<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 MARCH 31, 1999
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 May 12, 1999.
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1999
and June 30, 1998............................................. 1-2
Condensed Consolidated Statements of Operations for the Nine
Months and Three Months ended March 31, 1999 and 1998......... 3
Condensed Consolidated Statement of Stockholders' Equity for
March 31, 1999................................................ 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months and Three Months ended March 31, 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............................. 14-22
PART II. OTHER INFORMATION.......................................... 23
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,822,085 $ 966,140
Marketable securities 11,875 25,000
Accounts receivable
Trade - Net of allowance for doubtful accounts
of $709,565 and $547,969, respectively 3,574,712 2,338,359
Inventory 2,592,708 1,648,250
Prepaid expenses and other current assets 528,235 581,627
------------ ------------
Total current assets 9,529,615 5,559,376
------------ ------------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $12,803,862 and $8,566,717, respectively 45,727,085 31,280,805
------------ ------------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $4,909,780 and $3,102,367,
respectively 6,091,305 2,892,181
------------ ------------
OTHER ASSETS
Deferred financing costs - Net of accumulated
amortization of $628,481 and $1,594,379, respectively 6,601,345 2,679,450
Other noncurrent assets 243,134 275,084
------------ ------------
6,844,479 2,954,534
------------ ------------
$68,192,484 $42,686,896
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
--------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $1,900,042 $ 736,612
Accounts payable - Trade 1,223,198 917,316
Purchase holdbacks 773,008 431,378
Accrued expenses and other current liabilities 2,230,756 1,931,419
Deferred revenue 3,408,115 3,051,053
------------ -----------
Total current liabilities 9,535,119 7,067,778
----------- -----------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt 47,510,886 16,490,156
Purchase holdbacks 11,051 169,242
Deferred compensation expense 2,562,500
----------- -----------
47,521,937 19,221,898
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock - Par value $.008
Authorized 37,500,000 shares
Issued and outstanding 8,057,985 shares - March 31,
1999 and 6,317,023 shares - June 30, 1998 64,464 50,537
Additional paid-in capital 66,054,626 60,664,468
Collateral shares in escrow (500,000)
Accumulated other comprehensive loss (13,125)
Accumulated deficit (54,470,537) (44,317,785)
------------ -------------
11,135,428 16,397,220
------------ -------------
$68,192,484 $42,686,896
------------ -------------
------------ -------------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Product sales $ 3,599,401 $ 2,258,816 $ 1,092,956 $ 912,911
Monitoring and service 14,485,544 8,511,749 5,341,132 3,343,729
Security patrol 2,123,774 301,202 713,344 301,202
----------- ----------- ---------- ----------
20,208,719 11,071,767 7,147,432 4,557,842
----------- ----------- ---------- ----------
COST OF REVENUES
Product sales 3,037,461 1,439,108 930,943 637,290
Monitoring and service 4,339,240 2,435,342 1,510,564 982,289
Security patrol 1,642,067 238,833 560,188 238,833
----------- ----------- ---------- ----------
9,018,768 4,113,283 3,001,695 1,858,412
----------- ----------- ---------- ----------
GROSS PROFIT 11,189,951 6,958,484 4,145,737 2,699,430
----------- ----------- ---------- ----------
OPERATING EXPENSES
Selling, general and administrative 8,960,470 5,401,144 3,424,449 2,074,690
Compensation - Employment contracts 437,500 537,541 732,541
Depreciation and amortization 5,400,259 2,860,503 2,030,885 1,536,759
Nonrecurring charges (see Note 6) 1,114,731 389,988
----------- ----------- ---------- ----------
15,912,960 8,799,188 5,845,322 4,343,990
----------- ----------- ---------- ----------
LOSS FROM OPERATIONS (4,723,009) (1,840,704) (1,699,585) (1,644,560)
----------- ----------- ---------- ----------
OTHER INCOME/(EXPENSE)
Interest expense, net (2,834,843) (2,119,026) (1,142,962) (427,897)
Joint venture loss (355,996) (108,985)
----------- ----------- ---------- ----------
(2,834,843) (2,475,022) (1,142,962) (536,882)
----------- ----------- ---------- ----------
LOSS BEFORE TAXES (7,557,852) (4,315,726) (2,842,547) (2,181,442)
Income tax expense (27,094) (27,094)
----------- ----------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM (7,584,946) (4,315,726) (2,869,641) (2,181,442)
EXTRAORDINARY ITEM
Loss on debt extinguishment (2,567,806)
----------- ----------- ---------- ----------
NET LOSS (10,152,752) (4,315,726) (2,869,641) (2,181,442)
Dividends and accretion on preferred stock (3,449,805) (1,673,608)
----------- ----------- ---------- ----------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $(10,152,752) $(7,765,531) $(2,869,641) $(3,855,050)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Loss per common share - Basic and diluted
Loss before extraordinary item ($1.05) ($1.53) ($0.37) ($0.52)
Extraordinary item ($0.36) $0.00 $0.00 $0.00
----------- ----------- ---------- ----------
Net loss ($1.41) ($1.53) ($0.37) ($0.52)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Net loss applicable to common shareholders ($1.41) ($2.75) ($0.37) ($0.93)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Weighted average number of shares outstanding 7,212,230 2,826,135 7,768,587 4,155,163
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------ ADDITIONAL COMPRE- COLLATERAL
NUMBER PAID-IN HENSIVE SHARES IN ACCUMULATED
OF SHARES AMOUNT CAPITAL LOSS ESCROW DEFICIT TOTAL
--------- ------- ----------- -------- --------- ------------ ------------
<S> <C> <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 1,114,918 8,918 4,398,487 4,407,405
Issuance of shares in escrow to
guarantee Acquisition Note
(see Note 2) 83,612 669 499,331 (500,000) --
Exercise of stock options
and warrants 422,800 3,383 9,301 12,684
Issuance of shares of common
stock in connection with
the refinancing 119,632 957 779,043 780,000
Net issuance costs incurred
in connection with the
issuance of common stock
and warrants (46,004) (46,004)
Payment of stock guarantee (250,000) (250,000)
Unrealized holding losses on
available for sale securities (13,125) (13,125)
Net loss (10,152,752) (10,152,752)
--------- ------- ----------- -------- --------- ------------ ------------
Balance - March 31, 1999 8,057,985 $64,464 $66,054,626 $(13,125) $(500,000) $(54,470,537) $ 11,135,428
--------- ------- ----------- -------- --------- ------------ ------------
--------- ------- ----------- -------- --------- ------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(10,152,752) $(4,315,726)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 5,400,259 2,731,753
Amortization of goodwill 128,750
Amortization of deferred financing costs and
debt discount 3,307,931 981,289
Gain on sale of property and equipment (3,988) (2,442)
Loss on joint venture 355,996
Loss on sale of marketable securities 3,777
Compensation (benefit) expense in connection with
employment agreements (2,562,500) 537,541
(Increase) decrease in accounts receivable - Trade (1,251,578) 92,109
Increase in inventory (915,166) (372,591)
(Increase) decrease in prepaid expenses and other
current assets 18,313 (362,062)
Increase in deposits (18,410) (10,585)
Increase in accounts payable - Trade 252,628 434,743
Increase in accrued expenses and other
current liabilities 75,900 154,868
Increase in deferred revenues 4,958 1,156,260
------------- ------------
Net cash provided by (used in) operating activities (5,844,405) 1,513,680
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of monitoring contracts (net of purchase
holdbacks) (12,949,080) (12,303,021)
Proceeds from the sale of marketable securities 113,138
Proceeds from the sale of property and equipment 19,845 900
Purchase of property and equipment (3,748,814) (1,482,990)
Payment of stock guarantee (250,000)
------------- -----------
Net cash used in investing activities (16,928,049) (13,671,973)
------------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the secondary offering 21,247,200
Costs incurred in connection with the secondary
offering (3,269,612)
Redemption of preferred stock (8,676,935)
Costs incurred in connection with the issuance of
preferred stock (16,081)
Net Costs incurred in connection with the issuance of
common stock and warrants (46,004)
Deferred financing costs incurred (83,650) (44,931)
Proceeds of long-term debt 43,426,838 5,197,711
Principal payments on long-term debt (18,681,469) (2,014,449)
Net proceeds from the exercise of stock options
and warrants 12,684 135,241
------------- -------------
Net cash provided by financing activities 24,628,399 12,558,144
------------- -------------
NET INCREASE IN CASH 1,855,945 399,851
CASH - BEGINNING 966,140 698,551
------------- -------------
CASH - ENDING $ 2,822,085 $ 1,098,402
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 2,039,483 $ 1,075,461
Cash paid during the year for income taxes $ 27,094 $ --
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
During the nine months ended March 31, 1998 and 1999, long-term notes
payable of $160,904 and $314,638, respectively, were incurred for the purchase
of property and equipment.
During the nine months ended March 31, 1999, long-term notes payable of
$650,000 were incurred for the acquisition of monitoring contracts.
During the nine months ended March 31, 1998 and 1999, the Company
issued 686,664 and 1,022,987 shares of its common stock, valued at $4,488,175
and $4,407,405, respectively, in connection with acquisitions (see Note 2 of
Notes to Condensed Consolidated Financial Statements). During the nine months
ended March 31, 1998 and 1999, the Company issued 2,900 and 15,166 shares of its
common stock and canceled 2,666 and 2,666 shares of its common stock,
respectively, pursuant to guarantees of stock valuations, in connection with
past acquisitions of monitoring contracts. During the nine months ended March
31, 1999, the Company also issued 163,043 shares of its common stock which were
placed in escrow (the "Escrow Shares") to guarantee a note payable and purchase
holdback, in connection with an acquisition. The Company recorded common stock
and charged additional paid-in capital $1,304, as the result of the Escrow
Shares.
During the nine months ended March 31, 1998 and 1999, the Company
increased monitoring contract costs and the corresponding transition costs
liability (included in accrued expenses and other current liabilities) in the
amount of $119,665 and $70,000, respectively.
During the nine months ended March 31, 1999, 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 Condensed 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 nine months ended March 31, 1998, the Company recorded
deemed dividends and accretion on such deemed dividends totaling $2,044,152 in
connection with the preferred stock issuance, with a corresponding charge to
accumulated deficit.
During the nine months ended March 31, 1998, $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 nine months ended March 31, 1998, the Company recorded
additional paid-in capital of $1,255,653, with a corresponding charge to
accumulated deficit, to reflect the fair value of the additional warrants issued
to the preferred shareholders in connection with the Amended Settlement
Agreement executed on November 30, 1997.
During the nine months ended March 31, 1998, the Company issued 1,334
shares of its common stock, valued at $10,000, as an employee bonus.
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 March 31, 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 account 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, 1998
Annual Report on Form 10-KSB filed with the Securities and Exchange Commission.
The results of operations for the periods ended March 31, 1999 are not
necessarily indicative of operating results for the full year.
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 $12,981,733 (including acquisition costs
incurred of $253,354), consisting of $9,303,354 in cash and 901,077 shares (the
"Payment Shares") of the Company's common stock valued at $3,678,379, 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 to the seller. The Company has agreed to guarantee the proceeds to
be received by the Sellers in connection with the sale of the Payment Shares
(See Note 7).
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. As of March 31, 1999 they
have not requested such appointment to the Board of Directors.
8
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS (CONTINUED)
The following unaudited pro forma combined operating information for
the nine and three months ended March 31, 1999 and 1998, 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>
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues $20,984,446 $12,727,647 $7,147,432 $5,272,846
Loss before
extraordinary item (8,064,207) (5,857,780) (2,869,641) (2,609,569)
Net loss (10,632,013) (5,857,780) (2,869,641) (2,609,569)
Net loss applicable to
common shareholders (10,632,013) (9,307,585) (2,869,641) (4,283,177)
Net loss per common
share applicable to
common shareholders ($1.40) ($2.50) ($0.37) $(0.85)
Weighted average
number of shares
outstanding 7,531,225 3,727,212 7,510,503 5,056,239
</TABLE>
During the nine months ended March 31, 1999, the Company acquired
additional monitoring contracts for an aggregate purchase price of $7,050,075.
As consideration, the Company paid $5,411,260 in cash (including acquisition and
assimilation costs of $391,280), incurred notes payable of $650,000 payable over
five years, issued 121,910 shares of the Company's common stock valued at
$729,027, increased purchase holdbacks in the amount of $189,788, 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, (the" Acquisition Note"), and a purchase
holdback of $100,000. The Acquisition Note agreement required 146,321 shares,
valued at 175% of the original note amount, to be placed in escrow. The
agreement also requires the Company to place additional shares into escrow if
the value of the escrow shares falls to below 150% of the Acquisition Note
balance. The Company has recorded the shares issued in connection with guarantee
of the Acquisition Note at the original Acquisition Note balance,$500,000, and
recorded a corresponding amount to Collateral Shares in Escrow in Stockholder's
Equity. The shares in escrow related to the remaining 75% of the Acquisition
Note value and the purchase holdback were recorded at par value. 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM NOTES PAYABLE
<TABLE>
<CAPTION>
<S> <C>
RECEIVABLE FINANCING AGREEMENT
Principal payments payable as follows: $261,846 -fiscal year 1999,
$1,301,101 - fiscal year 2000, $4,017,191 - fiscal year 2001,
$6,117,324 fiscal year 2002, $7,997,733 - fiscal year 2003, and
$27,737,519 fiscal year 2004; plus interest at 7.25% - 8% on the
outstanding loan balance; collateralized by related monitoring contracts $47,432,714
EQUIPMENT FINANCING
Payable in monthly installments aggregating $43,308 including interest
at rates ranging from 2.94% to 11.83%; final payments due
April, 1999 through January, 2004; collateralized by related
equipment 1,153,679
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; final payments are due March 1, 2000. 81,842
OTHER
Note payable in monthly installments of $10,258 including interest
at 8.5%; final payment due July, 2003 443,685
Note payable in monthly installments of $2,086 including interest
at 10.0%; final payment due February, 2002 64,914
Notes payable in monthly installments aggregating $6,750 including
interest at 8.0%; final payment due January, 2001 138,462
Notes payable in monthly installments of $9,046 including interest
at 8%; final payments due March, 2000 95,632
-----------
49,410,928
Less Current Portion 1,900,042
-----------
$47,510,886
-----------
-----------
</TABLE>
10
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 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 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. Subsequent to
the Initial Loan, RAC received additional financing (the "Additional Financing")
from MSCH in the amount of $21,646,178 and granted MSCH a first priority
perfected security interest in the receivables derived from the Purchased
Contracts. The Additional Financing also has a term of five years and bears
interest at rates of 7.25% - 7.33% per annum. Principal payments on the
Financing Agreement are due as follows: years ending June 30, 1999 - $475,310;
2000 - $1,301,101; 2001 - $4,017,191; 2002 - $6,117,324; 2003 - $7,997,733 and
2004 - $27,737,519 . 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. Under the Financing Agreement, RAC has a total credit
facility of $70,000,000, of which $47,646,178 is outstanding, and $22,353,822
remains available for future borrowing. RAC may borrow additional funds from
time to time 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 Financing Agreement was
used to satisfy existing indebtedness of the Company and the remaining amount
has been and will be used for acquisitions and general working capital.
In connection with the Financing Agreement, the Company recorded debt
issuance costs of $7,229,827, of which $6,449,827 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 (See Note 7).
The Financing Agreement contains certain provisions that significantly
restrict RAC's 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 RAC. At March 31, 1999 the net book
value of such monitoring contracts was $44,966,120.
11
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 1,159,681 $.030 - $13.350 $3.691
Options granted 163,875 $2.063 - $4.063 $3.207
Options exercised (422,800) $.030 .030
Options canceled or expired (211,666) $.300 - $7.875 $4.647
--------- ---------------- ----------------
Options outstanding at March 31, 1999 689,090 $.300 - $13.350 $5.529
--------- ---------------- ----------------
--------- ---------------- ----------------
Options exercisable at March 31, 1999 559,090 $.300 - $13.350 $5.412
--------- ---------------- ----------------
--------- ---------------- ----------------
The following is a summary of warrant activity:
NUMBER WARRANT PRICE WEIGHTED AVERAGE
OF SHARES PER SHARE(RANGE) EXERCISE PRICE
--------- ---------------- ----------------
Warrants outstanding at June 30, 1998 2,008,760 $6.00 - $24.000 $10.563
Warrants canceled or expired (912,610 $7.50 - $16.875 $8.743
--------- ---------------- ----------------
Warrants outstanding at March 31, 1999 1,096,150 $6.00 - $24.000 $12.078
--------- ---------------- ----------------
--------- ---------------- ----------------
</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 nine months ended March 31, 1999 and 1998,
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 nine months ended March 31, 1999, the Company recorded
nonrecurring charges totaling $1,114,731. 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 March 31, 1999,
the Company has recorded an accrual in the amount of $28,611. All other costs
have been expensed when incurred.
As of March 31, 1999, nonrecurring charges consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Hiring and training costs $ 448,366
Temporary help 219,132
Employee severance and related costs 173,458
Abandoned fixed assets & inventory 41,474
Abandoned leases 13,068
Travel 113,212
Telephone 38,220
Consulting 16,998
Other 50,803
----------
$1,114,731
----------
----------
</TABLE>
12
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company had employment contracts with two former key employees of
USS, a subsidiary of the Company, for terms expiring March, 1999. The contracts
provided for initial base salaries aggregating $240,000 which were subject to
incremental increases as determined by the Board of Directors. Additional
compensation was due provided the following conditions were realized: (i) if the
Company increased its net alarm system subscriber accounts by at least 10,000
accounts before March, 1999, the Company would pay each employee $1.0 million
less the gross proceeds from the sale or exercise of their options; (ii) if the
Company increased its net alarm system subscriber accounts by at least 15,000
accounts before March, 1999, the Company would 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 would entitle
certain employees to a prorated amount between $1.0 million and $1.5 million as
determined in provisions (i) and (ii) above. The increase in net alarm systems
exceeded 15,000 accounts prior to March, 1999. The total liability of $3,000,000
was paid in March, 1999 and their options were terminated. On March 31, 1998,
the Company elected to terminate the two employees, without cause, effective
June 28, 1998. In connection with such termination, the Company made certain
payments during the quarter ended September 30, 1998, totaling $178,692, which
were accrued for at June 30, 1998.
CONTINGENCIES
As part of certain acquisitions and the MSCH Financing Agreement, 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 October 2003.
As of March 31, 1999, the Company's contingent liabilities under these
agreements aggregated $5,458,606, which may be settled in cash or by the
issuance of common stock. Based on a March 31, 1999 market price of $2.03, the
Company would be required to issue approximately 2,689,000 shares of its common
stock to satisfy this contingent liability.
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 nine months ended March 31,
1999 and 1998 was $10,165,877 and $4,371,976, 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.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement, which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities, is
effective for all interim and annual periods beginning after June 15, 1999. The
Company will adopt SFAS No. 133 for the year beginning July 1, 1999. The Company
has not yet determined the impact that SFAS No. 133 will have on the Company's
financial position or results of operations.
13
<PAGE>
ITEM 6. 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 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.
14
<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 it is 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 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.
During the nine months ended March 31, 1999, the Company has added
approximately $575,000 of monthly recurring revenue ("MRR") primarily through
acquisitions. The Company has realized a growth rate of approximately 26% or
16,000 subscribers during the past twelve months from 62,000 subscribers at
March 31, 1998 to approximately 78,000 current subscribers. The Company's MRR
increased by approximately $590,000 or 44% from $1,350,000 at March 31, 1998 to
$1,940,000 at March 31, 1999. The increases in MRR for the past twelve months,
by segment are as follows: (1) the PRS segment increased by $494,000, or 155%
from $318,000 to $812,000; (2) the electronic security services segment
increased by
15
<PAGE>
$32,000, or 4% from $845,000 to $877,000; and (3) the security patrol
segment, increased by $65,000, or 35% from $186,000 to $251,000.
Operating revenues increased by $9,136,952 or 83% and $2,589,590
or 57% for the nine months and three months ended March 31, 1999 as compared to
the same periods ended March 31, 1998. Product sales accounted for an increase
of $1,340,585 or 59% and an increase of $180,045 or 20% for the nine months and
three months ended March 31, 1999, as compared to the same period ended March
31, 1998. Monitoring and service revenues increased by $5,973,795 or 70% and
$1,997,403 or 60% for the nine and three months ended March 31, 1999 as compared
to the nine and three months ended March 31, 1998. The Company, through its
acquisition of Jupiter, has expanded its operating revenue base to include
security patrol revenue, which totaled $2,123,774 and $713,344 for the nine and
three months ended March 31, 1999. The acquisitions of Triple A, Jupiter, and
OEC, during February 1998, Health Watch, during October 1998, and In Home Health
in January, 1999, accounted for increases in operating revenues as follows: (i)
product sales - $2,035,698 and $361,226; (ii) monitoring and service revenues -
$5,707,151 and $1,976,571; and (iii) security patrol revenues - $1,822,572 and
$412,141; for an aggregate totaling $9,565,421 and $2,749,938 for the nine
months and three months ended March 31, 1999 as compared to same periods ended
March 31, 1998. The increase in product sales due to the above acquisitions was
offset by a decrease in revenues from the sale of PRS to private label
wholesalers and home healthcare agencies totaling approximately $460,000 and
$35,000, and a decrease in residential and commercial product sales of
electronic security devices of approximately $235,000 and $147,000 for the same
periods.
Gross Profit for the nine months ended March 31, 1999 was
$11,189,951 which represents an increase of $4,231,467 or 61%, as compared to
the $6,958,484 of gross profit recognized for the nine months ended March 31,
1998. The Gross Profit Margin ("GPM"), as a percentage of sales, for the nine
and three months ended March 31, 1999 was 55% and 58% as compared to 63% and 59%
for the same periods ending March 31, 1998. The decrease in GPM from the nine
months ended March 31, 1998 to the nine months ended March 31, 1999 was due to
the decrease in the GPM percentage in product sales from 36% to 16%. This
decrease is 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 remained relatively constant, 70% for the
nine months ended March 31,1999 and 71% for the nine months ended March 31,
1998. The GPM on security patrol revenue also remained relatively constant at
23% for the nine months ended March 31, 1999 and 21% for the nine months ended
March 31, 1998.
Selling, general and administrative expenses increased by
$3,559,326 or 66% and $1,349,759 or 65% for the nine and three months ended
March 31, 1999 as compared to the same periods ended March 31, 1998. The
increase for the nine months ended March 31, 1999 over the nine months ended
March 31, 1998 primarily consisted of (i) additional payroll and related costs
of approximately $2,160,000 and (ii) other overhead expenses totaling
approximately $1,950,000 in connection with the acquisitions of Triple A, Triple
A Patrol, OEC, Health Watch, and In Home Health. Selling, general and
administrative expenses, as a percentage of total
16
<PAGE>
operating revenues were 44% and 48% for the nine and three months ended March
31, 1999 and 49% and 46% for the same periods ended March 31, 1998. The
reduction in selling, general and administrative expenses for the nine months
ended March 31, 1999 as compared to the nine months ended March 31, 1998 is
attributable to efficiencies realized in the Company's corporate offices from
assimilation of newly acquired customers into its customer base and support
of the larger subscriber base. The Company anticipates that its current level
of selling, general and administrative expenses, as a percentage of sales,
will decrease as a result of the Company's continuing strategy to consolidate
the support infrastructure and fully integrate the operations of the newly
acquired companies.
The Company recorded a deferred compensation expense of
$437,500 for the nine months ended March 31, 1999 and a deferred compensation
expense of $537,541 and $732,541 for the nine and three months ended March 31,
1998, in connection with two employment contracts with former officers of USS
(see Note 7 of Notes to Condensed Consolidated Financial Statements of the
Company).
Amortization and depreciation expenses increased by $2,539,756
or 89% and $494,126 or 32% for the nine and three months ended March 31, 1999 as
compared to the nine and three months ended March 31, 1998. 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 $18.8 million and property and equipment totaling approximately
$5.4 million.
During the nine and three months ended March 31, 1999, the
Company incurred nonrecurring charges totaling $1,114,731 and $389,988,
respectively. 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 nine months ended March 31, 1999,
nonrecurring charges, consisted of the following: (i) hiring and training costs
of $448,366, (ii) temporary help of $219,132, (iii) employee severance and
related costs of $173,458, (iv) loss on abandonment of fixed assets and
inventory of $41,474, (v) abandonment of leases of $13,068, (vi) travel expenses
of $113,212, (vii) telephone expenses of $38,220, (viii) consulting expenses of
$16,998, and (vii) other restructuring and integration costs of $50,803 (see
Note 6 of Notes to Condensed Consolidated Financial Statements of the Company).
Interest expense increased by $715,817, or 34%, and $715,065, or
167%, from $2,119,026 and $427,897 for the nine and three months ended March 31,
1998 to $2,834,843 and $1,142,962 for the nine and three months ended March 31,
1999. The increase in interest expense is due to additional borrowings used for
acquisitions of monitoring contracts and property and equipment. Such additional
borrowings were also used to fund the nonrecurring charges incurred to move the
Company's subscriber base to its own central station and to integrate the sales
and marketing of PRS (see Note 6 of Notes to Condensed Consolidated Financial
Statements of the Company).
17
<PAGE>
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 $355,996 and $108,985 represents the
Company's share of HealthLink's losses for the nine and three months ended March
31, 1998. 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 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. On February 9, 1999, the Company acquired all of the
existing monitoring contracts of HealthLink for $125,000 and paid $250,000 to
satisfy a stock guarantee. Such amount was recorded as a reduction to the
Additional Paid in Capital previously recorded in connection with the Company's
initial investment in HealthLink.
The net loss for the nine and three months ended March 31, 1999 was
$10,152,752 or ($1.41) per share and $2,869,641 or ($0.37) per share. The net
loss for the nine months ended March 31, 1999 is primarily attributable to
non-cash charges totaling $10,062,783, consisting of (i) depreciation and
amortization of $5,400,259, (ii) amortization of deferred financing costs of
$2,094,718 and, (iii) 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 nine and three months ended March 31, 1999 was
$10,152,752 or ($1.41) per share and $2,869,641 or ($0.37) per share based on
7,212,230 and 7,768,587 weighted average shares outstanding as compared to
$7,765,531 or ($2.75) per share and $3,855,050 or ($0.93) per share based on
2,826,135 and 4,155,163 for the nine and three months ended March 31, 1998.
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 $2,229,481 and $721,288 for the nine and three
months ended March 31, 1999 as compared to $1,557,340 and $624,740 for the nine
and three months ended March 31, 1998; an improvement of $672,141 or 43% and
$93,842 or 15% 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 nine and three months
ended March 31, 1999 was $3,213,536 and $1,096,631, 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
18
<PAGE>
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.
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 third quarter of Fiscal 1999, the Company
experienced annualized subscriber attrition of approximately 7% and annualized
MRR attrition of approximately 7%.
LIQUIDITY AND CAPITAL RESOURCES
19
<PAGE>
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 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 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. Subsequent to the Initial Loan, RAC received additional
financing (the "Additional Financing") from MSCH in the amount of $21,646,178
and granted MSCH a first priority perfected security interest in the receivables
derived from the Purchased Contracts. The Additional Financing also has a term
of five years and bears interest at rates of 7.25% - 7.33% per annum. Principal
payments on the Financing Agreement are due as follows: years ending June 30,
1999 - $475,310; 2000 - $1,301,101; 2001 - $4,017,191; 2002 - $6,117,324; 2003 -
$7,997,733 and 2004 - $27,737,519 . 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. Under the Financing Agreement, RAC
has a total credit facility of $70,000,000, of which $47,646,178 is outstanding,
and $22,353,822 remains available for future borrowing. RAC may borrow
additional funds from time to time 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 Financing
Agreement was used to satisfy existing indebtedness of the Company and the
remaining amount has been and will be used for acquisitions and general working
capital.
In connection with the Financing Agreement, the Company recorded debt
issuance costs of $7,229,827, of which $6,449,827 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 (See Note 7).
The Financing Agreement contains certain provisions that significantly
restrict RAC's 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 RAC. At March 31, 1999 the net book
value of such monitoring contracts was $44,966,120.
20
<PAGE>
The Company's working capital improved by $1,502,898 from a working
capital deficiency of $1,508,402 at June 30, 1998 to a working capital
deficiency of $5,504 at March 31, 1999. 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.
Net cash used in operating activities for the nine months ended
March 31, 1999 was $5,844,405. In March, 1999 the Company paid its deferred
compensation expense liability of $3,000,000 to two former key employees of USS
(see Note 7 to the Condensed Consolidated Financial Statements). A net loss of
$10,152,752 including non-cash transactions totaling $8,708,190 along with the
payment of the deferred compensation expense liability, resulted in net cash
used in operating activities in the amount of $5,844,405. The non-cash
transactions are as follows: (i) depreciation and amortization of $5,400,259;
(ii) amortization of deferred financing costs of $740,125; and (iii) loss on
debt extinguishment of $2,567,806.
Net cash used in investing activities for the nine months ended
March 31, 1999 was $16,928,049. Purchases of monitoring contracts (including
purchase holdback payments) accounted for $12,949,080 of the cash used in
investing activities. Other investing activities included the purchase of
property and equipment of $3,748,814 (including equipment used for rentals in
the amount of $2,096,409, which is primarily attributable to the purchase of
Health Watch), and a stock guarantee of $250,000 in connection with a previous
joint venture investment.
Net cash provided by financing activities was $24,628,399 for the
nine months ended March 31, 1999. Net proceeds received of $43,426,838 included
$1,575,000 from a line of credit, $41,351,838 from a receivables financing
agreement, and $500,000 from equipment financing notes payable. 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
and working capital. The Company's cash increased $1,855,945 for the nine
months, which will be used for working capital.
Response Ability Systems, a subsidiary of the Company, 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; as of March 31, 1999 deferred payment obligations to such
pre-reorganization creditors totaled $81,842, which is payable in March of the
year 2000.
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
21
<PAGE>
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 an
upgraded 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 has started communicating 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 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.
22
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings--None
ITEM 2. Changes in Securities--
During the quarter ended March 31, 1999, the Company issued 15,166
shares of its common stock, in connection with acquisitions.
During the quarter ended March 31, 1999, the Company issued 422,800
shares of its common stock, in connection with the exercise of stock options.
On February 11, 1999, and effective March 30, 1999, the Board of
Directors granted each of the two non-employee directors a non-qualified
stock option to purchase 35,000 shares of Common Stock at an exercise price
of $2.063.
ITEM 3. Defaults Upon Senior Securities--None
ITEM 4. Submission of Matters to a Vote of Security Holders--
An Annual Meeting of the Stockholders was held on March 30, 1999.
The Stockholders of the Company voted on the following: (i) to elect five
members to the Board of Directors of the Company; (ii) to adopt the Company's
1999 Stock Option Plan, and (iii) to ratify the selection by the Company of
Deloitte & Touche LLP, independent public accountants, to audit the financial
statements of the Company for the year ended June 30, 1998.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C> <C>
Election to the Board of Directors--
Richard M. Brooks 7,343,282 351,919 0
Ronald A. Feldman 7,343,282 353,919 0
Robert L. May 7,343,282 353,919 0
A. Clinton Allen 7,343,282 354,102 0
Stuart R. Chalfin 7,343,282 352,102 0
Adopt the Company's 1999 Stock
Option Plan 3,951,486 320,021 299,717
Ratify Deloitte & Touche LLP
to audit the financial statements 7,405,854 37,373 255,227
</TABLE>
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
23
<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. MAY 17, 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 NINE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss $ (10,152,752) $ (4,315,726)
Deduct:
Accretion, discount and dividends on
preferred stock -- (3,449,805)
-------------- ------------
Net loss applicable to common shareholders $ (10,152,752) $ (7,765,531)
-------------- ------------
-------------- ------------
Weighted average number of common
shares outstanding 7,212,230 2,826,135
-------------- ------------
-------------- ------------
Basic loss per share $ (1.41) $ (2.75)
-------------- ------------
-------------- ------------
Weighted average number of common
shares outstanding 7,212,230 2,826,135
Common share equivalents applicable to:
Warrants - Class A 411,127
Warrants - Class B 493,983
Warrants - Class C 9,067 16,567
Warrants - Other 1,087,083 903,750
Stock options 689,092 1,156,016
Less common stock acquired with net proceeds (1,785,242) (2,981,443)
-------------- ------------
Weighted average number of common shares and
common share equivalents used to compute
diluted loss per share 7,212,230 2,826,135
-------------- ------------
-------------- ------------
Diluted loss per share $ (1.41) $ (1.53)
-------------- ------------
-------------- ------------
</TABLE>
<PAGE>
EXHIBIT 11
COMPUTATION OF LOSS PER SHARE
FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss $ (2,869,641) $ (2,181,442)
Deduct:
Accretion, discount and dividends on
preferred stock -- (1,673,608)
-------------- ------------
Net loss applicable to common shareholders $ (2,869,641) $ (3,855,050)
-------------- ------------
-------------- ------------
Weighted average number of common
shares outstanding 7,768,587 4,155,163
Basic loss per share $ (0.37) $ (0.93)
-------------- ------------
-------------- ------------
Weighted average number of common
shares outstanding 7,768,587 4,155,163
Common share equivalents applicable to:
Warrants - Class A 411,127
Warrants - Class B 493,983
Warrants - Class C 9,067 16,567
Warrants - Other 1,087,083 903,750
Stock options 689,092 1,156,016
Less common stock acquired with net proceeds (1,785,242) (2,981,443)
-------------- ------------
Weighted average number of common shares and
common share equivalents used to compute
diluted loss per share 7,768,587 4,155,163
-------------- ------------
-------------- ------------
Diluted loss per share $ (0.37) $ (0.52)
-------------- ------------
-------------- ------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,822
<SECURITIES> 12
<RECEIVABLES> 4,284
<ALLOWANCES> 710
<INVENTORY> 2,593
<CURRENT-ASSETS> 9,530
<PP&E> 11,001
<DEPRECIATION> 4,910
<TOTAL-ASSETS> 68,192
<CURRENT-LIABILITIES> 9,535
<BONDS> 0
0
0
<COMMON> 64
<OTHER-SE> 11,071
<TOTAL-LIABILITY-AND-EQUITY> 68,192
<SALES> 1,093
<TOTAL-REVENUES> 7,147
<CGS> 931
<TOTAL-COSTS> 3,002
<OTHER-EXPENSES> 5,845
<LOSS-PROVISION> 143
<INTEREST-EXPENSE> 1,143
<INCOME-PRETAX> (2,843)
<INCOME-TAX> 27
<INCOME-CONTINUING> (2,870)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,870)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
