<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 SEPTEMBER 30, 1999
Commission File Number 0-20770
RESPONSE USA, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE #22-3088639
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3 EXECUTIVE CAMPUS, 2ND FLOOR SOUTH, CHERRY HILL, NJ 08002
(Address of principal executive offices) (Zip code)
(856) 661-0700
(Issuer'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 equity, as of the latest practical date: 6,176,431 shares of Common
Stock, $.008 par value per share, as of November 18, 1999.
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999 and June 30, 1999........... 1-2
Condensed Consolidated Statements of Operations for the Three Months ended
September 30, 1999 and 1998............................................................ 3
Condensed Consolidated Statement of Stockholders' Equity for the Three Months
ended September 30, 1999............................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months ended
September 30, 1999 and 1998............................................................ 5-7
Notes to Condensed Consolidated Financial Statements.................................... 8-13
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................. 14-19
PART II. OTHER INFORMATION............................................................................... 20
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash .................................................... $12,632,284 $ 3,241,016
Marketable securities ................................... 15,000
Accounts receivable
Trade - Net of allowance for doubtful accounts
of $424,849 and $761,631, respectively ............ 1,894,081 3,834,499
Purchase holdback - Net of allowance of $1,317,820 ...... 3,786,281
Inventory ............................................... 1,594,019 2,621,052
Prepaid expenses and other current assets ............... 190,704 562,072
----------- -----------
Total current assets ......................... 20,097,369 10,273,639
----------- -----------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $4,566,736 and $15,509,288, respectively .. 20,024,544 44,662,593
----------- -----------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $3,922,244 and $5,896,462,
respectively .............................................. 3,738,611 5,889,409
----------- -----------
OTHER ASSETS
Deferred financing costs - Net of accumulated
amortization of $418,751 and $950,812, respectively .. 3,842,975 7,371,692
Other noncurrent assets ................................. 177,786 244,659
----------- -----------
4,020,761 7,616,351
----------- -----------
$47,881,285 $68,441,992
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
1
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt ............................ $ 1,180,693 $ 2,166,433
Accounts payable - Trade ..................................... 441,022 996,304
Income taxes payable ......................................... 704,200
Purchase holdbacks ........................................... 218,559 673,122
Accrued stock guarantee ...................................... 622,251
Accrued expenses and other current liabilities ............... 2,028,477 3,102,125
Accrued transaction expenses related to Security Sale (Note 2) 1,854,812
Deferred purchase price related to prior acquistion (Note 3) . 3,750,000
Deferred revenue ............................................. 276,963 3,371,821
------------ ------------
Total current liabilities ......................... 11,076,977 10,309,805
------------ ------------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt ............................................... 26,801,999 51,951,120
Purchase holdbacks ........................................... 28,395 64,483
------------ ------------
26,830,394 52,015,603
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock - Par value $.008
Authorized 37,500,000 shares
Issued and outstanding 7,147,731 shares - September 30,
1999 and 8,351,012 shares - June 30, 1999 ............ 57,182 66,809
Additional paid-in capital .................................. 59,907,605 65,708,202
Collateral shares in escrow ................................. (500,000)
Accumulated deficit ......................................... (49,990,873) (59,148,427)
Accumulated other comprehensive loss ........................ (10,000)
------------ ------------
9,973,914 6,116,584
------------ ------------
$ 47,881,285 $ 68,441,992
============ ============
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING REVENUES
Product sales .......................... $ 1,325,609 $ 1,202,723
Monitoring and service ................. 5,626,108 4,142,769
Security patrol ........................ 871,294 670,177
------------ ------------
7,823,011 6,015,669
------------ ------------
COST OF REVENUES
Product sales .......................... 1,204,010 1,003,071
Monitoring and service ................. 1,589,403 1,318,585
Security patrol ........................ 706,616 502,041
------------ ------------
3,500,029 2,823,697
------------ ------------
GROSS PROFIT ................................ 4,322,982 3,191,972
------------ ------------
OPERATING EXPENSES
Selling, general and administrative .... 4,028,020 2,726,352
Compensation - Employment contracts .... 387,500
Depreciation and amortization .......... 2,183,425 1,395,998
------------ ------------
6,211,445 4,509,850
------------ ------------
LOSS FROM OPERATIONS ........................ (1,888,463) (1,317,878)
------------ ------------
OTHER INCOME/(EXPENSE)
Interest expense, net .................. (1,519,967) (720,945)
Gain on sale of security division ...... 17,354,099
Loss on marketable securities .......... (25,000)
------------ ------------
15,809,132 (720,945)
------------ ------------
INCOME (LOSS) BEFORE TAXES .................. 13,920,669 (2,038,823)
Income tax expense ..................... (704,200) 0
------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ..... 13,216,469 (2,038,823)
------------ ------------
EXTRAORDINARY ITEM
Loss on debt extinguishment ............ (4,058,915) (2,567,806)
------------ ------------
NET INCOME (LOSS) ........................... 9,157,554 (4,606,629)
============ ============
Income (loss) per common share - Basic
Income (loss) before extraordinary item $ 1.58 ($0.31)
Extraordinary item ..................... ($0.49) ($0.40)
------------ ------------
Net income (loss) ...................... $ 1.09 ($0.71)
============ ============
Weighted average number of shares outstanding 8,351,012 6,472,049
============ ============
Income (loss) per common share - Diluted
Income (loss) before extraordinary item $ 1.58 ($0.31)
Extraordinary item ..................... ($0.49) ($0.40)
------------ ------------
Net income (loss) ...................... $ 1.09 ($0.71)
============ ============
Weighted average number of shares outstanding 8,351,512 6,472,049
============ ============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
------------ Additional Collateral
Number Paid-In Shares in Comprehensive
of Shares Amount Capital Escrow Income
--------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance - June 30, 1999 ....................... 8,351,012 $ 66,809 $ 65,708,202 ($500,000)
Cancellation of shares in escrow to guarantee
acquisition note and holdback ............... (454,222) (3,634) (496,366) 500,000
Payment of holdback ........................... 16,722 134 99,866
Cancellation of shares in escrow in connection
with an acquisition ......................... (18,199) (146) 146
Payment of stock guarantee .................... (4,312,023)
Stock repurchases ............................. (747,582) (5,981) (1,092,220)
Comprehensive loss:
Net income .................................. 9,157,554
Other comprehensive income:
Unrealized holding losses on available-for-
sale securities ......................... 10,000
------------
Total comprehensive income .................... $ 9,167,554
--------- ------------ ------------ ----------- ============
Balance - September 30, 1999 .................. 7,147,731 $ 57,182 $ 59,907,605 $ --
--------- ------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Accumulated
Income/(Loss) Deficit Total
<S> > <C> <C> <C>
Balance - June 30, 1999 ....................... ($10,000) ($59,148,427) $ 6,116,584
Cancellation of shares in escrow to guarantee
acquisition note and holdback ............... $ 0
Payment of holdback ........................... $ 100,000
Cancellation of shares in escrow in connection
with an acquisition ......................... $ 0
Payment of stock guarantee .................... ($4,312,023)
Stock repurchases ............................. ($1,098,201)
Comprehensive loss:
Net income .................................. 9,157,554 $ 9,157,554
Other comprehensive income:
Unrealized holding losses on available-for-
sale securities ......................... 10,000 $ 10,000
Total comprehensive income ....................
----------- ----------- -----------
Balance - September 30, 1999 .................. $ -- $(49,990,873) $ 9,973,914
=========== ============ ============
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................ $ 9,157,554 $ (4,606,629)
Adjustments to reconcile net income (loss) to net cash used in
operating activities
Depreciation and amortization ......................... 2,183,425 1,395,998
Amortization of deferred financing costs and
debt discount ...................................... 402,039 227,445
Loss on debt extinguishment ........................... 4,058,915 2,567,806
Loss on sale of property and equipment ................ 42,597 2,947
Loss on sale of marketable securities ................. 25,000
Gain on sale of security division ..................... (17,349,598)
Compensation expense in connection with
employment agreements .............................. 387,500
Increase in accounts receivable - Trade ............... (530,980) (18,075)
Decrease in inventory ................................. 304,066 40,068
Increase in prepaid expenses and other
current assets ..................................... (999,030) (185,805)
Increase in deposits .................................. (51,538) (2,553)
Decrease in accounts payable - Trade .................. (320,031) (243,492)
Increase (decrease) in accrued expenses and other
current liabilities ................................ 2,521,039 (257,219)
Decrease in deferred revenues ......................... (145,000) (42,855)
------------ ------------
Net cash used in operating activities ..... (701,542) (734,864)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of monitoring contracts (net of purchase
holdbacks) ............................................... (161,052) (1,508,584)
Net proceeds from the sale of security division (net of
purchase holdbacks) ...................................... 42,187,404
Proceeds from the sale of property and equipment ............ 11,868 852
Purchase of property and equipment .......................... (1,069,864) (523,090)
Payment of stock guarantees ................................. (3,689,772)
------------ ------------
Net cash provided by (used in) investing activities ...... 37,278,584 (2,030,822)
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred financing costs incurred ............................ (932,236) (69,368)
Proceeds of long-term debt ................................... 6,152,480 24,455,000
Principal payments on long-term debt ......................... (31,307,817) (18,201,778)
Stock repurchases ............................................ (1,098,201)
Net issuance costs incurred in connection with the issuance of
common stock .............................................. 18,827
----------------------------
Net cash provided by (used in) financing activities ....... (27,185,774) 6,202,681
------------ ------------
NET INCREASE IN CASH ............................................. 9,391,268 3,436,995
CASH - BEGINNING ................................................. 3,241,016 966,140
------------ ------------
CASH - ENDING .................................................... $ 12,632,284 $ 4,403,135
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest ....................... $ 1,326,955 $ 676,196
Cash paid during the year for income taxes ................... $ -- $ --
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
Supplemental Disclosures of Noncash Investing and Financial Activities
During the three months ended September 30, 1998 and 1999, long-term notes
payable of $160,672 and $32,040, respectively, were incurred for the purchase of
property and equipment.
During the three months ended September 30, 1999, the Company accrued
$3,750,000 to monitoring contract costs in connection with an acquisition (see
Note 3 to Notes to Condensed Consolidated Financial Statements). Also related to
the same acquisition, the Company accrued $622,251 to Additional Paid-in Capital
for a stock price guarantee.
During the three months ended September 30, 1998, in connection with an
acquisition, the Company issued 284,953 shares of its Common Stock, valued at
$1,704,027, of which 163,043 shares with a value of $975,000 was stock held in
escrow to guarantee a note payable of $500,000 (the "Acquisition Note") and
purchase holdback of $100,000. The Acquisition Note agreement required an
additional 291,179 shares be placed in escrow during the fiscal year ended June
30, 1999. The Company recorded the shares issued to guarantee the Acquisition
Note of $500,000 as collateral shares held in escrow in Stockholder's Equity. On
September 30, 1999, the Company released 16,722 shares from escrow to the seller
to satisfy the purchase holdback of $100,000. The Company then repurchased
135,902 of the shares issued, including the 16,722 holdback shares, for their
guaranteed value of $812,701. Also on this date, the Company paid the balance of
the note payable and as a result, the remaining 437,500 shares held in escrow
were released to the Company and retired.
During the three months ended September 30, 1998, the Company issued
119,632 shares of its Common Stock to a lender, in connection with the
refinancing of the Company's indebtedness. 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. In June of 1999, the Company recorded deferred
financing costs of $311,383 with a corresponding entry to Additional Paid-in
Capital related to a stock price guarantee on these shares.
See notes to condensed consolidated financial statements
7
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying interim balance sheet as of September 30, 1999 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 information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's June 30, 1999
Annual Report on Form 10-KSB filed with the Securities and Exchange Commission.
The results of operations for the period ended September 30, 1999 are not
necessarily indicative of operating results for the full year.
Certain amounts in the September 1998 quarterly financial statements have
been reclassified to conform to the September 1999 presentation.
2. THE SALE OF THE SECURITY BUSINESS
On September 30, 1999, the Company sold its electronic security and patrol
subsidiaries, United Security Systems, Inc. ("USS") and The Jupiter Group, Inc.
d/b/a Triple A Patrol ("Triple A Patrol") (USS together with Triple A Patrol,
collectively referred to herein as the "Security Division") to Vector Security,
Inc. ("Vector") for approximately $50,300,000 (the "Security Sale") pursuant to
the terms of a Stock Purchase Agreement, dated August 11, 1999, as amended (the
"Stock Purchase Agreement"). The Company recorded a gain on the Security Sale of
$17,354,099, net of certain severance and transaction expenses totaling
approximately $4,000,000.
Simultaneous with the Security Sale, the Company paid off $30,628,277 of
McGinn, Smith Capital Holdings Corp. ("MSCH") financing, including accrued
interest. As a result of paying off this debt, the Company recorded a loss on
debt extinguishment of $4,058,914. The Company also paid other notes payable
totaling $455,602, paid stock guarantees of $4,312,023, acquired and
subsequently retired 747,582 shares of treasury stock for $1,098,201, released
from escrow and subsequently canceled 437,500 shares of Common Stock related to
the guarantee of an acquisition note.
The Stock Purchase Agreement provides for aggregate holdbacks of
approximately $5,000,000, which are to be paid after holdback periods ranging
from 150 days to one year. Such holdbacks are being held by Vector pending
finalization of certain post-closing adjustments. The Company has recorded an
estimated allowance of $1,317,820 against the purchase holdback. This allowance
was recorded as a decrease to the gain. The outcome of these post-closing
adjustments will determine the actual amount of the gain.
3. ACQUISITIONS
During the three months ended September 30, 1999, the Company acquired
additional monitoring contracts for an aggregate purchase price of $65,979. As
consideration, the Company paid $61,314 in cash and recorded purchase holdbacks
of $4,655 (which are payable over periods of up to two years based on
performance guarantees of the seller). The pro forma effects of these
acquisitions are not considered material. In satisfaction of holdback
liabilities related to prior acquisitions totaling $281,393, the Company paid
cash of $99,232, issued 16,722 shares of its Common Stock valued at $100,000,
and reduced monitoring contract costs by $82,161.
8
<PAGE>
3. ACQUISITIONS (CONTINUED)
In October 1998, the Company acquired the capital stock of Health Watch,
Inc ("Health Watch"). Health Watch is in the business of marketing and
monitoring personal response systems. As part of this acquisition, the sellers
were entitled to receive up to an aggregate of $3,750,000 upon the achievement
of certain milestones or as a result of other transactions or events. The sale
of the Security Division was an event which resulted in the acceleration of such
payment, and accordingly the Company has accrued $3,750,000 with a corresponding
entry to monitoring contract costs.
4. LONG-TERM DEBT
<TABLE>
<S> <C>
Receivable Financing Agreement
------------------------------
Principal payments payable as follows: $733,956 -fiscal year 2000,
$1,650,810 - fiscal year 2001, $2,736,561 - fiscal year 2002, $3,885,032
fiscal year 2003, $14,656,064 - fiscal year 2004, and $3,467,259 fiscal
year 2005; plus interest at 8.3% - 8.52% on the outstanding loan balance;
collateralized by related monitoring contracts $ 27,129,682
Equipment Financing
-------------------
Payable in monthly installments aggregating $985 including interest at
rates ranging from 7.20% to 10.54%; final payments due August 2002 through
May 2003; collateralized by related equipment 33,298
Other
-----
Note payable in monthly installments of $6,234 including interest at 8%;
final payment due July 2004 672,464
Notes payable in monthly installments aggregating $6,750 including interest
at 8.0%; final payment due January 2001 102,912
Notes payable in monthly installments of $9,046 including interest at 8%;
final payments due March, 2000 44,336
------------
27,982,692
------------
Less Current Portion 1,180,693
$ 26,801,999
============
</TABLE>
On June 30, 1999, the Company's Receivable Financing Agreement with
McGinn, Smith Capital Holdings Corp. ("MSCH") was modified. As of June 30,
1999, Response Acquisition Corp., a subsidiary of the Company ("RAC") merged
with and into USS, and USS was the surviving corporation. Also on June 30,
1999, three Delaware limited liability companies were formed: (i) Response
Alarm Monitoring, LLC ("RAM"); (ii) Response Security Monitoring, LLC
("RSM"); and (iii) Response Security Systems, LLC ("RSS") (collectively,
referred to as the "LLCs"). USS was the sole Member of each LLC. Each of the
LLCs then entered into Purchase Agreements with USS (the "Second Purchase
Agreements") pursuant to which each LLC purchased certain contracts and
receivables from USS. RAM purchased alarm receivables and contracts from USS,
RSM purchased Personal Response System (PRS) receivables and contracts from
USS, and RSS was intended for future contract acquisitions. Each of the LLCs
also entered into Receivable Financing Agreements with MSCH (the "Second
Receivable Agreements"), under which MSCH provided financing to each LLC for
its purchase of the respective receivables and contracts from USS.
9
<PAGE>
4. LONG-TERM DEBT (CONTINUED)
In contemplation of the Company's sale of USS to Vector in the Security
Sale, the financing arrangement described above was further modified as follows:
USS assigned and transferred its Membership Interests in RSS and RSM to the
Company's wholly owned subsidiary, Response Ability Systems, Inc., a New Jersey
Corporation. USS maintained its Membership Interest in RAM, which was sold to
Vector as part of the Security Sale (see Note 2) (the Second Purchase
Agreements, as amended, together with the Second Receivable Agreements, as
amended, collectively referred to subsequently herein as the "Financing
Agreement").
On September 30, 1999, the Company sold its stock in USS to Vector and paid
off approximately $30,628,000, including accrued interest, of the MSCH Financing
Agreement in respect of RAM. In connection with the refinancing, the Company
incurred a charge for loss on debt extinguishment of $4,058,914. As of the
closing of the Security Sale, $27,129,682 is outstanding to MSCH under the MSCH
Financing Agreement in respect of RSS and RSM and approximately $12,870,000 is
available for future borrowings. Substantially all of the Company's $830,000 in
MRR has been pledged pursuant to the MSCH Financing Agreement.
Under the MSCH Financing Agreement, the Company is required to pay
financing fees of 15% to the lender for each additional borrowing at the time of
the financing. These financing fees are recorded as debt issuance costs and are
amortized over five years, the term of the notes, using the effective interest
method. Taking these debt issuance costs into consideration, the Company's
effective interest rates under the Financing Agreement range from 13.059% to
13.234%. In connection with the various borrowings under the Financing
Agreement, the Company recorded debt issuance costs of $9,254,740. In connection
with the repayment of $31,307,817 of the MSCH Financing Agreement on September
30, 1999, the Company wrote off debt issuance costs of $4,058,915, net of
accumulated amortization of $934,099.
The Financing Agreement contains certain provisions that significantly
restrict the LLCs' ability to make any loans, advances or other distributions to
any other entity. The borrowings under the Financing Agreement are secured by
the capitalized monitoring contracts held by RSM and RSS. At September 30, 1999
the net book value of such monitoring contracts was $19,386,713.
5. STOCKHOLDERS' EQUITY
On September 30, 1999 the Company repurchased 747,582 shares of its Common
Stock related to prior security acquisitions for $1,098,201. In addition, the
Company paid stock guarantees of $4,312,023.
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, 1999 697,242 $ .300 - $13.350 $5.450
Options granted 0
Options exercised 0
Options canceled or expired (28,950) $4.063 - 6.030 $5.762
------- ---------------- ------
Options outstanding at September 30, 1999 668,292 $ .300 - $13.350 $5.432
======= ================ ======
Options exercisable at September 30, 1999 584,959 $ .300 - $13.350 $5.347
======= ================ ======
</TABLE>
10
<PAGE>
5. STOCKHOLDERS' EQUITY (CONTINUED)
The following is a summary of warrant activity:
<TABLE>
<CAPTION>
Number Warrant Price Weighted Average
of Shares Per Share(Range) Exercise Price
--------- --------------- ----------------
<S> <C> <C> <C>
Warrants outstanding at June 30, 1999 946,150 $6.00 - $24.000 $12.566
======= =============== =======
Warrants outstanding at September 30, 1999 946,150 $6.00 - $24.000 $12.566
======= =============== =======
</TABLE>
6. NET INCOME (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, EARNINGS PER SHARE, which was adopted by the Company effective
for the year ended June 30, 1998, as required by this statement. For the three
months ended September 30, 1999, 500 shares of Common Stock issuable upon the
exercise of outstanding options were included in the diluted weighted average
shares outstanding. For the three months ended September 30, 1998, such shares
had an antidilutive effect on the net loss per common share, and have,
therefore, been excluded. At September 30, 1999, potentially dilutive stock
equivalents included 668,292 stock options and 946,150 warrants.
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - The Company has employment contracts with
certain employees for terms through September 2002. At September 30, 1999, these
contracts provide for annual base salaries aggregating $1,050,000.
CONSULTING AGREEMENT - The Company has a yearly renewable consulting
agreement with A.C. Allen & Co., a company owned by a director of the Company,
under which such company will receive $4,000 per month in consideration for
providing certain consulting services to the Company.
CONTINGENCIES - In the normal course of business, the Company is
subject to litigation, none of which is expected to have a material effect on
the consolidated financial position, results of operations or cash flows of the
Company.
As part of certain acquisitions, the Company has guaranteed the value of
its Common Stock at various prices ranging from $4.15 to $6.75 for periods
expiring at various dates through September 2003. As of September 30, 1999, the
Company's contingent liabilities under these agreements aggregated $1,722,752,
which may be settled in cash or by the issuance of Common Stock. Based on a
September 30, 1999 market price of $1.469, the Company would be required to
issue approximately 1,172,738 shares of its Common Stock to satisfy this
contingent liability.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement, which was amended in June
1999, establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities, and is effective for all interim and annual periods
beginning after June 15, 2000. The Company will adopt SFAS No. 133 for the year
beginning July 1, 2000. The Company has not yet determined the impact that SFAS
No. 133 will have on its consolidated financial position or results of
operations.
11
<PAGE>
9. INDUSTRY SEGMENT INFORMATION
Upon the adoption of SFAS No. 131 in 1999, the Company's operations fall
into two industry segments: Security and Personal Response Systems ("PRS").
Previously, the Company's operations were considered to be one segment. The
Company's Security segment utilizes electronic systems 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. Such services are
provided through the use of an electronic device installed at a customer's
location that is monitored by the Company at its central monitoring station. The
Security segment also includes the Company's security patrol operations. The PRS
segment includes monitoring services designed to monitor, identify and
electronically report emergencies requiring medical, fire or police assistance.
Such services are provided through the use of a transmitter worn by the customer
and a receiving base located at the customer's home which communicates with the
Company's central monitoring station.
These segments are separate strategic business units that offer different
services and are managed separately due to the different technology and
marketing strategies required for each segment. The Security segment includes
the operations of USS and Triple A Patrol and the PRS segment includes the
operations of Response Ability Systems, Inc., Emergency Response Systems, Inc.,
Organization for Enhanced Capability, Inc., In Home Health, Inc., and Health
Watch.
The following table summarizes the Company's financial information by
industry segment. The components of net income (loss) below operating income
(loss) are not separately evaluated by the Company's management on a segment
basis.
12
<PAGE>
<TABLE>
<CAPTION>
Corporate and
Security PRS Other Total
-------- --- ------------- -----
<S> <C> <C> <C> <C>
Quarter ended September 30, 1999:
Revenues:
Product Sales ........................... $ 1,084,517 $ 241,092 $ 1,325,609
Monitoring and service .................. 3,121,546 2,504,562 5,626,108
Security Patrol ......................... 871,294 871,294
Total revenues ....................... 5,077,357 2,745,654 7,823,011
Gross profit ............................... 2,404,948 1,918,034 4,322,982
Selling, general and administrative expenses 1,971,520 1,976,098 80,402 4,028,020
Depreciation and amortization expense ...... 1,255,757 927,668 2,183,425
Net loss from operations ................... (822,329) (985,732) $ (80,402) (1,888,463)
Quarter ended September 30, 1998:
Revenues:
Product sales ........................... $ 986,431 $ 216,292 $ 1,202,723
Monitoring and service .................. 3,067,173 1,075,596 4,142,769
Security patrol ......................... 670,177 670,177
Total revenues ....................... 4,723,781 1,291,888 6,015,669
Gross profit ............................... 2,348,344 843,628 3,191,972
Selling, general and administrative expenses 1,770,013 886,097 70,242 2,726,352
Depreciation and amortization expense ...... 1,095,579 300,419 1,395,998
Net loss from operations ................... (517,247) (342,888) $ (457,743) (1,317,878)
Total assets at September 30, 1999 ......... $ 0 $ 32,945,054 $ 14,936,231 $ 47,881,285
Total assets at June 30, 1999 .............. $ 39,444,085 $ 27,660,289 $ 1,337,618 $ 68,441,992
</TABLE>
10. SUBSEQUENT EVENTS
Concurrent with the closing of the Security Sale, the Company announced a
stock repurchase program for up to $2.5 million of its Common Stock. The program
authorizes the Company to make purchases of its Common Stock in the open market.
The timing and terms of purchases, and the number of shares actually purchased,
will be determined by management based on market conditions and other factors.
The purchases will be conducted in accordance with applicable rules of the
Securities and Exchange Commission. As of November 17, 1999 the Company
repurchased and subsequently retired 971,300 shares of its Common Stock at an
average market price of $1.23 per share. The total price paid for these shares
was $1,196,456.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Condensed
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 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 leading provider of PRS throughout the United States
engaged in the marketing, installation and monitoring of PRS. The Company
markets its proprietary PRS to consumers, home health care agencies, hospitals,
health maintenance organizations, durable medical equipment providers and
government agencies. The Company's PRS enables individual users, such as elderly
or disabled persons, to transmit a distress signal using a portable transmitter
to the Company's Monitoring Station. The Company currently monitors
approximately 38,000 PRS subscribers generating approximately $830,000 in
Monthly Recurring Revenue ("MRR"). The Company believes it is currently the
second largest provider of PRS in the United States based on annual recurring
revenue. The Company's revenues consist primarily of recurring payments for the
monitoring of PRS products. During the past twelve months, the Company has
focused significant capital and human resources on the expansion of its PRS
operations, increasing its subscriber base by approximately 17,000 customers
generating approximately $480,000 in MRR, through acquisitions and the expansion
of the Company's PRS provider programs.
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 the 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.
On September 30, 1999, the Company sold its Security Division to Vector in
the Security Sale. The total consideration for the Security Sale was
approximately $50,300,000 in cash (of which approximately $5,000,000 is being
held by Vector pending certain post-closing adjustments) and is subject to
adjustment under certain circumstances.
As a result of the Security Sale, the Company is no longer engaged in the
alarm or patrol businesses and is solely engaged in the PRS business.
Simultaneous with the Security Sale, the Company moved all of its PRS monitoring
to its Monitoring Station located in Boca Raton, Florida. Information with
respect to the alarm and patrol businesses is included in this Quarterly Report
because the financial statements included herein include financial information
from such businesses.
The Company's electronic security systems business utilized electronic
systems installed in businesses and residences to provide (i) detection of
events such as intrusion or fire, (ii) surveillance and
14
<PAGE>
(iii) control of access to property. The detection devices were monitored either
by a third party monitoring station located in Euclid, Ohio or by the Company's
Underwriters Laboratory and Factory Mutual approved monitoring station located
in Wilkes Barre, Pennsylvania. 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 security services industry encompasses a wide range of products and
services, which can be broadly divided into electronic monitoring products and
services which the Company provided and highly labor intensive manned guarding
and patrol services, which the Company provided on a limited basis through its
former subsidiary, Triple A Patrol. Electronic monitoring products and services
consist of the sale, installation, continuous monitoring and maintenance of
electronic security systems. This business utilizes modern electronic devices
installed in customers' businesses and residences to provide (i) detection of
events such as intrusion or fire, (ii) surveillance and (iii) control of access
to properties. Event detection devices are monitored by a monitoring center,
which is linked to the customer through telephone lines. This center is often
located at remote distances from the customer's premises. In some instances, the
customer may monitor these devices at its 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 sophisticated commercial
systems incorporating closed-circuit television systems and access control.
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 of 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 Triple A Patrol 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.
Operating revenues increased by $1,807,342 or 30% from the three months
ended September 30, 1998 ("Fiscal 1999") to the three months ended September 30,
1999 (`Fiscal 2000"). Operating revenues from the security division increased
from $4,723,781 to $5,077,357, an increase of $353,576 or 7%. The PRS division
contributed an increase in operating revenues of $1,453,766 or 113%.
Product sales accounted for an increase of $122,886 or 10% from Fiscal 1999
to Fiscal 2000. Product sales from the security division increased by $98,086 or
10%. Product sales from the PRS division decreased by $24,800 or 11%. This
decrease is the result of a decrease in sales of PRS to private label
wholesalers and home healthcare agencies, as the Company has redirected its
efforts to expand its MRR from rental programs through providers.
Monitoring and service revenues accounted for an increase in operating
revenues of $1,483,339 or 36% from Fiscal 1999 to Fiscal 2000. Monitoring and
service revenues from the security division increased by $54,373 or 2%.
Monitoring and service revenues from the PRS division increased by $1,428,966 or
133%. The acquisition of Health Watch in October 1998 accounted for $1,033,138
or 72% of the PRS increase.
15
<PAGE>
The Company expanded its operating revenue base to include security patrol
revenue in February 1998 through the acquisition of Triple A Patrol. Security
patrol revenues increased by $201,117 or 30% from $670,177 in Fiscal 1999 to
$871,294 in Fiscal 2000.
Gross profit increased by $1,131,010 or 35% from Fiscal 1999 to Fiscal
2000. The gross profit from the security division increased by $56,604 or 2%.
The gross profit from the PRS division increased by $1,074,406 or 127%. The
acquisition of Health Watch accounted for $837,295 or 78% of the PRS increase.
The Gross Profit Margin ("GPM") as a percentage of sales increased from 53%
in Fiscal 1999 to 55% in Fiscal 2000. The security division's GPM percentage
decreased from 50% to 47%, while the PRS GPM percentage increased from 65% to
70%.
Selling, general and administrative expenses increased by $1,301,668 or 48%
from Fiscal 1999 to Fiscal 2000.
The security division's selling, general and administrative expenses
increased by $201,507 or 11%, the PRS division increased by $1,090,001 or 123%,
and the corporate selling, general and administrative expenses increased by
$10,160 or 1% from Fiscal 1999 to Fiscal 2000. Included in the PRS increases are
restructuring expenses associated with transferring the Company's subscriber
base from its Wilkes Barre, Pennsylvania central station to its Boca Raton,
Florida central station in anticipation of the sale of the security division.
These restructuring expenses totaled approximately $90,000. The balance of the
increase in selling, general and administrative expenses for the PRS division of
approximately $1,000,000 is primarily due to the additional payroll and overhead
expenses associated with the acquisitions of Health Watch, and In-Home Health
which were acquired in October 1998 and January 1999, respectively. These two
acquisitions accounted for approximately $841,000 of selling, general and
administrative expenses.
Amortization and depreciation expense increased by $787,427 or 56% from
Fiscal 1999 to Fiscal 2000. The security division increased by $160,178 or 15%
and the PRS division increased by 627,249 or 209%. The increase in amortization
and depreciation expense in the PRS division is primarily due to the Company's
acquisitions of the monitoring contracts of Health Watch, Inc. in October 1998
and In Home Health, Inc. in January 1999. These two entities had combined
amortization and depreciation expense for the three months ended September 30,
1999 of $561,914, which represents 90% of the PRS increase.
Net interest expense increased by $799,022 or 111% from Fiscal 1999 to
Fiscal 2000. The increase in interest expense is due to additional long-term
debt of approximately $34 million from Fiscal 1999 to Fiscal 2000 (see Note 4 of
Notes to Condensed Consolidated Financial Statements of the Company). The
primary use of such borrowings was for the acquisition of monitoring contracts
and property and equipment. Such additional borrowings were also used to fund
the move of the Company's subscriber base to its own central station and to
integrate the sales and marketing of PRS. On September 30, 1999 the Company
reduced its indebtedness by approximately $31.5 million as a result of the sale
of its security division (see Note 2 of Notes to Condensed Consolidated
Financial Statements of the Company).
The Company recorded a gain on sale of the security division of $17,354,099
on September 30, 1999 (See Note 3 of Notes to Condensed Consolidated Financial
Statements of the Company). This gain is net of an estimated allowance of
$1,317,820 on the purchase holdback due from Vector recorded by the Company. The
actual amount of the gain will be determined by the outcome of certain
post-closing adjustments.
Income tax expense for the three months ended September 30, 1999 has been
estimated to be $704,200, of which $470,000 is related to the gain on sale of
the security division.
Simultaneous with the Security Sale, the Company paid $30,628,277,
including interest, of its MSCH Financing Agreement, and as a result, wrote off
Deferred Financing Costs of $4,058,915. This write off was recorded as a loss on
debt extinguishment, an extraordinary item.
16
<PAGE>
The net income for Fiscal 2000, was $9,157,554 or $1.09 per share based on
8,351,012 weighted average number of shares outstanding, as compared to a net
loss of $4,606,629 or ($.71) per share based on 6,472,049 weighted average
number of shares outstanding for Fiscal 1999. The increase in net income is
primarily attributable to the gain from the sale of the security division of
$17,354,099 or $2.08 per share less the loss on debt extinguishment of
$4,058,915 or ($.49) per share. Excluding these two items the company would have
had a net loss of $4,137,630 or ($.49) per share for Fiscal 2000. Included in
this net loss are non-cash charges totaling $2,585,464, consisting of
depreciation and amortization of $2,183,425 and amortization of deferred
financing costs of $402,039.
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
either through the Company's dealer program or through acquisition of subscriber
account portfolios) 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, if necessary. 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.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1999, the Company's Receivable Financing Agreement with MSCH
was modified. As of June 30, 1999, RAC merged with and into USS, and USS was the
surviving corporation. Also on June 30, 1999, the following events occurred:
Three Delaware limited liability companies were formed: (i) Response Alarm
Monitoring, LLC ("RAM"); (ii) Response Security Monitoring, LLC ("RSM"); and
(iii) Response Security Systems, LLC ("RSS") (collectively, referred to as the
"LLCs"). USS was the sole Member of each LLC. Each of the LLCs then entered into
Purchase Agreements with USS (the "Second Purchase Agreements") pursuant to
which each LLC purchased certain contracts and receivables from USS. RAM
purchased alarm receivables and contracts from USS, RSM purchased PRS
receivables and contracts from USS, and RSS was intended for future contract
acquisitions. Each of the LLCs also entered into Receivable Financing Agreements
with MSCH (the "Second Receivable Agreements"), under which MSCH provided
financing to each LLC for its purchase of the respective receivables and
contracts from USS.
In contemplation of the Company's sale of USS to Vector in the Security
Sale, the financing arrangement described above was further modified as follows:
USS assigned and transferred its Membership Interests in RSS and RSM to the
Company's wholly owned subsidiary, Response Ability Systems, Inc., a New Jersey
Corporation. USS maintained its Membership Interest in RAM, which was sold to
Vector as part of the Security Sale (see Note 2 of Notes to Condensed
Consolidated Financial Statements of the Company) (the Second Purchase
Agreements as amended together with the Second Receivable Agreements as amended
collectively referred to subsequently herein as the "Financing Agreement"). .
On September 30, 1999, the Company sold its stock in USS to Vector and paid
off approximately $30,628,000, including accrued interest, of the MSCH Financing
Agreement in respect of RAM. In connection with the refinancing, the Company
incurred a charge for loss on debt extinguishment of $4,058,914. As of the
closing of the Security Sale, $27,129,682 is outstanding to MSCH under the MSCH
Financing Agreement in respect of RSS and RSM and approximately $12,870,000 is
available for future borrowings. Substantially all of the Company's $830,000 in
MRR has been pledged pursuant to the MSCH Financing Agreement. As a result, in
order to obtain additional borrowings under the Financing Agreement, new
collateral must be acquired or internally generated.
17
<PAGE>
Under the MSCH Financing Agreement, the Company is required to pay
financing fees of 15% to the lender for each additional borrowing at the time of
the financing. These financing fees are recorded as debt issuance costs and are
amortized over five years, the term of the notes, using the effective interest
method. Taking these debt issuance costs into consideration, the Company's
effective interest rates under the Financing Agreement range from 13.059% to
13.234%. In connection with the various borrowings under the Financing
Agreement, the Company recorded debt issuance costs of $9,254,740. In connection
with the repayment of $31,307,817 of the MSCH Financing Agreement on September
30, 1999, the Company wrote off debt issuance costs of $4,058,915, net of
accumulated amortization of $934,099.
The Financing Agreement contains certain provisions that significantly
restrict the LLCs' ability to make any loans, advances or other distributions to
any other entity. The borrowings under the Financing Agreement are secured by
the capitalized monitoring contracts held by RSS and RSM. At September 30, 1999,
the net book value of such monitoring contracts was $19,386,713.
The Company's working capital increased by $9,056,558 from a working
capital deficiency of $36,166 at June 30, 1999 to working capital of $9,020,392
at September 30, 1999. This increase is primarily attributable to the Security
Sale.
Net cash used in operating activities decreased from $734,864 used in
Fiscal 1999 to $701,542 used in Fiscal 2000.
Net cash provided by investing activities was $37,278,584 for Fiscal 2000
as compared to net cash used in investing activities for Fiscal 1999 of
$2,030,822. On September 30, 1999, the Company received net proceeds from the
sale of the security division of $42,187,404. Also on this date the Company paid
stock guarantees of $3,689,772 related to prior security acquisitions. During
Fiscal 2000, the Company purchased property and equipment for $1,069,864, which
includes equipment used for rentals in the amount of $532,995. The balance of
the capital expenditures were incurred mainly for the transfer of all of the
Company's PRS subscriber accounts from its Monitoring Station in Wilkes Barre,
Pennsylvania to its Monitoring Station in Boca Raton, Florida.
Net cash used in financing activities was $27,185,774 for Fiscal 2000. The
Company received proceeds of $6,152,480 from an additional borrowing under the
MSCH Financing Agreement for the PRS division net of $932,236 in deferred
financing costs in Fiscal 2000. On September 30, 1999, the Company paid
$31,307,817 in principal payments on long-term debt including $30,428,103 of the
MSCH Financing Agreement. The Company also repurchased stock related to prior
security acquisitions for $1,098,201.
In October 1998, the Company acquired all of the capital stock of Health
Watch. Health Watch is in the business of marketing and monitoring personal
response systems. As part of this acquisition, the sellers were entitled to
receive up to an aggregate of $3,750,000 upon the achievement of certain
milestones or as a result of other transactions or events. The sale of the
Security Division was an event which resulted in the acceleration of such
payment, and accordingly the Company has accrued $3,750,000 to be paid in cash.
The Company has received a letter from the sellers claiming that they are
entitled to receive $3,750,000 in Common Stock in lieu of cash valued at the
current market price (see Note 3 to Notes of Condensed Consolidated Financial
Statements of the Company).
Concurrent with the closing of the Security Sale, the Company announced a
stock repurchase program for up to $2.5 million of its Common Stock. The program
authorizes the Company to make purchases of its Common Stock in the open market.
The timing and terms of purchases, and the number of shares actually purchased,
will be determined by management based on market conditions and other factors.
The purchases will be conducted in accordance with applicable rules of the
Securities and Exchange Commission. As of November 17, 1999 the Company
repurchased and subsequently retired 971,300 shares of its Common Stock at an
average market price of $1.23 per share. The total price paid for these shares
was $1,196,456.
18
<PAGE>
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.
Based on an inventory conducted during Fiscal year 1999, the Company
identified computer systems that required modification or replacement so that
they would properly utilize dates beyond December 31, 1999. The majority 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 Monitoring
Station and the Company's current accounts receivable and billing software. The
Company installed and upgraded general ledger and accounts payable programs,
which the manufacturer warrants are Year 2000 compliant during the fourth
quarter 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 has
communicated 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. Based on the responses that have
been received, the Company believes that these significant suppliers, customers,
and financial institutions' products and systems are Year 2000 compliant. 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 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 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.
INFLATION
The Company does not believe that inflation has a material effect on its
operations.
19
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
(11) Computation of Loss per Common Share
(27) Financial Data Schedule
(b) Report on Form 8-K - None
20
<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. November 19, 1999
- ----------------- -----------------
Issuer
By: /s/ Richard M. Brooks
---------------------------------
Richard M. Brooks
President
Chief Executive Officer
By: /s/ Donna M. Dorris
---------------------------------
Donna M. Dorris
Chief Financial Officer
Principal Financial Officer
Principal Accounting Officer
<PAGE>
EXHIBIT 11
COMPUTATION OF INCOME (LOSS) PER SHARE
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income (loss) ..................................... $ 9,157,554 $(4,606,629)
Deduct:
Accretion, discount and dividends on preferred stock -- --
Net income (loss) applicable to common shareholders ... $ 9,157,554 $(4,606,629)
=========== ===========
Weighted average number of common shares outstanding .. 8,351,012 6,472,049
=========== ===========
Basic income (loss) per share ......................... $ 1.09 $ (0.71)
=========== ===========
Weighted average number of common shares outstanding .. 8,351,012 6,472,049
Common share equivalents applicable to:
Warrants - Class A ................................. 411,127
Warrants - Class B ................................. 493,983
Warrants - Class C ................................. 9,067 16,567
Warrants - Other ................................... 937,083 1,087,083
Stock options ...................................... 697,242 1,159,683
Less common stock acquired with net proceeds .......... (1,642,892) (3,168,443)
---------- ----------
Weighted average number of common shares and
common share equivalents used to compute diluted
income (loss) per share ............................... 8,351,512 6,472,049
=========== ===========
Diluted income (loss) per share ....................... $ 1.09 $ (0.71)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,632
<SECURITIES> 0
<RECEIVABLES> 7,432
<ALLOWANCES> 1,743
<INVENTORY> 1,594
<CURRENT-ASSETS> 20,097
<PP&E> 7,661
<DEPRECIATION> 3,922
<TOTAL-ASSETS> 47,881
<CURRENT-LIABILITIES> 11,077
<BONDS> 0
0
0
<COMMON> 57
<OTHER-SE> 9,917
<TOTAL-LIABILITY-AND-EQUITY> 47,881
<SALES> 1,326
<TOTAL-REVENUES> 7,823
<CGS> 1,204
<TOTAL-COSTS> 3,500
<OTHER-EXPENSES> 6,211
<LOSS-PROVISION> 488
<INTEREST-EXPENSE> 1,520
<INCOME-PRETAX> 13,921
<INCOME-TAX> 704
<INCOME-CONTINUING> 13,217
<DISCONTINUED> 0
<EXTRAORDINARY> (4,059)
<CHANGES> 0
<NET-INCOME> 9,158
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.09
</TABLE>
