10QSB 1 d804188_1.txt QUARTER ENDED 03/31/2002 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2002 Commission File Number 1-8635 AMERICAN MEDICAL ALERT CORP. (Exact Name of Registrant as Specified in its Charter) New York 11-2571221 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3265 Lawson Boulevard, Oceanside, New York 11572 (Address of principal executive offices) (Zip Code) (516) 536-5850 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 7,467,922 shares of $.01 par value common stock as of May 8, 2002. AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES INDEX PAGE Part I Financial Information Report of Independent Accountants 1 Condensed Consolidated Balance Sheets for March 31, 2002 and December 31, 2001 2 Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II Other Information 16 Report of Independent Accountants Board of Directors and Shareholders American Medical Alert Corp. and Subsidiaries Oceanside, New York We have reviewed the condensed consolidated balance sheet of American Medical Alert Corp. and Subsidiaries as of March 31, 2002 and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2002 and 2001. These financial statements are the responsibility of the company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated March 14, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Margolin, Winer & Evens LLP Margolin, Winer & Evens LLP May 8, 2002 -1- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. --------------------- AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
March 31, 2002 (Unaudited) Dec. 31, 2001* ----------------- --------------- CURRENT ASSETS Cash $ 597,914 $ 818,696 Accounts receivable (net of allowance for doubtful accounts of $452,500 and $417,500) 2,898,822 2,866,015 Notes and other receivables 374,310 276,594 Inventory 169,662 171,283 Prepaid and refundable taxes 69,562 109,328 Prepaid expenses and other current assets 192,584 123,987 Deferred income taxes 408,000 408,000 ----------------- --------------- Total Current Assets 4,710,854 4,773,903 ----------------- --------------- INVENTORY OF MEDICAL DEVICES HELD FOR LEASE - AT COST 1,294,085 1,433,750 ----------------- --------------- FIXED ASSETS (Net of accumulated depreciation and amortization) 6,071,073 6,298,301 ----------------- --------------- OTHER ASSETS Long-term portion of notes receivable 54,789 162,918 Intangible assets and deferred charges (net of accumulated amortization of $449,051 and $398,187) 926,748 757,218 Goodwill (net of accumulated amortization of $58,868) 862,772 837,504 Other assets 277,290 117,749 Deferred income taxes 50,000 50,000 ----------------- --------------- 2,171,599 1,925,389 ----------------- --------------- TOTAL ASSETS $14,247,611 $14,431,343 ================= =============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of notes payable $ 1,347,079 $ 1,345,616 Accounts payable 653,281 799,456 Accrued expenses 536,752 538,949 Current portion of capital lease obligations 220,046 214,903 Deferred revenue 79,010 117,901 ----------------- --------------- Total Current Liabilities 2,836,168 3,016,825 DEFERRED INCOME TAX LIABILITY 519,000 519,000 LONG-TERM PORTION OF NOTES PAYABLE 500,966 599,573 LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS 123,087 180,065 PUT WARRANT OBLIGATION 344,000 319,000 ACCRUED RENTAL OBLIGATION AND OTHER 53,500 61,466 ----------------- --------------- TOTAL LIABILITIES 4,376,721 4,695,929 ----------------- --------------- COMMITMENTS AND CONTINGENT LIABILITIES - - SHAREHOLDERS' EQUITY Preferred stock, $.01 par value - authorized, 1,000,000 shares; none issued and outstanding Common stock, $.01 par value - authorized, 20,000,000 shares; issued 6,525,053 and 6,498,545 shares in 2002 and 2001, respectively. 65,251 64,985 Additional paid-in capital 6,396,108 6,340,669 Retained earnings 3,515,563 3,435,792 ----------------- --------------- 9,976,922 9,841,446 Less treasury stock, at cost (43,910 shares) (106,032) (106,032) ----------------- --------------- Total Shareholders' Equity 9,870,890 9,735,414 ----------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,247,611 $ 14,431,343 ================= ===============
See accompanying notes to condensed financial statements. * Derived from audited financial statements, with a reclassification to conform to March 31, 2002 presentation -2- AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, 2002 2001 ---- ---- Revenues: Services $ 3,521,687 $ 3,208,413 Product sales 87,576 103,097 ------------ ------------ 3,609,263 3,311,510 Costs and Expenses (Income): Costs related to services 1,611,893 1,694,584 Costs of products sold 48,799 70,174 Selling, general and administrative expenses 1,773,254 1,647,221 Interest expense 35,837 66,035 Other income (13,291) (32,667) ------------ ------------ Income (loss) before provision for income taxes 152,771 (133,837) Provision (credit) for income taxes 73,000 (48,000) ------------ ------------ NET INCOME (LOSS) $ 79,771 (85,837) ============ ============ Net income (loss) per share: Basic $ .01 $ (.01) ------------ ------------ Diluted $ .01 $ (.01) ------------ ------------ Weighted average number of common shares outstanding (Note 3) Basic 6,475,175 6,415,241 ============ ============ Diluted 7,004,285 6,415,241 ============ ============ See accompanying notes to condensed financial statements.
-3- AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, 2002 2001 ---- ---- Cash Flows From Operating Activities: Net income (loss) $ 79,771 $ (85,837) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 479,042 490,194 Valuation of put warrants 25,000 20,000 Decrease (increase) in: Accounts receivables (32,807) (84,778) Inventory 1,621 (4,434) Prepaid and refundable taxes (10,234) 26,227 Prepaid expenses and other current assets (68,597) 27,929 Other assets (109,541) (2,228) (Decrease) in: Accounts payable, accrued expenses and other (156,338) (242,616) Deferred revenue (38,891) (65,309) ---------- ---------- Net Cash Provided by Operating Activities 169,026 79,148 ---------- ---------- Cash Flows From Investing Activities: Expenditures for fixed assets including inventory of medical devices held for lease (61,284) 68,067 Repayment of notes receivable 10,413 38,888 Payment for goodwill, account acquisitions and licensing agreement (245,663) (16,396) ---------- ---------- Net Cash (Used In) Provided by Investing Activities (296,534) 90,559 ---------- ---------- Cash Flows From Financing Activities: Principal payments under capital lease obligation (51,835) (44,934) Proceeds from note payable -- 17,898 Repayment of notes payable (97,144) (117,699) Proceeds upon exercise of stock options 55,705 -- ---------- ---------- Net Cash Used in Financing Activities (93,274) (144,735) ---------- ----------
See accompanying notes to condensed financial statements. -4- AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
Three Months Ended March 31, 2002 2001 ---- ---- Net (Decrease) increase in Cash $(220,782) $ 24,972 ---------- ---------- Cash, Beginning of Period 818,696 537,247 ---------- ---------- Cash, End of Period $ 597,914 $ 562,219 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR INTEREST $ 34,938 $ 62,014 ========== ========== CASH PAID DURING THE PERIOD FOR INCOME TAXES $ 34,192 $ -- ========== ==========
During 2001 the Company incurred capital lease obligations of $98,340 when it entered into a lease agreement for new equipment. See accompanying notes to condensed financial statements. -5- AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) 1. General: These financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-KSB. 2. Results of Operations: In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of March 31, 2002 and the results of operations and cash flows for the three months ended March 31, 2002 and 2001. The accounting policies used in preparing these financial statements are the same as those described in the December 31, 2001 financial statements, except as those described in Note 3. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for any other interim period or for the full year. 3. New Pronouncements: In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, "Goodwill and Other Intangible Assets" which states that goodwill and other intangible assets with indefinite lives, are no longer to be amortized, but instead are to be tested for impairment at least annually. The impairment process consists of comparing the fair value of the intangible asset to its carrying value. The Company adopted SFAS No. 142 effective January 1, 2002. The financial information for acquired intangible assets is as follows: As of March 31, 2002 -------------------- Gross Carrying Accumulated Amount Amortization -------------- ----------- Amortized intangible assets Account acquisitions $ 879,443 $ 420,046 Noncompete agreement 60,000 18,750 Deferred charges 41,022 10,255 Licensing fees 395,334 -- ---------- ---------- Total $1,375,799 $ 449,051 ========== ========== -6- Amortization expense for the quarter ended March 31, 2002 was approximately $51,000 and annual estimated amortization is as follows: Estimated amortization expense: ------------------------------- For the year ended December 31, 2002 $ 205,000 For the year ended December 31, 2003 $ 173,000 For the year ended December 31, 2004 $ 154,000 For the year ended December 31, 2005 $ 38,000 For the year ended December 31, 2006 $ 5,000 The changes in carrying amount of goodwill for the quarter ended March 31, 2002 are as follows:
PERS TAS Other Consolidated ---- --- ----- ------------ Balance as of January 1, 2002 $ -- $837,503 $ -- $837,503 Additional Goodwill during quarter -- 25,269 -- 25,269 ----- -------- ----- -------- Balance as of March 31, 2002 $ -- $862,772 $ -- $862,772 ===== ======== ===== ========
The following financial information is presented as if SFAS 142 was adopted at the beginning of the quarter ended March 31, 2001: For the three months ended March 31, ------------------------------------ 2002 2001 ---- ---- NET INCOME: Reported net income (loss) $ 79,771 $ (85,837) Add back: Goodwill amortization -- 13,133 --------- --------- Adjusted net income (loss) $ 79,771 $ (72,704) ========= ========= BASIC EARNINGS PER SHARE: Reported basic earnings (loss) per share $ .01 $ (.01) Add back: Goodwill amortization -- -- --------- --------- Adjusted basic earnings (loss) per share $ .01 $ (.01) ========= ========= DILUTED EARNINGS PER SHARE: Reported diluted earnings (loss) per share $ .01 $ (.01) Add back: Goodwill amortization -- -- --------- --------- Adjusted diluted earnings (loss) per share $ .01 $ (.01) ========= ========= -7- In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets". This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", while retaining many of the requirements of such statement. The Company adopted SFAS No. 144 effective January 1, 2002. The application did not have a significant impact on the Company's results of operations or financial condition. 4. Earnings Per Share: The Company adopted SFAS No. 128, "Earnings Per Share", in December 1997. Earnings per share data for the three months ended March 31, 2002 and 2001 is presented in conformity with this pronouncement. The following table is a reconciliation of the numerators and denominators in computing earnings per share:
Income Shares Per-Share March 31, 2002 (Numerator) (Denominator) Amounts -------------- ----------- ------------- ------- Basic EPS - Income available to common stockholders $ 79,771 6,475,175 $ .01 ======== Effect of dilutive securities - Options and warrants -- 529,110 ---------- ---------- Diluted EPS - Income available to common stockholders and assumed conversions $ 79,771 7,004,285 $ .01 ========== ========== ======== March 31, 2001 -------------- Basic EPS - Loss available to common stockholders $ (85,837) 6,415,241 $.(01) ======== Effect of dilutive securities - Options and warrants -- -- ---------- ---------- Diluted EPS - Loss available to common stockholders and assumed conversions $ (85,837) 6,415,241 $.(01) ========== ========== ========
-8- 5. Major Customers: Since 1983, the Company has provided PERS services to the City of New York's Human Resources Administration Home Care Service Program ("HCSP"). The Company provides services to the City of New York under extensions and contracts issued periodically. The current contract, which runs through June 2002, reflects terms and conditions present in the original contract. The Company believes, based on discussions with HCSP representatives, that an extension through June 2003 is forthcoming under the same terms and conditions as in the original contract. During the three months March 31, 2002 and 2001, the Company had revenues from this contract representing 25% and 28%, respectively, of its total revenue. During any contract renewal process, there can be no assurance that the same level of revenues will be sustained due to a variety of factors, including pricing, number of subscribers to be serviced, and the amount of time that passes before the renewal agreement is acted upon by HCSP. While the Company has reduced its dependence on revenue from HCSP, a significant amount of the Company's revenue could be lost, albeit over a protracted period, if the contract with HCSP is not maintained or is maintained at a significantly lower level of revenue. This could have a material adverse effect on operating results and cash flows. In addition, it is possible that significant adjustments to inventory of medical devices held for lease and leased medical devices associated with the contract would occur. The extent and significance of the adjustments will be dependent upon the length of the transition period to the new provider subject to management's ability to place these devices with other providers. As of March 31, 2002 and December 2001, accounts receivable from the contract represented 47% of accounts receivable and leased medical devices in service under the contract represented 26% and 30%, respectively, of leased medical devices. 6. Segment Reporting: The Company has two reportable segments, Personal Emergency Response Systems ("PERS") and Telephone After-Hours Answering Services ("TAS"), which is provided through the Company's HCI subsidiary, which was acquired on November 21, 2000. The table below provides a reconciliation of segment information to total consolidated information for the three months ended March 31, 2002 and 2001:
2002 ---- PERS TAS Other Consolidated ---- --- ----- ------------ Revenue $ 2,972,254 $ 605,798 $ 31,211 $ 3,609,263 Income before provision for income taxes 74,896 78,319 (444) 152,771 Total assets 11,900,978 2,157,003 189,630 14,247,611 -9- 2001 ---- PERS TAS Other Consolidated ---- --- ----- ------------ Revenue $ 2,792,344 $ 500,537 $ 18,629 $ 3,311,510 Income (loss) before provision for income taxes (139,898) 25,585 (19,524) (133,837) Total assets 12,769,457 1,754,020 190,199 14,713,676
7. Contingencies: Although the Company is a party to certain routine litigation incidental to its business, the Company believes that, except as set forth below, there are no material pending legal proceedings to which it is a party or to which any of its properties are subject. On March 2, 2001 American Medical Alert Corp. was served with a Summons and Complaint by a former employee seeking to recover damages for discrimination and harassment in connection with her employment and the associated termination thereof. The action is pending in the Supreme Court of Queens County. The plaintiff seeks to recover the sum of $750,000 for compensatory damages and $750,000 for punitive damages. At this stage of the proceedings, it is not possible to predict the outcome of this litigation, however, management believes that the Company has meritorious defenses to the complaint. At the present time the insurance company has declined coverage although efforts to obtain a reversal of the declination of coverage are ongoing. 8. Subsequent Events: In April 2002, the Company raised approximately $2,700,000 through a private equity placement of the Company's common stock and warrants. Several investors purchased an aggregate of 910,000 shares of the Company's common stock and warrants to purchase 227,500 shares of the Company's common stock. The securities associated with this offering have not been registered. The Company has agreed to register for resale the common stock and the common stock underlying the warrants sold in the private placement within a certain timeframe. The Company will be required to pay a fee to the investors equal to 2% of the amount raised for each month the securities are not registered after the timeframe. The Company plans to utilize a majority of the proceeds of this offering to further execute its business expansion and diversification strategy into the remote patient monitoring and medical contact center industries, including its recently announced initiative with Health Hero Network, Inc. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ----------------------------------------------------------------------- FORWARD LOOKING STATEMENTS Statements contained in this Quarterly Report on Form 10-QSB include "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause our actual results, performance and achievements, whether expressed or implied by such forward-looking statements, not to occur or be realized. Such forward-looking statements generally are based upon our best estimates of future results, performance or achievement, based upon current conditions and the most recent results of operations, including assumption of the continuation of the degree and timing of customer utilization and rate of renewals of contracts with the Company at historic levels. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "will," "expect," "believe," "estimate," "anticipate," "continue" or similar terms, variations of those terms or the negative of those terms. Readers should carefully review the risk factors described in other documents we have filed from time to time with the Securities and Exchange Commission, including our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001, for a discussion of certain of the factors that may cause actual results to differ from forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company has an amended $1,700,000 Revolving Credit Facility (the "Facility") with a bank expiring May 31, 2002 (based upon 75% of eligible accounts receivable and 50% of inventory, as defined in the agreement with respect to the Facility). Borrowings under the Facility bear interest at the lower of the prime rate or the LIBOR Rate plus 2.50% and are collateralized by the Company's assets. There was $1,100,000 outstanding under the Facility as of March 31, 2002 and December 31, 2001. The agreement with respect to the Facility provides for negative and affirmative covenants including those related to tangible net worth, working capital and other borrowings. At March 31, 2002, the Company was in compliance with its loan covenants. The following table is a summary of contractual obligations recorded as of March 31, 2002:
Payments Due by Period ---------------------- Contractual Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years ------------------------ ----- ---------------- --------- --------- ------------- Line of Credit - Bank $1,100,000 $1,100,000 Debt $ 748,045 $ 247,079 $ 334,716 $ 70,000 $ 96,250 Capital Leases $ 343,133 $ 220,046 $ 123,087 Operating Leases $1,407,601 $ 282,556 $ 757,953 $ 367,092 Total Contractual Cash Obligations $3,598,779 $1,849,681 $1,215,756 $ 437,092 $ 96,250
In March 2002, the Company completed negotiations with another bank, for which it received a commitment letter, subject to certain conditions, for a credit facility of $3,000,000, which includes a term loan of $1,500,000 and a revolving credit line that permits maximum borrowings -11- up to $1,500,000 (based on eligible receivables as defined). Borrowings under the term loan will bear interest at LIBOR plus 3.5% and the revolving credit line will bear interest at LIBOR plus 3.0%. The term loan will be payable over five years while the credit facility will be available for three years. The Company intends to use the proceeds from this bank financing to repay the existing bank debt and fund capital expenditures and working capital needs. The Company expects to complete the definitive agreement with respect to the new loan agreement prior to May 31, 2002, the expiration date of the Facility. The Company's working capital on March 31, 2002 was $1,874,686 as compared to $1,757,078 on December 31, 2001. The Company believes that its present cash and working capital position combined with its borrowing availability under its new credit facility and future anticipated cash flow generated from operations will be sufficient to meet its cash and working capital needs for at least the next 12 months. During 2002, the Company anticipates that it will make capital investments of approximately $1,000,000, exclusive of Health Hero Network, Inc., for the enhancement of its management information systems, and the production and purchase of additional systems which the Company intends to rent. On January 14, 2002, the Company entered into an operating lease agreement for space in Long Island City, New York in an effort to consolidate its HCI, Flushing and Oceanside ERC and Customer Service facilities. The Company, believes that centralization of the ERC, Customer Service and H-Link OnCall operations would provide additional efficiencies and facilitate the continued projected growth of the H-Link and Disease Management Monitoring divisions. The term of the lease is fifteen (15) years from the commencement date. The commencement date is the last of the following to occur: (a) the date on which landlord gives notice to tenant that the work to be performed by landlord has been substantially completed; (b) the date landlord shall have obtained a temporary certificate of occupancy for the building which authorizes and permits the occupancy by tenant; and (c) the date on which the certain interior work has been completed. The lease calls for minimum annual rentals of $269,500, subject to a 3% annual increase plus reimbursement for real estate taxes. As a result of this transaction, the Company and the building are eligible for significant Relocation and Employment Assistance Program (REAP) and other tax incentive and cost savings benefits from the City of New York. The Company expects to occupy the premises during the fourth quarter of 2002. Simultaneously with the move, the Company plans to sublet 3255 Lawson Boulevard in Oceanside and sell the condominium currently occupied by HCI Acquisition Corp. On November 1, 2001, the Company entered into a Cooperative Licensing, Development, Services and Marketing Agreement with Health Hero Network, Inc. (the "Agreement") pursuant to which the Company is developing, with the assistance of Health Hero Network, Inc., a new integrated appliance combining the features of the Company's PERS product with Health Hero Network's (HHN) technology. Pursuant to the Agreement, the Company will be the exclusive manufacturer and distributor (based on achievement of certain sales milestones), in the United States, of an enhanced PERS system that combines the Company's traditional safety monitoring features with Health Hero Network, Inc.'s internet based disease management monitoring technology. The Agreement has a minimum five-year term, and also provides for the payment by the Company of certain fees based on the service revenue derived from the enhanced PERS product. In addition, the Company's exclusivity is subject to achievement of certain sales milestones during the term of the Agreement. The Company anticipates the costs associated -12- with the licensing, research and development and marketing with respect to this Agreement to approximate $2,000,000 over the next 12-18 months. The cost of the licensing component will aggregate $1,000,000, of which $300,000 has been paid as of May 8, 2002. Related professional fees of approximately $95,000 have been capitalized through March 31, 2002. In April 2002, the Company raised approximately $2,700,000 in a private equity placement of the Company's common stock and warrants. Several investors purchased an aggregate of 910,000 shares of the Company's common stock and warrants to purchase 227,500 shares of the Company's common stock. The securities associated with this offering have not been registered. The Company has agreed to register for resale the common stock and the common stock underlying the warrants sold in the private placement within a certain timeframe. The Company will be required to pay a fee to the investors equal to 2% of the amount raised for each month the securities are not registered after the timeframe. The Company plans to utilize a majority of the proceeds of this offering to further execute its business expansion and diversification strategy into the remote patient monitoring and medical contact center industries, including its recently announced initiative with HHN. In the normal course of business, as of March 31, 2002, the Company has committed to purchase Model 800 Personal Emergency Response systems in 2002. The cost to purchase these units will be $321,700. As of March 31, 2002 the Company prepaid $175,000 towards this purchase. The remaining amount outstanding will be paid within the 2002 fiscal year. Since 1983, the Company has provided PERS services to the City of New York's Human Resources Administration Home Care Service Program ("HCSP"). The Company provides services to the City of New York under extensions and contracts issued periodically. The current contract, which runs through June 2002, reflects terms and conditions present in the original contract. The Company believes, based on discussions with HCSP representatives, that an extension through June 2003 is forthcoming under the same terms and conditions as in the original contract. During the three months March 31, 2002 and 2001, the Company had revenues from this contract representing 25% and 28%, respectively, of its total revenue. During any contract renewal process, there can be no assurance that the same level of revenues will be sustained due to a variety of factors, including pricing, number of subscribers to be serviced, and the amount of time that passes before the renewal agreement is acted upon by HCSP. While the Company has reduced its dependence on revenue from HCSP, a significant amount of the Company's revenue could be lost, albeit over a protracted period, if the contract with HCSP is not maintained or is maintained at a significantly lower level of revenue. This could have a material adverse effect on operating results and cash flows. In addition, it is possible that significant adjustments to inventory of medical devices held for lease and leased medical devices associated with the contract would occur. The extent and significance of the adjustments will be dependent upon the length of the transition period to the new provider subject to management's ability to place these devices with other providers. The Company's management has developed and implemented a business plan to minimize its reliance on HCSP. This involves the reduction in HCSP related overhead and redeployment of assets to other programs, in the event that HCSP contract were not to continue for any reason. In addition, the Company focuses on, and will continue to build its subscriber base through -13- consumers, healthcare agencies, health maintenance organizations, durable medical equipment providers, retirement communities, hospitals and other governmental agencies. In addition, the Company is continuing to invest in new products, services, and initiatives. RESULTS OF OPERATIONS --------------------- The Company's gross revenue, which consists primarily of monthly recurring revenues ("MRR"), increased by $297,753 for the three months ended March 31, 2002 as compared to the same period in 2001, an increase of 9%. The Company has experienced continued success in growing its customer base outside the contract with the City of New York through a variety of marketing efforts that have continued to contribute to increasing MRR. These efforts include expansion into new regions, competitive conversions, strategic partnerships with healthcare provider systems, and additional entry into Medicaid reimbursed marketplaces. In addition, the Company experienced a 21% growth in its OnCall telephone answering service as compared to the same period last year. Costs related to services decreased by $82,691 for the three months ended March 31, 2002 as compared to the same period in 2001. Costs related to services, as a percentage of service revenues, for the three months ended March 31, 2002 and 2001 were 46% and 53%, respectively. The Company incurred less costs related to the repairing and upgrading of units as compared to the same period in 2001. In addition, depreciation for the three months ended March 31, 2002 was consistent with the amount compared to the same period in 2001 while service revenues increased. Therefore, this resulted in a reduced percentage of costs related to services, as a percentage of service revenues. Selling, general and administrative expenses increased by $126,033 for the three months ended March 31, 2002 as compared to the same period in 2001, an increase of 8%. Selling, general, and administrative expenses, as a percentage of total revenue, for the three months ended March 31, 2002 and 2001 were 49% and 50%, respectively. The increase in selling, general and administrative expenses is primarily due to increased commissions, directly related to increased sales, and the hiring of independent consultants to assist in advisory matters. An additional increase is due to the Company hiring personnel specifically relating to the Health Hero Network, Inc. endeavor. Interest expense decreased by $30,198 for the three months ended March 31, 2002 as compared to the same period in 2001. Interest expense decreased due to reduction of borrowings during 2001 as well as a decrease in interest rates. The Company's income before provision for income taxes for the three months ended March 31, 2002 was $152,771 as compared to a loss of $133,837 for the same period in 2001. The increase of $286,608 resulted from an increase in the Company's revenues from services and a decrease of costs related to services, offset by an increase in selling, general and administrative costs. -14- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. ------------------ Although the Company is a party to certain routine litigation incidental to its business, the Company believes that, except as set forth below, there are no material pending legal proceedings to which it is a party or to which any of its properties are subject. On March 2, 2001 American Medical Alert Corp. was served with a Summons and Complaint by a former employee seeking to recover damages for discrimination and harassment in connection with her employment and the associated termination thereof. The action is pending in the Supreme Court of Queens County. The plaintiff seeks to recover the sum of $750,000 for compensatory damages and $750,000 for punitive damages. At this stage of the proceedings, it is not possible to predict the outcome of this litigation, however, management believes that the Company has meritorious defenses to the complaint. At the present time the insurance company has declined coverage although efforts to obtain a reversal of the declination of coverage are ongoing. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ----------------------------------------- (a) Recent Sales of Unregistered Securities. On April 19, 2002, the Company sold 910,000 shares of its common stock and warrants to purchase 227,500 shares of its common stock to several accredited investors in a private placement, for a total cash consideration of $2,730,000. The warrants are exercisable for a five year term expiring April 19, 2007, at an exercise price of $3.80 per share. In connection with the April 19, 2002 private placement, the Company paid a placement agent, Jessup & Lamont Securities Corp., a cash fee equal to 7.5% of the gross proceeds, and issued this placement agent warrants to purchase common stock, for a five year term expiring April 19, 2007. The warrants issued to the placement agent are to purchase 91,000 shares of common stock at $3.83 per share and 22,750 shares of common stock at $4.17 per share, respectively. The sale and issuance of the shares and the warrants was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K. -------------------------------- (a) Exhibits: None. (b) Reports on Form 8-K: On January 18, 2002, the Company filed a Current Report on Form 8-K relating to Item 5, Other Events, reporting the issuance of a press release relating to the signing of a long-term lease for a new communication facility. On April 23, 2002, the Company filed a Current Report on Form 8-K relating to Item 5, Other Events, reporting the issuance of a press release announcing the completion of a private equity placement. -15- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN MEDICAL ALERT CORP. Dated: May 15, 2002 By: /s/ Howard M. Siegel ----------------------------- Name: Howard M. Siegel Title: Chairman of the Board, President and CEO Dated: May 15, 2002 By: /s/ Richard Rallo ----------------------------- Name: Richard Rallo Title: Controller and Principal Accounting Officer -16-