UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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: 11,104,052 shares of Common
Stock, $.008 par value per share, as of November 13, 2000.
Transitional Small Business Disclosure Format (check one) Yes __ No X
RESPONSE USA, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000
and June 30, 2000 1-2
Condensed Consolidated Statements of Operations for the Three
Months ended September 30, 2000 and 1999 3
Condensed Consolidated Statement of Stockholders' Deficit for
the Three Months ended September 30, 2000 4
Condensed Consolidated Statements of Cash Flows for the Three
Months ended September 30, 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 15-19
PART II. OTHER INFORMATION 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
2000 2000
------------------ ------------------
ASSETS
CURRENT ASSETS
Cash $1,222,034 $2,650,467
Trade accounts receivable - net of allowance for
doubtful accounts of $439,526 and $420,664, respectively 1,632,379 1,592,402
Inventory 1,861,799 1,880,959
Prepaid expenses and other current assets 262,929 339,089
------------------ ------------------
Total current assets 4,979,141 6,462,917
------------------ ------------------
MONITORING CONTRACT COSTS - Net of accumulated
amortization of $7,546,891 and $6,823,589, respectively 17,873,212 18,599,993
------------------ ------------------
PROPERTY AND EQUIPMENT - Net of accumulated
depreciation and amortization of $4,522,238 and $4,175,612,
respectively 4,755,704 4,638,545
------------------ ------------------
OTHER ASSETS
Deferred financing costs - Net of accumulated
amortization of $1,316,989 and $1,074,283, respectively 3,596,939 3,753,045
Other noncurrent assets 337,006 301,717
------------------ ------------------
3,933,945 4,054,762
------------------ ------------------
$31,542,002 $33,756,217
================== ==================
See notes to condensed consolidated financial statements
1
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(UNAUDITED)
September 30, June 30,
2000 2000
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt:
Notes payable $2,225,318 $1,922,712
Capitalized lease obligations 63,052 60,307
Accounts payable - Trade 381,837 407,057
Accrued expenses and other current liabilities 882,245 977,417
Accrued severance 470,342 953,065
Accrued income taxes 256,289 201,062
Deferred revenue 239,550 253,424
------------------ ------------------
Total current liabilities 4,518,633 4,775,044
------------------ ------------------
LONG-TERM LIABILITIES - Net of current portion
Long-term debt:
Notes payable 29,475,896 29,450,997
Capitalized lease obligations 140,015 158,188
Accrued severance 317,526 451,213
------------------ ------------------
29,933,437 30,060,398
------------------ ------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' DEFICIT
Common stock - Par value $.008
Authorized 37,500,000 shares
Issued and outstanding 11,104,052 shares - September 30,
2000 and 7,398,670 shares - June 30, 2000 88,832 59,190
Additional paid-in capital 59,715,037 59,756,960
Accumulated deficit (62,713,937) (60,895,375)
------------------ ------------------
(2,910,068) (1,079,225)
------------------ ------------------
$31,542,002 $33,756,217
================== ==================
See notes to condensed consolidated financial statements
2
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months ended September 30,
------------------------------------------
2000 1999
------------------ ------------------
OPERATING REVENUES
Product sales $38,214 $1,325,609
Monitoring and service 2,817,008 5,626,108
Security patrol 0 871,294
------------------ ------------------
2,855,222 7,823,011
------------------ ------------------
COST OF REVENUES
Product sales 8,084 1,204,010
Monitoring and service 744,028 1,589,403
Security patrol 0 706,616
------------------ ------------------
752,112 3,500,029
------------------ ------------------
GROSS PROFIT 2,103,110 4,322,982
------------------ ------------------
OPERATING EXPENSES
Selling, general and administrative 1,989,063 4,028,020
Depreciation and amortization 1,121,799 2,183,425
------------------ ------------------
3,110,862 6,211,445
------------------ ------------------
LOSS FROM OPERATIONS (1,007,752) (1,888,463)
------------------ ------------------
OTHER INCOME/(EXPENSE)
Interest expense, net (911,784) (1,519,967)
Gain on sale of security division 0 17,354,099
Loss on marketable securities 0 (25,000)
------------------ ------------------
(911,784) 15,809,132
------------------ ------------------
INCOME (LOSS) BEFORE TAXES (1,919,536) 13,920,669
Income tax benefit (expense) 100,974 (704,200)
------------------ ------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,818,562) 13,216,469
EXTRAORDINARY ITEM
Loss on debt extinguishment 0 (4,058,915)
------------------ ------------------
NET INCOME (LOSS) (1,818,562) 9,157,554
================== ==================
Income (loss) per common share - Basic
Income (loss) before extraordinary item ($0.20) $1.58
Extraordinary item $0.00 ($0.49)
------------------ ------------------
Net income (loss) ($0.20) $1.09
================== ==================
Weighted average number of shares outstanding 9,291,637 8,351,012
================== ==================
Income (loss) per common share - Diluted
Income (loss) before extraordinary item ($0.20) $1.58
Extraordinary item $0.00 ($0.49)
------------------ ------------------
Net income (loss) ($0.20) $1.09
================== ==================
Weighted average number of shares outstanding 9,291,637 8,351,512
================== ==================
See notes to condensed consolidated financial statements
3
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
COMMON STOCK
---------------------------- ADDITIONAL
NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------------------------- ---------------- ---------------- ---------------
Balance - June 30, 2000 7,398,670 $59,190 $59,756,960 ($60,895,375) ($1,079,225)
Shares issued in connection with a stock price
guarantee 3,705,382 29,642 (29,642) $ 0
Costs incurred in connection with issuances
of common stock (12,281) ($12,281)
Net loss (1,818,562) ($1,818,562)
---------------------------- ---------------- ---------------- ---------------
Balance - September 30, 2000 11,104,052 $ 88,832 $ 59,715,037 $ (62,713,937) $ (2,910,068)
============================ ================ ================ ===============
See notes to condensed consolidated financial statements
4
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months ended September 30,
-------------------------------------------------
2000 1999
---------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,818,562) $ 9,157,554
Adjustments to reconcile net income (loss) to net cash used in
operating activities
Depreciation and amortization 1,121,799 2,183,425
Amortization of deferred financing costs and
debt discount 242,706 402,039
Loss on debt extinguishment 4,058,915
Loss on sale of property and equipment 771 42,597
Loss on sale of marketable securities 25,000
Gain on sale of security division (17,354,099)
Increase in accounts receivable - Trade (39,977) (530,980)
Decrease in inventory 19,160 304,066
(Increase) decrease in prepaid expenses and other
current assets 76,161 (999,030)
Increase in deposits (2,981) (51,538)
Decrease in accounts payable - Trade (25,220) (320,031)
Increase (decrease) in accrued expenses and other
current liabilities (647,536) 2,521,039
Decrease in deferred revenues (13,874) (145,000)
---------------------- ---------------------
Net cash used in operating activities (1,087,553) (706,043)
---------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of monitoring contracts (net of purchase
holdbacks) (5,340) (161,052)
Net proceeds from the sale of security division (net of
purchase holdbacks) 42,191,905
Purchase of property and equipment (519,428) (1,069,864)
Proceeds from the sale of property and equipment 4,000 11,868
Payment of stock guarantees (3,689,772)
---------------------- ---------------------
Net cash provided by (used in) investing activities (520,768) 37,283,085
---------------------- ---------------------
See notes to condensed consolidated financial statements
5
RESPONSE USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(UNAUDITED)
Three Months ended September 30,
-------------------------------------------------
2000 1999
---------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred financing costs incurred (86,600) (932,236)
Proceeds of long-term debt (net of holdbacks) 632,847 6,152,480
Principal payments on long-term debt (354,078) (31,307,817)
Stock repurchases (1,098,201)
Net costs incurred in connection with the issuance of
common stock (12,281)
---------------------- ---------------------
Net cash provided by (used in) financing activities 179,888 (27,185,774)
---------------------- ---------------------
NET INCREASE (DECREASE) IN CASH (1,428,433) 9,391,268
CASH - BEGINNING 2,650,467 3,241,016
---------------------- ---------------------
CASH - ENDING $ 1,222,034 $ 12,632,284
====================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 701,049 $ 1,326,955
Net cash received during the period for income taxes $ (156,200) $ -
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 three months ended September 30, 1999, long-term notes
payable of $32,040 were incurred for the purchase of property and equipment.
During the three months ended September 30, 1999, the Company accrued
$3,750,000 to monitoring contract costs in connection with an acquisition (see
Note 3 of Notes to Condensed Consolidated Financial Statements of the Company).
Also related to the same acquisition, the Company accrued $622,251 to Additional
Paid-in Capital for a stock price guarantee.
On September 30, 1999, in connection with a prior acquisition, the
Company released 16,722 shares of Common Stock from escrow to the seller to
satisfy a purchase holdback of $100,000. The Company then repurchased 135,902
shares of Common Stock that had been previously issued, including the 16,722
holdback shares, for their guaranteed value of $812,701. Also on this date, the
Company paid the balance of a note payable and as a result, 437,500 shares held
in escrow were released to the Company and retired.
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 September 30, 2000 and the
related statements of operations, stockholders' deficit 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, 2000
Annual Report on Form 10-KSB filed with the Securities and Exchange Commission
on October 13, 2000. The results of operations for the period ended September
30, 2000 are not necessarily indicative of operating results for the full year.
Certain amounts in the September 1999 quarterly financial statements
have been reclassified to conform to the September 2000 presentation.
2. OPERATIONS
Historically, the Company's revenues have not been sufficient to fund
its operations, and thus it has had to finance its operating losses externally,
through debt and equity financing. The Company has undergone a number of
operational changes during fiscal years 2000 and 2001. In September 1999, the
Company sold its security business, as more fully described in Note 3. In July
2000, the Company changed its management team. The new management's efforts have
been focused on restructuring operations, which include personnel and other cost
reductions, which were substantially complete as of September 30, 2000, a
consolidation of operations and an expanded focus on internal growth, rather
than external acquisitions. Management expects such operational changes to
substantially reduce cash used in operations and that such improvements,
together with existing cash on hand and available borrowings under the McGinn,
Smith Capital Holdings Corp. ("MSCH") financing agreement will allow the Company
to implement its growth strategy and meet its cash requirements for at least the
next twelve months. The Company's continued ability to operate is dependent upon
its ability to achieve levels of revenue to support the Company's cost
structure.
3. 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 $51,000,000 (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 $5,100,000, 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.
During the quarter ended September 30, 1999, the Company recorded a
gain on the sale of the Security Division of $17,354,099. This gain was later
reduced to $14,841,872 as a result of the holdback settlement on March 13, 2000
and other transaction expenses associated with the sale. During the quarter
ended September 30, 1999, the Company 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.
8
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. THE SALE OF THE SECURITY BUSINESS (CONTINUED)
Simultaneous with the Security Sale, the Company paid off $30,628,277
of MSCH financing, including accrued interest. As a result of paying off this
debt, the Company recorded a loss on debt extinguishment of $4,058,915. The
Company also paid other notes payable totaling $455,602, paid stock guarantees
of $3,703,675, related to prior security acquisitions, and released from escrow
and subsequently canceled 437,500 shares of Common Stock related to the
guarantee of an acquisition note.
4. ACQUISITIONS
On October 1, 1998, the Company acquired all of the issued and
outstanding stock (the "Stock") of Health Watch, Inc., a Florida Corporation
("Health Watch" or the "Queens"), pursuant to a Stock Purchase Agreement dated
as of September 16, 1998 (the "Stock Purchase Agreement"). Health Watch is in
the business of marketing and monitoring personal response systems ("PRS"),
which are designed to summon help in a medical emergency when activated by the
subscriber.
As part of the Health Watch acquisition, the Company guaranteed the
value of the Common Stock issued to the Queens and was therefore obligated to
pay an amount equal to the difference between the guaranteed value and the
proceeds from the sale of the shares nine months after the closing and on
subsequent make-up dates (each such date shall be referenced to as the "Make-up
Date"). On October 1, 1999, the Company paid the Queens $622,251 as payment of
their stock price guarantee. The second Make-up Date was July 10, 2000 and
pursuant to a settlement agreement (the "Settlement Agreement") entered into
between the Company and the Queens on January 11, 2000, the Company was also
obligated to pay approximately $1.85 million in either cash or in shares of the
Company's Common Stock. On July 19, 2000, the Company executed Amendment No. 1
(the "Amendment") to the Settlement Agreement by and among the Company and the
Queens. Under the Amendment, the Company agreed to issue the Queens 3,705,382
shares of the Company's Common Stock having an agreed upon value of $0.50 per
share in settlement of its obligations under the Settlement Agreement, giving
the Queens a 46% interest in the Company.
During the three months ended September 30, 2000, the Company acquired
no additional monitoring contracts. In satisfaction of holdback liabilities
related to prior acquisitions totaling $8,820, the Company paid cash of $5,340,
and reduced monitoring contract costs by $3,480.
9
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM NOTES PAYABLE
AS OF SEPTEMBER 30, 2000 LONG-TERM DEBT INCLUDED THE FOLLOWING:
RECEIVABLE FINANCING AGREEMENT
Principal payments payable as follows: $1,498,490 -fiscal year 2001,
$3,053,051 - fiscal year 2002, $4,403,393 - fiscal year 2003,
$15,385,112 fiscal year 2004, $6,288,342 - fiscal year 2005, and
$346,425 fiscal year 2006; plus interest at 8.3% - 9.5% on the
outstanding loan balance; collateralized by related monitoring contracts $30,974,813
EQUIPMENT FINANCING
Payable in monthly installments of $326 including interest at 9.83%;
final payment due August 2002; collateralized by related collateralized
by related equipment 6,827
OTHER
Note payable in monthly installments of $6,234 including interest
at 8%; final payment due July 2004 647,388
Notes payable in monthly installments aggregating $6,750 including interest
at 8%; final payment due January 2001 72,186
-----------
31,701,214
Less Current Portion 2,225,318
===========
$29,475,896
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 3) (the Second Purchase
Agreements, as amended, together with the Second Receivable Agreements, as
amended, collectively referred to subsequently herein as the "Financing
Agreement").
10
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM NOTES PAYABLE (CONTINUED)
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.
The MSCH Financing Agreement provides for borrowing based on a multiple
of MRR. As of September 30, 2000, $30,974,813 was outstanding to MSCH under the
MSCH Financing Agreement in respect of RSS and RSM. Based upon MRR available to
pledge, approximately $888,000 of net borrowings was available under the
facility. On September 13, 2000, the Company's credit facility with MSCH was
increased from $40 Million to $50 Million.
Under the MSCH Financing Agreement, the Company is required to pay
financing fees ranging from 13% to 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 13.76%.
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.
Beginning in December 1999, the MSCH Financing Agreement was amended to
include a five percent holdback on each funding going forward, which is due back
to the Company upon final payment of the corresponding note payable. These
holdbacks, totaling $236,920, have been recorded on the Company's balance sheet
as other noncurrent assets.
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 monitoring contracts held by RSM and RSS. At September 30, 2000 the net book
value of such monitoring contracts was $17,716,150.
6. CAPITALIZED LEASE OBLIGATIONS
The Company leases office furniture and equipment with a cost of
$243,341 and a net book value of $198,064 at September 30, 2000, under capital
leases. The following is a schedule by years of future minimum lease payments
under these leases together with the present value of the net minimum lease
payments as of September 30, 2000.
YEAR ENDING JUNE 30,
2001.............................................. $73,767
2002.............................................. 98,152
2003.............................................. 93,642
2004..............................................
2005..............................................
Total minimum lease payments...................... 265,561
Less amount representing interest................. (62,494)
Present value of net minimum lease payments....... $203,067
11
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY
In August 2000, the Company issued the Queens 3,705,382 shares of the
Company's Common Stock having an agreed upon value of $0.50 per share in
settlement of its obligations under the Settlement Agreement giving the Queens a
46% interest in the Company (see Note 4).
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, 2000 1,074,367 $0.30 - $13.35 $3.48
Options granted 40,000 $0.38 $0.38
Options exercised 0
Options canceled or expired (2,517) $4.06 - $ 7.88 $4.32
------------- ---------------- ----------
Options outstanding at September 30, 2000 1,111,850 $0.30 - $13.35 $3.43
============= ================ ==========
Options exercisable at September 30, 2000 1,011,850 $0.30 - $13.35 $3.54
============= ================ ==========
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, 2000 878,750 $6.00 - $24.00 $12.52
============= ================ ==========
Warrants outstanding at September 30, 2000 878,750 $6.00 - $24.00 $12.52
============= ================ ==========
8. NET INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is computed based on the weighted
average number of common shares outstanding during each period. For the three
months ended September 30, 2000, potential common shares had an antidilutive
effect on the net loss per common share, and have, therefore, been excluded. For
the three months ended September 30, 1999, 500 shares of Common Stock issuable
upon the exercise of outstanding options were included in the diluted weighted
average shares outstanding. At September 30, 2000, potentially dilutive stock
equivalents included 1,111,850 stock options and 878,750 warrants.
9. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - The Company has employment contracts with
certain employees for terms through February 2003. At September 30, 2000, these
contracts provide for annual base salaries aggregating $530,000.
On January 18, 2000, the Company terminated without cause the
employment of its former Executive Vice President (the "Executive") effective
February 29, 2000. Pursuant to the Executive's employment agreement and
subsequent severance, noncompetition, and nondisclosure agreement, the Company
agreed to pay as severance $1,019,705, of which $850,165 was paid during fiscal
year ended June 30, 2000, $87,306 was paid during the three months ended
September 30, 2000, and the balance of $82,234 will be paid in monthly
installments through January 1, 2001.
12
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On June 27, 2000, the Board of Directors of the Company reached a
severance, noncompetition and nondisclosure agreement with its former Chief
Executive Officer ("Former CEO"). Pursuant to the terms of the Settlement
Agreement with the Queens and the terms of the Former CEO's Employment Agreement
with the Company, both of which were executed on July 19, 2000: (1) the Former
CEO resigned as Chief Executive Officer of the Company as of July 24, 2000, but
continues to serve as Chairman of the Board until date the Former CEO no longer
serves as a Director of the Company, and (2) the Former CEO, as requested by the
Chief Executive Officer or the Board of Directors of the Company, devotes a
decreasing amount of his time over the next twenty-four months as a consultant
to the Company. The Company agreed to pay as severance $1,323,610, of which
$551,504 was paid during the three months ended September 30, 2000 and the
balance of $772,106 shall be paid in monthly installments of $36,767 through
July 2002.
CONSULTING AGREEMENT - The Company had a yearly renewable consulting
agreement with A.C. Allen & Co., a company owned by a former director of the
Company, under which such company received $4,000 per month in consideration for
providing certain consulting services to the Company. This consulting agreement
was terminated in October 2000, effective November 30, 2000.
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.
In connection with the Health Watch acquisition, the Company has
guarantees with the Queens on 5,161,729 shares of its Common Stock, of which
3,933,760 are guaranteed at $.50 per share and 1,227,969 are guaranteed at $1.00
per share. These guarantees expire on October 1, 2003. As of September 30, 2000,
the Company's contingent liabilities under these agreements aggregated
$1,742,855 based on a closing bid price of $0.28, which may be settled in cash
or by the issuance of Common Stock.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (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. Effective July 1,
2000, the Company adopted SFAS No. 133. As the Company has no instruments that
are defined as derivatives under SFAS No. 133, the adoption of SFAS No. 133 had
no impact on the Company's consolidated financial position or results of
operations.
11. INDUSTRY SEGMENT INFORMATION
Upon the adoption of SFAS No. 131 in 1999, the Company's operations
fell 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, which was sold on September 30, 2000, 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").
13
RESPONSE USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. INDUSTRY SEGMENT INFORMATION (CONTINUED)
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
included 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, Inc. 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
loss are not separately evaluated by the Company's management on a segment
basis.
CORPORATE AND
SECURITY PRS OTHER TOTAL
--------- ------------- ------------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 2000:
Revenues:
Product sales............................... $38,214 $38,214
Monitoring and service...................... 2,817,008 2,817,008
Total revenues........................... 2,855,222 2,855,222
Gross profit................................... 2,103,110 2,103,110
Selling, general and administrative expenses... 1,823,187 $165,876 1,989,063
Depreciation and amortization expense.......... 1,121,799 1,121,799
Net loss from operations....................... (841,876) (165,876) (1,007,752)
THREE MONTHS ENDED SEPTEMBER 30, 1999:
Revenues:
Product sales............................... $1,084,517 $241,092 $1,325,609
Monitoring and service...................... 3,121,546 2,504,562 5,626,108
Security patrol............................. 871,294 871,294
Total revenues........................... 5,077,357 2,745,654 7,823,011
Gross profit................................... 2,404,948 1,918,034 4,322,982
Selling, general and administrative expenses... 1,971,520 1,976,098 $80,402 4,028,020
Depreciation and amortization expense.......... 1,255,757 927,668 2,183,425
Net loss from operations....................... (822,329) (985,732) (80,402) (1,888,463)
Total assets at September 30, 2000............. $0 $31,053,536 $488,466 $31,542,002
Total assets at June 30, 2000.................. $0 $31,889,687 $1,866,530 $33,756,217
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's
principal PRS product called Health Watch is designed to monitor, identify and
electronically report emergencies requiring medical, fire and police assistance.
The Company markets its Health Watch products and monitoring services to home
health care companies, hospitals, and government agencies ("Providers"). The
Company supplies the Health Watch PRS products and monitoring services to its
Providers who then market the products and services to their subscribers.
Providers utilize the Company's Health Watch PRS product and monitoring services
to improve health care services in their local community, to obtain a
relationship with a subscriber who may utilize other home care or hospital
services supplied by the Providers, to enhance community relations and to
facilitate early discharge from the hospitals. The Company currently monitors
approximately 43,000 PRS subscribers generating approximately $933,000 in
monthly recurring revenue ("MRR"). The Company believes it is currently the
second largest provider of PRS in the United States based on MRR. The Company's
revenues consist primarily of recurring payments for the monitoring of PRS
products.
The Company's PRS products enable individual users, such as elderly or
disabled persons, to transmit a distress signal using a portable transmitter to
the Company's Monitoring Station. 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, where the user's name, address and vital information are
within seconds automatically displayed on a computer screen. This signal
instantaneously 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 nature of the distress is
determined and when necessary, appropriate help is dispatched. If the user does
not answer, help is dispatched immediately. The Monitoring Station is staffed 24
hours a day, 365 days a year.
The PRS industry generally consists of companies that provide
technological support services to help elderly or medically-at-risk individuals
live independently, without the need of supervised care. In the Company's view,
the growth of the PRS market is strongly linked to the belief of medical
professionals that such individuals should be encouraged to live independently
for as long as possible. The Company believes that the demand for PRS will
increase as the number of people over 65 years of age, and the number of such
persons living alone, increases.
15
The Company was previously engaged in the security services business,
which included electronic monitoring products and services and guarding and
patrol services. 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 3 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 security services business and is solely
engaged in the PRS business. Information with respect to the security services
business is included in this quarterly report because the financial statements
included herein include historical financial information from such business.
RESULTS OF OPERATIONS
The Company's revenues consist primarily of monthly recurring payments
for providing and monitoring PRS products, and prior to September 30, 1999,
security services. The security division also generated revenues from the sale
and installation of security systems and from security patrol services.
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 were recognized as the service was provided.
Operating revenues decreased by $4,967,789 or 64% from the three months
ended September 30, 1999 to the three months ended September 30, 2000. This
decrease was 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 September 30, 2000. Operating revenues for the PRS division
increased by $109,568 or 4% from the quarter ended September 30, 1999 to the
quarter ended September 30, 2000.
Product sales for the PRS division decreased by $202,878 or 84% from
the quarter ended September 30, 1999 to the quarter ended September 30, 2000.
This decrease is a result of the Company's redirected efforts to expand its
recurring service revenues.
Monitoring and service revenues for the PRS division accounted for an
increase in operating revenues of $312,446 or 12% from the quarter ended
September 30, 1999 to the quarter ended September 30, 2000. This increase is the
result of the Company's efforts to expand its MRR from recurring services
through its Providers. The Company believes it will continue to experience
significant increases to its recurring service revenues during this fiscal year
and will become the fastest growing PRS company among the leaders in the
industry.
Gross profit for the PRS division increased by $185,076 or 10% from the
three months ended September 30, 1999 to the three months ended September 30,
2000. This increase is also primarily due to the Company's efforts to expand MRR
from recurring services through its Providers. Monitoring and service revenues
generate significantly higher gross margins than product sales.
The Gross Profit Margin as a percentage of sales for the PRS division
improved from 70% to 74% from the quarter ended September 30, 1999 to the
quarter ended September 30, 2000.
Selling, general and administrative expenses ("SG&A") decreased by
$2,038,957 or 51% from the three months ended September 30, 1999 to the three
months ended September 30, 2000. This decrease is primarily due to the sale of
the security division on September 30, 1999. SG&A for the PRS division decreased
by $152,911 or 8% from the quarter ended September 30, 1999 to the quarter ended
September 30, 2000. 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. In addition, the Company changed its management team in July
2000. The new management's efforts have been focused on restructuring
operations, which include personnel
16
and other cost reductions. The Company expects continued reductions in operating
costs during this fiscal year due to the new management's efforts in
restructuring and consolidating operations.
Depreciation and amortization expense for the PRS division increased by
$194,131 or 21% from the three months ended September 30, 1999 to the three
months ended September 30, 2000. The increase in amortization and depreciation
expense in the PRS division is primarily due to the Company's acquisitions of
monitoring contracts and increases in equipment used for PRS rentals.
Net interest expense decreased by $608,183 or 40% from the quarter
ended September 30, 1999 to the quarter ended September 30, 2000. 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 3 of Notes to Condensed
Consolidated Financial Statements of the Company). As of September 30, 2000, the
Company still maintains approximately $31,700,000 in long-term notes payable
with interest rates ranging from 8% to 9.83%.
The Company recorded a gain on sale of the security division of
$17,354,099 for the three months ended September 30, 1999. The amount of the
gain was later reduced to $14,841,872 as a result of the holdback settlement and
other transaction expenses associated with the sale (see Note 3 of Notes to
Condensed Consolidated Financial Statements of the Company).
The Company recorded an Income tax benefit of $100,974 for the three
months ended September 30, 2000. The Income tax expense for the three months
ended September 30, 1999 was $704,200, which was 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 Financing Agreement, and as a result, wrote off
Deferred Financing Costs of $4,058,915. This amount was recorded as a loss on
debt extinguishment, an extraordinary item, during the quarter ended September
30, 1999.
The net loss for the three months ended September 30, 2000 was
$1,818,562 or ($0.20) per share based on 9,291,637 weighted average number of
shares outstanding, as compared to net income of $9,157,554 or $1.09 per share
based on 8,351,012 weighted average number of shares outstanding for the three
months ended September 30, 1999. This difference in net income (loss) is
primarily attributable to the gain from the sale of the security division of
$17,354,099 or $2.08 per share less the loss on debt extinguishment of
$4,058,915 or ($0.49) per share. Included in the net loss for the three months
ended September 30, 2000 are non-cash charges totaling $1,364,505, consisting of
depreciation and amortization of $1,121,799 and amortization of deferred
financing costs of $242,706.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased by $1,227,365 from working
capital of $1,687,873 at June 30, 2000 to working capital of $460,508 at
September 30, 2000. The Company believes that its existing cash on hand 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, 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
17
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 3 to 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 $4,058,915.
The MSCH Financing Agreement provides for borrowing based on a multiple
of MRR. As of September 30, 2000, $30,974,813 was outstanding to MSCH under the
MSCH Financing Agreement in respect of RSS and RSM. Based upon MRR available to
pledge, approximately $888,000 of net borrowings was available under the
facility. On September 13, 2000, the Company's credit facility with MSCH was
increased from $40 Million to $50 Million.
Under the MSCH Financing Agreement, the Company is required to pay
financing fees ranging from 13% to 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 13.76%.
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.
Beginning in December 1999, the MSCH Financing Agreement was amended to
include a five percent holdback on each funding going forward, which is due back
to the Company upon final payment of the corresponding note payable. These
holdbacks, totaling $236,920, have been recorded on the Company's balance sheet
as other noncurrent assets.
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 monitoring contracts held by RSM and RSS. At September 30, 2000 the net book
value of such monitoring contracts was $17,716,150.
Net cash used in operating activities increased from $706,043 used in
the three months ended September 30, 2000 to $1,087,553 used in the three months
ended September 30, 2000. The Company paid $638,810 of severance payments during
the three months ended September 30, 2000, which had been accrued for at June
30, 2000.
Net cash used in investing activities was $520,768 for the three months
ended September 30, 2000. During the three months ended September 30, 2000, the
Company purchased property and equipment for $519,428, which included equipment
used for rentals in the amount of $412,730.
Net cash provided by financing activities was $179,888 for the three
months ended September 30, 2000. The Company received proceeds of $632,847 from
additional borrowings under the MSCH Financing Agreement for the PRS division
net of holdbacks of $33,308 and incurred $86,600 in deferred financing costs.
The Company also paid $354,078 in principal payments on long-term debt.
18
Historically, the Company's revenues have not been sufficient to fund
its operations, and thus it has had to finance its operating losses externally,
through debt and equity financing. The Company has undergone a number of
operational changes during fiscal years 2000 and 2001. In September 1999, the
Company sold its security business, as more fully described in Note 3 to Notes
to Condensed Consolidated Financial Statements. In July 2000, the Company
changed its management team. The new management's efforts have been focused on
restructuring operations, which include personnel and other cost reductions, a
consolidation of operations and an expanded focus on internal growth. Management
expects such operational changes to substantially reduce cash used in operations
and that such improvements, together with existing cash on hand and available
borrowings under the MSCH Financing Agreement will allow the Company to
implement its growth strategy and meet its cash requirements for at least the
next twelve months. The Company's continued ability to operate is dependent upon
its ability to achieve levels of revenue to support the Company's cost
structure.
INFLATION
The Company does not believe that inflation has a material effect on
its operations.
19
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 August 2, 2000, the
Company filed a Report under Item 5 on Form 8-K reporting the
Amendment to the Settlement Agreement with the Queens (see
Note 4 of Notes to Condensed Consolidated Financial Statements
of the Company).
20
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/ JEFFREY QUEEN NOVEMBER 20, 2000
----------------------------------
Jeffrey Queen
Chief Executive Officer
By: /s/ DONNA M. DORRIS NOVEMBER 20, 2000
----------------------------------
Donna M. Dorris
Chief Financial Officer
Principal Financial Officer
Principal Accounting Officer
21