UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1999
Commission File Number 0-20770
RESPONSE USA, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE #22-3088639
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3 EXECUTIVE CAMPUS, 2ND FLOOR SOUTH, CHERRY HILL, NJ 08002
(Address of principal executive offices) (Zip code)
(856) 661-0700
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X
No ___ --
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: 7,398,670 shares of Common
Stock, $.008 par value per share, as of February 14, 2000.
RESPONSE USA, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1999
and June 30, 1999 1-2
Condensed Consolidated Statements of Operations for the Six
Months and Three months ended December 31, 1999 and 1998 3
Condensed Consolidated Statement of Stockholders' Equity for
the Six Months ended December 31, 1999 4
Condensed Consolidated Statements of Cash Flows for the Six
Months and Three Months ended December 31, 1999
and 1998 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, June 30,
1999 1999
------------------ ------------------
ASSETS
CURRENT ASSETS
Cash $4,435,187 $3,241,016
Marketable securities 2,144,113 15,000
Accounts receivable
Trade - Net of allowance for doubtful accounts
of $593,298 and $761,631, respectively 1,871,921 3,834,499
Purchase holdback - Net of allowance of $1,317,820 3,795,552
Inventory 1,755,874 2,621,052
Prepaid expenses and other current assets 141,503 562,072
------------------ ------------------
Total current assets 14,144,150 10,273,639
------------------ ------------------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $5,289,077 and $15,509,288, respectively 19,713,457 44,662,593
------------------ ------------------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $4,295,984 and $5,896,462,
respectively 3,999,112 5,889,409
------------------ ------------------
OTHER ASSETS
Deferred financing costs - Net of accumulated
amortization of $627,348 and $950,812, respectively 3,986,379 7,371,692
Other noncurrent assets 114,960 244,659
------------------ ------------------
4,101,339 7,616,351
------------------ ------------------
$41,958,058 $68,441,992
================== ==================
See notes to condensed consolidated financial statements.
1
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(UNAUDITED)
December 31, June 30,
1999 1999
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $1,400,838 $2,166,433
Accounts payable - Trade 394,638 996,304
Income taxes payable 380,000
Purchase holdbacks 221,272 673,122
Accrued expenses and other current liabilities 1,391,039 3,102,125
Deferred purchase price related to prior acquistion (Note 3) 3,750,000
Deferred revenue 236,796 3,371,821
------------------ ------------------
Total current liabilities 7,774,583 10,309,805
------------------ ------------------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt 28,192,755 51,951,120
Purchase holdbacks 28,396 64,483
------------------ ------------------
28,221,151 52,015,603
------------------ ------------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock - Par value $.008
Authorized 37,500,000 shares
Issued and outstanding 6,170,701 shares - December 31,
1999 and 8,351,012 shares - June 30, 1999 49,366 66,809
Additional paid-in capital 58,699,105 65,708,202
Collateral shares in escrow (500,000)
Accumulated deficit (52,786,147) (59,148,427)
Accumulated other comprehensive loss (10,000)
------------------ ------------------
5,962,324 6,116,584
------------------ ------------------
$41,958,058 $68,441,992
================== ==================
See notes to condensed consolidated financial statements.
2
RESPONSE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Six Months ended December 31, Three Months ended December 31,
------------------------------------ ------------------------------------
1999 1998 1999 1998
------------ ------------- ------------ --------------
OPERATING REVENUES
Product sales $1,511,118 $2,506,445 $185,509 $1,303,722
Monitoring and service 8,227,772 9,144,412 2,601,664 5,001,643
Security patrol 871,294 1,410,430 0 740,253
------------ ------------- ------------ --------------
10,610,184 13,061,287 2,787,173 7,045,618
------------ ------------- ------------ --------------
COST OF REVENUES
Product sales 1,376,943 2,106,518 172,933 1,103,447
Monitoring and service 2,278,148 2,828,676 688,745 1,510,091
Security patrol 706,616 1,081,879 0 579,838
------------ ------------- ------------ --------------
4,361,707 6,017,073 861,678 3,193,376
------------ ------------- ------------ --------------
GROSS PROFIT 6,248,477 7,044,214 1,925,495 3,852,242
------------ ------------- ------------ --------------
OPERATING EXPENSES
Selling, general and administrative 6,738,832 6,187,879 2,710,812 3,461,527
Compensation - Employment contracts 0 437,500 0 50,000
Depreciation and amortization 3,280,506 3,369,374 1,097,082 1,973,376
Nonrecurring charges 0 72,885 0 72,885
------------ ------------ ----------- --------------
10,019,338 10,067,638 3,807,894 5,557,788
------------ ------------ ----------- --------------
LOSS FROM OPERATIONS (3,770,861) (3,023,424) (1,882,399) (1,705,546)
------------ ------------ ----------- --------------
OTHER INCOME/(EXPENSE)
Interest expense, net (2,281,945) (1,691,881) (761,978) (970,936)
Gain on sale of security division 17,203,200 (150,898)
Loss on marketable securities (25,000)
------------ ------------ ----------- --------------
14,896,255 (1,691,881) (912,876) (970,936)
------------ ------------ ----------- --------------
INCOME (LOSS) BEFORE TAXES 11,125,394 (4,715,305) (2,795,275) (2,676,482)
Income tax expense (704,200)
------------ ------------ ----------- --------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 10,421,194 (4,715,305) (2,795,275) (2,676,482)
EXTRAORDINARY ITEM
Loss on debt extinguishment (4,058,914) (2,567,806)
------------ ------------ ----------- --------------
NET INCOME (LOSS) 6,362,280 (7,283,111) (2,795,275) (2,676,482)
============ ============ =========== ==============
Income (loss) per common share - Basic
Income (loss) before extraordinary item $1.41 ($0.68) ($0.44) ($0.36)
Extraordinary item ($0.55) ($0.37) $0.00 $0.00
------------ ------------ ----------- --------------
Net income (loss) $0.86 ($1.05) ($0.44) ($0.36)
============ ============ =========== ==============
Weighted average number of shares outstanding 7,385,858 6,940,098 6,420,704 7,408,149
============ ============ =========== ==============
Income (loss) per common share - Diluted
Income (loss) before extraordinary item $1.41 ($0.68) ($0.44) ($0.36)
Extraordinary item ($0.55) ($0.37) $0.00 $0.00
------------ ------------ ----------- --------------
Net income (loss) $0.86 ($1.05) ($0.44) ($0.36)
============ ============ =========== ==============
Weighted average number of shares outstanding 7,387,381 6,940,098 6,420,704 7,408,149
============ ============ =========== ==============
See notes to condensed consolidated financial statements.
3
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional Collateral
Number Paid-In Shares in
of Shares Amount Capital Escrow
-------------------------------- ------------------- --------------------
Balance - June 30, 1999 8,351,012 $66,809 $65,708,202 ($500,000)
Cancellation of shares in escrow to guarantee
acquisition note and holdback (454,222) (3,634) (496,366) 500,000
Payment of holdback 16,722 134 99,866
Cancellation of shares in escrow in connection
with an acquisition (18,199) (146) 146
Payment of stock guarantee (4,325,277)
Stock repurchases (1,724,612) (13,797) (2,287,466)
Comprehensive loss:
Net income
Other comprehensive income:
Unrealized holding losses on available-for-
sale securities
Total comprehensive income
-------------------------------- ------------------- --------------------
Balance - December 31, 1999 6,170,701 $ 49,366 $ 58,699,105 $ -
================================ =================== ====================
Accumulated
Other
Comprehensive Comprehensive Accumulated
Income Income/(Loss) Deficit Total
-------------------- -------------------- -------------------- -----------------
($10,000) ($59,148,427) $6,116,584
Balance - June 30, 1999
Cancellation of shares in escrow to guarantee $0
acquisition note and holdback
Payment of holdback $100,000
Cancellation of shares in escrow in connection $0
with an acquisition
($4,325,277)
Payment of stock guarantee
($2,301,263)
Stock repurchases
Comprehensive loss:
Net income 6,362,280 6,362,280 $6,362,280
Other comprehensive income:
Unrealized holding losses on available-for- 10,000 10,000 $10,000
sale securities --------------------
$6,372,280
====================
Total comprehensive income
$ - $ (52,786,147) $ 5,962,324
Balance - December 31, 1999 ==================== ==================== =================
See notes to condensed consolidated financial statements.
4
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months ended December 31,
-------------------------------------------------
1999 1998
---------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 6,362,280 $ (7,283,111)
Adjustments to reconcile net income (loss) to net cash used in
operating activities
Depreciation and amortization 3,280,506 3,369,374
Amortization of deferred financing costs and
debt discount 610,637 462,619
Loss on debt extinguishment 4,058,914 2,567,806
(Gain) loss on sale of property and equipment 42,592 (2,839)
Loss on sale of marketable securities 25,000
Gain on sale of security division (17,203,200)
Compensation expense in connection with
employment agreements 437,500
Increase in accounts receivable - Trade (442,545) (1,152,107)
(Increase) decrease in inventory 142,211 (531,955)
(Increase) decrease in prepaid expenses and other
current assets (949,829) 41,017
Increase in deposits (55,987) (12,130)
Increase (decrease) in accounts payable - Trade (366,415) 241,394
Decrease in accrued expenses and other
current liabilities (294,701) (53,511)
Decrease in deferred revenues (185,162) (73,920)
---------------------- ---------------------
Net cash used in operating activities (4,975,699) (1,989,863)
---------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of monitoring contracts (net of purchase
holdbacks) (569,591) (9,382,444)
Net proceeds from the sale of security division (net of
purchase holdbacks) 42,027,235
Proceeds from the sale of property and equipment 11,868 7,722
Purchase of property and equipment (1,700,318) (3,123,309)
Purchase of marketable securities (2,144,113)
Payment of stock guarantees (4,325,277)
---------------------- ---------------------
Net cash provided by (used in) investing activities 33,299,804 (12,498,031)
---------------------- ---------------------
See notes to condensed consolidated financial statements.
5
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(UNAUDITED)
Six Months ended December 31,
-------------------------------------------------
1999 1998
---------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred financing costs incurred (1,284,236) (83,185)
Proceeds of long-term debt 8,024,734 38,499,068
Principal payments on long-term debt (31,569,169) (18,381,857)
Stock repurchases (2,301,263)
Net issuance costs incurred in connection with the issuance of
common stock (6,063)
---------------------- ---------------------
Net cash provided by (used in) financing activities (27,129,934) 20,027,963
---------------------- ---------------------
NET INCREASE IN CASH 1,194,171 5,540,069
CASH - BEGINNING 3,241,016 966,140
---------------------- ---------------------
CASH - ENDING $ 4,435,187 $ 6,506,209
====================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 1,949,493 $ 1,203,110
Cash paid during the year for income taxes $ 324,200 $ -
See notes to condensed consolidated financial statements.
6
RESPONSE USA, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
During the six months ended December 31, 1998 and 1999, long-term notes
payable of $160,672 and $32,040, respectively, were incurred for the purchase of
property and equipment.
During the six months ended December 31, 1999, the Company accrued
$3,750,000 to monitoring contract costs in connection with an acquisition (see
Note 3 of Notes to Condensed Consolidated Financial Statements of the Company).
During the six months ended December 31, 1998, in connection with
acquisitions, the Company issued 284,953 shares of its Common Stock, valued at
$5,387,998, 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 note payable 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 six months ended December 31, 1999. In addition, during the
six months ended December 31, 1998, the Company cancelled 2,666 shares of its
Common Stock pursuant to guarantees of stock valuations in connection with past
acquisitions of monitoring contracts.
During the six months ended December 31, 1998, 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
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying interim balance sheet as of December 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
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 December 31, 1999 are not
necessarily indicative of operating results for the full year.
Certain amounts in the December 1998 quarterly financial statements have
been reclassified to conform to the December 1999 presentation.
2. THE SALE OF THE SECURITY BUSINESS
On September 30, 1999, the Company sold its electronic security and patrol
subsidiaries, United Security Systems, Inc. ("USS") and The Jupiter Group, Inc.
d/b/a Triple A Patrol ("Triple A Patrol") (USS together with Triple A Patrol,
collectively referred to herein as the "Security Division") to Vector Security,
Inc. ("Vector") for approximately $50,300,000 (the "Security Sale") pursuant to
the terms of a Stock Purchase Agreement, dated August 11, 1999, as amended (the
"Stock Purchase Agreement"). The Company recorded a gain on the Security Sale of
$17,203,200, net of certain severance and transaction expenses totaling
approximately $4,000,000 and an allowance against the purchase holdback of
$1,317,820.
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.
The Stock Purchase Agreement provides for aggregate holdbacks of
approximately $5,000,000, which are to be paid after holdback periods ranging
from 150 days to one year. Such holdbacks are being held by Vector pending
finalization of certain post-closing adjustments. The Company has recorded an
estimated allowance of $1,317,820 against the purchase holdback. This allowance
was recorded as a decrease to the gain. The outcome of these post-closing
adjustments will determine the actual amount of the gain.
3. ACQUISITIONS
During the six months ended December 31, 1999, the Company acquired
additional monitoring contracts for an aggregate purchase price of $486,247. As
consideration, the Company paid $468,310 in cash and recorded purchase holdbacks
of $17,937 (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 $291,952, the Company paid
cash of $101,281, issued 16,722 shares of its Common Stock valued at $100,000,
and reduced monitoring contract costs by $90,671.
8
RESPONSE USE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
In October 1998, the Company acquired the capital stock of Health Watch,
Inc ("Health Watch"). Health Watch is in the business of marketing and
monitoring personal response systems. As part of this acquisition, the sellers
were entitled to receive up to an aggregate of $3,750,000 upon the achievement
of certain milestones or as a result of other transactions or events. The sale
of the Security Division was an event which resulted in the acceleration of such
payment, and accordingly the Company has accrued $3,750,000 with a corresponding
entry to monitoring contract costs. On January 11, 2000, the Company entered
into a settlement agreement with the sellers in regards to such payment (see
Note 10).
4. LONG-TERM DEBT
RECEIVABLE FINANCING AGREEMENT
Principal payments payable as follows: $550,573 -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 $28,767,420
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 56,485
OTHER
Note payable in monthly installments of $6,234 including interest
at 8%; final payment due July 2004 667,176
Notes payable in monthly installments aggregating $6,750 including
interest at 8.0%; final payment due January 2001 84,598
Notes payable in monthly installments of $9,046 including interest
at 8%; final payments due March, 2000 17,914
------------
29,593,593
Less Current Portion 1,400,838
------------
$28,192,755
============
On June 30, 1999, the Company's Receivable Financing Agreement with
McGinn, Smith Capital Holdings Corp. ("MSCH") was modified. As of June 30, 1999,
Response Acquisition Corp., a subsidiary of the Company ("RAC") merged with and
into USS, and USS was the surviving corporation. Also on June 30, 1999, three
Delaware limited liability companies were formed: (i) Response Alarm Monitoring,
LLC ("RAM"); (ii) Response Security Monitoring, LLC ("RSM"); and (iii) Response
Security Systems, LLC ("RSS") (collectively, referred to as the "LLCs"). USS was
the sole Member of each LLC. Each of the LLCs then entered into Purchase
Agreements with USS (the "Second Purchase Agreements") pursuant to which each
LLC purchased certain contracts and receivables from USS. RAM purchased alarm
receivables and contracts from USS, RSM purchased Personal Response System
("PRS") receivables and contracts from USS, and RSS was intended for future
contract acquisitions. Each of the LLCs also entered into Receivable Financing
Agreements with MSCH (the "Second Receivable Agreements"), under which MSCH
provided financing to each LLC for its purchase of the respective receivables
and contracts from USS.
9
RESPONSE USE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT (CONTINUED)
In contemplation of the Company's sale of USS to Vector in the Security
Sale, the financing arrangement described above was further modified as follows:
USS assigned and transferred its Membership Interests in RSS and RSM to the
Company's wholly owned subsidiary, Response Ability Systems, Inc., a New Jersey
Corporation. USS maintained its Membership Interest in RAM, which was sold to
Vector as part of the Security Sale (see Note 2) (the Second Purchase
Agreements, as amended, together with the Second Receivable Agreements, as
amended, collectively referred to subsequently herein as the "Financing
Agreement").
On September 30, 1999, the Company sold its stock in USS to Vector and paid
off approximately $30,628,000, including accrued interest, of the MSCH Financing
Agreement in respect of RAM. In connection with the refinancing, the Company
incurred a charge for loss on debt extinguishment of $4,058,914. As of December
31, 1999, $28,767,420 is outstanding to MSCH under the MSCH Financing Agreement
in respect of RSS and RSM and approximately $11,230,000 is available for future
borrowings. Substantially all of the Company's $845,000 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 December 31, 1999
the net book value of such monitoring contracts was $18,720,443.
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 three months ended
December 31, 1999, 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 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 December 31, 1999, 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 $1,199,831.
In connection with the acquisition of Health Watch and as a result of the
Security Sale, the Company issued to the sellers of Health Watch, 1,227,969
shares of the Company's Common Stock (representing approximately 19.9% of the
Company's Common Stock prior to such issuance). In addition, the seller 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 10).
10
RESPONSE USE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. STOCKHOLDERS' EQUITY (CONTINUED)
The following is a summary of stock option activity:
Number Option Price Weighted Average
of Shares Per Share(Range) Exercise Price
------------ ---------------- ----------------
Options outstanding at June 30, 1999 697,242 $.30 - $13.35 $5.45
Options granted 60,000 .97 $ .97
Options exercised 0
Options canceled or expired (92,575) $.30 - $ 7.89 $4.63
------------ --------------- ---------
Options outstanding at December 31, 1999 664,667 $.30 - $13.35 $5.16
============ =============== =========
Options exercisable at December 31, 1999 581,334 $.30 - $13.35 $5.03
============ =============== =========
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, 1999 946,150 $6.00 - $24.000 $12.566
========= =============== =============
Warrants outstanding at December 31, 1999 946,150 $6.00 - $24.000 $12.566
========= =============== =============
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 six months
ended December 31, 1999, 1,523 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 December 31, 1999 and the six and three
months ended December 31, 1998, such shares had an antidilutive effect on the
net loss per common share, and have, therefore, been excluded. At December 31,
1999, potentially dilutive stock equivalents included 664,667 stock options and
946,150 warrants.
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - The Company has employment contracts with certain
employees for terms through December 2002. At December 31, 1999, these contracts
provide for annual base salaries aggregating $1,052,500. On January 18, 2000 the
Company terminated without cause the employment of Ronald A. Feldman (the
"Executive") effective February 29, 2000 (See Note 10). Upon his termination,
the Company shall pay the Executive as severance $964,736 pursuant to the
employment agreement. As a result of this termination, the Company no longer
will be obligated to pay the Executive's annual salary of $250,000.
CONSULTING AGREEMENT - The Company has a yearly renewable consulting
agreement with A.C. Allen & Co., a company owned by a director of the Company,
under which such company will receive $4,000 per month in consideration for
providing certain consulting services to the Company.
CONTINGENCIES - In the normal course of business, the Company is subject to
litigation, none of which is expected to have a material effect on the
consolidated financial position, results of operations or cash flows of the
Company.
11
RESPONSE USE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As part of certain acquisitions, the Company has guaranteed the value of
its Common Stock at various prices ranging from $1.00 to $6.75 for periods
expiring at various dates through September 2003. As of December 31, 1999, the
Company's contingent liabilities under these agreements aggregated $2,010,105,
which may be settled in cash or by the issuance of Common Stock. Based on a
December 31, 1999 market price of $1.00, the Company would be required to issue
approximately 2,010,105 shares of its Common Stock to satisfy this contingent
liability.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement, which was amended in June
1999, establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities, and is effective for all interim and annual periods
beginning after June 15, 2000. The Company will adopt SFAS No. 133 for the year
beginning July 1, 2000. The Company has not yet determined the impact that SFAS
No. 133 will have on its consolidated financial position or results of
operations.
9. INDUSTRY SEGMENT INFORMATION
Upon the adoption of SFAS No. 131 in 1999, the Company's operations fall
into two industry segments: Security and Personal Response Systems ("PRS").
Previously, the Company's operations were considered to be one segment. The
Company's Security segment utilizes electronic systems installed in businesses
and residences to provide (i) detection of events such as intrusion or fire,
(ii) surveillance and (iii) control of access to property. Such services are
provided through the use of an electronic device installed at a customer's
location that is monitored by the Company at its central monitoring station. The
Security segment also includes the Company's security patrol operations. The PRS
segment includes monitoring services designed to monitor, identify and
electronically report emergencies requiring medical, fire or police assistance.
Such services are provided through the use of a transmitter worn by the customer
and a receiving base located at the customer's home which communicates with the
Company's central monitoring station.
These segments are separate strategic business units that offer different
services and are managed separately due to the different technology and
marketing strategies required for each segment. The Security segment includes
the operations of USS and Triple A Patrol and the PRS segment includes the
operations of Response Ability Systems, Inc., Emergency Response Systems, Inc.,
Organization for Enhanced Capability, Inc., In Home Health, Inc., and Health
Watch. 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.
12
RESPONSE USE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SECURITY PRS CORPORATE AND TOTAL
-------- --- -----
OTHER
-----
SIX MONTHS ENDED DECEMBER 31, 1999:
Revenues:
Product Sales......................................... $1,084,517 $426,601 $1,511,118
Monitoring and service................................ 3,121,546 5,106,226 8,227,772
Security Patrol....................................... 871,294 871,294
Total revenues..................................... 5,077,357 5,532,827 10,610,184
Gross profit............................................. 2,404,849 3,843,628 6,248,477
Selling, general and administrative expenses............. 2,026,265 4,435,533 $277,034 6,738,832
Depreciation and amortization expense.................... 1,255,756 2,024,750 3,280,506
Net loss from operations................................. $(877,172) $(2,616,655) $(277,034) $(3,770,861)
THREE MONTHS ENDED DECEMBER 31, 1999:
Revenues:
Product Sales......................................... $185,509 $185,509
Monitoring and service................................ 2,601,664 2,601,664
Security Patrol.......................................
Total revenues..................................... 2,787,173 2,787,173
Gross profit............................................. $(99) 1,925,594 1,925,495
Selling, general and administrative expenses............. 54,745 2,459,435 $196,632 2,710,812
Depreciation and amortization expense.................... 1,097,082 1,097,082
Net loss from operations................................. $(54,844) $(1,630,923) $(196,632) $(1,882,399)
SIX MONTHS ENDED DECEMBER 31, 1998:
Revenues:
Product sales......................................... $2,086,986 $419,459 $2,506,445
Monitoring and service................................ 6,150,225 2,994,187 9,144,412
Security patrol....................................... 1,410,430 1,410,430
Total revenues..................................... 9,647,641 3,413,646 13,061,287
Gross profit............................................. 4,691,497 2,352,717 7,044,214
Selling, general and administrative expenses............. 3,723,697 2,322,897 $141,285 6,187,879
Depreciation and amortization expense.................... 2,335,387 1,033,987 3,369,374
Net loss from operations................................. $(1,377,367) $(1,067,272) $(578,785) $(3,023,424)
THREE MONTHS ENDED DECEMBER 31, 1998:
Revenues:
Product sales......................................... $1,100,555 $203,167 $1,303,722
Monitoring and service................................ 3,083,052 1,918,591 5,001,643
Security patrol....................................... 740,253 740,253
Total revenues..................................... 4,923,860 2,121,758 7,045,618
Gross profit............................................. 2,343,153 1,509,089 3,852,242
Selling, general and administrative expenses............. 1,953,684 1,436,800 $71,043 3,461,527
Depreciation and amortization expense.................... 1,239,808 733,568 1,973,376
Net loss from operations................................. $(860,119) $(724,384) $(121,043) $(1,705,546)
Total assets at December 31, 1999........................ $0 $32,639,623 $9,318,435 $41,958,058
Total assets at June 30, 1999............................ $39,444,085 $27,660,289 $1,337,618 $68,441,992
13
RESPONSE USE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. SUBSEQUENT EVENTS
On January 11, 2000, the Company, Jeffrey Queen, Andrew Queen, and the
Jeffrey Queen and Andrew Queen Irrevocable Trust U/A January 2, 1998
(collectively, the "Queens") entered into a Settlement Agreement (the
"Settlement Agreement") to settle a dispute among the parties in connection with
the Deferred Purchase Price provisions under a Stock Purchase Agreement between
the Company and the Queens dated September 16, 1998.
Pursuant to the Settlement Agreement, the Company issued to the Queens an
aggregate of 1,227,969 shares of the Company's Common Stock (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, which the Queens have not exercised) under
certain circumstances.
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 December 31, 1999, the Company's contingent liability under
these agreements was $1,832,919, which may be settled, at the Company's option,
in cash or by the issuance of Common Stock. Based on a December 31, 1999 market
price of $1.00, the Company would be required to issue approximately 1,832,919
shares of its Common Stock to satisfy this contingent liability.
In addition, on January 18, 2000, the Company terminated without cause the
employment of Ronald A. Feldman and accepted the resignation of Ronald A.
Feldman as the Company's Treasurer, Executive Vice President, Secretary, and
Director, and Jeffrey Queen and Andrew Queen were elected as the Company's
President and Executive Vice President and Chief Operating Officer,
respectively. 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 of $250,000 plus any accrued benefits through the end of the
term of his Employment Agreement.
14
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 February 14, the Company monitors
approximately 41,000 PRS subscribers generating approximately $845,000 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
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 $50,300,000 in cash (of which approximately $5,000,000 is being
held by Vector pending certain post-closing adjustments) and is subject to
adjustment under certain circumstances. The Company cannot predict the final
amount of the holdback to be received from Vector.
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 $2,451,103 or 19% and $4,258,445 or 60%
from the six and three months ended December 31, 1998 to the six and three
months ended December 31, 1999. 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 three months ended
December 31, 1999. Operating revenues for the PRS division increased by
$2,119,181 or 62% and $665,415 or 31% for the six and three months ended
December 31, 1999 as compared to the same periods ended December 31, 1998.
Product sales for the PRS division increased by $7,142 or 2% and decreased
by $17,658 or 9% for the six and three months ended December 31, 1999 as
compared to the six and three months ended December 31, 1998.
Monitoring and service revenues for the PRS division accounted for an
increase in operating revenues of $2,112,039 or 71% and $683,073 or 36% for the
six and three months ended December 31, 1999 as compared to the six and three
months ended December 31, 1998. 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 $1,490,911 or 63% and
$416,505 or 28% for the six and three months ended December 31, 1999 as compared
to the six and three months ended December 31, 1998. This increase is also
primarily due to the Company's continued efforts to expand MRR from rental
programs through providers.
16
The Gross Profit Margin ("GPM") as a percentage of sales for the PRS
division remained relatively constant at 69% for both the six and three months
ended December 31, 1999 and 69% and 71% for the six and three months ended
December 31, 1998, respectively.
Selling, general and administrative expenses ("SG&A") increased by $550,953
or 9% and decreased by $750,715 or 22% for the six and three months ended
December 31, 1999 as compared to the six and three months ended December 31,
1998. This decrease is due to the sale of the security division on September 30,
1999. SG&A for the PRS division increased by $2,112,636 or 90% and $1,022,635 or
71% for the six and three months ended December 31, 1999 as compared to the six
and three months ended December 31, 1998. 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 six months ended December 31, 1999, the Company
incurred approximately $105,000 in restructuring 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.
Amortization and depreciation expense for the PRS division increased by
$990,763 or 95% and $363,514 or 50% for the six and three months ended December
31, 1999 as compared to the six and three months ended December 31, 1998. The
increase in amortization and depreciation expense in the PRS division is
primarily due to the Company's acquisitions of monitoring contracts.
Net interest expense increased by $590,064 or 35% and decreased by $208,958
or 22% for the six and three months ended December 31, 1999 as compared to the
six and three months ended December 31, 1998. 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 December 31, 1999 the Company still
maintains approximately $30,000,000 in long-term debt with interest rates
ranging from 8% 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 $17,203,200
for the six months ended December 31, 1999 (See Note 2 of Notes to Condensed
Consolidated Financial Statements of the Company). This gain is net of an
estimated allowance of $1,317,820 on the purchase holdback due from Vector
recorded by the Company. The actual amount of the gain will be determined by the
outcome of certain post-closing adjustments.
Income tax expense for the six months ended December 31, 1999 has been
estimated to be $704,200, of which $470,000 is related to the gain on sale of
the security division.
Simultaneous with the Security Sale, the Company paid $30,628,277,
including interest, of its MSCH Financing Agreement, and as a result, wrote off
Deferred Financing Costs of $4,058,914. This amount was recorded as a loss on
debt extinguishment, an extraordinary item.
The net income for the six months ended December 31, 1999 was $6,362,280 or
$0.86 per share based on 7,385,858 weighted average number of shares
outstanding, as compared to a net loss of $7,283,111 or ($1.05) per share based
on 6,940,098 weighted average number of shares outstanding for the six months
ended December 31, 1998. The increase in net income is primarily attributable to
the gain from the sale of the security division of $17,203,200 or $2.32 per
share less the loss on debt extinguishment of $4,058,914 or ($.55) per share.
Excluding these two items the company would have had a net loss of $6,782,006 or
($.92) per share for the six months ended December 31, 1999. Included in this
net loss are
17
non-cash charges totaling $3,891,141, consisting of depreciation and
amortization of $3,280,506 and amortization of deferred financing costs of
$610,635. The net loss for the three months ended December 31, 1999 was
$2,795,275 or ($0.44) per share based on 6,420,704 weighted average number of
shares outstanding, as compared to a net loss of $2,676,482 or ($0.36) per share
based on 7,408,149 weighted average number of shares outstanding for the three
months ended December 31, 1998.
ACCOUNTING DIFFERENCES FOR ACCOUNT PURCHASES AND NEW INSTALLATIONS
A difference between the accounting treatment of the purchase of subscriber
accounts and the accounting treatment of the generation of new accounts through
direct sales by the Company's sales force has a significant impact on the
Company's results of operations. The costs of monitoring contracts (acquired
either through the Company's dealer program or through acquisition of subscriber
account portfolios) are capitalized and amortized over estimated lives ranging
from 5 to 10 years, on a straight-line basis, for alarm and PRS accounts.
Included in capitalized costs are certain acquisition transition costs
associated with incorporating the purchased subscriber accounts into the
Company's operations, if necessary. Such costs include costs incurred by the
Company in fulfilling the seller's preacquisition obligations to the acquired
subscribers, such as providing warranty repair services. In contrast, all of the
Company's costs related to the sales, marketing and installation of new alarm
monitoring systems generated by the Company's sales force are expensed in the
period in which such activities occur.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1999, the Company's Receivable Financing Agreement with MSCH
was modified. As of June 30, 1999, RAC merged with and into USS, and USS was the
surviving corporation. Also on June 30, 1999, the following events occurred:
Three Delaware limited liability companies were formed: (i) Response Alarm
Monitoring, LLC ("RAM"); (ii) Response Security Monitoring, LLC ("RSM"); and
(iii) Response Security Systems, LLC ("RSS") (collectively, referred to as the
"LLCs"). USS was the sole Member of each LLC. Each of the LLCs then entered into
Purchase Agreements with USS (the "Second Purchase Agreements") pursuant to
which each LLC purchased certain contracts and receivables from USS. RAM
purchased alarm receivables and contracts from USS, RSM purchased PRS
receivables and contracts from USS, and RSS was intended for future contract
acquisitions. Each of the LLCs also entered into Receivable Financing Agreements
with MSCH (the "Second Receivable Agreements"), under which MSCH provided
financing to each LLC for its purchase of the respective receivables and
contracts from USS.
In contemplation of the Company's sale of USS to Vector in the Security
Sale, the financing arrangement described above was further modified as follows:
USS assigned and transferred its Membership Interests in RSS and RSM to the
Company's wholly owned subsidiary, Response Ability Systems, Inc., a New Jersey
Corporation. USS maintained its Membership Interest in RAM, which was sold to
Vector as part of the Security Sale (see Note 2 of Notes to Condensed
Consolidated Financial Statements of the Company) (the Second Purchase
Agreements as amended together with the Second Receivable Agreements as amended
collectively referred to subsequently herein as the "Financing Agreement").
.
On September 30, 1999, the Company sold its stock in USS to Vector and paid
off approximately $30,628,000, including accrued interest, of the MSCH Financing
Agreement in respect of RAM. In connection with the refinancing, the Company
incurred a charge for loss on debt extinguishment of $4,058,914. As of December
31, 1999, $28,767,420 is outstanding to MSCH under the MSCH Financing Agreement
in respect of RSS and RSM and approximately $11,230,000 is available for future
borrowings. Substantially all of the Company's $845,000 in MRR has been pledged
pursuant to the MSCH Financing Agreement. As a result, in order to obtain
additional borrowings under the Financing Agreement, new collateral must be
acquired or internally generated.
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
18
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 December 31, 1999,
the net book value of such monitoring contracts was $18,720,443.
The Company's working capital increased by $6,405,733 from a working
capital deficiency of $36,166 at June 30, 1999 to working capital of $6,369,567
at December 31, 1999. This increase is primarily attributable to the Security
Sale. The Company believes that its existing cash on hand, marketable
securities, and anticipated proceeds from the Vector holdback 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.
Net cash used in operating activities increased from $1,989,863 used in the
six months ended December 31, 1998 ("Fiscal 1999") to $4,975,699 used in the six
months ended December 31, 1999 ("Fiscal 2000").
Net cash provided by investing activities was $33,299,804 for Fiscal 2000
as compared to net cash used in investing activities for Fiscal 1999 of
$12,498,031. On September 30, 1999, the Company received net proceeds from the
sale of the security division of $42,027,235. During Fiscal 2000, the Company
paid stock guarantees of $4,325,277, purchased monitoring contacts for $569,591,
purchased property and equipment for $1,700,318, which includes equipment used
for rentals in the amount of $892,645. 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 during Fiscal 2000.
Net cash used in financing activities was $27,129,934 for Fiscal 2000. The
Company received proceeds of $6,740,496 from additional borrowings under the
MSCH Financing Agreement for the PRS division net of $1,284,236 in deferred
financing costs in Fiscal 2000. During Fiscal 2000, the Company paid $31,569,169
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 the Company has accrued $3,750,000 to be paid in cash.
In January 2000 the Company satisfied this liability by paying $2,522,031 in
cash and issuing 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 December 31, 1999, the Company's contingent liability under
these agreements was $1,832,919, which may be settled, at the Company's option,
in cash or by the issuance of Common Stock. Based on a December 31, 1999 market
price of $1.00, the Company would be
19
required to issue approximately 1,832,919 shares of its Common Stock to satisfy
this contingent liability (see Note 10 to Notes of Condensed Consolidated
Financial Statements of the Company).
.
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 shall pay the Executive,
as severance, $964,736 pursuant to the Employment Agreement (see Note 10 to
Notes of Condensed Consolidated Financial Statements of the Company).
YEAR 2000 COMPLIANCE
Year 2000 compliance relates to the ability of computer hardware and
software to respond to the problems posed by the fact that computer programs
have traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer programs and
systems will not be able to differentiate between the year 2000 and 1900. The
failure to address the problem could result in system failures and the
generation of erroneous data.
Based on an inventory conducted during Fiscal year 1999, the Company
identified computer systems that required modification or replacement so that
they would properly utilize dates beyond December 31, 1999. The majority of the
Company's critical systems were new and were already Year 2000 compliant, such
as the central station monitoring hardware and software used at our Monitoring
Station and the Company's current accounts receivable and billing software. The
Company installed and upgraded general ledger and accounts payable programs,
which the manufacturer warrants are Year 2000 compliant during the fourth
quarter of Fiscal 1999. The Company has not incurred significant costs in regard
to Year 2000 compliance thus far and the Company does not expect to incur
significant costs in its future compliance efforts. In addition the Company has
communicated with its significant suppliers, customers, and financial
institutions, to determine their plans for remediating the Year 2000 Issue in
their software which the Company relies on. Based on the responses that have
been received, the Company believes that these significant suppliers, customers,
and financial institutions' products and systems are Year 2000 compliant. The
Company is attempting to limit the potential impact of the Year 2000 by
monitoring the progress of its own Year 2000 project and those of its critical
external relationships. Should the Company be notified of any significant issues
through responses to its inquiries of key third parties, it intends to develop
and implement contingency plans to minimize the impact on its operations. The
Company believes that it has mitigated risks related to the Year 2000 Issue
through modifications to its existing software and conversions to new software.
However, if such modifications and conversions were not made properly the Year
2000 Issue could have a material adverse impact on the operations of the
Company.
INFLATION
The Company does not believe that inflation has a material effect on its
operations.
20
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 -
An Annual Meeting of the Stockholders of the Company was held
on December 17, 1999. The Stockholders of the Company voted: (i) to
elect five members to the Board of Directors of the Company; (ii) to
approve the selection by the Company of Deloitte & Touche LLP,
independent public accountants, to audit the financial statements of
the Company for the current fiscal year. The number of votes cast on
such matters were as follows:
FOR AGAINST ABSTAIN
--------- -------- -------
Election to the Board of Directors-
Richard M. Brooks 6,169,342 235,695 0
Ronald A. Feldman 6,169,342 235,695 0
Stuart R. Chalfin 6,169,342 235,695 0
A. Clinton Allen 6,169,342 235,695 0
Richard B. DeWolfe 6,169,342 235,695 0
Approve Deloitte & Touche LLP
to audit the financial statements 6,351,660 46,417 6,960
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 - October 15, 1999
(2) Report on Form 8-KA - December 15, 1999
21
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 FEBRUARY 14, 2000
---------------------- -----------------
Richard M. Brooks
President
Chief Executive Officer
By: /s/ Donna M. Dorris FEBRUARY 14, 2000
-------------------- -----------------
Donna M. Dorris
Chief Financial Officer
Principal Financial Officer
Principal Accounting Officer