<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 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: 8,057,985 shares of $.008 par
value common stock as of February 12, 1999.
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets for December 31, 1998
and June 30, 1998 1-2
Consolidated Statements of Operations for the Six Months
and Three Months ended December 31, 1998 and 1997 3
Consolidated Statement of Stockholders' Equity for
December 31, 1998 4
Consolidated Statements of Cash Flows for the Six Months
And Three Months ended December 31, 1998 and 1997 5-7
Notes to Consolidated Financial Statements 8-13
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-23
PART II. OTHER INFORMATION 24
</TABLE>
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------------ ------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $6,506,209 $966,140
Marketable securities 17,500 25,000
Accounts receivable
Trade - Net of allowance for doubtful accounts
of $632,176 and $547,969, respectively 3,617,158 2,338,359
Inventory 2,209,497 1,648,250
Prepaid expenses and other current assets 592,172 581,627
------------------ ------------------
Total current assets 12,942,536 5,559,376
------------------ ------------------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $11,235,361 and $8,566,717, respectively 43,393,343 31,280,805
------------------ ------------------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $4,465,771 and $3,102,367,
respectively 5,608,909 2,892,181
------------------ ------------------
OTHER ASSETS
Deferred financing costs - Net of accumulated
amortization of $350,975 and $1,594,379, respectively 6,031,328 2,679,450
Other noncurrent assets 235,883 275,084
------------------ ------------------
6,267,211 2,954,534
------------------ ------------------
$68,211,999 $42,686,896
------------------ ------------------
------------------ ------------------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $1,410,558 $736,612
Accounts payable - Trade 1,218,991 917,316
Purchase holdbacks 598,458 431,378
Accrued expenses and other current liabilities 2,034,544 1,931,419
Deferred compensation expense 3,000,000
Deferred revenue 3,329,238 3,051,053
------------------ ------------------
Total current liabilities 11,591,789 7,067,778
--------------------------------------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt 42,326,667 16,490,156
Purchase holdbacks 169,242
Deferred compensation expense 2,562,500
------------------ ------------------
42,326,667 19,221,898
------------------ ------------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock - Par value $.008
Authorized 37,500,000 shares
Issued and outstanding 7,620,019 shares - December 31,
1998 and 6,317,023 shares - June 30, 1998 60,960 50,537
Additional paid-in capital 65,840,979 60,664,468
Unrealized holding losses on available-for-sale securities (7,500)
Accumulated deficit (51,600,896) (44,317,785)
------------------ ------------------
14,293,543 16,397,220
------------------ ------------------
$68,211,999 $42,686,896
------------------ ------------------
------------------ ------------------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended December 31, Three Months ended December 31,
----------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES
Product sales $2,506,445 $1,345,905 $1,303,722 $683,059
Monitoring and service 9,144,412 5,168,020 5,001,643 2,582,982
Security patrol 1,410,430 740,253
------------ ------------ ------------ -----------
13,061,287 6,513,925 7,045,618 3,266,041
------------ ------------ ------------ -----------
COST OF REVENUES
Product sales 2,106,518 801,818 1,103,447 403,376
Monitoring and service 2,828,676 1,453,053 1,510,091 684,314
Security patrol 1,081,879 579,838
------------ ------------ ------------ -----------
6,017,073 2,254,871 3,193,376 1,087,690
------------ ------------ ------------ -----------
GROSS PROFIT 7,044,214 4,259,054 3,852,242 2,178,351
------------ ------------ ------------ -----------
OPERATING EXPENSES
Selling, general and administrative 5,536,021 3,326,454 3,119,300 1,710,819
Compensation - Employment contracts 437,500 (195,000) 50,000 255,000
Depreciation and amortization 3,369,374 1,701,846 1,973,376 864,307
Nonrecurring charges (see Note 6) 724,743 415,112
------------ ------------ ------------ -----------
10,067,638 4,833,300 5,557,788 2,830,126
------------ ------------ ------------ -----------
LOSS FROM OPERATIONS (3,023,424) (574,246) (1,705,546) (651,775)
------------ ------------ ------------ -----------
OTHER INCOME/(EXPENSE)
Interest expense, net (1,691,881) (1,313,027) (970,936) (670,955)
Joint venture loss (247,011) (116,873)
------------ ------------ ------------ -----------
(1,691,881) (1,560,038) (970,936) (787,828)
------------ ------------ ------------ -----------
LOSS BEFORE EXTRAORDINARY ITEM (4,715,305) (2,134,284) (2,676,482) (1,439,603)
EXTRAORDINARY ITEM
Loss on debt extinguishment (2,567,806)
------------ ------------ ------------ -----------
NET LOSS (7,283,111) (2,134,284) (2,676,482) (1,439,603)
Dividends and accretion on preferred stock (1,776,197) (1,440,925)
------------ ------------ ------------ -----------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $(7,283,111) $(3,910,481) $(2,676,482) $(2,880,528)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per common share - Basic and diluted
Loss before extraordinary item ($0.68) ($0.98) ($0.36) ($0.65)
Extraordinary item ($0.37) $0.00 $0.00 $0.00
------------ ------------ ------------ -----------
Net loss ($1.05) ($0.98) ($0.36) ($0.65)
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Net loss applicable to common shareholders ($1.05) ($1.80) ($0.36) ($1.31)
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Weighted average number of shares outstanding 6,940,098 2,169,271 7,408,149 2,200,364
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Holding Losses
Number Paid-In on Available-For- Accumulated
of Shares Amount Capital Sale Securities Deficit Total
------------------------ ----------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1998 6,317,023 $50,537 $60,664,468 ($44,317,785) $16,397,220
Acquisitions 1,183,364 9,466 4,403,532 4,412,998
Issuance of shares of common stock
in connection with the refinancing 119,632 957 779,043 780,000
Issuance costs incurred in connection with
the issuance of common stock and warrants (29,590) (29,590)
Refund of payments made in connection
with the issuance of warrants and
common stock 23,526 23,526
Unrealized holding losses on available-for-sale
securities (7,500) (7,500)
Net loss (7,283,111) (7,283,111)
--------- -------- ------------ --------- -------------- ------------
Balance - December 31, 1998 7,620,019 $ 60,960 $ 65,840,979 $ (7,500) $ (51,600,896) $ 14,293,543
--------- -------- ------------ --------- -------------- ------------
--------- -------- ------------ --------- -------------- ------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended December 31,
-------------------------------------------------
1998 1997
---------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (7,283,111) $ (2,134,282)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 3,369,374 1,701,844
Amortization of deferred financing costs and
debt discount 462,619 603,187
Loss on debt extinguishment 2,567,806
Gain on sale of property and equipment (2,839) (2,489)
Loss on joint venture 247,011
Compensation (benefit) expense in connection with
employment agreements 437,500 (195,000)
Increase in accounts receivable - Trade (1,152,107) (21,223)
Increase in inventory (531,955) (270,574)
(Increase) decrease in prepaid expenses and other
current assets 41,017 (399,596)
(Increase) decrease in deposits (12,130) 2,180
Increase in accounts payable - Trade 241,394 45,672
Increase (decrease) in accrued expenses and other
current liabilities (53,511) 2,433
Increase (decrease) in deferred revenues (73,920) 17,973
---------------------- ---------------------
Net cash used in operating activities (1,989,863) (402,864)
---------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of monitoring contracts (net of purchase
holdbacks) (9,382,444) (1,060,684)
Proceeds from the sale of property and equipment 7,722
Purchase of property and equipment (3,123,309) (264,082)
---------------------- ---------------------
Net cash used in investing activities (12,498,031) (1,324,766)
---------------------- ---------------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended December 31,
-------------------------------------------------
1998 1997
---------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of preferred stock (795,150)
Costs incurred in connection with the issuance of
preferred stock (16,081)
Costs incurred in connection with the issuance of common
stock and warrants (6,063)
Deferred financing costs incurred (83,185) (6,396)
Proceeds of long-term debt 38,499,068 2,597,711
Principal payments on long-term debt (18,381,857) (456,867)
Net proceeds from the exercise of stock options
and warrants 135,241
Refund of payments made in connection with common
stock issuances
---------------------- ---------------------
Net cash provided by financing activities 20,027,963 1,458,458
---------------------- ---------------------
NET INCREASE (DECREASE) IN CASH 5,540,069 (269,172)
CASH - BEGINNING 966,140 698,551
---------------------- ---------------------
CASH - ENDING $ 6,506,209 $ 429,379
---------------------- ---------------------
---------------------- ---------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 1,203,110 $ 669,754
Cash paid during the year for income taxes -- --
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
During the six months ended December 31, 1997 and 1998, long-term notes
payable of $70,552 and $199,352, respectively, were incurred for the purchase of
property and equipment.
During the six months ended December 31, 1998, the Company issued
1,186,030 shares of its common stock, valued at $5,193,002, of which 163,043
shares of its common stock was placed in escrow (the "Escrow Shares") to
guarantee a note payable and purchase holdback, 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 also canceled 2,666 shares of
its common stock, pursuant to guarantees of stock valuations, in connection
with past acquisitions of monitoring contracts, during the six months ended
December 31, 1998. During the six months ended December 31, 1997, the Company
issued 4,834 shares of its common stock, valued at $48,938, in connection
with an acquisition. In addition, the Company issued 2,900 shares of its
common stock, and canceled 2,666 shares of its common stock, pursuant to
guarantees of stock valuations, in connection with past acquisitions of
monitoring contracts, during the six months ended December 31, 1997.
During the six months ended December 31, 1998 and 1997, 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 and $119,665, respectively.
During the six months ended December 31, 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 six months ended December 31, 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 six months ended December 31, 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.
During the six months ended December 31, 1997, 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 in connection with the Amended Settlement
Agreement executed on November 30, 1997.
During the six months ended December 31, 1997, the Company issued 1,334
shares of its common stock, valued at $10,000, as an employee bonus.
See notes to consolidated financial statements.
7
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying interim balance sheet as of December 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 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 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 response systems ("PRS"), which are designed
to summon help in a medical emergency when activated by the subscriber. In
consideration of the acquisition of approximately 10,000 subscriber accounts,
the Company paid an aggregate of $12,936,765 (including acquisition costs
incurred of $202,795), consisting of $9,252,794 in cash and 901,079 shares (the
"Payment Shares") of the Company's common stock valued at $3,683,971, of which
60,240 shares will be held in escrow for a period equal to the lesser of (i) the
completion of a certified 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 purchase price was allocated based on the fair market
value of the assets acquired and liabilities assumed and may be adjusted based
on the results of the audit of the financial statements of Health Watch.
Although the audit has been completed, the shares held in escrow have not yet
been released. The Company has agreed to guarantee the proceeds to be received
by the Sellers in connection with the sale of the Payment Shares.
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.
8
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS (CONTINUED)
The following unaudited pro forma combined operating
information for the six and three months ended December 31, 1998 and 1997, gives
effect for the Company's acquisition of Health Watch, and the net proceeds
borrowed pursuant to a financing agreement between the Company's wholly owned
subsidiary, Response Acquisition Corp., and McGinn, Smith Capital Holdings Corp.
(the "MSCH Financing Agreement"), which were used for the acquisition of Health
Watch, as if such events had been completed at July 1, 1997. The pro forma
information is based on the historical financial statements of the Company and
Health Watch, giving effect to the transactions under 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, 1997.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues $ 13,837,014 $ 7,454,800 $ 7,045,618 $ 3,798,555
Loss before extra-
ordinary item (5,165,545) (3,248,235) (2,676,482) (2,529,663)
Net loss (7,733,351) (3,248,235) (2,676,482) (2,529,663)
Net loss applicable to
common shareholders (7,733,351) (5,024,432) (2,676,482) (3,970,588)
Net loss per common
share applicable to
common shareholders ($1.04) ($1.64) ($0.35) ($1.29)
Weighted average
number of shares
outstanding 7,415,122 3,070,348 7,408,149 3,101,443
</TABLE>
During the six months ended December 31, 1998, the Company acquired
additional monitoring contracts for an aggregate purchase price of
$3,179,800. As consideration, the Company paid $1,882,245 in cash, including
acquisition and assimilation costs of $180,166, a note payable of $500,000
payable over five years, issued 121,910 shares of the Company's common stock
valued at $729,027, decreased purchase holdbacks in the amount of $1,472, and
accrued transition costs of $70,000. As part of one such acquisition, the
Company issued 163,043 shares of its common stock valued at $975,000 to be
held in escrow to guarantee a note payable of $500,000 and a purchase
holdback of $100,000. 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.
9
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM NOTES PAYABLE
<TABLE>
<S> <C>
RECEIVABLE FINANCING AGREEMENT
Principal payments payable in monthly installments totaling $425,728
fiscal year 1999, $1,065,899 - fiscal year 2000, $3,628,338 - fiscal
year 2001, $5,499,627 - fiscal year 2002, $7,150,487 - fiscal year
2003, and $24,229,040 - fiscal year 2004; plus interest at 7.25% - 8%
on the outstanding loan balance; collateralized by related monitoring
contracts $41,923,370
EQUIPMENT FINANCING
Payable in monthly installments aggregating $36,983 including interest
at rates ranging from 2.94% to 11.83%; final payments due October, 1998
through January, 2004; collateralized by related equipment 1,010,209
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
OTHER
Note payable in monthly installments of $10,258 including interest
at 8.5%; final payment due July, 2003 464,581
Notes payable in monthly installments aggregating $2,086 including
interest at 10.0%; final payments due February, 2002 67,695
Notes payable in monthly installments of $9,046 including interest
at 8%; final payments due March 2000 120,524
---------------
43,737,235
Less Current Portion 1,410,558
---------------
$42,326,677
---------------
---------------
</TABLE>
10
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM NOTES PAYABLE (CONTINUED)
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, United Security Systems, Inc. ("USS") a
subsidiary of the Company, 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. 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 the Company. 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.
The Company recorded debt issuance costs of $3,972,630, of which
$3,192,630 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.
Subsequent to the Initial Loan, RAC received additional financing (the
"Additional Financing") from MSCH in the amount of $15,999,118 and granted MSCH
a first priority perfected security interest in the receivables derived from the
Purchased Contracts. The Additional Financing has a term of five years and bears
interest at a rate of 7.25% per annum. Principal payments on the Additional
Financing are due as follows: years ending June 30, 1999 - $293,029; 2000 -
$739,024; 2001 - $1,267,729; 2002 - $1,901,760; 2003 - $2,604,606; 2004 -
$9,192,970. In connection with the Additional Financing, the Company recorded
debt issuance costs of $2,409,673. As of December 31, 1998, $41,923,370 was
outstanding under the Financing Agreement.
4. STOCK OPTIONS AND WARRANTS
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Number Option Price Weighted Average
Of Shares Per Share(Range) Exercise Price
--------- ---------------- ----------------
<S> <C> <C> <C>
Options outstanding at June 30, 1998 and
December 31, 1998 1,159,681 $.03 - $13.35 $3.691
--------- ------------- ------
--------- ------------- ------
Options exercisable at December 31, 1998 958,015 $.03 - $13.35 $3.106
--------- ------------- ------
--------- ------------- ------
</TABLE>
11
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following is a summary of warrant activity:
<TABLE>
<CAPTION>
Number Warrant Price
Of Shares Per Share(Range)
--------- ----------------
<S> <C> <C>
Warrants outstanding at June 30, 1998 2,008,760 $6.00 - $24.00
Warrants canceled or expired (912,610)
---------
Warrants outstanding at December 31, 1998 1,096,150 $6.00 - $24.00
--------- --------------
--------- --------------
</TABLE>
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 six months ended December 31, 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 six months ended December 31, 1998, the Company recorded
nonrecurring charges totaling $724,743. 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 as
well as to integrate the sales and marketing of PRS with the addition of Health
Watch. The plan involves the transfer of its subscriber base to its own central
station and the consolidation of its support infrastructure. At December 31,
1998, the Company has recorded an accrual in the amount of $58,798. All other
costs have been expensed when incurred.
As of December 31, 1998, nonrecurring charges consisted of the
following:
<TABLE>
<S> <C>
Hiring and training costs $336,950
Temporary help 120,970
Employee severance and related costs 75,359
Abandoned fixed assets & inventory 41,474
Abandoned leases 13,068
Travel 101,071
Other 35,851
----------
$724,743
----------
----------
</TABLE>
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
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RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
December 31, 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 December 31, 1997 and 1998 of ($195,000) and $437,500,
respectively. The total liability under these agreements was $3,000,000 at
December 31, 1998. Under the employment agreements, such amounts are to be paid
in 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 MSCH
Financing Agreement, the Company has guaranteed the value of its
common stock at various prices ranging from $6.50 to $6.75 for periods expiring
at various dates through February 2001. As of December 31, 1998, the Company's
contingent liabilities under these agreements aggregated approximately
$2,827,656 which may be settled in cash or by the issuance of common stock, at
the Company's option.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No, 130, REPORTING COMPREHENSIVE
INCOME, which was adopted by the Company effective July 1, 1998, as required by
the statement. The total comprehensive loss for the six months ended December
31, 1998 and 1997 was $7,290,611 and $3,910,481 respectively. The adjustment to
arrive at the total comprehensive loss for each period consists of unrealized
losses on available for sale securities.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION, which was adopted by the Company
effective for the year beginning July 1, 1998, as required by the statement.
This statement does not require adoption in interim financial statements in the
initial year of adoption.
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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 response systems ("PRS"). 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 PRS
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.
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<PAGE>
The Company's PRS 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 PRS
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 PRS, 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 PRS, 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 six months ended December 31, 1998, the Company has
added approximately $395,000 of monthly recurring revenue ("MRR") primarily
through acquisitions. The Company has realized a growth rate of approximately
63% or 30,000 subscribers during the past twelve months from 47,000 subscribers
at December 31, 1997 to approximately 77,000 current subscribers. The Company's
MRR increased by approximately $840,000 or 105% from $800,000 at December 31,
1997 to $1,640,000 at December 31, 1998. Recurring security patrol revenues
derived from preventive services through vehicles patrolling residential
neighborhood communities are included in the Company's MRR.
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<PAGE>
Operating revenues increased by $6,547,362 or 101% and $3,779,577
or 116% for the six months and three months ended December 31, 1998 as compared
to the same periods ended December 31, 1997. Product sales accounted for an
increase of $1,160,540 or 86% and an increase of $620,663 or 91% for the six
months and three months ended December 31, 1998, as compared to the same period
ended December 31, 1997. Monitoring and service revenues increased by $3,976,392
or 77% and $2,418,661 or 94% for the six and three months ended December 31,
1998 as compared to the six and three months ended December 31, 1997. The
acquisitions of Triple A, Jupiter, and OEC, during February 1998 and Health
Watch, during October 1998 accounted for additional operating revenues as
follows: (i) product sales - $1,662,820 and $921,449; (ii) monitoring and
service revenues - $1,985,163 and $904,319; and (iii) security patrol revenues -
$1,410,430 and $740,253; for an aggregate totaling $5,058,413 and $2,566,021 for
the six months and three months ended December 31, 1998. The increase in product
sales due to the above acquisitions was offset by a decrease in revenues from
the sale of PERS to private label wholesalers and home healthcare agencies
totaling approximately $415,000 and $254,000 for the same periods. The Company,
through its acquisition of Jupiter, has expanded its operating revenue base to
include security patrol revenue, which totaled $1,410,430 and $740,253 for the
six and three months ended December 31, 1998.
Gross Profit for the six months ended December 31, 1998 was $7,044,214,
which represents an increase of $2,785,160 or 65%, as compared to the $4,259,054
of gross profit recognized for the six months ended December 31, 1997. The Gross
Profit Margin ("GPM"), as a percentage of sales, for the six and three months
ended December 31, 1997 were 65% and 67% as compared to 54% and 55% for the same
periods ending December 31, 1998. The decrease in GPM on product sales, from 40%
for Fiscal 1998 to 16% 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 PRS 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 from 72% to 69% for the six months ended December 31, 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 six and three
months ended December 31, 1998 the GPM on the security patrol revenue were 23%
and 22% respectively.
Selling, general and administrative expenses increased by
$2,209,567 or 66% and $1,408,481 or 82% for the six and three months ended
December 31, 1998 as compared to the same periods ended December 31, 1997. The
increase for the six months ended December 31, 1998 over the six months ended
December 31, 1997 primarily consisted of (i) additional payroll and related
costs of approximately $1,340,000 and (ii) other overhead expenses totaling
approximately $1,048,000 in connection with the acquisitions of Triple A,
Jupiter, OEC, and Health Watch. Selling, general and administrative expenses, as
a percentage of total operating revenues, decreased significantly from 51% and
52% for the six and three months ended December 31, 1997 to 42% and 44% for the
same periods ended December 31, 1998. The reduction in selling, general and
administrative expenses is attributable to efficiencies realized in
16
<PAGE>
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.
The Company recorded a deferred compensation expense of
$437,500 and $50,000 during the six and three months ended December 31, 1998 and
a deferred compensation (benefit) expense of ($195,000) and $255,000 for the six
and three months ended December 31, 1997, 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 $1,667,528
or 98% and $1,109,069 or 128% for the six and three months ended December 31,
1998 as compared to the six and three months ended December 31, 1997. The
increase in amortization and depreciation expense is the result of the Company's
acquisitions over the past twelve months of monitoring contracts totaling
approximately $23 million and property and equipment totaling approximately $5.9
million.
During the six months ended December 31, 1998, the Company
incurred nonrecurring charges totaling $724,743. 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 as
well as to integrate the sales and marketing of PRS with the addition of Health
Watch. The plan involves the transfer of its subscriber base to its own
Monitoring Station and the consolidation of the support infrastructure. During
the six months ended December 31, 1998, nonrecurring charges, consisted of the
following: (i) hiring and training costs of $336,950, (ii) temporary help of
$120,970, (iii) employee severance and related costs of $75,359, (iv)
abandonment of leases of $13,068, (v) loss on abandonment of fixed assets and
inventory of $41,474, (vi) travel expenses of $101,071, and (vii) other
restructuring and integration costs of $35,851 (see Note 6 of Notes to
Consolidated Financial Statements of the Company).
Interest expense increased by $378,854, or 29% and $299,981, or 45%
from $1,313,027 and $670,955 for the six and three months ended December 31,
1997 to $1,691,881 and $970,936 for the six and three months ended December 31,
1998. Interest expense on additional borrowings for acquisitions and working
capital increased by $563,787 for the six months ended December 31, 1998. A
decrease in the amortization of debt issue costs of $140,569 and an increase in
interest income of approximately $91,000 offset this increase in interest
expense.
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 joint venture loss of $247,011 represents the Company's
share of HealthLink's losses for the six months ended December 31, 1997. In the
fourth quarter of Fiscal 1998, the Company wrote off its investment in the joint
venture. The Company considered the continued operating losses of the joint
17
<PAGE>
venture, the inability to find a media partner and the projected future cash
flows from the joint venture to be its primary indicators of an impairment loss.
The net loss for the six and three months ended December 31, 1998 was
$7,283,111 or ($1.05) per share and $2,676,482 or ($0.36) per share. The net
loss for the six months ended December 31, 1998 is primarily attributable to
non-cash charges totaling $6,837,299, consisting of (i) depreciation and
amortization of $3,369,374 , (ii) compensation - employment contracts of
$437,500 , (iii) amortization of deferred financing costs of $462,619 and, (iv)
loss on debt extinguishment of $2,567,806. The net loss applicable to common
shareholders (net loss adjusted for dividends and accretion on Preferred Stock)
for the six and three months ended December 31, 1998 was $7,283,111 or ($1.05)
per share and $2,676,482 or ($0.36) per share based on 6,940,098 and 7,408,149
weighted average shares outstanding as compared to $3,910,481 or ($1.80) per
share and $2,880,528 or ($1.31) per share based on 2,169,271 and 2,200,364 for
the six and three months ended December 31, 1997
Earnings before interest, taxes, depreciation and amortization
("EBITDA"), excluding charges for: (i) compensation expense - employment
agreements; (ii) nonrecurring charges; (iii) loss on debt extinguishment; and
(iv) joint venture loss, was $1,508,193 and $732,942 for the six and three
months ended December 31, 1998 as compared to $932,600 and $467,531 for the six
and three months ended December 31, 1997; an improvement of $575,593 or 62% and
$265,411 or 57% for the same periods. 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 and six months
ended December 31, 1998 was $1,072,385 and $2,114,202, respectively.
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 PRS 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.
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<PAGE>
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 second quarter of Fiscal 1999, the Company
experienced annualized subscriber attrition of approximately 5% and annualized
MRR attrition of approximately 5%.
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
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<PAGE>
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.
The Company recorded debt issuance costs of $3,972,630, of which
$3,192,630 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 filed 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.
Subsequent to the Initial Loan, RAC received additional financing
(the "Additional Financing") from MSCH in the amount of $15,999,118 and granted
MSCH a first priority perfected security interest in the receivables derived
from the Purchased Contracts. The Additional Financing has a term of five years
and bears interest at a rate of 7.25% per annum. Principal payments on the
Additional Financing are due as follows: years ending June 30, 1999 - $293,029;
2000 - $739,024; 2001 - $1,267,729; 2002 - $1,901,760; 2003 - $2,604,606; 2004 -
$9,192,970. In connection with the Additional Financing, the Company recorded
debt issuance costs of $2,409,673. As of December 31, 1998, $41,923,370 was
outstanding under the Financing Agreement.
The Company's working capital improved by $2,859,149 from a working
capital deficiency of $1,508,402 at June 30, 1998 to working capital of
$1,350,747 at December 31, 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,
during the next twelve months.
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Net cash used in operating activities for the six months ended
December 31, 1998 was $1,989,863. A net loss of $7,283,111 including non-cash
transactions totaling $6,837,299 resulted in net cash used in operating
activities in the amount of $1,989,863. The non-cash transactions are as
follows: (i) depreciation and amortization of $3,369,374; (ii) compensation
expense in connection with employment agreements of $437,500; (iii) amortization
of deferred financing costs of $462,619; and (iv) loss on debt extinguishment of
$2,567,806.
Net cash used in investing activities for the six months ended December
31, 1998 was $12,498,031. Purchases of monitoring contracts (including purchase
holdback payments) accounted for $9,382,444 of the cash used in investing
activities. Other investing activities included the purchase of property and
equipment of $3,123,309 (including equipment used for rentals in the amount of
$1,892,439, which is primarily attributable to the purchase of Health Watch),
and proceeds from the sale of property and equipment of $7,722.
Net cash provided by financing activities was $20,027,963 for the six
months ended December 31, 1998. Net proceeds received of $38,499,068 included
$1,575,000 from a line of credit, $36,480,000 from a receivables financing
agreement, and $444,068 from equipment financing notes payables. The proceeds
were primarily used to satisfy the Company's existing indebtedness at July 30,
1998 of $17,985,000, the acquisition of monitoring contracts and related assets
(including $9,252,794 of cash paid for Health Watch), and working capital. The
Company's cash increased $5,540,069 for the six months, which will also be used
for the acquisition of monitoring contracts and working capital.
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
December 31, 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 and to satisfy it's deferred compensation expense
liability of $3,000,000 to two former key employees of USS (see Note 7 of Notes
to Consolidated Financial Statements). 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.
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YEAR 2000 COMPLIANCE
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 Company is in the process of evaluating and addressing the impact
of the Year 2000 Issue on its operations to ensure that its information
technology and business systems recognize calendar Year 2000. The Company is
utilizing both internal and external resources in implementing its Year 2000
program, which consists of the following phases:
ASSESSMENT PHASE - Identify all IT and Non-IT issues and establish
priorities.
DETAILED PLANNING PHASE - Development of specific action steps to
address the issues identified in the Assessment Phase.
CONVERSION PHASE - Implement the necessary system modifications as
outlined in the Detailed Planning Phase.
TESTING PHASE - Verification that the modifications implemented in the
Conversion Phase will be successful in resolving the Year 2000 Issue so that all
identified IT and Non-IT issues will function properly, both individually and on
an integrated basis.
IMPLEMENTATION PHASE - Final implementation of the fully tested
modifications.
Based on an inventory conducted during Fiscal 1998, the
Company has identified computer systems that will require modification or
replacement so that they will properly utilize dates beyond December 31, 1999.
Some of the Company's critical systems are new and are already Year 2000
compliant, such as the central station monitoring hardware and software used at
our Pennsylvania monitoring station and the Company's current accounts
receivable and billing software. The Company plans to install a new
Windows-based general ledger and accounts payable program, which the
manufacturer warrants is Year 2000 compliant, by the end of Fiscal 1999. The
Company has not incurred significant costs in regard to Year 2000 compliance
thus far and the Company does not expect to incur significant costs in its
future compliance efforts. In addition the Company will initiate communications
with its significant suppliers, customers, and financial institutions, to
determine their plans for remediating the Year 2000 Issue in their software
which the Company relies on. The Company is attempting to limit the potential
impact of the Year 2000 by monitoring the progress of its own Year 2000 project
and those of its critical external relationships. Should the Company be notified
of any significant issues through their responses to its inquiries of key third
parties, it intends to develop and implement contingency plans to minimize the
impact on its operations. The Company believes
22
<PAGE>
that with modifications to its existing software and conversions to new
software, the Year 2000 Issue can be mitigated. However, if such modifications
and conversions are not made, or are not completed within an adequate time
frame, the Year 2000 Issue could have a material adverse impact on the
operations of the Company.
23
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities -
During the quarter ended December 31, 1998, the Company issued
901,079 shares of its common stock, in connection with acquisitions.
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 - October 6, 1998
(c) Report on Form 8-K/A - December 14, 1998
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESPONSE USA, INC. FEBRUARY 15, 1999
- -------------------- -----------------
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
<PAGE>
EXHIBIT 11
COMPUTATION OF LOSS PER SHARE
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net loss $ (7,283,111) $ (2,134,284)
Deduct:
Accretion, discount and dividends on preferred stock -- 1,776,197
Net loss applicable to common shareholders $ (7,283,111) $ (3,910,481)
------------- -------------
------------- -------------
Weighted average number of common shares outstanding 6,940,098 2,169,271
------------- -------------
------------- -------------
Basic loss per share $ (1.05) $ (1.80)
------------- -------------
------------- -------------
Weighted average number of common shares outstanding 6,940,098 2,169,271
Common share equivalents applicable to:
Warrants - Class A 411,127
Warrants - Class B 493,983
Warrants - Class C 9,067 9,067
Warrants - Other 1,087,083 787,083
Stock options 1,159,683 659,850
Less common stock acquired with net proceeds (2,255,833) (2,361,110)
Weighted average number of common shares and
common share equivalents used to compute diluted
loss per share 6,940,098 2,169,271
------------- -------------
------------- -------------
Diluted loss per share $ (1.05) $ (0.98)
------------- -------------
------------- -------------
</TABLE>
<PAGE>
EXHIBIT 11
COMPUTATION OF LOSS PER SHARE
FOR THE QUARTERS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net loss $ (2,676,482) $ (1,439,603)
Deduct:
Accretion, discount and dividends on preferred stock -- 1,440,925
Net loss applicable to common shareholders $ (2,676,482) $ (2,880,528)
------------- -------------
------------- -------------
Weighted average number of common shares outstanding 7,408,149 2,200,364
------------- -------------
------------- -------------
Basic loss per share $ (0.36) $ (1.31)
------------- -------------
------------- -------------
Weighted average number of common shares outstanding 7,408,149 2,200,364
Common share equivalents applicable to:
Warrants - Class A 411,127
Warrants - Class B 493,983
Warrants - Class C 9,067 9,067
Warrants - Other 1,087,083 787,083
Stock options 1,159,683 659,850
Less common stock acquired with net proceeds (2,255,833) (2,361,110)
Weighted average number of common shares and
common share equivalents used to compute diluted
loss per share 7,408,149 2,200,364
------------- -------------
------------- -------------
Diluted loss per share $ (0.36) $ (0.65)
------------- -------------
------------- -------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 6,506
<SECURITIES> 18
<RECEIVABLES> 4,249
<ALLOWANCES> 632
<INVENTORY> 2,209
<CURRENT-ASSETS> 12,943
<PP&E> 10,075
<DEPRECIATION> 4,466
<TOTAL-ASSETS> 68,212
<CURRENT-LIABILITIES> 11,592
<BONDS> 0
0
0
<COMMON> 61
<OTHER-SE> 14,233
<TOTAL-LIABILITY-AND-EQUITY> 68,212
<SALES> 1,304
<TOTAL-REVENUES> 7,046
<CGS> 1,103
<TOTAL-COSTS> 3,193
<OTHER-EXPENSES> 5,558
<LOSS-PROVISION> 79
<INTEREST-EXPENSE> 971
<INCOME-PRETAX> (2,676)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,676)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
