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 March 31, 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: 6,320,857 shares of $.008 par value common stock as of
April 30, 1998.
Response USA, Inc. and Subsidiaries
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets for March 31, 1998
and June 30, 1997 1-2
Consolidated Statements of Operations for the Nine
Months and Three Months ended March 31, 1998
and 1997 3
Consolidated Statement of Stockholders' Equity for
March 31, 1998 4
Consolidated Statements of Cash Flows for the Nine
Months and Three Months ended March 31, 1998
and 1997 5-8
Notes to Consolidated Financial Statements 9-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-22
PART II. OTHER INFORMATION 23-24
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
1998 1997
--------- -------
(Unaudited)
ASSETS
--------
CURRENT ASSETS
Cash $1,098,402 $698,551
Marketable securities 18,750 75,000
Accounts receivable - Current portion
Trade - Net of allowance for doubtful
accounts of $550,690 and
$437,208, respectively 2,125,761 1,443,203
Net investment in sales-type leases 69,110 89,124
Inventory 1,638,302 798,814
Prepaid expenses and other current assets 677,763 271,087
--------- ---------
Total current assets 5,628,088 3,375,779
--------- ---------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $7,451,310 and $5,217,345,
respectively 32,314,685 18,433,133
---------- ----------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $2,820,397
and $2,363,067, respectively 2,821,703 1,512,077
---------- ----------
OTHER ASSETS
Accounts receivable - Noncurrent portion
Trade 17,018 49,046
Net investment in sales-type leases 145,096 179,752
Deposits 67,006 45,310
Investment in joint venture 2,654,739 3,139,484
Noncompete covenant 89,930
Deferred compensation expense 548,760 892,500
Deferred financing costs - Net of accumulated
amortization of $1,235,943 and $254,654,
respectively 3,033,868 3,612,727
---------- ----------
6,556,417 7,918,819
---------- ----------
$47,320,893 $31,239,808
========== ==========
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
1998 1997
----------- ----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt
Notes payable $310,849 $100,329
Capitalized lease obligations 47,047 57,453
Accounts payable - Trade 1,027,437 556,205
Purchase holdbacks 737,495 415,765
Accrued expenses and other current
liabilities 1,608,117 1,288,332
Deferred revenue 3,137,760 1,981,500
---------- ----------
Total current liabilities 6,868,705 4,399,584
---------- ----------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt
Notes payable 15,954,121 12,435,287
Capitalized lease obligations 51,064 85,435
Deferred compensation expense 2,743,801 2,550,000
---------- ----------
18,748,986 15,070,722
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY
Preferred stock - Series A -
Par value $1,000
Authorized 250,000 shares
Series A issued and outstanding 6,890
shares - June 30, 1997 7,757,783
Common stock - Par value $.008
Authorized 37,500,000 shares
Issued and outstanding 1,775,437
shares - June 30, 1997 and 6,320,690
shares - March 31, 1998 50,566 14,203
Additional paid-in capital 60,916,366 35,439,465
Unrealized holding losses on available-
for-sale securities (56,250)
Accumulated deficit (39,207,480) (31,441,949)
------------ ------------
21,703,202 11,769,502
------------ ------------
$47,320,893 $31,239,808
============ ============
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Nine Months Ended March 31, Three Months Ended March 31
1998 1997 1998 1997
---- ---- ---- ----
OPERATING REVENUES
Product sales $2,258,816 $2,138,229 $912,911 $860,187
Monitoring and service 8,511,749 7,176,841 3,343,729 2,468,910
Security patrol 301,202 301,202
---------- ---------- --------- ---------
11,071,767 9,315,070 4,557,842 3,329,097
---------- ---------- --------- ---------
COST OF REVENUES
Product sales 1,439,108 1,526,201 637,290 653,206
Monitoring and service 2,435,342 2,215,760 982,289 889,841
Security patrol 238,833 238,833
---------- ---------- --------- ---------
4,113,283 3,741,961 1,858,412 1,543,047
---------- ---------- --------- ---------
GROSS PROFIT 6,958,484 5,573,109 2,699,430 1,786,050
---------- ---------- --------- ---------
OPERATING EXPENSES
Selling, general and
administrative 5,401,144 5,970,522 2,074,690 2,393,572
Compensation - Options
/Employment contracts 537,541 1,739,784 732,541 772,500
Depreciation and
amortization 2,860,503 2,055,268 1,158,657 719,456
Amortization of
deferred financing
costs 981,289 750,734 378,102 58,756
Interest 1,142,713 633,888 429,711 276,947
---------- --------- --------- ---------
10,923,190 11,150,196 4,773,701 4,221,231
---------- ---------- --------- ---------
LOSS FROM OPERATIONS (3,964,706) (5,577,087) (2,074,271) (2,435,181)
---------- ---------- --------- ---------
OTHER INCOME
Interest income 4,976 12,177 1,814 2,119
Joint venture loss (355,996) (28,442) (108,985) (28,442)
---------- ---------- ---------- --------
(351,020) (16,265) (107,171) (26,323)
---------- ---------- ---------- --------
LOSS BEFORE
EXTRAORDINARY ITEM (4,315,726) (5,593,352) (2,181,442) (2,461,504)
EXTRAORDINARY ITEM
Loss on debt
extinguishment 2,549,708
---------- ---------- --------- --------
NET LOSS (4,315,726) (8,143,060) (2,181,442) (2,461,504)
Dividends and accretion
on preferred stock (3,449,805) (6,556,681) (1,673,608) (212,954)
----------- ----------- ----------- ----------
NET LOSS APPLICABLE TO
COMMON SHAREHOLDERS ($7,765,531) ($14,699,741) ($3,855,050)($2,674,458)
============ ============= ============ ==========
Loss per common share
Loss before
extraordinary item ($1.53) ($4.04) ($0.52) ($1.66)
Extraordinary item 0.00 (1.84) 0.00 0.00
------- ------- ------- -------
Net loss ($1.53) ($5.88) ($0.52) ($1.66)
======= ======= ======= =======
Net loss applicable
to common shareholders ($2.75) ($10.62) ($0.92) ($1.81)
======= ======== ======= =======
Weighted average number
of shares outstanding 2,827,569 1,384,116 4,172,755 1,480,747
========= ========= ========= =========
<TABLE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Unrealized
Holding
Preferred Stock Preferred Stock Losses on
Series - A Series - B Common Stock Additional Available-
Number Number Number Paid-In For-Sale Accumulated
of Shares Amount of Shares Amount of Shares Amount Capital Securities Deficit Total
----- --------- ------ ----- -------- ------- ---------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance-June 30, 1997
(see Note 5) 6,890 $7,757,783 - $ - 1,775,437 $14,203 $35,439,465 $ - $(31,441,949) $11,769,502
Secondary offering
(including
overallotment) 3,268,800 26,150 17,951,438 17,977,588
Exercise of stock
options 23,639 189 165,240 165,429
Exercise of warrants
to lender 3069.58 31 107,263 858 (889) 0
Issuance of common
stock to lender 40,000 320 267,180 267,500
Issuance of common
stock to consultant 15,000 120 89,880 90,000
Discount on and
deemed dividends on
preferred stock 2,044,152 (2,044,152) 0
Conversion of
preferred stock-
Series A (1,000) (1,125,000) 300,000 2,400 1,272,600 (150,000) 0
Conversion of
preferred stock-
Series B (3,069.58) (31) 102,319 819 (788) 0
Redemption of
preferred stock (5,890) (8,676,935) (8,676,935)
Issuance of warrants
to preferred
shareholders 1,255,653 (1,255,653) 0
Issuance costs
incurred in
connection with
the preferred stock
settlement (16,081) (16,081)
Acquisitions 686,898 5,496 4,482,679 4,488,175
Employee bonus 1,334 11 9,989 10,000
Unrealized holding
losses on available-
for-sale securities (56,250) (56,250)
Net loss (4,315,726) (4,315,726)
----- ---------- ------ ------ --------- ------- ---------- ------- ----------- ----------
Balance-March 31, 1998 0 $ - 0 $ - 6,320,690 $50,566 $60,916,366 $(56,250) $(39,207,480) $21,703,202
===== ========== ====== ====== ========= ======= ========== ======= =========== ==========
</TABLE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended March 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($4,315,726) ($8,143,060)
Adjustments to reconcile net loss
to net cash used in operating activities
Amortization of monitoring contract costs 2,237,190 1,665,903
Depreciation and amortization of property
and equipment 494,563 389,366
(Gain)Loss on sale of property and equipment (2,442) 16,743
Loss on sale of marketable securities 3,777
Amortization of deferred financing costs and
debt discount 981,289 750,734
Amortization of goodwill 128,750
Loss on joint venture 355,996 28,442
Issuance of common stock and warrants for
consulting fees 689,000
Compensation expense in connection with
the issuance of stock options and
employment contracts 537,541 1,739,784
Decrease in accounts receivable
Trade 37,440 2,266
Net investment in sales-type leases 54,669 33,034
Increase in inventory (372,591) (179,704)
Increase in prepaid expenses and other
current assets (362,062) (103,151)
Increase in deposits (10,585) (282)
Increase in accounts payable - Trade 434,743 213,939
Increase (decrease) in accrued expenses and
other current liabilities 154,868 (876,513)
Increase in deferred revenues 1,156,260 342,321
---------- ----------
Net cash provided by (used in) operating
activities 1,513,680 (3,431,178)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of monitoring contracts
(net of purchase holdbacks) (12,303,021) (3,377,559)
Proceeds from the sale of marketable
securities 113,138
Proceeds from the sale of property and
equipment 900 39,864
Purchase of property and equipment (1,482,990) (525,823)
Investment in Joint Venture (4,629)
----------- ----------
Net cash used in investing activities (13,671,973) (3,868,147)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the secondary offering 21,247,200
Costs incurred in connection with the
secondary offering (3,269,612)
Proceeds from the issuance of
preferred stock 7,500,000
Redemption of preferred stock (8,676,935)
Costs incurred in connection with
the preferred stock issuance (16,081) (1,012,449)
Deferred financing costs incurred (44,931) 22,761
Proceeds from long-term debt
Notes payable 5,197,711 14,300,000
Principal payments on long-term debt
Notes payable (1,969,672) (15,217,908)
Capitalized lease obligations (44,777) (65,364)
Net proceeds from the exercise of
stock options and warrants 135,241 447,260
----------- ------------
Net cash provided by financing activities 12,558,144 5,974,300
----------- ------------
NET INCREASE (DECREASE) IN CASH 399,851 (1,325,025)
CASH - BEGINNING 698,551 1,926,766
---------- ----------
CASH - ENDING $1,098,402 $601,741
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $1,075,461 $776,156
Cash paid during the year for income taxes -- --
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
Supplemental Disclosures of Noncash Investing and Financial
Activities
During the nine months ended March 31, 1997 and 1998,
long-term notes payable of $74,028 and $160,904,
respectively, were incurred for the purchase of property and
equipment. In July 1996, capitalized lease obligations of
$143,100 were incurred for the acquisition of property and
equipment.
During the nine months ended March 31, 1997,
convertible subordinated promissory notes of $50,000 were
converted to common stock. As a result, the Company reduced
deferred financing costs and additional paid-in capital in
the amount of $5,068.
During the nine months ended March 31, 1997, the
Company recorded accretion to preferred stock in the amount
of $5,895,000 with a corresponding charge to accumulated
deficit. The accretion represents the intrinsic value of the
beneficial conversion feature contained within the preferred
stock.
During the nine months ended March 31, 1997 and 1998,
the Company recorded deemed dividends and accretion on such
deemed dividends totaling $661,681 and $2,044,152,
respectively, in connection with the preferred stock
issuance, with a corresponding charge to accumulated
deficit.
During the nine months ended March 31, 1997 and 1998,
$610,000 and $1,000,000 of preferred stock, and $8,738 and
$100,000 in deemed dividends were converted into 63,446 and
300,000 shares of common stock, respectively (see Note 4 of
Notes to Consolidated Financial Statements).
During the nine months ended March 31, 1998, the
Company recorded additional paid-in capital of $1,255,653,
with a corresponding charge to accumulated deficit, to
reflect the fair value of the additional warrants issued to
the preferred shareholders (see Note 4 of Notes to
Consolidated Financial Statements).
During the nine months ended March 31, 1997, the
Company decreased the put obligation payable associated with
warrants issued to the Company's lender and the
corresponding charge to deferred financing costs by
$315,155, in connection with the refinancing at June 30,
1996. On June 24, 1997, the Company, in return for the
holder of the warrants forgiving the put obligation feature,
reduced the exercise price of such warrants from $9.75 to
$4.50. On August 13, 1997, the Holder exercised the warrants
and received 107,263 shares of common stock and blank check
preferred stock convertible into 102,319 shares of common
stock (see Note 3 of Notes to Consolidated Financial
Statements).
On February 13, 1998, the Company entered into an
amended and restated Loan and Security Agreement with Mellon
Bank, N.A. increasing the Credit Line to $18,000,000. In
connection with the Company's amended and restated Loan and
Security Agreement, the Company issued 40,000 shares of its
common stock, valued at $267,500, to APT Holdings
Corporation (an affiliate of Mellon Bank, N.A.), and 15,000
shares of its common stock , valued at $90,000, to a
consultant (see Note 3 of Notes to Consolidated Financial
Statements).
During the nine months ended March 31, 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 $119,665.
During the nine months ended March 31, 1998, the
Company issued 686,664 shares of its common stock, valued at
$4,488,175, in connection with acquisitions (see Note 2 of
Notes to Consolidated Financial Statements).
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS (continued)
Supplemental Disclosures of Noncash Investing and Financial
Activities (continued)
During the nine months ended March 31, 1997 and 1998,
the Company issued 5,567 and 2,900 shares of its common
stock, respectively, pursuant to guarantees of stock
valuations, in connection with past acquisitions of
monitoring contracts. The Company, also, canceled 2,666
shares of its common stock pursuant to guarantees of stock
valuations, during the nine months ended March 31, 1998.
During the nine months ended March 31, 1997 and 1998,
the Company reduced amounts receivable and recorded
monitoring contract costs in the amount of $154,570 and
$4,326, respectively, in connection with the purchase of
monitoring contracts.
During the nine months ended March 31, 1997, the
Company reduced monitoring contracts and the corresponding
purchase holdbacks in the amount of $294,652.
During the nine months ended March 31, 1997, the
Company issued 8,334 shares of its common stock, valued at
$75,000, in connection with the purchase of monitoring
contracts.
In March 1997, the Company issued 364,721 shares of its
common stock, valued at $3.3 million in connection with a
Joint Venture.
During the nine months ended March 31, 1998, the
Company issued 1,334 shares of its common stock, valued at
$10,000, as an employee bonus.
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying interim balance sheet as of March 31,
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 and nine month
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
On September 30, 1997, the Company, entered into an
agreement with Triple A Security Systems, Inc. ("Triple A"),
a Pennsylvania corporation, and Robert L. May, an
individual, to acquire substantially all of the assets of
Triple A. Triple A is engaged in the installation, servicing
and monitoring of electronic security systems. On February
11, 1998, the Company acquired Triple A. In consideration of
the acquisition of approximately 14,000 subscriber accounts,
the Company paid Triple A an aggregate of $13,030,169,
consisting of $10,035,096 in cash (including acquisition
costs incurred of $35,096) and 460,780 shares of its common
stock, valued at $2,995,073; additionally the Company
assumed certain liabilities totaling $1,051,883.
The following represents the assets purchased and the
liabilities assumed:
Assets
Cash $ 211,069
Marketable securities 116,915
Accounts receivable 472,137
Inventory 466,897
Due from affiliate 92,203
Prepaid expenses and other
current assets 13,313
Monitoring contracts 11,609,264
Covenant - Noncompete 50,000
Property and equipment 1,050,254
----------
14,082,052
----------
Liabilities
Deferred revenue 998,139
Accrued expenses and other
current liabilities 53,744
----------
1,051,883
----------
Total purchase price $13,030,169
==========
In October 1997, the Company entered into an agreement
to acquire all of the outstanding stock of The Jupiter
Group, Inc., dba Triple A Patrol ("Jupiter"), a patrol
service company. Jupiter's patrol services are principally
supplied in areas in which the Company believes that Triple
A is a substantial provider of security systems services.
The patrol service supplements the Company's alarm
monitoring service by providing routine patrol of a
subscriber's premises and neighborhood, response to alarm
system activations and "special watch" services, such as
picking up mail and newspapers and increased surveillance when the
2. Acquisitions (Continued)
customer is on vacation. On February 11, 1998, the Company
acquired Jupiter. In consideration of the acquisition, the
Company issued 161,050 shares of its common stock, valued at
$1,039,163, subject to adjustment.
The following represents the assets purchased and the
liabilities assumed:
Assets
Cash $ 80,254
Accounts receivable 219,440
Prepaid expenses and other
current assets 13,287
Monitoring contracts 868,973
Covenant - Noncompete 23,157
Property and equipment 159,810
---------
1,364,921
---------
Liabilities
Accounts payable 36,489
Due to affiliate 92,483
Accrued expenses and other
current liabilities 56,373
Notes payable 140,413
---------
325,758
---------
Total purchase price $ 1,039,163
=========
On February 23, 1998, the Company entered into an
agreement to acquire all of the outstanding stock of
Organization for Enhanced Capability, Incorporated ("OEC"),
a Massachusetts corporation. OEC provides technological
support services to help elderly or medically-at-risk
individuals live independently, without the need of
supervised care, through the use of personal emergency
response systems ("PERS"). In consideration of the
acquisition of approximately 2,500 subscriber accounts, the
Company paid an aggregate of $1,820,323, consisting of
$1,215,322 in cash, a note payable in the amount of $200,000
payable over two years, and 60,000 shares of its common
stock valued at $405,001.
The following represents the assets purchased and the
liabilities assumed:
Assets
Prepaid expenses and other
current assets $ 7,926
Monitoring contracts 1,799,491
Covenant - Noncompete 20,000
Property and equipment 9,198
---------
1,836,615
---------
Liabilities
Deferred revenue 16,292
---------
Total purchase price $ 1,820,323
=========
During the nine months ended March 31, 1998, the
Company purchased additional monitoring contracts for an
aggregate of $1,837,790. As consideration, the Company paid
$1,389,926 in cash, including acquisition and assimilation
costs of $166,883, issued 4,834 shares of the Company's
common stock valued at $48,938, recorded purchase holdbacks
of $394,600 (which are payable over periods of up to two
years based on performance guarantees of the seller), and
reduced accounts receivable in the amount of $4,326.
2. Acquisitions (Continued)
The following unaudited pro forma combined operating
information for the nine and three months ended March 31,
1998 and 1997, gives effect to the acquisitions as if they
had been completed at July 1, 1996. The pro forma
information is based on the historical financial statements
of the Company, Triple A, Jupiter, and OEC, giving effect to
the purchase method of accounting.
The unaudited pro forma combined operating information
may not be indicative of the results that actually would
have occurred if the acquisition had occurred on July 1,
1996.
Nine Months Ended Three
Months Ended
1998 1997 1998
1997
Operating revenues $16,609,209 $15,175,264 $5,755,122 $5,267,394
Loss before extra-
ordinary item (4,993,505) (6,530,581) (2,520,966) (2,724,885)
Net loss (4,993,505) (9,080,289) (2,520,966) (2,724,885)
Net loss applicable to
common shareholders (4,993,505) (9,080,289) (2,520,966) (2,724,885)
EBITDA 2,389,875 377,230 825,067 (305,350)
Net loss per common
share applicable to
common shareholders ($1.42) ($4.39) ($.52) ($1.26)
Weighted average
number of shares
outstanding 3,509,399 2,065,946 4,854,585 2,162,577
3. Long-Term Notes Payable
Line of Credit Agreement
------------------------
Note payable with interest only due through June
30, 2000 at prime plus 1-3/4% on the outstanding
loan balance; a commitment fee of .5% is payable
on the average daily unused credit; collateralized
by all assets of the Company $ 15,610,000
Equipment Financing
-------------------
Payable in monthly installments aggregating
$15,372 including interest at rates ranging from
2.94% to 11.83%; final payments due April, 1998
through August, 2002; collateralized by related
equipment 311,826
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 $30,676 142,958
Federal priority tax claims payable in annual
installments of $2,211 through March, 1999, and
$ 1,896 thereafter 7,898
3. Long-Term Notes Payable (Continued)
Other
-----
Notes payable in monthly installments of $9,046
including interest at 8%; final payments due
March 2000; collateralized by related monitoring
contracts 192,288
----------
16,264,970
Less Current Portion 310,849
----------
$15,954,121
==========
On June 30, 1996, the Company entered into a four-year
$15,000,000 revolving bank line of credit agreement, which
was increased to $15,500,000 on January 14, 1998 and
increased to $18,000,000 on February 13, 1998 (see below).
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 March
31, 1998, the Company has available on its revolving credit
facility the amount of $2,390,000.
On June 30, 1996, in connection with obtaining a line
of credit, the Company issued a stock purchase warrant (the
"Warrant") to an affiliate of the bank which provided the
line of credit. The terms of this Warrant, which were
subsequently modified (see below), included the following:
(i) number of shares, 344,045; (ii) exercise price, $9.75
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
344,045 shares.
On June 24, 1997, the Company, in return for the holder
of the Warrant forgiving the put obligation feature, reduced
the exercise price of the Warrant to $4.50.
On August 13, 1997 the holder of the Warrant exercised
the Warrant and received 107,263 shares of common stock and
blank check preferred stock convertible into 102,319 shares
of common stock, taking advantage of its noncash conversion
feature whereby the number of shares issued was reduced from
344,045 to 209,582 and no cash was paid by the holder of the
Warrant. On March 24, 1998, such holder converted all of its
preferred stock into common stock.
On October 1 and November 13, 1997, Mellon Bank amended
certain financial covenants in the Loan and Security
Agreement dated June 30, 1996, as follows: (i) ratio of cash
flow to interest expense; (ii) ratio of senior funded debt
to cash flow; (iii) net income (loss); and (iv) capital
expenditures.
On February 13, 1998, the Company entered into an
amended and restated Loan and Security Agreement with Mellon
Bank, N.A. increasing the Credit Line to $18,000,000.
Pursuant to the restated Loan and Security Agreement, the
amended amortization on the outstanding loan balance is
interest only for one year, and the reduction of principal
in the amount of $250,000 per quarter, thereafter. In
connection with the Company's amended and restated Loan and
Security Agreement, the Company issued 40,000 shares of its
common stock, valued at $267,500, to APT Holdings
Corporation (an affiliate of Mellon Bank, N.A.), and 15,000
shares of its common stock , valued at $90,000, to a
consultant.
4. Preferred Stock
During July, 1997, 1,000 shares of Series A Preferred
Stock and deemed dividends with a total book value of
$1,125,000 were converted into 300,000 shares of the
Company's common stock. As a result, the Company recorded
common stock of $2,400, additional paid-in capital of
$1,272,600, charged accumulated deficit $150,000, and
reduced the preferred stock account for $1,125,000, which
included a reduction of the discount on the outstanding
preferred stock in the amount of $25,000.
During the nine months ended March 31, 1998, deemed
convertible preferred stock dividends totaling $1,970,528
were recorded relating to the preferred shares. As a result
of the beneficial conversion feature contained within the
preferred stock dividend, the Company recorded a discount on
preferred stock in the amount of $73,624.
Prior to June 30, 1997, certain holders of the
Preferred Stock commenced litigation against the Company,
challenging, among other things, the Company's decision to
suspend conversion rights and seeking, among other things,
specific performance under the Certificate of Designations
to convert their Preferred Stock to Common Stock of the
Company. The Company reached an agreement, which was
subsequently amended pursuant to an amendment dated November
30, 1997 (as amended, the "Settlement Agreement") with the
holders (the "Holders") of the Preferred Stock (other than
Halifax Fund, LP ("Halifax")), pursuant to which the Holders
agreed to refrain from all conversions of the Preferred
Stock for specified periods, and the Company agreed to issue
to the Holders of the Preferred Warrants as described below
and to amend the terms of the Preferred Stock by the filing
of an Amended Certificate of Designation (the "Amendment").
Pursuant to the terms of the Settlement Agreement, on
June 26, 1997, each Holder received 5,000 Preferred Warrants
for each 100 shares of Preferred Stock held as of June 26,
1997, an aggregate of 114,833 Preferred Warrants. The
Preferred Warrants, which are not redeemable by the Company,
are exercisable at a price per share of $6.00 and entitle
the holder thereof to purchase one share of Common Stock per
Preferred Warrant. Of such Preferred Warrants, 50% are
exercisable after June 30, 1998 and the remaining 50% of the
Preferred Warrants are exercisable after June 30, 1999. The
Preferred Warrants expire after June 30, 2006. In connection
with the amendment executed on November 30, 1997, each Holder
received an additional 7,500 Warrants (the "Additional Warrants")
for each 100 shares of Preferred Stock held as of November 30,
1997, an aggregate of 147,250 Additional Warrants. The Additional
Warrants, which are redeemable by the Company, are
exercisable at a price per share of $10.125 and entitle the
holder thereof to purchase one share of Common Stock per
Additional Warrant. The value of these Additional Warrants,
$1,255,653, was recorded as a dividend to the preferred
shareholders. Of such Additional Warrants, fifty percent
(50%) 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 Preferred
Warrants as amended, and subject to the terms and conditions
set forth in the Settlement Agreement, each Holder agreed
(a) to give its proxy and its consent in favor of the
Amendment and (b) to refrain from any and all conversions of
such Holder's Preferred Stock, pursuant to the terms of the
original Certificate of Designation, until the earlier of
February 12, 1998 or upon the occurrence of defaults on
certain dates. On February 10, 1998, all outstanding shares
of 1996 Series A Preferred Stock were redeemed.
5. Common Stock and Additional Paid-in Capital
In October, 1997, the Company filed a Form SB-2
Registration Statement under the Securities Act of 1933,
offering 3,000,000 shares of Common Stock, par value $.008
per share. The Company granted the Underwriters a 45-day
option to purchase up to an additional 450,000 shares of
Common Stock solely to cover over-allotments, if any. In
connection with the offering, the Underwriters received
warrants to
5. Common Stock and Additional Paid-in Capital (Continued)
purchase up to an aggregate of 300,000 shares of Common
Stock, at an exercise price of $9.10, from the Company.
On February 10, 1998, the Company completed a public
offering whereby it issued 3,000,000 shares of its Common
Stock, par value $.008, at $6.50 per share. The underwriters
exercised their overallotment option to purchase an
additional 268,800 shares of the Company's common stock on
March 31, 1998. As a result, the Company received net
proceeds from such offering of approximately $18.0 million,
after giving effect to underwriting discounts and
commissions and other expenses of the offering. The net
proceeds from the sale of Stock were used for the
acquisition of Triple A (see Note 2), and the reduction of
amounts outstanding under the Credit Line, which amounts
were subsequently borrowed to fund the redemption of the
Company's 1996 Series A Preferred Stock (see Note 4).
In January 1998, the Board of Directors and
Stockholders authorized and approved a one-for-three reverse
stock split (the "Reverse Stock Split"). The Reverse Stock
Split became effective on the 9th of January 1998. The
Reverse Stock Split reduced the number of issued and
outstanding shares of common stock from 6,637,787 to
2,212,741. The Company recorded additional paid-in capital
of $35,400 and reduced common stock for the same amount. The
Company amended its Certificate of Incorporation to increase
the authorized number of shares of Common Stock from
12,500,000 to 37,500,000. The financial statements give
effect to this transaction effective as of July 1, 1997.
On January 6, 1998, and effective February 5, 1998, the
Board of Directors granted incentive stock options to
Directors and Officers of the Company to purchase 500,000
shares of Common Stock at an exercise price equal to the
average of the closing bid and ask prices as quoted on the
NASDAQ Small Cap Market on the effective date of the
Company's secondary public offering or $6.03. The vesting
schedule for the incentive stock options are as follows: (i)
225,000 options vested as of February 5, 1998;
(ii) 195,000 options will vest at one-third annually on each
anniversary date of grant; and (iii) the remaining 80,000
options vest ratably over a period of one year from the date
of grant. In the event of a change in control of the
Company, all options will vest immediately.
During the nine months ended March 31, 1998, the
following stock options were exercised: (i) 2,734
nonqualified stock options with an exercise price of $.30;
(ii) 20,571 nonqualified stock options with an
exercise price of $7.875; and (iii) 334 incentive stock
options with an exercise price of $7.875. As a result, the
Company recorded common stock of $189 and additional paid-in
capital of $165,240.
During the nine months ended March 31, 1998, the
Company issued 686,664 shares of its common stock, valued at
$4,488,175, in connection with acquisitions (see Note 2).
During the nine months ended March 31, 1998, the
Company issued 2,900 shares of its common stock and canceled
2,666 shares of its common stock pursuant to a guarantee of
stock valuation in connection with past acquisitions.
During the nine months ended March 31, 1998, the
Company issued 1,334 shares of its common stock, valued at
$10,000, as an employee bonus.
5. Common Stock and Additional Paid-in Capital (Continued)
The following is a summary of stock option activity:
Weighted
Number Option Average
of Price Per Exercise
Shares Share(Range) Price
-------- ------------- ---------
Options outstanding at June 30, 1997 679,655 $.03 - $13.35 $2.06
Options granted 500,000 $6.03 $6.03
Options exercised (23,639) $.30 - $7.875 $7.00
Options canceled or expired -- $ -- $ --
--------- ------------- ------
Options outstanding at March 31, 1998 1,156,016 $.03 - $13.35 $3.677
========= ============= ======
Options exercisable at March 31, 1998 894,350 $.03 - $13.35 $2.988
========= ============= ======
The following is a summary of warrant activity:
Number Exercise Price
of Shares Per Share
---------- ---------------
Warrants outstanding at June 30, 1997 1,722,222 $4.50 - $24.00
Warrants granted to underwriter 300,000 $9.10
Warrants granted to preferred shareholders 147,250 $10.13
Warrants exercised in connection with
refinancing (209,582) $4.50
Warrants canceled in connection with
refinancing (134,463) $4.50
--------- --------------
Warrants outstanding at March 31, 1998 1,825,427 $6.00 - $24.00
========= ==============
6. 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 nine and three months ended March
31, 1998 and 1997, the potential common shares have an
antidilutive effect on the net loss per common share for
common stockholders. Accordingly, diluted net loss per
common share for common shareholders has not been presented.
7. Commitments and Contingencies
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 March 31, 1997 and 1998 the increase
in net alarm systems exceeded 15,000 accounts. As a result,
the Company recorded compensation expense and a deferred
compensation liability at March 31, 1997 and 1998 of
$1,597,500 and $537,541, respectively. Increases in the
Company's stock price result in a decreasing obligation on
behalf of the Company and also are the cause for the
compensation benefit in 1997. On March 31, 1998, the Company
elected to terminate the two employees, without cause, effective
June 28, 1998. The Company will be required to make certain
payments in connection with such termination.
7. Commitments and Contingencies (Continued)
The Company entered into an employment contract with
the former President of Triple A Security Systems, Inc. for
a term expiring February 2001. The contract provides for an
initial base salary of $150,000 with incremental increases
pursuant to the employment agreement. Additional
compensation is due annually, provided certain financial
performance criteria are achieved. The Company granted the
employee 175,000 incentive stock options, of which, 105,000
options are currently vested, and the remaining options will
vest at one-third annually on each anniversary date of
grant. In the event of a change in control of the Company,
all options will vest immediately.
The Company entered into a one-year renewable
consulting agreement commencing on February 1, 1998, with a
director of the Company, in which the director of the
Company will receive $4,000 per month in consideration for
providing certain consulting services to the Company.
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 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
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, and Connecticut. 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.
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.
Liquidity and Capital Resources
On February 10, 1998, the Company completed a
public offering whereby it issued 3,000,000 shares of its
Common Stock, par value $.008, at $6.50 per share. The
underwriters exercised their overallotment option to
purchase an additional 268,800 shares of the Company's
common stock on March 31, 1998. As a result, the Company
received net proceeds from such offering of approximately
$18.0 million, after giving effect to underwriting discounts
and commissions and other expenses of the offering.
Liquidity and Capital Resources (Continued)
The net proceeds from the sale of Stock were used for the
acquisition of Triple A (see Note 2 of Notes to Consolidated
Financial Statements), and the reduction of amounts
outstanding under the Credit Line, which amounts were
subsequently borrowed to fund the redemption of the Company's
1996 Series A Preferred Stock (see Note 4 of Notes to
Consolidated Financial Statements).
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., which was increased to $15.5 million on January
14, 1998 and increased to $18 million on February 13, 1998
(see below), and issued $7.5 million of its 1996 Series A
Convertible Preferred Stock to institutional and individual
domestic and foreign investors. The proceeds of the
financing were utilized to repay the Company's existing long-
term indebtedness and resulted in a substantial decrease in
the Company's borrowing costs. The restructuring resulted in
an extraordinary charge of $2,549,708 for early
extinguishment of debt in Fiscal 1997. As of March 31, 1998,
the Company has available on its revolving credit facility
the amount of $2,390,000. The credit facility bears interest
at the Prime Rate, plus 1 3/4%. On February 13, 1998, the
Company entered into an amended and restated Loan and
Security Agreement with Mellon Bank, N.A. increasing the
Credit Line to $18,000,000. Pursuant to the restated Loan
and Security Agreement, the amended amortization on the
outstanding loan balance is interest only for one year, and
the reduction of principal in the amount of $250,000 per
quarter, thereafter. The increase in the line of credit was
conditional upon net proceeds received, after the redemption
of preferred shareholders and expenses, from the secondary
offering (see Note 3 of Notes to Consolidated Financial
Statements). The Company's working capital decreased by
$216,812 from a working capital deficiency of $1,023,805 at
June 30, 1997, to a working capital deficiency of $1,240,617
at March 31, 1998. 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. The Company is
currently considering increasing or replacing its current
credit facility, and is in an advanced stage of negotiations
with respect to a new credit facility.
Net cash provided by operating activities for the nine
months ended March 31, 1998 was $1,513,680. A net loss of
$4,315,726 including noncash transactions totaling
$4,736,664, provided cash from operating activities in the
amount of $420,938. The noncash transactions are as follows:
(i) depreciation and amortization of $3,841,792; (ii)
compensation expense in connection with employment
agreements of $537,541; (iii) a loss on joint venture of
$355,996; and (iv) a net loss from the sale of marketable
securities and equipment of $1,335. Cash provided by
operating activities included significant changes in
inventory, prepaid expenses and other current assets,
accounts payable and accrued expenses and other current
liabilities, and deferred revenues totaling $1,011,218. The
increase in inventory of $372,591 is primarily attributable
to the purchase of WanderWatch systems, a monitoring device
designed to provide around-the-clock monitoring of patients
that suffer from Alzheimer's disease and other diseases or
injuries which may involve memory loss, in preparation of
the anticipated distribution of this new product; and
inventory purchased as part of the Triple A acquisition.
Prepaid expenses and other current assets increased by
$362,062, due primarily to the acquisitions of Triple A and
OEC, and security deposits on pending acquisitions.
Accounts payable and accrued expenses increased by $589,611,
due to costs incurred in connection with the offering, and
the acquisition of Triple A. Deferred revenues increased by
$1,156,260, as a result of the acquisition of approximately
18,000 subscriber accounts during the current fiscal year.
Net cash used in investing activities for the nine
months ended March 31, 1998 was $13,671,973. Purchases of
monitoring contracts (including purchase holdback payments)
accounted for $12,303,021 of the cash used in investing
activities. Other investing activity included the purchase
of property and equipment of $1,482,990 (including equipment
used for rentals in the amount of $731,194), and proceeds
from the sale of marketable securities and equipment of
$114,038.
Liquidity and Capital Resources (Continued)
Net cash provided by financing activities was
$12,558,144 for the nine months ended March 31, 1998. The
Company received net proceeds of $17,977,588 from its
secondary offering, after giving effect to underwriter
commissions and other expenses of the offering. Proceeds
from the exercise of stock options and warrants totaled
$135,241. The Company, on February 10, 1998, redeemed all of
the outstanding Series A Preferred Stock, including all
deemed dividends, totaling $8,676,935. Net proceeds
received from a line of credit of $3,375,000 were used
primarily for the acquisition of monitoring contracts, and
expenses incurred in connection with the secondary offering.
Costs incurred in connection with the prior years
refinancing totaled $44,931. Principal payments on long-term
debt totaling $214,449 were made during the nine months
ended March 31, 1998.
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 during the next twelve months. 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
revolving bank line of credit together with the remaining
cash flow from operations to continue to acquire monitoring
contracts. Additional funds beyond those currently available
will be required to continue the acquisition program, and
there can be no assurance that the Company will be able to
obtain such financing.
Results of Operations
A majority of the Company's revenues are derived
from monthly recurring payments for the monitoring, rental
and servicing of both electronic security systems and PERS,
pursuant to contracts with initial terms up to five years.
Service revenues are derived from payments under extended
warranty contracts and for service calls performed on a time
and material basis. The remainder of the Company's
revenues are generated from the sale and installation of
security systems and PERS, 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.
Since June 30, 1995, the Company has added
approximately $738,000 of monthly recurring revenue ("MRR")
primarily through acquisitions, of which $488,000 was
acquired during the past twelve months. The Company has
realized a growth rate of approximately 42% or 19,000
subscribers during the past twelve months from 45,000
subscribers at March 31, 1997 to approximately 64,000
subscribers at March 31, 1998. The Company's MRR increased
by approximately $500,000 or 67% from $750,000 to $1,250,000
for the same comparable period. Security patrol revenues
derived from preventive patrol services through vehicles
covering residential neighborhood communities are included
in the Company's MRR.
Operating revenues increased by $1,756,697 or 19% and
$1,228,745 or 37% for the nine months and three months ended
March 31, 1998 as compared to the same periods ended March
31, 1997. The acquisitions of Triple A, Jupiter, and OEC,
during February 1998, accounted for additional operating
revenues as follows: (i) product sales - $316,711; (ii)
monitoring and service revenues - $643,980; and (iii)
security patrol revenues - $301,202; for an aggregate
totaling $1,261,893. Product sales increased by $120,587 or
6% and $52,724 or 6% for the nine months and three months
ended March 31, 1998 as
Results of Operations (Continued)
compared to the same periods ended March 31, 1997. The
increases in product sales for the nine and three month
periods were due to the additional sales from the above
acquisitions totaling $316,711, which were offset by
decreases in the sales of PERS of approximately $200,000 and
$185,000, respectively, and a decline in residential
security systems installations of $70,000 for the three
month period. The decline in PERS product sales was
primarily due to significantly lower PERS sales to private
label wholesalers. The significant growth in monitoring and
service revenues of $1,334,908 or 19% and $874,819 or 35%
for both the nine and three month periods ended March 31,
1998 as compared to the same periods ended March 31, 1997,
were due to additional monitoring and service revenues from
the aforementioned acquisitions totaling $643,980, and the
continued growth of the Company through acquisitions of
monitoring contracts. The Company, through its acquisition
of Jupiter, has expanded its operating revenue base to
include security patrol revenue, which totaled $301,202 for
both periods ended March 31, 1998.
The Gross Profit Margin ("GPM"), as a percentage of
sales, for both the three and nine months ended March 31,
1997 were 60% and 62%, and 59% and 63% for the same
comparative periods ended March 31, 1998, respectively. To
calculate the gross profit margin as a percentage of
revenues, the Company added back an inventory adjustment of
$217,000 for 1997. The inventory adjustment was primarily
due to the reduction of the valuation of parts used in the
repair of outdated electronic security systems acquired from
other alarm dealers. Services and rental GPM's decreased
slightly, from 72% and 73% for both the nine and three
month periods ended March 31, 1997 (excluding the inventory
adjustment), to 71% for the same comparable periods ended
March 31, 1998. Additional costs were incurred in servicing
the existing customer base due to telephone area code
changes, implemented by the local telephone companies,
within the Company's operating region. The increase in GPM's
on product sales, as a percentage of sales, of 7% and 6% for
the same nine and three month periods ended March 31, 1998
and 1997, respectively, were due to the significant decline
in the sales of PERS to private label resellers, during both
periods ended March 31, 1998 as compared to 1997, which
result in significantly lower gross profit margins than
other product sales. The GPM on the security patrol revenue
was 21% , as a percentage of sales, for both periods ended
March 31, 1998.
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
for the nine months ended March 31, 1997; and nonrecurring
charges totaling $900,000 for the nine and three months
ended March 31, 1997) grew to $5,401,144 and $2,074,690 for
the nine and three month periods ended March 31, 1998, which
represents increases of $1,019,622, or 23% and $581,118 or
39%, over selling, general and administrative expenses for
the same periods ended March 31, 1997. The nonrecurring
charges include (i) direct write-offs of accounts receivable
of $228,000; (ii) an increase in the allowance for doubtful
accounts of $322,000; (iii) engineering, development and
licensing costs of $50,000; (iv) approximately $200,000 in
professional fees and legal fees attributable primarily to
the litigation involving the Company's 1996 Series A
Preferred Stock; (v) and $100,000 in due diligence costs
associated with loss from acquisition terminations and
amortized transition costs. The acquisitions of Triple A,
Jupiter, and OEC accounted for approximately $400,000 or 39%
and 69% of the increase for the nine and three months ended
March 31, 1998 as compared to the same periods ended March
31, 1997. Selling, general and administrative expenses, as a
percentage of total operating revenues, increased from 47%
and 45%, to 49% and 46% for the nine and three months ended
March 31, 1997 and 1998, 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 2% and
1% during the nine and three month periods ended March 31,
1998, monitoring and service revenues increased by 19% and
35% between the 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
Results of Operations (Continued)
operating revenues growing substantially due to increases in
monitoring and service revenues from ongoing acquisitions,
and the integration of the operations of the recently
acquired security business.
During the nine months and three months ended
March 31, 1998, the Company recorded a deferred
compensation liability with a corresponding charge to
operating expenses in the amount of $537,541 and $732,541,
respectively; and $1,597,500 and $772,500 for the nine and
three months ended March 31, 1997, pursuant to employment
contracts (see Note 6 of Notes to Consolidated Financial
Statements). 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
$805,235 or 39% and $439,201 or 61% for the nine and three
months ended March 31, 1998, as compared to the same periods
ended March 31, 1997.
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 and the acquisition of approximately
18,000 monitoring contracts during the current fiscal year.
Costs incurred in connection with the line of credit
agreement have been deferred and amortized over the terms of
the financing using the straight-line method. The
amortization of deferred financing costs for the nine and
three months ended March 31, 1998 were $981,289 and
$378,102, as compared to $750,734 and $58,756 for the
comparable periods ended March 31, 1997.
Interest expense increased by $508,825 or 80%, and
$152,764 or 55% for the nine and three months ended March
31, 1998, as compared to the same periods ended March 31,
1997. The increase in interest expense is due to an increase
in borrowings of approximately $4.7 million during the past
twelve months, which was used primarily for acquisitions and
other capital expenditures.
On March 4, 1997, the Company entered into a joint
venture agreement with BKR, Inc. to acquire a 50% interest
in HealthLink Ltd. Healthlink Ltd. subcontracts its
production of the HealthLink System to a
third-party foreign manufacturer. The HealthLink System, a
low cost PERS product, is distributed nationally through
retail stores. For the nine months ended and quarter ended
March 31, 1998, the Company has realized non-cash losses
from joint venture of $355,996 and $108,985, respectively.
The net losses for the nine and three months ended
March 31, 1998 were $4,315,726 or ($1.53) per share based on
2,827,569 shares outstanding; and $2,181,442 or ($.52) per
share based on 4,172,755 shares outstanding; as compared to
net losses of $8,143,060 or ($5.88) per share based on
1,384,116 shares outstanding, and $2,461,504 or ($1.66) per
share based on 1,480,747 shares outstanding for the nine and
three months ended March 31, 1997. The net losses applicable
to common shareholders (net losses adjusted for dividends
and accretion on preferred stock) for the nine and three months
ended March 31, 1998 were $7,765,531 or ($2.75) per share
based on 2,827,569 shares outstanding, and $3,855,050 or ($.92)
per share based on 4,172,755 shares outstanding; as compared
to net losses applicable to common shareholders of $14,699,741
or ($10.62) per share based on 1,384,116 shares outstanding,
and $2,674,458 or ($1.81) per share based on 1,480,747 shares
outstanding for the nine and three month periods ended March 31,
1997, respectively. Earnings before interest, taxes, depreciation and
amortization (EBITDA), excluding charges for the loss on
debt extinguishment, loss on joint venture, compensation
expense - options/employment agreements, consulting fees
from the issuance of warrants and nonrecurring adjustments
during 1997 were $1,557,340 and $624,740 for the nine months
and three months ended March 31, 1998; as compared to
$1,191,587 and $292,478 for the nine months and three months
ended March 31, 1997; an improvement of $365,753 or 31% and
$332,262 or 114%, respectively. This significant improvement
in the Company's EBITDA for the comparable periods, is the
result of the
Results of Operations (Continued)
Company's ability to assimilate newly acquired monitoring
contracts into the existing customer base without incurring
substantial increases in overhead expenses.
Response USA, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities -
The Company amended its Certificate of
Incorporation to increase the authorized number
of shares of Common Stock from 12,500,000 to
37,500,000.
During the quarter ended March 31, 1998, the
Company issued 686,664 shares of its common stock, in
connection with acquisitions.
During the quarter ended March 31, 1998, the
Company issued 300,000 warrants to the underwriter at
an exercise price of $9.10; and 147,250 warrants to
the holders of preferred stock ,at November 30, 1997,
at an exercise price of $10.125.
On January 6, 1998, and effective February 5,
1998, the Board of Directors granted incentive stock
options to Directors and Officers of the Company to purchase
500,000 shares of Common Stock at an exercise price
equal to the average of the closing bid and ask prices as
quoted on the NASDAQ Small Cap Market on the effective
date of the Company's secondary public offering or $6.03.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
An Annual Meeting of the Stockholders was held on
January 6, 1998. The Stockholders of the Company voted on the
following: (i) to elect nine members to the Board of Directors
of the Company; (ii) to authorize the Board of Directors of the
Company to effect a one-for-three reverse stock split of the
issued and outstanding shares of common stock, $.008 par value
per share; (iii) to authorize an amendment to the Company's
Certificate of Incorporation to amend the terms of the
Company's 1996 Series A Convertible Preferred Stock;
(iv) to authorize an amendment to the Company's Certificate
of Incorporation to increase the authorized number of shares
of Common Stock from 12,500,000 to 37,500,000; (v) to adopt the
Company's 1997 stock option plan; and (vi) to ratify the
selection by the Company of Deloitte & Touche LLP, independent
public accountants, to audit the financial statements of the
Company for the year ended June 30, 1997.
Response USA, Inc. and Subsidiaries
PART II. OTHER INFORMATION (CONTINUED)
Item 4. Submission of Matters to a Vote of Security
Holders (Continued) -
For Against Abstain
Election to the Board of Directors-
Richard M. Brooks 6,161,752 0 434,510
Ronald A. Feldman 6,161,752 0 434,510
Robert L. May 6,161,752 0 434,510
A. Clinton Allen 6,161,752 0 434,510
Todd E. Herman 6,161,752 0 434,510
Robert M. Rubin 6,161,752 0 434,510
Stuart Levin 6,161,752 0 434,510
Bruce H. Luehrs 6,161,752 0 434,510
Stuart R. Chalfin 6,161,752 0 434,510
One-for-three reverse stock split
of the outstanding shares of
common stock 6,116,177 63,368 409,042
Amend the terms of the Company's
1996 Series A Convertible Preferred
Stock 6,214,301 49,949 2,792,247
Increase the authorized number of
shares of Common Stock 3,749,918 57,193 2,781,476
Adopt the Company's 1997 stock
option plan 3,716,955 80,109 2,791,523
Ratify Deloitte & Touche LLP
to audit the financial statements 6,174,516 4,555 409,516
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 - February 19, 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. May 11, 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:
FOR THE THREE MONTHS ENDED MARCH 31, 1998
Total exercise proceeds 17,930,947
Period - end outstanding shares 6,320,690
20% of period - end outstanding shares 1,264,138
x
Average share price during period $7.0521
Proceeds used to purchase shares 8,914,828
Remaining proceeds 9,016,119
Proceeds used to retire average debt 16,168,452
Remaining proceeds to be invested (7,152,333)
Adjusted Income (Loss):
Net income(loss) (2,181,442)
Dividends and accretion to preferred stock (1,673,608)
Adjusted Income (Loss) (3,855,050)
Interest expense on retired debt(10.25%) 414,317
Interest income on proceeds invested(2.5%) 0
Tax effect of interest adjustments (40%) (165,727)
Net income (loss) for E.P.S. purpose (3,606,460)
Shares:
Weighted average shares outstanding 4,172,755
Weighted average equivalent shares o/s 2,481,443
20% of period - end outstanding shares (1,264,138)
Total shares for E.P.S. purposes 5,390,060
Net income (loss) per share ($0.67)
=======
Maximum income (minimum loss) per share:
Adjusted Income (Loss) (3,855,050)
divide by
Weighted average shares outstanding 4,172,755
Net income (loss) per share ($0.92)
=======
EARNINGS PER SHARE COMPUTATIONS:
MODIFIED TREASURY STOCK METHOD:
FOR THE NINE MONTHS ENDED MARCH 31, 1998
Total exercise proceeds 16,361,865
Period - end outstanding shares 6,320,690
20% of period - end outstanding shares 1,264,138
x
Average share price during period $9.2049
Proceeds used to purchase shares 11,636,264
Remaining proceeds 4,725,601
Proceeds used to retire average debt 14,431,879
Remaining proceeds to be invested (9,706,278)
Adjusted Income (Loss):
Net income(loss) (4,315,726)
Dividends and accretion to preferred stock (3,449,805)
Adjusted Income (Loss) (7,765,531)
Interest expense on retired debt(10.25%) 1,109,451
Interest income on proceeds invested(2.5%) 0
Tax effect of interest adjustments(40%) (443,780)
Net income (loss) for E.P.S. purposes (7,099,860)
Shares:
Weighted average shares outstanding 2,827,569
Weighted average equivalent shares o/s 2,287,365
20% of period - end outstanding shares (1,264,138)
Total shares for E.P.S. purposes 3,850,796
Net income (loss) per share ($1.84)
=======
Maximum income (minimum loss) per share:
Adjusted Income (Loss) (7,765,531)
divide by
Weighted average shares outstanding 2,827,569
Net income (loss) per share ($2.75)
=====
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<CGS> 1439
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