for
which USS will receive a monthly fee equal to $5.00 per Purchased Contract
from RAC. Under the terms of the Financing Agreement, all funds derived from
the Receivables will be paid to the lockbox account and MSCH will be paid its
monthly payment of principal and interest under the Loan out of such lockbox
account prior to any payments to USS as Collection Agent or any other funds
being distributed to the Company or its subsidiaries. RAC may finance, from
time to time, up to an additional $24,000,000 pursuant to the Financing
Agreement by pledging additional Purchased Contracts which it may purchase
from USS pursuant to the Purchase Agreement to MSCH. A portion of the proceeds
from the Initial Loan was used to satisfy existing indebtedness of the Company
and the remaining amount will be used for acquisitions and general working
capital. As of September 30, 1998, $25,976,589 was outstanding under
the Financing Agreement.
The Company recorded debt issuance costs of $3,900,000, of which $3,120,000
was paid in cash at the closing and $780,000 was paid in 119,632 shares of
Common Stock (the "Fee Shares"). The debt issuance costs will be amortized
over the life of the loan using the effective interest method. The Company
has agreed that in the event the proceeds to be derived by MSCH from the sale
of the Fee Shares is less than $780,000, the Company is obligated to, at its
option, pay cash or issue additional shares equal to the amount of the
shortfall, if any.
-9-
4. Common Stock and Additional Paid-in Capital
The following is a summary of stock option activity:
Weighted
Number Option Price Average
of Shares Per Share(Range) Exercise
Price
--------- --------------- --------
Options outstanding at June 30, 1998
and September 30, 1998 1,159,681 $.03 - $13.35 $3.691
========= =============== =======
Options exercisable at Sept.30,1998 938,017 $.03 - $13.35 $3.106
========= =============== ========
The following is a summary of warrant activity:
Number Exercise Price
of Shares Per Share
---------- ---------------
Warrants outstanding at June 30, 1998 and
September 30, 1998 2,008,760 $6.00 - $24.00
========== ===============
5. Net Loss Per Common Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
was adopted by the Company effective for the year ended June 30, 1998, as
required by this statement. For the three months ended September 30, 1998 and
1997, the potential common shares have an antidilutive effect on the net loss
per common share, and have, therefore, been excluded.
6. Nonrecurring Charges
During the quarter ended September 30, 1998, the Company recorded nonrecurring
charges totaling $309,631. The majority of these charges were in connection
with management's plan to reduce costs and improve operating efficiencies for
the monitoring and servicing of its existing customer base. The plan involves
the transfer of its subscriber base to its own central station and the
consolidation of its support infrastructure. At September 30, 1998,
the Company has recorded an accrual in the amount of $74,043, which is
primarily for severance and related costs.
As of September 30, 1998, nonrecurring charges consisted of the following:
Hiring and training costs $123,339
Temporary help 88,214
Employee severance and related costs 8,102
Abandoned fixed assets 31,694
Abandoned leases 9,068
Other 49,214
--------
$309,631
========
-10-
7. Commitments and Contingencies
Employment Agreements
The Company has employment contracts with two former key employees 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, 1997 and 1998
the increase in net alarm systems exceeded 15,000 accounts. As a result, the
Company recorded compensation (benefit) expense for the quarters ended
September 30, 1997 and 1998 of ($450,000) and $387,500, respectively. The
total liability under these agreements was $2,950,000 at September 30, 1998.
Under the employment agreements, such amounts are to be paid within one year
of the expiration date of March 1999. On March 31, 1998, the Company elected
to terminate the two employees, without cause, effective June 28, 1998. The
Company made certain payments totaling $178,692, which were accrued for at
June 30, 1998, in connection with such termination, during the quarter
ended September 30, 1998.
Contingencies
As part of certain acquisitions, a joint venture, and the restructuring
of the Company's indebtedness, the Company has guaranteed the value of its
common stock at various prices ranging from $6.50 to $9.05 for periods
expiring at various dates through February 2001. As of September 30, 1998,
the Company's contingent liabilities under these agreements aggregated
approximately $1,800,000, which may be settled in cash or by the issuance of
common stock, at the Company's discretion.
8. Subsequent Events
On October 1, 1998, the Company acquired all of the issued and outstanding
stock (the "Stock") of Health Watch, Inc., a Florida Corporation ("Health
Watch"), pursuant to a Stock Purchase Agreement dated as of September 16, 1998
(the "Stock Purchase Agreement"), by and among the Company and Jeffrey Queen,
Andrew Queen, and the Jeffrey Queen and Andrew Queen Irrevocable Trust U/A
January 2, 1998 (the "Sellers"). Health Watch is in the business of marketing
and monitoring personal emergency response systems which are designed to
summon help in a medical emergency when activated by the subscriber. Health
Watch has approximately 10,000 monitoring contracts.
The purchase price for the Stock (the "Purchase Price") was $12,789,476. Such
amount may be adjusted based on the results of a certified audit of the
financial statements of Health Watch to be completed after the closing date.
The Purchase Price was paid as follows: $3,786,620 was paid in cash at
closing to the Sellers; $5,263,380 was paid to certain debt holders of Health
Watch; and 901,079 shares (the "Payment Shares") of the Company's common stock,
having a value of approximately $3,739,476 was issued to the Sellers, of which
60,240 Payment Shares will be held in escrow for a period equal to the lesser
of (i) the completion of the audit of the financial statements of Health Watch
by the Company's independent auditors or (ii) 120 days after the date of the
Stock Purchase Agreement. The Company has agreed to guarantee the proceeds to
be received by the Sellers in connection with the sale of the Payment Shares.
-11-
8. Subsequent Events (Continued)
In addition, the Sellers may be entitled to receive up to an aggregate of
$3,750,000 upon the achievement of certain milestones relating to additional
monthly recurring revenue achieved by Health Watch during the 30 month period
following the closing. Also, in connection with the Health Watch acquisition,
the Company entered into employment agreements with each of Jeffrey Queen and
Andrew Queen. The employment agreements have a term of three years commencing
on October 1, 1998 and are terminable by the Company under certain
circumstances. In addition, so long as either Jeffrey Queen or Andrew Queen
is employed by the Company or any of its affiliates, they are entitled to a
single seat, at their request, on the Board of Directors of the Company.
Subsequent to September 30, 1998, RAC pledged additional contracts generating
monthly recurring revenue of approximately $300,000 to MSCH pursuant to the
Financing Agreement between RAC and MSCH dated July 30, 1998, as amended, and
received net proceeds of approximately $8,800,000, after payment of a fee of
$1,693,800 to MSCH. The proceeds of this transaction were utilized for the
Health Watch acquisition.
-12-
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.
General Overview
The Company is a fully-integrated security systems provider engaged in the
monitoring, sale, installation, and maintenance of residential and commercial
security systems and personal emergency response systems ("PERS"). The Company
is a regional provider of security alarm monitoring services for residential
and small business subscribers operating in the states of New York,
New Jersey, Pennsylvania, Delaware, Maryland, and Connecticut. The Company
provides security patrol services in the northeast region of Pennsylvania, as
a supplement to its alarm monitoring services. The Company is also a
nationwide provider of PERS products which enable individual users, such as
elderly or disabled persons, to transmit a distress signal using a portable
transmitter.
The Company's electronic security systems business utilizes electronic devices
installed in businesses and residences to provide (i) detection of events such
as intrusion or fire, (ii) surveillance, and (iii) control of access to
property. The monitoring station personnel verify the nature of the emergency
and contact the appropriate emergency authorities in the user's area. In some
instances, commercial customers may monitor these devices at their own
premises or the devices may be connected to local fire or police departments.
The products and services marketed in the electronic security services
industry range from residential systems that provide basic entry and fire
protection to more sophisticated commercial systems.
-13-
The Company's PERS is an electronic device which is designed to monitor,
identify and electronically report emergencies requiring medical, fire or
police assistance, to help elderly, disabled and other individuals. When
activated by the pressing of a button, or automatically in the case of
certain environmental temperature fluctuations, the transmitter sends a radio
signal to a receiving base installed in the user's home. The receiving base
relays the signal over telephone lines to a monitoring station which provides
continuous monitoring services. In addition, this signal establishes two-way
voice communication between the user and the monitoring station personnel
directly through the PERS unit, thereby avoiding any need for the user to
access a telephone.
The electronic security services industry is highly fragmented and the
Company's strategy is to grow by acquisition, as well as by offering new
products and services. The Company believes that there is an industry-wide
trend towards consolidation due, in part, to the relatively high fixed costs
of maintaining a centralized monitoring station and the relatively low
incremental cost of servicing additional subscribers. The Company typically
acquires only the subscriber accounts, and not the facilities or liabilities,
of acquired companies. As a result, the Company is able to obtain gross
margins on the monitoring of acquired subscriber accounts that are similar to
those that the Company currently generates on the monitoring of its existing
subscriber base. In addition, the Company may increase the monitoring charges
paid by those subscribers if its determined that those currently being paid
do not reflect the market area rates.
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, and since the acquisition of Jupiter in February
1998, security patrol income. 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. Security patrol revenues are
recognized as the service is provided. Alarm monitoring and rental services
generate significantly higher gross margins than do the other services
provided by the Company.
During the three months ended September 30, 1998, the Company has added
approximately $75,000 of monthly recurring revenue ("MRR") primarily through
acquisitions. The Company has realized a growth rate of approximately 36% or
17,000 subscribers during the past twelve months from 47,000 subscribers at
September 30, 1997 to approximately 64,000 current subscribers. The Company's
MRR increased by approximately $525,000 or 66% from $800,000 at September 30,
1997 to $1,325,000 at September 30, 1998. Recurring security patrol revenues
derived from preventive services through vehicles patrolling residential
neighborhood communities are included in the Company's MRR.
-14-
Operating revenues increased by $2,767,785 or 85%, from $3,247,884 for
the quarter ended September 30, 1997 ("Fiscal 1998"), to $6,015,669 for the
quarter ended September 30, 1998 ("Fiscal 1999"). The acquisitions of Triple A,
Jupiter, and OEC, during February 1998, accounted for additional operating
revenues as follows: (i) product sales - $741,371; (ii) monitoring and service
revenues - $1,080,844; and (iii) security patrol revenues - $670,177; for an
aggregate totaling $2,492,392. Product sales increased by $539,877 or 81% for
the three months ended September 30, 1998, as compared to the same period
ended September 30, 1997. The increase in product sales was primarily due to
the additional sales generated from the above acquisitions totaling $741,371;
these increases were offset by a decrease in the sales of PERS to home
healthcare agencies and private label wholesalers totaling $169,757. The
significant growth in monitoring and service revenues of $1,557,731 or 60% for
the quarter ended September 30, 1998 as compared to the same period ended
September 30, 1997, was due to additional monitoring and service revenues
from the aforementioned acquisitions totaling $1,080,844, and the continued
growth of the Company through purchases of monitoring contracts. The Company,
through its acquisition of Jupiter, has expanded its operating revenue base
to include security patrol revenue, which totaled $670,177 for the quarter
ended September 30, 1998.
Gross Profit for Fiscal 1999 was $3,191,972, which represents an increase of
$1,111,269 or 53%, as compared to the $2,080,703 of gross profit recognized
in Fiscal 1998. The Gross Profit Margin ("GPM"), as a percentage of sales, for
the quarters ended September 30, 1997 and 1998 were 64% and 53%, respectively.
The decrease in GPM on product sales, from 40% for Fiscal 1998 to 17% for
Fiscal 1999 was primarily due to the significant increase in the sales of
electronic security systems as a percentage of total product sales, as opposed
to the sales of PERS to home health care agencies. Sales to home health care
agencies result in significantly higher gross profit margins than other
product sales. The GPM on monitoring and service revenues decreased slightly,
as a percentage of sales, from 70% to 68% for the three months ended
September 30, 1997 and 1998, respectively. This decrease is due to an increase
in the amount charged per subscriber for monitoring, by the subcontracted
central station. The decrease in the GPM attributable to the monitoring of
subscribers was offset by an increase in the GPM realized on service revenues,
as a result of the restructuring and integration of the service department.
For the quarter ended September 30, 1998 the GPM on the security patrol
revenue was 25%.
Selling, general and administrative expenses increased by $801,086 or
50%, from $1,615,635 for Fiscal 1998, to $2,416,721 for Fiscal 1999. The
increase primarily consisted of (i) additional payroll and related costs of
approximately $470,000, and (ii) other overhead expenses totaling
approximately $400,000 in connection with the acquisitions of Triple A,
Jupiter and OEC. Selling, general and administrative expenses, as a percentage
of total operating revenues, decreased significantly from 50% for the three
months ended September 30, 1997 to 40% for the three months ended September 30,
1998. The reduction in selling, general and administrative expenses is
attributable to efficiencies realized in the Company's corporate offices from
assimilation of newly acquired customers into its customer base and support of
the larger subscriber base. 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 continuing strategy to consolidate the
support infrastructure and fully integrate the operations of the newly
acquired companies.
-15-
The Company recorded a deferred compensation benefit of ($450,000) during
the quarter ended September 30, 1997 and a deferred compensation expense of
$387,500 for the quarter ended September 30, 1998, in connection with two
employment contracts with former officers of USS (see Note 7 of Notes to
Consolidated Financial Statements of the Company).
Amortization and depreciation expenses increased by $558,459 or 67%, from
$837,539 for the quarter ended September 30, 1997 to $1,395,998 for the same
period ended September 30, 1998. The increase in amortization and depreciation
expense is the result of the Company's acquisitions of monitoring contracts
totaling approximately $16.2 million and property and equipment totaling
approximately $3.2 million (including equipment held for lease of $819,139)
during the fiscal year ended June 30, 1998.
During the quarter ended September 30, 1998, the Company incurred
nonrecurring charges totaling $309,631. The majority of these charges were in
connection with management's plan to reduce costs and improve operating
efficiencies for the monitoring and servicing of its existing customer base.
The plan involves the transfer of its subscriber base to its own Monitoring
Station and the consolidation of the support infrastructure. During the three
months ended September 30, 1998, nonrecurring charges, consisted of the
following: (i) hiring and training costs of $123,339, (ii) temporary help of
$88,214, (iii) employee severance and related costs of $8,102, (iv) abandonment
of leases of $9,068, (v) loss on abandonment of fixed assets of $31,694, and
(vi) other restructuring and integration costs of $49,214 (see Note 6 of Notes
to Consolidated Financial Statements of the Company).
Interest expense increased by $78,873 or 12%, from $642,072 for Fiscal 1998 to
$720,945 for Fiscal 1999. Interest expense on additional borrowings for
acquisitions and working capital increased by $198,705. This increase in
interest expense was offset by a decrease in the amortization of debt issue
costs of $74,032 and an increase in interest income of $45,800.
On March 4, 1997, the Company entered into a joint venture agreement with BKR,
Inc. to acquire a 50% interest in HealthLink Ltd ("HealthLink"). The equity
losses of the joint venture consists of the Company's share, $130,138 of
Healthlink's losses for the quarter ended September 30, 1998. In the fourth
quarter of Fiscal 1998, the Company decided to discontinue HealthLink's
operations, other than providing monitoring services to existing HealthLink
customers and the Company recorded a non-cash impairment loss, related to the
writedown of its joint venture.
-16-
The net loss applicable to common shareholders (net loss adjusted for
dividends and accretion on Preferred Stock) for the quarters ended
September 30, 1997 and 1998 were $1,029,953 or ($.48) per share based on
2,138,173 shares outstanding, and $4,606,629 or ($.71) per share based on
6,472,049 shares outstanding, respectively. The net loss for Fiscal 1998, was
$694,681 or ($.32) per share, as compared to a net loss of $4,606,629 or
($.71) per share for Fiscal 1999. The net loss for the quarter ended
September 30, 1998 is primarily attributable to non-cash charges totaling
$4,578,749, consisting of (i) depreciation and amortization of $1,395,998,
(ii) compensation - employment contracts of $387,500, (iii) amortization of
deferred financing costs of $227,445, and (iv) loss on debt extinguishment of
$2,567,806.
Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
excluding charges for: (I) compensation expense - employment agreements;
(ii) nonrecurring charges; (iii) loss on joint venture; and (iv) loss on debt
extinguishment, were $465,068 for the quarter ended September 30, 1997 as
compared to $775,251 for the quarter ended September 30, 1998; an improvement
of $310,183 or 67%. The significant improvement in the Company's EBITDA is
the result of the Company's ability to assimilate newly acquired monitoring
contracts into the existing customer base without incurring substantial
increases in overhead expenses.
Adjusted EBITDA is derived by adding Internal Sales and Marketing Program
costs, net of installation revenues, to EBITDA. This calculation provides a
basis for comparison of the Company's results to those of other alarm
security companies that only grow through the acquisition of subscriber
accounts. Adjusted EBITDA does not represent cash flows from operations as
defined by generally accepted accounting principles and should not be
construed as an alternative to net income. Adjusted EBITDA for the quarter
ended September 30, 1998 was $1,123,544.
Accounting Differences for Account Purchases and New Installations.
A difference between the accounting treatment of the purchase of subscriber
accounts and the accounting treatment of the generation of new accounts through
direct sales by the Company's sales force has a significant impact on the
Company's results of operations. The costs of monitoring contracts acquired
are capitalized and amortized over estimated lives ranging from 5 to 10 years,
on a straight-line basis, for alarm and PERS accounts. Included in capitalized
costs are certain acquisition transition costs associated with incorporating
the purchased subscriber accounts into the Company's operations. Such costs
include costs incurred by the Company in fulfilling the Seller's
preacquisition obligations to the acquired subscribers, such as providing
warranty repair services. In contrast, all of the Company's costs related to
the sales, marketing and installation of new alarm monitoring systems
generated by the Company's sales force are expensed in the period in which
such activities occur.
-17-
Electronic Security Subscriber Attrition.
Subscriber attrition has a direct impact on the Company's results of
operations, since it affects both the Company's revenues and its amortization
expense. Attrition can be measured in terms of canceled subscriber accounts
and in terms of decreased MRR resulting from canceled subscriber accounts.
The Company experiences attrition of subscriber accounts as a result of
several factors, including relocation of subscribers, adverse financial and
economic conditions and competition from other alarm service companies. In
addition, the Company may lose certain subscriber accounts, particularly
subscriber accounts acquired as part of an acquisition, if the Company does
not service those subscriber accounts successfully or does not assimilate
such accounts into the Company's operations. Subscriber attrition is defined
by the Company for a particular period as a quotient, the numerator of which
is equal to the number of subscribers who disconnect during such period, net
of the number of subscribers during such period (i) resulting from new
installations, (ii) resulting from reconnections from premises previously
occupied by subscribers of the Company or of prior subscribers of the Company,
(iii) resulting from conversions, and (iv) associated with cancelled accounts
with respect to which the Company obtained an account guarantee, and the
denominator of which is the average of the number of subscribers at each
month end during such period. MRR attrition is defined by the Company for a
particular period as a quotient, the numerator of which is an amount equal to
gross MRR lost as the result of canceled subscriber accounts during such
period, net of MRR during such period (i) resulting from new installations,
(ii) resulting from upgrades of current alarm systems, (iii) generated by
increases in rates to existing subscribers, (iv) resulting from the
reconnection of premises previously occupied by subscribers of the Company or
of prior subscribers of the Company, (v) resulting from conversions and
(vi) associated with cancelled accounts with respect to which the Company
obtained an account guarantee, and the denominator of which is the average
month-end MRR in effect during such period. Although the Company believes
that its formulas of subscriber attrition and MRR attrition are similar to
those used by other security alarm companies, there can be no assurance that
subscriber attrition and MRR attrition, as presented by the Company, are
comparable to other similarly titled measures of other alarm monitoring
companies. During the first quarter of Fiscal 1999, the Company experienced
annualized subscriber attrition of approximately 5% and annualized MRR
attrition of approximately 5%.
-18-
Liquidity and Capital Resources
On July 30, 1998, the Company completed a restructuring of its long-term
indebtedness with McGinn, Smith Capital Holdings Corp. ("MSCH"). In
connection with the refinancing the Company incurred a charge for loss on debt
extinguishment of $2,567,806, during the quarter ended September 30, 1998. As
part of such restructuring, USS sold certain of its alarm monitoring contracts
(the "Purchased Contracts") to its newly created, wholly-owned subsidiary,
Response Acquisition Corp. ("RAC"), for aggregate consideration of $26,000,000
pursuant to a Purchase Agreement dated as of July 30, 1998 (the "Purchase
Agreement"), between USS and RAC. Also on July 30, 1998, in a related
transaction, RAC entered into a Receivable Financing Agreement dated as of
July 30, 1998 (the "Financing Agreement"), among RAC, USS and MSCH. Pursuant
to the terms of the Financing Agreement, RAC received initial financing from
MSCH in the amount of $26,000,000 (the "Initial Loan") and granted MSCH a
first priority perfected security interest in the receivables derived from the
Purchased Contracts (the "Receivables"). The Initial Loan has a term of five
years and bears interest at a rate of 8% per annum. Principal payments on
the Initial Loan are due as follows: years ending June 30, 1999 - $132,699;
2000 - $326,875; 2001 - $2,360,609; 2002 - $3,597,866; 2003 - $4,545,881
and 2004 - $15,036,070 . The Receivables are paid directly into a lockbox
administered by USS as Collection Agent under the Financing Agreement for
which USS will receive a monthly fee equal to $5.00 per Purchased Contract
from RAC. Under the terms of the Financing Agreement, all funds derived from
the Receivables will be paid to the lockbox account and MSCH will be paid its
monthly payment of principal and interest under the Loan out of such lockbox
account prior to any payments to USS as Collection Agent or any other funds
being distributed to the Company or its subsidiaries. RAC may finance, from
time to time, up to an additional $24,000,000 pursuant to the Financing
Agreement by pledging additional Purchased Contracts which it may purchase
from USS pursuant to the Purchase Agreement to MSCH. A portion of the proceeds
from the Initial Loan was used to satisfy existing indebtedness of the Company
and the remaining amount will be used for acquisitions and general working
capital. As of September 30, 1998, $25,976,589 was outstanding under the
Financing Agreement.
The Company recorded debt issuance costs of $3,900,000, of which $3,120,000
was paid in cash at the closing and $780,000 was paid in 119,632 shares of
Common Stock (the "Fee Shares"). The debt issuance costs will be amortized
over the life of the loan using the effective interest method. The Company
has agreed to file a registration statement to register the sale of (the "Fee
Shares") by MSCH under the Securities Act of 1933, as amended. The Company has
agreed that in the event the proceeds to be derived by MSCH from the sale of
the Fee Shares is less than $780,000, the Company is obligated to, at its
option, pay cash or issue additional shares equal to the amount of the
shortfall, if any.
The Company's working capital improved by $3,575,297 from a working capital
deficiency of $1,508,402 at June 30, 1998 to working capital of $2,066,895 at
September 30, 1998. The Company believes its cash flows from operations will
be sufficient to fund the Company's principal and 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 quarter ended September 30, 1998
was $734,864. A net loss of $4,606,629 including non-cash transactions
totaling $4,578,749, resulted in net cash used in operating activities in the
amount of $27,880. The non-cash transactions are as follows: (i) depreciation
and amortization of $1,395,998; (ii) compensation expense in connection with
employment agreements of $387,500; (iii) amortization of deferred financing
costs of $227,445; and (iv) loss on debt extinguishment of $2,567,806. Net
cash used in operating activities included significant changes in prepaid
expenses and other current assets, and accounts payable and accrued expenses
and other current liabilities totaling $686,516. The increase in prepaid
expenses and other current assets of $185,805 is primarily attributable to a
deposit held in escrow in connection with the Health Watch acquisition.
Accounts payable and accrued expenses decreased by $500,711, primarily due to
costs accrued at June 30, 1998 in connection with the refinancing of the
Mellon Bank, N.A. Line of Credit (see Note 3 of Notes to Consolidated
Financial Statements), and employee severance and related costs associated
with the restructuring of the Company being satisfied during the three months
ended September 30, 1998.
-19-
Net cash used in investing activities for the quarter ended September 30,
1998 was $2,030,822. Purchases of monitoring contracts (including purchase
holdback payments) accounted for $1,508,584 of the cash used in investing
activities. Other investing activities included the purchase of property
and equipment of $523,090 (including equipment used for rentals in the amount
of $139,690), and proceeds from the sale of property and equipment of $852.
Net cash provided by financing activities was $6,202,681 for the quarter ended
September 30, 1998. Net proceeds received from a line of credit of $24,385,632
were used primarily to satisfy the Company's existing indebtedness at July 30,
1998; with the remainder of the proceeds to be used for the acquisition of
monitoring contracts, and working capital. Principal payments on long-term
debt totaling $18,201,778, including $17,985,000 to satisfy the Company's
existing indebtedness, were made during the quarter ended September 30, 1998.
Systems' filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code in October 1987. Systems' Plan of Reorganization became
effective in February 1990 and provided for, among other things, long-term
payments to creditors totaling approximately $2,800,000. As of September 30,
1998 deferred payment obligations to such pre-reorganization creditors
totaled $150,856, which is payable in varying installments through the year
2000.
The Company anticipates transferring all of its subscriber accounts from the
third party central station to Triple A's monitoring station, as well as
incurring additional costs for the integration of the security businesses
and Health Watch totaling approximately $1,250,000, including capital
expenditures of approximately $500,000 during the fiscal year ending June 30,
1999. The Company has no other 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 Receivable Financing Agreement
dated July 30, 1998 (see Note 3 of Notes to Consolidated Financial Statements)
together with the remaining cash flow from operations to continue to acquire
monitoring contracts. Additional funds beyond those currently available could
be required to continue the acquisition program, and there can be no
assurance that the Company will be able to obtain such financing.
-20-
Year 2000 compliance relates to the ability of computer hardware and
software to respond to the problems posed by the fact that computer programs
have traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer programs and
systems will not be able to differentiate between the year 2000 and 1900. The
failure to address the problem could result in system failures and the
generation of erroneous data. The accounts receivable and billing software
currently used by the Company has been tested internally and, based upon such
tests, the Company believes such software is year 2000 compliant. The Company
that designs the monitoring software for the Triple A Monitoring Station has
represented to the Company that such software is year 2000 compliant. The
Company plans to test such monitoring station software prior to its use by
the Company. The Company plans to install a new Windows-based general ledger
and accounts payable program, which the manufacturer has warranted as year
2000 compliant, by January 1, 1999. To date, the Company has not incurred any
material costs historically and does not expect to incur any material costs
in the future with respect to becoming Year 2000 compliant. However, the
Company cannot predict the effect of the year 2000 problem on entities with
which the Company transacts business (including its customers, financial
institutions and vendors), and there can be no assurance that the effects of
the year 2000 problem on such entities will not have a material adverse
effect on the Company's business, financial condition or results of
operations. The Company plans to initiate communication with its financial
institutions and major suppliers concerning there readiness for the year 2000,
during the current fiscal year, in order to minimize the risk associated with
the year 2000 hardware and software problems. If the Company's current
financial institutions or major suppliers are unable to attain year 2000
compliance in a timely manner; then the Company will change to financial
institutions that will be year 2000 compliant, and seek out other suppliers
for the same product or purchase certain levels of product to enable the
vendor to become year 2000 compliant over a specified period of time.
-21-
Response USA, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities -
During the quarter ended September 30, 1998, the Company issued 284,953
shares of its common stock, in connection with acquisitions.
During the quarter ended September 30, 1998, the Company issued 119,632
shares of its common stock, in connection with the refinancing.
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 - August 5, 1998
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 10, 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
Vice President, Secretary
Treasurer
EXHIBIT 11
COMPUTATION OF LOSS PER SHARE
FOR THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
------------ ------------
Net loss $(4,606,629) $(694,681)
Deduct:
Accretion, discount and
dividends on preferred stoc - 335,272
------------ ------------
Net loss applicable to common
shareholders $(4,606,629) $(1,029,953)
============ ============
Weighted average number of
common shares outstanding 6,472,049 2,138,173
============ ============
Basic loss per share $(0.71) $(0.48)
============ ============
Weighted average number of
common shares outstanding 6,472,049 2,138,173
Common share equivalents
applicable to:
Warrants - Class A 411,127 411,127
Warrants - Class B 493,983 493,983
Warrants - Class C 16,567 16,567
Warrants - Other 1,087,083 804,376
Stock options 1,159,683 665,626
Less common stock acquired
with net proceeds (3,168,443) (1,638,922)
----------- -----------
Weighted average number of
common shares and common
share equivalents used to
compute diluted loss per share 6,472,049 2,890,930
=========== ===========
Diluted loss per share $(0.71) $(0.24)
=========== ===========
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