<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, 2000
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 the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: 7,398,670 shares of Common
Stock, $.008 par value per share, as of May 12, 2000.
Transitional Small Business Disclosure Format (check one) Yes __ No X
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000
and June 30, 1999 1-2
Condensed Consolidated Statements of Operations for the Nine
Months and Three Months ended March 31, 2000
and 1999 3
Condensed Consolidated Statement of Stockholders' Equity for
the Nine Months ended March 31, 2000 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months and Three Months ended March 31, 2000
and 1999 5-7
Notes to Condensed Consolidated Financial Statements 8-14
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-20
PART II. OTHER INFORMATION 21
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
-------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,905,967 $ 3,241,016
Marketable securities 244,689 15,000
Accounts receivable
Trade - Net of allowance for doubtful accounts
of $516,084 and $761,631, respectively 1,684,764 3,834,499
Inventory 1,885,029 2,621,052
Prepaid expenses and other current assets 184,613 562,072
----------- -----------
Total current assets 6,905,062 10,273,639
----------- -----------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $6,099,825 and $15,509,288, respectively 19,259,553 44,662,593
----------- -----------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $4,637,480 and $5,896,462,
respectively 4,269,379 5,889,409
----------- -----------
OTHER ASSETS
Deferred financing costs - Net of accumulated
amortization of $845,818 and $950,812, respectively 3,679,909 7,371,692
Other noncurrent assets 195,003 244,659
----------- -----------
3,874,912 7,616,351
----------- -----------
$34,308,906 $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>
March 31, June 30,
2000 1999
-------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,597,594 $ 2,166,433
Accounts payable - Trade 426,497 996,304
Income taxes payable 405,185
Purchase holdbacks 63,073 673,122
Accrued expenses and other current liabilities 1,778,351 3,102,125
Deferred revenue 263,414 3,371,821
------------ ------------
Total current liabilities 4,534,114 10,309,805
------------ ------------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt 27,697,948 51,951,120
Purchase holdbacks 64,483
------------ ------------
27,697,948 52,015,603
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock - Par value $.008
Authorized 37,500,000 shares
Issued and outstanding 7,398,670 shares - March 31,
2000 and 8,351,012 shares - June 30, 1999 59,190 66,809
Additional paid-in capital 59,917,250 65,708,202
Collateral shares in escrow (500,000)
Accumulated deficit (57,899,596) (59,148,427)
Accumulated other comprehensive loss (10,000)
------------ ------------
2,076,844 6,116,584
------------ ------------
$ 34,308,906 $ 68,441,992
============ ============
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended March 31, Three Months ended March 31,
---------------------------- ------------------------------
2000 1999 2000 1999
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Product sales $ 1,623,551 $ 3,599,401 $ 112,433 $ 1,092,956
Monitoring and service 10,896,889 14,485,544 2,669,117 5,341,132
Security patrol 871,294 2,123,774 713,344
----------- ----------- ----------- -----------
13,391,734 20,208,719 2,781,550 7,147,432
----------- ----------- ----------- -----------
COST OF REVENUES
Product sales 1,417,018 3,037,461 40,075 930,943
Monitoring and service 2,851,901 4,339,240 562,845 1,510,564
Security patrol 706,616 1,642,067 560,188
----------- ----------- ----------- -----------
4,975,535 9,018,768 602,920 3,001,695
----------- ----------- ----------- -----------
GROSS PROFIT 8,416,199 11,189,951 2,178,630 4,145,737
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling, general and administrative 8,905,479 9,877,776 2,177,555 3,689,897
Compensation - Employment contracts 437,500
Depreciation and amortization 4,433,748 5,400,259 1,153,242 2,030,885
Nonrecurring charges (Note 7) 1,019,705 197,425 1,019,705 124,540
----------- ----------- ----------- -----------
14,358,932 15,912,960 4,350,502 5,845,322
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (5,942,733) (4,723,009) (2,171,872) (1,699,585)
----------- ----------- ----------- -----------
OTHER INCOME/(EXPENSE)
Interest expense, net (3,044,141) (2,834,843) (762,196) (1,142,962)
Gain (loss) on sale of security division 14,932,422 (2,270,778)
Loss on marketable securities (25,000)
Other income 148,286 148,286
----------- ----------- ----------- -----------
12,011,567 (2,834,843) (2,884,688) (1,142,962)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES 6,068,834 (7,557,852) (5,056,560) (2,842,547)
Income tax expense (761,089) (27,094) (56,889) (27,094)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 5,307,745 (7,584,946) (5,113,449) (2,869,641)
EXTRAORDINARY ITEM
Loss on debt extinguishment (4,058,914) (2,567,806)
----------- ----------- ----------- -----------
NET INCOME (LOSS) 1,248,831 (10,152,752) (5,113,449) (2,869,641)
=========== =========== =========== ===========
Income (loss) per common share - Basic
Income (loss) before extraordinary item $0.72 ($1.05) ($0.71) ($0.37)
Extraordinary item ($0.55) ($0.36) $0.00 $0.00
----------- ----------- ----------- -----------
Net income (loss) $0.17 ($1.41) ($0.71) ($0.37)
=========== =========== =========== ===========
Weighted average number of shares outstanding 7,332,048 7,212,230 7,223,246 7,768,587
=========== =========== =========== ===========
Income (loss) per common share - Diluted
Income (loss) before extraordinary item $0.72 ($1.05) ($0.71) ($0.37)
Extraordinary item ($0.55) ($0.36) $0.00 $0.00
----------- ----------- ----------- -----------
Net income (loss) $0.17 ($1.41) ($0.71) ($0.37)
=========== =========== =========== ===========
Weighted average number of shares outstanding 7,337,630 7,212,230 7,223,246 7,768,587
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
3
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RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Collateral Other
Number Paid-In Shares in Comprehensive Comprehensive Accumulated
of Shares Amount Capital Escrow Income Income/(Loss) Deficit Total
--------- -------- ------------- ------------ ------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1999 8,351,012 $66,809 $65,708,202 ($500,000) ($10,000) ($59,148,427) $6,116,584
Cancellation of shares in
escrow to guarantee
acquisition note and holdback (454,222) (3,634) (496,366) 500,000 $0
Payment of holdback 16,722 134 99,866 $100,000
Cancellation of shares in
escrow in connection
with an acquisition (18,199) (146) 146 $0
Payment of stock guarantee (4,325,277) ($4,325,277)
Stock repurchases (1,724,612) (13,797) (2,287,466) ($2,301,263)
Shares issued in connection
with an acquisition 1,227,969 9,824 1,218,145 $1,227,969
Comprehensive loss:
Net income 1,248,831 1,248,831 $1,248,831
Other comprehensive income:
Unrealized holding losses
on available-for-
sale securities 10,000 10,000 $10,000
-----------
Total comprehensive income $1,258,831
--------- -------- ----------- ------------ =========== -------- ------------ -----------
Balance - March 31, 2000 7,398,670 $ 59,190 $59,917,250 $ - $ - $ (57,899,596) $2,076,844
========= ======== =========== ============ ======== ============ ===========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months ended March 31,
-------------------------------------------------
2000 1999
---------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,248,831 $ (10,152,752)
Adjustments to reconcile net income (loss) to net cash used in
operating activities
Depreciation and amortization 4,433,748 5,400,259
Amortization of deferred financing costs and
debt discount 829,105 3,307,931
Loss on debt extinguishment 4,058,914
(Gain) loss on sale of property and equipment 42,597 (3,988)
Loss on sale of marketable securities 25,000
Gain on sale of security division (14,932,422)
Compensation expense in connection with
employment agreements (2,562,500)
Increase in accounts receivable - Trade (255,388) (1,251,578)
(Increase) decrease in inventory 13,056 (915,166)
(Increase) decrease in prepaid expenses and other
current assets (992,939) 18,313
Increase in deposits (49,030) (18,410)
Increase (decrease) in accounts payable - Trade (334,556) 252,628
Increase in accrued expenses and other
current liabilities 117,796 75,900
Increase (decrease) in deferred revenues (158,543) 4,958
---------------------- ---------------------
Net cash used in operating activities (5,953,831) (5,844,405)
---------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of monitoring contracts (net of purchase
holdbacks) (3,635,057) (12,949,080)
Net proceeds from the sale of security division (net of
purchase holdbacks) 43,552,010
Purchase of property and equipment (2,312,074) (3,748,814)
Proceeds from the sale of property and equipment 11,868 19,845
Purchase of marketable securities (2,144,113)
Proceeds from the sale of marketable securities 1,899,424
Payment of stock guarantees (4,325,277) (250,000)
---------------------- ---------------------
Net cash provided by (used in) investing activities 33,046,781 (16,928,049)
---------------------- ---------------------
</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>
Nine Months ended March 31,
-------------------------------------------------
2000 1999
---------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred financing costs incurred (1,196,236) (83,650)
Proceeds of long-term debt (net of holdbacks) 7,936,732 43,426,838
Principal payments on long-term debt (31,867,232) (18,681,469)
Stock repurchases (2,301,263)
Net issuance costs incurred in connection with the issuance of
common stock (46,004)
Net proceeds from the exercise of stock options and warrants 12,684
---------------------- ---------------------
Net cash provided by (used in) financing activities (27,427,999) 24,628,399
---------------------- ---------------------
NET INCREASE (DECREASE) IN CASH (335,049) 1,855,945
CASH - BEGINNING 3,241,016 966,140
---------------------- ---------------------
CASH - ENDING $ 2,905,967 $ 2,822,085
====================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 2,534,831 $ 2,039,483
Cash paid during the year for income taxes $ 372,938 $ 27,094
</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 nine months ended March 31, 1999 and 2000, long-term notes
payable of $314,638 and $32,040, 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, 2000, Response USA, Inc. ("the
Company") issued 1,227,969 shares of its Common Stock valued at $1,227,969 in
connection with the acquisition of Health Watch (see Note 3 to Notes to
Condensed Consolidated Financial Statements of the Company). During the nine
months ended March 31, 1999, in connection with acquisitions, the Company issued
1,022,987 shares of its Common Stock, valued at $4,407,405, 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
and 60,240 shares were held in escrow pending certain purchase price
adjustments. 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 Acquisition
Note and as a result, the remaining 437,500 shares held in escrow were released
to the Company and retired. The Company also cancelled 18,199 of the 60,240
shares held in escrow and released the remaining 42,041 shares from escrow
during the nine months ended March 31, 2000. In addition, during the nine months
ended March 31, 1999, the Company issued 15,166 shares of its Common Stock and
cancelled 2,666 shares of its Common Stock pursuant to guarantees of stock
valuations in connection with past acquisitions of monitoring contracts.
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. 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 March 31, 2000 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 March 31, 2000 are not
necessarily indicative of operating results for the full year.
Certain amounts in the March 1999 quarterly financial statements have
been reclassified to conform to the March 2000 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 Stock Purchase Agreement provided
for aggregate holdbacks of approximately $5,000,000, which were to be held by
Vector pending finalization of certain post-closing adjustments. On March 13,
2000, the Company and Vector reached an Agreement regarding the final purchase
price and certain other post closing adjustments, in which Vector agreed to pay
the Company the amount of $1,575,956 as full and final payment and settlement of
all amounts due to the Company from Vector. The parties further agreed that
Vector's payment to the Company represented the full and final resolution of any
and all disagreements among the parties and that no further claims, actions or
set-offs may be asserted by either party, except as provided in the Stock
Purchase Agreement.
As a result of this final settlement with Vector, the Company has
recorded a loss on sale of the security division of $2,270,778 for the three
months ended March 31, 2000, which represents the difference between the net
purchase holdback receivable previously recorded and the $1,575,956 actually
received, and a gain on sale of the security division of $14,932,422 for the
nine months ended March 31, 2000. The Company has received net proceeds from the
sale of the security division of $43,552,010, 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, and
released from escrow and subsequently canceled 437,500 shares of Common Stock
related to the guarantee of an acquisition note.
3. ACQUISITIONS
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. On January 11, 2000, the Company entered into a
settlement agreement (the "Settlement Agreement") with the sellers in regards to
8
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
such payment. Pursuant to the Settlement Agreement, the Company issued to
Jeffrey Queen, Andrew Queen, and the Jeffrey Queen and Andrew Queen
Irrevocable Trust U/A (the "Queens") an aggregate of 1,227,969 shares of the
Company's Common Stock valued at $1,227,969 (based on the average closing bid
price for the 15 days prior to the settlement date and representing
approximately 19.9% of the Company's Common Stock prior to such issuance),
and paid the Queens an aggregate of $2,522,031 in cash. In addition, the
Queens agreed not to sell their shares of Common Stock prior to January 11,
2002 without the consent of the Company, subject to earlier termination under
certain circumstances. The Company also agreed to refrain from taking certain
extraordinary corporate actions without the consent of the Queens and agreed
that the Queens would have the right to nominate two additional members of
the Company's Board of Directors (in addition to their right to currently
nominate one member of the Board of Directors) under certain circumstances.
In April 2000, the Queens exercised their right to nominate one member of the
Board of Directors of the Company.
During the nine months ended March 31, 2000, the Company acquired
additional monitoring contracts for an aggregate purchase price of $853,610. As
consideration, the Company paid $796,601 in cash and recorded purchase holdbacks
of $57,009 (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 $517,618, the Company paid
cash of $316,426, issued 16,722 shares of its Common Stock valued at $100,000,
and reduced monitoring contract costs by $101,192.
4. LONG-TERM DEBT
As of March 31, 2000 long-term debt included the following:
<TABLE>
<S> <C>
RECEIVABLE FINANCING AGREEMENT
Principal payments payable as follows: $291,703 -fiscal year 2000,
$1,721,273 - fiscal year 2001, $2,868,083 - fiscal year 2002,
$4,089,779 fiscal year 2003, $14,942,925 - fiscal year 2004, and
$4,594,787 fiscal year 2005; plus interest at 8.3% - 8.6% on the
outstanding loan balance; collateralized by related monitoring contracts $28,508,550
EQUIPMENT FINANCING
Payable in monthly installments aggregating $1,567 including interest
at rates ranging from 7.20% to 10.54%; final payments due August 2002
through May 2004; collateralized by related equipment 53,025
OTHER
Note payable in monthly installments of $6,234 including interest
at 8%; final payment due July 2004 661,781
Notes payable in monthly installments aggregating $6,750 including
interest at 8.0%; final payment due January 2001 72,186
-----------
29,295,542
Less Current Portion 1,597,594
-----------
$27,697,948
===========
</TABLE>
9
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT (CONTINUED)
On June 30, 1999, the Company's Receivable Financing Agreement with
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.
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
March 31, 2000, $28,508,550 is outstanding to MSCH under the MSCH Financing
Agreement in respect of RSS and RSM and approximately $11,490,000 is available
for future borrowings. Approximately $800,000 of the Company's $870,000 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 13.06% to
14.79%. In connection with the various borrowings under the Financing Agreement,
the Company recorded debt issuance costs of $9,503,092. In connection with the
repayment of $30,628,000 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 March 31, 2000 the
net book value of such monitoring contracts was $18,330,120.
10
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. During the nine months ended
March 31, 2000, the Company repurchased an additional 2,730 shares related to
prior security acquisitions for $16,325, including stock guarantees of $13,254.
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 the 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 March 31, 2000, the Company
repurchased and subsequently retired 974,300 shares of its Common Stock at an
average market price of $1.23 per share. The total price paid for these shares
was $1,199,991.
In connection with the acquisition of Health Watch and as a result of
the Security Sale, the Company issued to the Queens, 1,227,969 shares of the
Company's Common Stock at a guaranteed value of $1,227,969 (representing
approximately 19.9% of the Company's Common Stock prior to such issuance). In
addition, the Queens agreed not to sell their shares of Common Stock prior to
January 11, 2002 without the consent of the Company, subject to earlier
termination under certain circumstances (see Note 7).
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 $.30 -$13.35 $5.45
Options granted 510,000 $.97 - $1.53 $1.19
Options exercised 0
Options canceled or expired (93,275) $.30 - $7.89 $4.63
----------- ------------- ------
Options outstanding at March 31, 2000 1,113,967 $.30 -$13.35 $3.43
=========== ============= ======
Options exercisable at March 31, 2000 972,301 $.30 -$13.35 $3.47
=========== ============= ======
</TABLE>
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 - $24.00 $12.57
Warrants canceled or expired (9,067) $11.25 $11.25
----------- -------------- ------
Warrants outstanding at March 31, 2000 937,083 $6.00 - $24.00 $12.58
=========== ============== ======
</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 nine months ended March 31, 2000, 5,582 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 March 31, 2000 and the
nine and three months ended March 31, 1999, such shares had an antidilutive
effect on the net loss per common share, and have, therefore, been excluded. At
March 31, 2000, potentially dilutive stock equivalents included 1,113,967 stock
options and 937,083 warrants.
11
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - The Company has employment contracts with
certain employees for terms through March 2003. At March 31, 2000, these
contracts provide for annual base salaries aggregating $1,000,000. On January
18, 2000, the Company terminated without cause the employment of Ronald A.
Feldman (the "Executive") effective February 29, 2000. Pursuant to the
Executive's employment agreement and subsequent severance, non competition, and
non disclosure agreement, the Company agreed to pay as severance $1,019,705, of
which $321,257 was paid during the quarter ended March 31, 2000. The balance,
which is included in accrued expenses at March 31, 2000, is to be paid as
follows: (i) a lump sum payment of $412,500 on April 1, 2000, (ii) nine monthly
installment payments of $29,102 each from April 1, 2000 through December 1,
2000, and (iii) a final payment of $23,555 on January 1, 2001. The total
severance amount has been recorded as a nonrecurring charge.
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 the Health Watch acquisition, the Company guaranteed the
value of its Common Stock at $4.15 and is therefore obligated to pay an amount
equal to the difference between the guaranteed value and the sale price for the
sale of the shares owned by the Queens prior to the delivery of the 1,227,969
shares of stock in January 2000. Pursuant to the Settlement Agreement, the
Company is obligated to satisfy this liability on July 10, 2000. Also on July
10, 2000, the Company is obligated to pay an amount equal to the product of (x)
the difference between $4.15 and the average closing bid price of the Company's
Common Stock on the NASDAQ Small Cap Market for the fifteen day period prior to
delivery of stock to the Queens and (y) the number of shares of the Company's
Common Stock owned by the Queens prior to the delivery of the 1,227,969 shares
of stock in January 2000. As of March 31, 2000, the Company's contingent
liability under these agreements was $1,796,551, which may be satisfied, at the
Company's option, in cash or by the issuance of Common Stock. Based on a March
31, 2000 market price of $1.0625, the Company would be required to issue
approximately 1,690,872 shares of its Common Stock to satisfy this contingent
liability, which when combined with other shares owned by the Queens as of March
31, 2000 would result in the Queens achieving a 35% interest in the Company's
outstanding Common Stock. The Company has guaranteed the 1,227,969 shares of
stock issued in January to the Queens at $1.00.
As part of another acquisition, the Company guaranteed the value of
30,815 shares of its Common Stock at $6.75. On March 27, 2000 the Company
received confirmation on the sale of 30,000 of these shares and has subsequently
issued cash in the amount of $160,290 to satisfy this 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.
12
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 utilized 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 were
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 included 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 (the "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. As of October 1, 1999, the Company was engaged in only one
segment, the PRS segment.
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.
13
<PAGE>
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Corporate and
Security PRS Other Total
-------- --- -------------- -----
<S> <C> <C> <C> <C>
NINE MONTHS ENDED MARCH 31, 2000:
Revenues:
Product Sales......................................... $ 1,084,517 $539,034 $1,623,551
Monitoring and service................................ 3,121,546 7,775,343 10,896,889
Security Patrol....................................... 871,294 871,294
Total revenues..................................... 5,077,357 8,314,377 13,391,734
Gross profit............................................. 2,395,752 6,020,447 8,416,199
Selling, general and administrative expenses............. 2,032,211 6,494,999 $378,269 8,905,479
Depreciation and amortization expense.................... 1,255,756 3,177,992 4,433,748
Net loss from operations................................. $ (892,215) $(4,672,249) $(378,269) $(5,942,733)
THREE MONTHS ENDED MARCH 31, 2000:
Revenues:
Product Sales......................................... $112,433 $112,433
Monitoring and service................................ 2,669,117 2,669,117
Security Patrol.......................................
Total revenues..................................... 2,781,550 2,781,550
Gross profit............................................. $ (9,097) 2,187,727 2,178,630
Selling, general and administrative expenses............. 5,946 2,070,374 $101,235 2,177,555
Depreciation and amortization expense.................... 1,153,242 1,153,242
Net loss from operations................................. $ (15,043) $(2,055,594) $(101,235) $(2,171,872)
NINE MONTHS ENDED MARCH 31, 1999:
Revenues:
Product sales......................................... $ 2,944,209 $ 655,192 $3,599,401
Monitoring and service................................ 9,196,380 5,289,164 14,485,544
Security patrol....................................... 2,123,774 2,123,774
Total revenues..................................... 14,264,363 5,944,356 20,208,719
Gross profit............................................. 7,053,299 4,136,652 11,189,951
Selling, general and administrative expenses............. 5,706,149 3,961,486 $210,141 9,877,776
Depreciation and amortization expense.................... 3,539,214 1,861,045 5,400,259
Net loss from operations................................. $(2,201,844) $(1,873,524) $(647,641) $(4,723,009)
THREE MONTHS ENDED MARCH 31, 1999:
Revenues:
Product sales......................................... $857,223 $235,733 $1,092,956
Monitoring and service................................ 3,046,155 2,294,977 5,341,132
Security patrol....................................... 713,344 713,344
Total revenues..................................... 4,616,722 2,530,710 7,147,432
Gross profit............................................. 2,361,802 1,783,935 4,145,737
Selling, general and administrative expenses............. 1,982,451 1,638,590 $68,856 3,689,897
Depreciation and amortization expense.................... 1,203,827 827,058 2,030,885
Net loss from operations................................. $ (824,477) $ (806,252) $(68,856) $(1,699,585)
Total assets at March 31, 2000........................... $0 $32,235,239 $2,073,667 $34,308,906
Total assets at June 30, 1999............................ $39,444,085 $27,660,289 $1,337,618 $68,441,992
</TABLE>
14
<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. As of March 31, 2000, the Company monitors
approximately 42,000 PRS subscribers generating approximately $870,000 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.
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.
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 (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 previously owned
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
15
<PAGE>
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.
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 $47,000,000 (see Note 2 of Notes to Condensed Consolidated
Financial Statements of the Company).
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 historical financial
information from such businesses.
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 decreased by $6,816,985 or 34% and $4,365,882 or 61%
from the nine and three months ended March 31, 1999 to the nine and three months
ended March 31, 2000. These decreases were primarily attributable to the sale of
the security division on September 30, 1999. The Company had no operating
revenues from the security division for the six months ended March 31, 2000.
Operating revenues for the PRS division increased by $2,370,021 or 40% and
$250,840 or 10% for the nine and three months ended March 31, 2000 as compared
to the same periods ended March 31, 1999.
Product sales for the PRS division decreased by $116,158 or 18% and
decreased by $123,300 or 52% for the nine and three months ended March 31, 2000
as compared to the nine and three months ended March 31, 1999.
Monitoring and service revenues for the PRS division accounted for an
increase in operating revenues of $2,486,179 or 47% and $374,140 or 16% for the
nine and three months ended March 31, 2000 as compared to the nine and three
months ended March 31, 1999. This increase is the result of the Company's
continued efforts to expand its MRR from rental programs through providers.
Gross profit for the PRS division increased by $1,883,795 or 46% and
$403,792 or 23% for the nine and three months ended March 31, 2000 as compared
to the nine and three months ended March 31, 1999. This increase is also
primarily due to the Company's continued efforts to expand MRR from rental
programs through providers. Monitoring and rental services generate
significantly higher gross margins than do the other services provided by the
Company.
16
<PAGE>
The Gross Profit Margin ("GPM") as a percentage of sales for the PRS
division improved from 70% to 72% for the nine months ended March 31, 1999 to
the nine months ended March 31, 2000, respectively and from 70% to 79% for the
three months ended March 31, 1999 to the three months ended March 31, 2000,
respectively.
Selling, general and administrative expenses ("SG&A") decreased by
$972,297 or 10% and decreased by $1,512,342 or 41% for the nine and three months
ended March 31, 2000 as compared to the nine and three months ended March 31,
1999. This decrease is due to the sale of the security division on September 30,
1999. SG&A for the PRS division increased by $2,533,513 or 64% and $431,784 or
26% for the nine and three months ended March 31, 2000 as compared to the nine
and three months ended March 31, 1999. This increase is due primarily to the PRS
division incurring expenses that had been previously allocated to the security
division. Since the sale of the security division on September 30, 1999, the
Company has been focusing its efforts on improving the efficiencies of the PRS
division. During the nine months ended March 31, 2000, the Company incurred
approximately $124,000 in expenses related to consolidating certain functions
and processes so that it can operate more efficiently. Another part of the PRS
increase in selling and administrative expenses is attributable to the increased
payroll and overhead required to service the increased PRS customer base.
Additional costs were also incurred by the Company in anticipation of the
pending contract award to provide PRS services to clients of the Human Resources
Administration (HRA) of the City of New York. The award of the contract to the
Company has been protested by other bidders and is being reviewed by HRA in
accordance with applicable procurement procedures.
Depreciation and amortization expense for the PRS division increased by
$1,316,947 or 71% and $326,184 or 39% for the nine and three months ended March
31, 2000 as compared to the nine and three months ended March 31, 1999. The
increase in amortization and depreciation expense in the PRS division is
primarily due to the Company's acquisitions of monitoring contracts.
Nonrecurring charges for the nine and three months ended March 31, 2000
were $1,019,705. On January 18, 2000 the Company terminated without cause the
employment of Ronald A. Feldman effective February 29, 2000. Pursuant to the
Executive's employment agreement and subsequent severance, non competition, and
non disclosure agreement, the Company agreed to pay the Executive $1,019,705.
This amount is a nonrecurring charge for the Company and has been recorded as
such.
Net interest expense increased by $209,298 or 7% and decreased by
$380,766 or 33% for the nine and three months ended March 31, 2000 as compared
to the nine and three months ended March 31, 1999. 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 to Notes to Condensed Consolidated
Financial Statements of the Company). As of March 31, 2000 the Company still
maintains approximately $29,300,000 in long-term debt with interest rates
ranging from 7.2% to 10.54%. The primary use of such borrowings was for the
acquisition of monitoring contracts and property and equipment. The borrowings
were also used to fund the move of the Company's subscriber base to its
Monitoring Station in Boca Raton, Florida, which occurred simultaneous with the
Security Sale and to integrate the sales and marketing of PRS.
The Company recorded a gain on sale of the security division of
$14,932,422 for the nine months ended March 31, 2000 and a loss on sale of the
security division of $2,270,778 for the three months ended March 31, 2000. This
loss was a result of a settlement of the amount due to the Company from the
purchase holdbacks (see Note 2 of Notes to Condensed Consolidated Financial
Statements of the Company).
Response Ability Systems, Inc. ("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. The Company was to pay out approximately $990,000,
representing 30.5% of the total claim, over a ten year period, with the final
payments to be made in March of 2000. The Company has paid approximately
$840,000 over this ten year period. In accordance with Chapter 11 of the United
States Bankruptcy Code, in March of 2000, the Company recorded $148,286 as other
income, which represents unclaimed property of creditors that the Company has
been unable to locate.
17
<PAGE>
Income tax expense for the nine months ended March 31, 2000 has been
estimated to be $761,089, 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 $4,058,914. This amount was recorded as a loss on
debt extinguishment, an extraordinary item.
The net income for the nine months ended March 31, 2000 was $1,248,831
or $0.17 per share based on 7,332,048 weighted average number of shares
outstanding, as compared to a net loss of $10,152,752 or ($1.41) per share based
on 7,212,230 weighted average number of shares outstanding for the nine months
ended March 31, 1999. The increase in net income is primarily attributable to
the gain from the sale of the security division of $14,932,422 or $2.04 per
share less the loss on debt extinguishment of $4,058,914 or ($0.55) per share.
Excluding these two items the company would have had a net loss of $9,624,677 or
($1.31) per share for the nine months ended March 31, 2000. Included in this net
loss are non-cash charges totaling $5,262,853, consisting of depreciation and
amortization of $4,433,748 and amortization of deferred financing costs of
$829,105. The net loss for the three months ended March 31, 2000 was $5,113,449
or ($0.71) per share based on 7,223,246 weighted average number of shares
outstanding, as compared to a net loss of $2,869,641 or ($0.37) per share based
on 7,768,587 weighted average number of shares outstanding for the three months
ended March 31, 1999. The net loss for the three months ended March 31, 2000 of
$5,113,449 includes the reduction of the purchase holdback due from Vector of
$2,270,778 due to certain post closing adjustments and the nonrecurring charge
of the Executive's severance of $1,019,705. Without these items, the Company's
net loss would have been $1,822,966 or ($0.25) per share.
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
The Company's working capital increased by $2,407,114 from a working
capital deficiency of $36,166 at June 30, 1999 to working capital of $2,370,948
at March 31, 2000. This increase is primarily attributable to the Security Sale.
The Company believes that its existing cash on hand, marketable securities, and
available borrowings under the MSCH Financing Agreement 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, for at least the
next twelve months.
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
18
<PAGE>
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
March 31, 2000, $28,508,550 is outstanding to MSCH under the MSCH Financing
Agreement in respect of RSS and RSM and approximately $11,490,000 is available
for future borrowings. Approximately $800,000 of the Company's $870,000 in MRR
has been pledged pursuant to the MSCH Financing Agreement; therefore, the
Company still has approximately $70,000 in MRR available to be purchased by RSS
generating net cash proceeds of approximately $2.1 million after financing fees.
In order to obtain additional borrowings under the Financing Agreement, new
collateral must be acquired or internally generated.
Under the MSCH Financing Agreement, the Company is required to pay
financing fees of 15% of the principal amount borrowed 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 13.06% to 14.79%. In connection with the various borrowings
under the Financing Agreement, the Company recorded debt issuance costs of
$9,503,092. In connection with the repayment of $30,628,277 of the MSCH
Financing Agreement on September 30, 1999, the Company wrote off debt issuance
costs of $4,058,914, 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 March 31, 2000, the
net book value of such monitoring contracts was $18,330,120.
Net cash used in operating activities increased from $5,844,405 used in
the nine months ended March 31, 1999 ("Fiscal 1999") to $5,953,831 used in the
nine months ended March 31, 2000 ("Fiscal 2000"). On January 18, 2000, the
Company terminated without cause the employment of Ronald A. Feldman. Pursuant
to the terms of Mr. Feldman's Employment Agreement, Mr. Feldman is entitled to
receive a severance payment equal to 2.99 times his annual base salary plus any
accrued benefit through the end of the term of his Employment Agreement. Upon
his termination, the Company's severance liability to the Executive was
$1,019,705 pursuant to the Employment Agreement. Included in the $5,844,405 cash
used in operating activities in the nine months ended March 31, 2000 was
$321,257 paid as a partial severance payment to the Executive. The balance of
the severance liability is to be paid as follows: (i) a lump sum payment of
$412,500 on April 1, 2000, (ii) nine monthly installment payments of $29,102
from April 1, 2000 through December 1, 2000, and (iii) a final payment of
$23,555 on January 1, 2001 (see Note 7 of Notes to Condensed Consolidated
Financial Statements of the Company).
Net cash provided by investing activities was $33,046,781 for Fiscal
2000 as compared to net cash used in investing activities for Fiscal 1999 of
$16,928,049. The Company received net proceeds from the sale of the security
division of $43,552,010. During Fiscal 2000, the Company paid stock guarantees
of
19
<PAGE>
$4,325,277, paid $3,635,057 for the purchase of monitoring contracts, purchased
property and equipment for $2,312,074, which includes equipment used for rentals
in the amount of $1,417,565. The balance of the capital expenditures were
incurred mainly for the transfer of all of the Company's PRS subscriber accounts
from its previously owned Monitoring Station in Wilkes Barre, Pennsylvania to
its Monitoring Station in Boca Raton, Florida. The Company also purchased
marketable securities for $2,144,113 and sold marketable securities for
$1,899,424 during Fiscal 2000.
Net cash used in financing activities was $27,427,999 for Fiscal 2000.
The Company received proceeds of $7,936,732 from additional borrowings under the
MSCH Financing Agreement for the PRS division net of $1,196,236 in deferred
financing costs in Fiscal 2000. During Fiscal 2000, the Company paid $31,867,232
in principal payments on long-term debt. The Company also repurchased stock for
$2,301,263.
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 Queens 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, in January 2000 the Company paid $2,522,031 in cash
and issued 1,227,969 shares of its Common Stock valued at $1,227,969. As part of
the Health Watch acquisition, the Company guaranteed the value of its Common
Stock at $4.15 and is therefore obligated to pay an amount equal to the
difference between the guaranteed value and the sale price for the sale of the
shares owned by the Queens prior to the delivery of the 1,227,969 shares of
stock in January 2000. Pursuant to the Settlement Agreement, the Company is
obligated to satisfy this liability on July 10, 2000. Also on July 10, 2000, the
Company is obligated to pay an amount equal to the product of (x) the difference
between $4.15 and the average closing bid price of the Company's Common Stock on
the NASDAQ Small Cap Market for the fifteen day period prior to delivery of
stock to the Queens and (y) the number of shares of the Company's Common Stock
owned by the Queens prior to the delivery of the 1,227,969 shares of stock in
January 2000. As of March 31, 2000, the Company's contingent liability under
these agreements was $1,796,551, which may be settled, at the Company's option,
in cash or by the issuance of Common Stock. Based on a March 31, 2000 market
price of $1.0625, the Company would be required to issue approximately 1,690,872
shares of its Common Stock to satisfy this contingent liability, which when
combined with other shares owned by the Queens as of March 31, 2000 would result
in the Queens achieving a 35% interest in the Company's outstanding Common Stock
(see Note 7 of Notes to Condensed Consolidated Financial Statements of the
Company).
INFLATION
The Company does not believe that inflation has a material effect on
its operations.
20
<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) Reports on Form 8-K
(1) Report on Form 8-K - On January 21, 2000, the
Company filed a Report under Item 5 on Form 8-K reporting the
Settlement Agreement with the Queens (see Note 7 of Notes to
Condensed Consolidated Financial Statements of the Company).
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESPONSE USA, INC.
- ----------------------
Registrant
By: /s/ Richard M. Brooks May 15, 2000
------------------------------
Richard M. Brooks
President
Chief Executive Officer
By: /s/ Donna M. Dorris May 15, 2000
------------------------------
Donna M. Dorris
Chief Financial Officer
Principal Financial Officer
Principal Accounting Officer
<PAGE>
EXHIBIT 11
COMPUTATION OF LOSS PER SHARE
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- ------------
<S> <C> <C>
Net income (loss) $ 1,248,831 $(10,152,752)
=========== ============
Weighted average number of common shares outstanding 7,332,048 7,212,230
=========== ============
Basic income (loss) per share $ 0.17 $ (1.41)
=========== ============
Weighted average number of common shares outstanding 7,332,048 7,212,230
Common share equivalents applicable to:
Warrants - Class A
Warrants - Class B
Warrants - Class C 9,067
Warrants - Other 937,083 1,087,083
Stock options 1,113,967 689,092
Less common stock acquired with net proceeds (2,045,468) (1,785,242)
----------- ------------
Weighted average number of common shares and
common share equivalents used to compute diluted
loss per share 7,337,630 7,212,230
=========== ============
Diluted income (loss) per share $ 0.17 $ (1.41)
=========== ============
</TABLE>
<PAGE>
EXHIBIT 11
COMPUTATION OF LOSS PER SHARE
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- ------------
<S> <C> <C>
Net loss $(5,113,449) $ (2,869,641)
=========== ============
Weighted average number of common shares outstanding 7,223,246 7,768,587
=========== ============
Basic loss per share $ (0.71) $ (0.37)
=========== ============
Weighted average number of common shares outstanding 7,223,246 7,768,587
Common share equivalents applicable to:
Warrants - Class A
Warrants - Class B
Warrants - Class C 9,067
Warrants - Other 937,083 1,087,083
Stock options 1,113,967 689,092
Less common stock acquired with net proceeds (2,051,050) (1,785,242)
----------- ------------
Weighted average number of common shares and
common share equivalents used to compute diluted
loss per share 7,223,246 7,768,587
=========== ============
Diluted loss per share $ (0.71) $ (0.37)
=========== ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,906
<SECURITIES> 245
<RECEIVABLES> 2,201
<ALLOWANCES> 516
<INVENTORY> 1,885
<CURRENT-ASSETS> 6,905
<PP&E> 8,907
<DEPRECIATION> 4,637
<TOTAL-ASSETS> 34,309
<CURRENT-LIABILITIES> 4,534
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> 2,018
<TOTAL-LIABILITY-AND-EQUITY> 34,309
<SALES> 1,624
<TOTAL-REVENUES> 13,392
<CGS> 1,417
<TOTAL-COSTS> 4,976
<OTHER-EXPENSES> 14,359
<LOSS-PROVISION> 875
<INTEREST-EXPENSE> 3,044
<INCOME-PRETAX> 6,069
<INCOME-TAX> 761
<INCOME-CONTINUING> 5,308
<DISCONTINUED> 0
<EXTRAORDINARY> 4,059
<CHANGES> 0
<NET-INCOME> 1,249
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.17
</TABLE>
