10KSB 1 form10ksb-12312003.txt YEAR END: 12/31/2003 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003. OR |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 1-8635 AMERICAN MEDICAL ALERT CORP. -------------------------------------------------------------------------------- (Name of Small Business Issuer in Its Charter) New York 11-2571221 -------- -------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3265 Lawson Boulevard, Oceanside, New York 11572 ------------------------------------------ ---------- (Address of Principal Executive Offices) (Zip Code) (516) 536-5850 ------------------------------------------------ (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: None ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 per share ---------------------------- (Title of Class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ----- ----- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. __ The issuer's revenues for its most recent fiscal year: $16,568,352. The aggregate market value of the voting stock held by non-affiliates of the registrant, as of March 19, 2004, was $21,901,721 computed by reference to the price at which such stock was sold, as reported on NASDAQ on that date. Aggregate number of shares of Common Stock outstanding as of March 19, 2004: 7,750,553 PART I Statements contained in this Annual Report on Form 10-KSB include "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including, in particular and without limitation, statements contained herein under the headings "Description of Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause the Company's actual results, performance and achievements, whether expressed or implied by such forward-looking statements, not to occur or be realized. These include uncertainties relating to government regulation, technological changes, our expansion plans and product liability risks. Such forward-looking statements generally are based upon the Company's best estimates of future results, performance or achievement, based upon current conditions and the most recent results of operations. 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. You should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements. Readers should carefully review the risk factors described herein and any other cautionary statements contained in this Annual Report on Form 10-KSB. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Item 1. DESCRIPTION OF BUSINESS ----------------------- A. General ------- American Medical Alert Corp. ("AMAC" or the "Company"), a corporation incorporated under the laws of the State of New York in 1981, is a healthcare communications company. As used herein, the term "AMAC" or "Company" means, unless the context requires otherwise, the Company and its wholly owned subsidiaries, HCI Acquisition Corp., LMA Acquisition Corp., and Safe Com, Inc. AMAC has four operating divisions: Personal Emergency Response System ("PERS"), H-LINK(R) OnCall Telephone Answering Service ("TAS"), Teleheath Disease Management Monitoring and Business-Safety Monitoring Products. AMAC's corporate goal is to leverage its core monitoring competency to identify and implement complementary business concepts designed to enhance and diversify the Company's revenue stream and earning capacity. The Company's financial model is the generation of monthly recurring revenues (MRR). For the year ended December 31, 2003, approximately 98% of the Company's revenue was generated from MRR. 2 B. Products and Services --------------------- 1. Personal Emergency Response Systems and Medication Compliance ------------------------------------------------------------- VOICECARE(R), the Company's flagship PERS product, enables medically at-risk, elderly, infirm and disabled persons to remain independent, enjoy the comforts of living at home, and, at the same time, reduce costly hours of safety supervision that would otherwise be necessary while giving family members and caregivers peace of mind. VOICECARE(R) Systems are designed to permit client requested two-way (talk/listen) voice communication between an individual and Company monitoring personnel. Through the use of the Company's VOICECARE(R) System, individuals are able to signal for help at the touch of a button when in need of assistance and engage in two-way voice communication to identify the appropriate level of intervention required. VOICECARE(R) Systems are available in tabletop or wall mounted configurations. The tabletop systems are primarily installed in client residences pursuant to a private pay contract. Medical facilities, home care service providers and government agencies utilize both the tabletop and wall mounted configurations. The wall-mounted units are typically used in new and refurbished senior multi-housing facilities (i.e., assisted living retirement settings). When the subscriber activates their remote pendant, the system emits an audible tone and turns on a light to indicate to the subscriber that the system is alerting personnel at AMAC's Emergency Response Center ("ERC"). The Company's VOICECARE(R) System, utilizing the subscriber's telephone line, permits hands-free voice communication between the subscriber and the ERC. The equipment includes a two-way voice communicator connected to the telephone line in the subscriber's home and a remote personal help activator, which is worn around the neck or wrist or carried by the subscriber. The Company recently introduced an upgraded, second version of its activator featuring a more lightweight design, a monitored battery and an increased transmission range. The Company's proprietary software acknowledges the incoming signal and automatically displays the subscriber's personal information to personnel at the ERC. The subscriber and ERC monitoring personnel speak to each other, thus allowing monitoring personnel to determine the nature of the emergency and the type of assistance required. Appropriate assistance is then dispatched in accordance with predetermined protocols and the subscriber's requested level of care. The Company's PERS are on the Centers for Medicare and Medicaid (CMS) list of approved monitoring devices. Payment for PERS services is available through various State Medicaid Home and Community Based waiver programs. AMAC believes that the use of home care as an alternative to institutional care will continue to increase, thereby making available the opportunity for broader use of the Company's current and future products. The Company also offers its monitoring services to healthcare providers as well as providing back-up monitoring services to assisted living facilities. During 2003, the Company upgraded its PERS operating platform. The primary objectives of the development program were to enhance AMAC's communication capability and to enable Web-based interactions with our provider base, to allow for seamless communication with new healthcare communication appliances and services and to comply with future privacy and security policy mandates. 3 The new software has been designed as a Microsoft Windows application, written in Visual Basic and accessing a Microsoft SQL 2000 Database, with the user computers running Microsoft Windows 2000/XP. The software is a three-tier system based on COM+ components and has been developed with 24/7/365 Emergency Response in mind. There are redundant application servers that will also run Microsoft Windows 2000. Additionally, the system provides for replication on back up SQL Servers. In the event of a network or server failure, the system will run in a stand-alone environment. This feature, otherwise transparent to the operators, allows call transactions to continue without interruption in the event of any local system outage. Upon system recovery, the workstations will update the SQL servers with the data that was captured during the outage. Complementary to the Company's PERS is the MED-TIME(R) Device, an electronic medication reminder and dispensing unit marketed under an exclusive licensing agreement. This agreement originates from PharmaCell AB, a Swedish company, with licensing rights extending throughout the United States, Canada and Mexico. MED-TIME(R) helps to insure adherence to prescribed therapeutic medication regimens and thus reduces healthcare expenditures related to noncompliance. MED-TIME(R) is a valuable asset to visually handicapped, medically or mentally challenged patients as well as patients on daily medication regimens who have difficulty adhering to complex medication schedules. The product can be utilized as a stand-alone device or integrated with the Company's PERS to notify the ERC of a noncompliant event. MED-TIME(R) contains a tray with twenty-eight compartments. At preprogrammed times, one to four times a day, the dispenser reminds the user to access and take the medication. The reminder signal for the stand-alone device remains active for the lesser of thirty minutes or until the medication is removed from the device. The reminder signal for the device used in conjunction with the PERS unit will notify the ERC for corrective action if the medicine is not removed from MED-TIME(R) within thirty minutes. Compliance with the medication regimen automatically resets the device. Several states now provide for Medicaid reimbursement of MED-TIME(R). In addition, MED-TIME(R) is used in retirement homes, assisted living facilities, and by private pay consumers. 2. H-LINK(R) OnCall (TAS) ---------------------- The Company provides TAS through its H-LINK(R) OnCall division at separate locations as a result of two acquisitions, Harriet Campbell Inc. (HCI) in November 2000, and Live Message America (LMA) in June 2003. Services offered by H-LINK(R) OnCall include message desk services, appointment making, referral services, voice-mail and wireless communications. H-LINK(R) OnCall offers contact center services designed to enhance the patient and provider contact experience. The client base is comprised of sole and group private practices, hospitals, multi-hospital systems as well as home care and hospice agencies. 4 In addition to new technology, a critical component for successful expansion is a professionally trained staff of call agents. H-LINK(R) has allocated additional resources to enhance contact agent training and staff development to support expansion efforts, new communication technology, a broader array of call center based services and continuous quality control. During the past three years, H-LINK(R) OnCall has grown substantially in its contractual base by offering quality oriented and innovative communication services to the healthcare community. To promote continued growth, the Company has increased its sales force and actively seeks additional synergistic acquisition opportunities. 3. Telehealth Disease Management Monitoring ---------------------------------------- On November 1, 2001, the Company entered into a cooperative licensing, development, services and marketing agreement with Health Hero Network, Inc. (HHN). This agreement provided the Company with the right to develop a newly integrated appliance combining the features associated with the PERS product and HHN's remote patient monitoring technology. The integrated appliance was released commercially in the last quarter of 2003. The exclusive nature of the Company's arrangement with HHN is anticipated to provide AMAC with a major point of differentiation from other PERS providers as the healthcare community begins to embrace disease management and home patient monitoring as a standard practice in healthcare delivery. The Company believes that entry into the telehealth/disease monitoring field provides an unparalleled opportunity for growth. The HHN technology platform has two main components. The first is the patient interface, the Health Buddy(R) appliance, and the second is the management tool, the Health Hero iCare Desktop(TM). The Health Buddy(R) appliance is a communications device that utilizes an existing telephone line within the client's home. The Health Buddy(R) provides clients daily on-screen viewing of their personalized question set (referred to as dialogues) and elicits responses to these dialogues through selection of options highlighted by pressing one of four push buttons. The client not only answers dialogues regarding the symptoms associated with his/her condition, but also is asked questions about their self-care behavior and is provided educational information regarding their condition. The iCare Desktop(TM) is an integrated web-based system accessible by authorized care managers through a secure Internet browser. This system allows the healthcare provider to efficiently review and manage population level and individual client data. The iCare Desktop(TM) facilitates the collection, analysis, and reporting of client symptomatic, behavioral and educational data utilizing proprietary algorithms and risk stratifying mechanisms. The use of the iCare Desktop(TM) may be modified to reflect specific work processes of the individual care manager or healthcare facility. 5 The efficacy of HHN's system has been the basis of studies by independent clinical entities as well as outsourced research organizations. Studies from various sources conclude that the HHN platform has had not only a positive effect on individual client clinical and qualitative outcomes but also is cost beneficial. Initial AMAC customers utilizing the current model of the device have affirmed similarly positive outcomes from both a clinical and cost avoidance perspective. PERS Buddy(R) ------------- A key value of the arrangement between HHN and AMAC is AMAC's right to build and market a hybrid appliance. This appliance incorporates all of the features of HHN's disease management platform with the PERS two-way communication capability in one, streamlined unit. The Company believes this cost-effective, comprehensive solution will allow healthcare providers and payors to remain in continuous contact with high-risk patients while enhancing quality of life in a home setting. Furthermore, the hybrid appliance will contain a biometric connectivity port that will allow patient vital signs to be remotely captured by the device. In 2003, the Company worked with its core provider group to further refine the AMAC iCare Desktop(TM) management platform utilizing feedback and input from the client base to modify and enhance the services provided. Additional services such as patient enrollment and first-line monitoring support have been offered as a value-added component to clients to promote system utilization. While the Company prepared for the commercial release of the integrated appliance, its sales and marketing team offered the Health Buddy(R) appliance and iCare Desktop(TM) management platform as well as beginning the process of pre-selling the integrated appliance and disease management monitoring services. Resource allocation to support and facilitate this endeavor has been considerable. Nonetheless, the Company believes that this revolutionary platform for patient-provider communications is a vital element to the success of the Company's long-term strategic plan. This initiative is expected to increasingly result in new revenue growth from managed care organizations and at-risk providers responsible for managing a diverse group of chronically ill patient populations. As disease management becomes a national focus, as evidenced by, among other trends, the passage of the Medicare Modernization Act, the opportunity to participate in new, mainstream healthcare service policies will unfold on a nationwide scale. The return on investment for the Company through participation in disease management monitoring is potentially enormous given national healthcare policy direction. 4. Safe Com, Inc. -------------- Safe Com, Inc. offers equipment and safety monitoring to pharmacies and other 24/7 retail organizations. Marketed through a product line known as Silent Partner, the offering provides a comprehensive retail security system integrating audio verification, access control, and systems monitoring to safeguard employees, customers, and assets. The Silent Partner program components include Threatening Event Monitoring Systems, Safe Coercion Monitoring Systems and VCR Systems Compliance Monitoring. Silent Partner 6 functions by transmitting emergency signals to the AMAC 24/7 monitoring center which pinpoints the exact location of distress within the retail establishment, monitoring and recording the event, and dispatching local law enforcement. Utilization of the system enhances the security comfort level of employees. During 2003, the number of stores monitored by Safe Com has increased 62% to 294 sites. 5. Production/Purchasing --------------------- The Company outsources its manufacturing and final assembly of its core product lines. Sources are selected through competitive bids, past performance and accessibility to the engineering process. Although the Company currently maintains favorable relationships with its subcontractors, the Company believes that, in the event any such relationship were to be terminated, the Company would be able to engage the services of alternative subcontractors as required to fulfill its needs without any material adverse effect to the Company's operations. With the exception of several proprietary components, which are manufactured to the Company's specifications, the manufacturing of the Company's product lines requires the use of generally available electronic components and hardware. C. Communications Centers ---------------------- The Company operates three (3) call centers: o Long Island City, New York The Company's primary communications center is located at 36-36 33rd Street, Long Island City, New York. In April 2003, the Company opened a one-hundred seat state-of-the-art call center providing the full scope of communication services offered by AMAC. The call center was built with system-wide redundancy. The primary telephone switch is a multi chassis Amtelco Infinity(R) system. The Infinity System's Automatic Call Distribution (ACD) system provides a high degree of control in call routing, allowing skills-based routing, priority and overflow scenarios to ensure that calls are delivered without delay. Infinity's extensive reporting and analysis tools allow management to monitor all aspects of contact center call traffic, operator performance and service levels. Phone service to the call center is provided by three separate carriers and is configured to provide continuous service in the event of disruption at any number of possible points of failure. T-1 circuits from our telephone provider's central offices are routed through separate paths to our call center to protect against street level cable failures. Phone circuit entry to our building is provided through a reinforced steel conduit built to UL Central Station Standards. All call center phone contacts are digitally recorded, indexed and cataloged direct to hard disk. Conversations can be searched by time, client or by operator and can be easily retrieved for review in the 7 event that any call data requires examination. This feature is also an essential part of the Company's quality review and staff development program. The call center's electricity supply is maintained by a comprehensive, three tiered back-up system. The system consists of dual power supplies at the telephone switch, an uninterruptible power supply (UPS) and a diesel generator. The Company's call center is staffed by full time Information System ("IS") professionals charged with the responsibility to maintain, refine and report on all data and communications system requirements. Critical systems are equipped with secure remote access and diagnostic abilities, enabling offsite as well as on-site access to IS system support 24/7. o Audubon, New Jersey This site serves as the call center for TAS provided by the LMA acquisition and services the Company's south Jersey and Philadelphia TAS customer base. The Company is in the process of upgrading the telephony platform at this site to be compatible with the Long Island City, New York call center. This upgrade will allow for significant additional service capability, provide eventual redundancy and overflow as well as single site operational capability during selected time periods to further realize operational efficiencies. o Oceanside, New York The corporate offices where the communication services were traditionally housed now serves as the back-up center for the Company's PERS ERC and Client Services. D. Marketing/Customers ------------------- The Company markets its portfolio of healthcare communication services and monitoring devices to integrated hospital systems, home healthcare providers, community service organizations, government agencies, third party insurers, as well as private pay clients. The Company believes there are several compelling industry and population trends that will continue to drive utilization of its products and services. Within our PERS and telehealth service lines, the aging population and percentage of individuals with chronic disease conditions will continue to provide significant opportunity to utilize our home monitoring and disease management solution, to achieve cost control and improve quality of life. With respect to our TAS business division, we continue to observe increased opportunity with integrated hospital systems and regional home health agencies. Specifically, healthcare organizations are seeking to achieve cost savings by consolidating services through single source vendor relationships. The Company's advanced telephony, call center infrastructure and specialization in healthcare, uniquely positions the Company to effectively compete for new business. 8 The Company's products and services may be acquired on a single line or bundled basis and are highly complimentary. As demand for our products and service continue to develop, the Company will add additional sales and marketing personnel to enhance our national presence throughout its respective businesses. E. Trademarks ---------- The Company considers its proprietary trademarks with respect to the development, manufacturing and marketing of its products to be a valuable asset. The Company believes that continued development of new products and services with trademark protection is vital to maintaining a competitive advantage. The Company's trademarks include "AMERICAN MEDICAL ALERT(R)", "THE RESPONSIVE COMPANY(R)", "WHERE PATIENT AND PROVIDERS CONNECT (R)", "VOICECARE(R)", "SMART TOUCH(R)", "THE VOICE OF HELP(R)", "MED-TIME(R)", "H-LINK(R)", "MED PASS(R)", "ROOM MATE(R)", "SYSTEM-ONE(R)", "SECURE-NET", "HELPING PEOPLE LIVE BETTER(R)", "CARERING(R)", "PERS BUDDY(R)", "HEALTH PARTNER(R)", "HEALTH MESSENGER(R)", "HELP LINK(R)", "CARE-NET(R) and "TELEFRIEND(R)", each of which is registered with the United States Patent and Trademark Office. F. Research and Development ------------------------ In a continuing effort by the Company to maintain state-of-the-art technology, the Company conducts research and development through the ongoing efforts of its employees and consulting groups. During 2004, the Company plans to continue the enhancement of its disease management monitoring platform. Expenditures for research and development for the years ended December 31, 2003, 2002 and 2001 were $181,547, $323,734 and $117,753, respectively, and are included in selling, general and administrative expenses. In addition to this, the Company continues to focus its research and development activities on enhancement of its core PERS products and SILENT PARTNER, as well as the development of new products and services specifically addressing disease management. G. Impact of Government Regulations -------------------------------- The Company derives approximately 27% of its revenues from various Medicaid programs. Government legislative initiatives, if enacted, could impose pressures on the pricing structures applicable to the Company's PERS services. Depending on the nature and extent of any new laws and/or regulations, or possible changes in the interpretation of existing laws and/or regulations, any such changes could affect revenue, operating margins, and profitability. The Privacy Rule under the Health Insurance Portability and Accountability Act (HIPAA) went into effect in April 2003. These regulations relate to the privacy of patient health information. To comply with the Privacy Rule, the Company executed required Business Associate Agreements with its business partners and 9 vendors, appointed a Privacy Officer, established policies, procedures and training standards, and began to assess its preparedness for the HIPAA Security Standards which are scheduled to go into effect in 2005. H. Competition ----------- The Company's competition includes manufacturers, distributors and providers of personal emergency response equipment and services, disease management and biometric carve out companies and a small number of security companies. Some of the Company's competitors may have more extensive manufacturing and marketing capabilities as well as greater financial, technological and personnel resources. The Company's competition focuses its marketing and sales efforts in the following areas: hospitals, home care providers, physicians, ambulance companies, medical equipment suppliers, state social services agencies, health maintenance organizations, and directly to consumers. I. Employees --------- As of March 19, 2004, the Company employed 234 persons who perform functions on behalf of the Company in the areas of administration, marketing, sales, engineering, finance, purchasing, operations, quality control and research. The Company is not a party to any collective bargaining agreement with its employees. The Company considers its relations with its employees to be good. J. Risk Factors ------------ RISKS ASSOCIATED WITH OUR BUSINESS OUR BUSINESSES MAY BE ADVERSELY IMPACTED BY GOVERNMENT REGULATIONS. We derive approximately 27% of our revenues from Medicaid reimbursed programs. Government legislative initiatives, if enacted, could impose pressures on the pricing structures applicable to our PERS. Our revenue, operating margin and profitability could be adversely affected by new laws and or regulations, or changes in the interpretation of existing laws and/or regulations, or reductions in funding or imposition of additional limits on reimbursements. In addition, as a provider of services under Medicaid programs, we are subject to the federal fraud and abuse and the so-called "Stark" anti-referral laws, violations of which may result in civil and criminal penalties and exclusion from participation in Medicaid programs. Also, several states have enacted their own statutory analogs of the federal fraud and abuse and anti-referral laws. While we at all times attempt to comply with the applicable federal and state fraud and abuse and anti-referral laws, there can be no assurance that administrative or judicial interpretations of existing statutes or regulations or enactments of new laws or regulations will not have a material adverse effect on our operations or financial condition. 10 TECHNOLOGICAL CHANGES MAY NEGATIVELY AFFECT OUR BUSINESS. The telecommunications industry, on which our business is dependent, is subject to significant changes in technology. These technological changes, including changes relating to emerging wireline and wireless transmission technologies, may require us to make changes in the technology we use in our products in order to remain competitive. This may require significant outlays of capital and personnel, which may adversely affect our results of operations and financial condition in the short term. OUR BUSINESS MAY BE ADVERSELY IMPACTED BY OUR EXPANSION INTO THE HOME CARE/DISEASE MANAGEMENT MONITORING SERVICE BUSINESS. Our expansion into Home Care/Disease Management monitoring service represents a significant commitment of management time and funds. While we are committed to affecting the goal of this expansion, and we believe that these activities should result in improved earnings and greater market share, there can be no assurances that this in fact will happen. If we are unsuccessful in selling the products and services in this new business endeavor, the Company will not receive its anticipated return on investment relating to this business. PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE. Because our business involves responding to personal emergencies, failures of our products or errors in the delivery of our services carry a risk of liability claims. We manage this risk through contractual limits on liability and damages, and by carrying insurance. However, the contractual limits may not be enforceable in all jurisdictions or circumstances. While historically we have not incurred significant liabilities due to such claims, a successful claim may be made for damages which exceed the coverage under any insurance policy. In the future, our insurance costs may become more expensive, and there can be no assurance that additional insurance will be available on acceptable terms. If one or more of these occur, it could have an adverse effect on our financial condition and operations. WE RELY ON THE CONTRACT WITH NEW YORK CITY FOR A SIGNIFICANT PORTION OF OUR BUSINESS. Since 1983, the Company has provided PERS services to the City of New York's Human Resources Administration Home Care Service Program ("HCSP"). During the years ended December 31, 2003, 2002 and 2001, the Company had revenues from this contract representing 18%, 23%, and 26%, respectively, of its total revenue. In November 2002, in response to a Request For Proposal issued by HCSP, AMAC and several other companies submitted proposals to provide PERS services on behalf of the City of New York for the period April 1, 2004 through March 31, 2007. The Company was chosen as the approved vendor and is currently reviewing the draft contract which was recently submitted to the Company by HCSP. Based on the preliminary terms of the contract, which may still be subject to negotiation, the Company would experience approximately a 20% reduction in monthly revenue relating to the HCSP contract, as the contract calls for a reduced rate per subscriber per month. As a result, the Company would also 11 realize reduced gross margins and net income arising from this contract. The new contract is anticipated to take effect in the second quarter of 2004. The Company has previously disclosed the possibility of the renewal terms of this contract being less favorable than the prior agreement and has implemented a variety of measures in anticipation of this occurrence. Among other things, the Company has reduced its reliance on the HCSP contract from 47 percent of gross revenue in 1998, to 18% in 2003. The Company has diversified its revenue sources to four distinct revenue streams and has taken significant steps in reducing overhead. During the fourth quarter of 2003 and the first quarter of 2004, the Company has secured certain other PERS contracts and further streamlined operational processes. The Company estimates that the new contracts and cost efficiencies will significantly mitigate the financial impact of the modification to the HCSP contract. RISKS ASSOCIATED WITH OUR SECURITIES WE DO NOT ANTICIPATE THE PAYMENT OF DIVIDENDS. We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain all available funds for use in the operation of our business. Thus, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. SHARES THAT ARE ELIGIBLE FOR SALE IN THE FUTURE MAY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. As of March 19, 2004, an aggregate of 1,623,012 of the outstanding shares of our common stock are "restricted securities" as that term is defined in Rule 144 under the federal securities laws. These restricted shares may be sold pursuant only to an effective registration statement under the securities laws or in compliance with the exemption provisions of Rule 144 or other securities law provisions. Rule 144 permits sales of restricted securities by any person (whether or not an affiliate) after one year, at which time sales can be made subject to the Rule's existing volume and other limitations. Rule 144 also permits sales of restricted securities by non-affiliates without adhering to Rule 144's existing volume or other limitations after two years. In general, an "affiliate" is a person that directly; or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with us. The SEC has stated that generally, executive officers and directors of an entity are deemed affiliates of the entity. In addition, 1,527,010 shares are issuable pursuant to currently exercisable options, and 531,250 shares are issuable pursuant to currently exercisable warrants, further adding to the number of outstanding shares. Future sales of substantial amounts of shares in the public market, or the perception that such sales could occur, could negatively affect the price of our common stock Item 2. DESCRIPTION OF PROPERTIES. -------------------------- The Company's executive offices and backup ERC are located in a 5,600 square foot facility at 3265 Lawson Boulevard, Oceanside, New York. On January 1, 1995, the Company entered into a five-year operating lease with Howard M. Siegel, CEO 12 and President of the Company, who owns this facility. In February 1998 the lease for this space and the adjoining 8,000 square foot parking lot was extended until September 30, 2007 (the "1995 Lease"). The 1995 Lease provides for a base annual rent of $74,600, subject to a 5% annual increase plus reimbursements for real estate taxes and other operating expenses. In October 1997, the Company entered into a separate ten-year operating lease (the "1997 Lease") for an additional 2,200 square feet of office space located in an adjacent building, located at 3255 Lawson Boulevard, Oceanside, New York, owned by Add on Properties, LLC, which is owned by Mr. Siegel. The 1997 Lease calls for an initial minimum annual rent of $36,000, subject to a 5% annual increase plus reimbursement for real estate taxes. In November 1999, an Addendum to the 1997 Lease was entered into for an additional 2,200 square feet at an annual rent of $39,600 subject to the same terms and conditions stated in the original lease. The Company executed a long-term lease on January 14th, 2002 with an unaffiliated party, for an 11,000 square foot property at 36-36 33rd Street, Long Island City, New York, which it occupied in April 2003. This location is the home for the Company's primary communication center. The Company and the building are eligible for significant Relocation and Employment Assistance Program (REAP) credits and other tax incentive and cost savings benefits. The term of the lease is for a period of fifteen (15) years from the commencement date and calls for minimum annual rentals of $269,500, subject to annual increases of 3% plus reimbursement for real estate taxes. The Company houses its Engineering, Research and Development, Quality Control and Testing departments in a 5,400 square foot facility located in Mt. Laurel, New Jersey. The Company occupies this space pursuant to a lease with an unaffiliated party. In January 2001, the Company renewed its lease, which expired in December 2000, for an additional three years at a current base annual rent of $43,200 plus charges for certain operating expenses. In 2003, the Company renewed its lease, which expired on December 31, 2003, for an additional one year under the same terms and conditions. The Company leases approximately 1,500 square feet of space in Flushing, New York on a month to month basis at a charge of $1,600 per month. The office serves as a hub for the City of New York's Human Resources Administration HCSP program, providing warehouse, storage, shipping, receiving and office space. The Company maintains a marketing and administrative office in Decatur, Georgia. The Company leases approximately 1,200 square feet of space from an unaffiliated party on a month to month basis at a charge of $1,750 per month. The Company maintains a marketing and administrative office in Tinley Park, Illinois. The Company leases approximately 1,700 square feet of space from an unaffiliated party pursuant to a five-year lease, which expires on April 30, 2005. The lease provides for an annual rent of $19,020 during the first year of the term, $19,591 during the second year of the term, $20,178 during the third year of the term, $20,784 during the fourth year of the term and $21,407 during the fifth year of the term. 13 The Company maintains a marketing and administrative office in Parker, Colorado. The Company leases approximately 1,275 square feet of space from an unaffiliated party pursuant to a five-year lease, which expires on March 31, 2005. The lease provides for an annual rent of $9,564 during the first year of the term, $10,200 during the second year of the term, $10,836 during the third year of the term, $11,472 during the fourth year of the term, $12,108 during the fifth year of the term. The Company believes that these properties are suitable for their intended uses. In connection with the purchase of certain assets of Harriet Campbell, Inc., the Company acquired a condominium located at 216 East 75th Street in New York City. The condominium consists of approximately 1,900 square feet. The Company sold this condominium in December 2003. Item 3. LEGAL PROCEEDINGS. ----------------- The Company is aware of various threatened or pending litigation claims against the Company relating to its products and arising in the ordinary course of its business. The Company has given its insurance carrier notice of such claims and it believes there is sufficient insurance coverage to cover any such claims. In any event, the Company believes the disposition of these matters will not have a material adverse effect on the financial condition of the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. --------------------------------------------------- No matters were submitted during the fourth quarter of the year covered by this report to a vote of the security holders through the solicitation of proxies or otherwise. PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. -------------------------------------------------------- The Company's Common Stock is traded on NASDAQ (Symbol: AMAC). The high and low sale price of the Common Stock, as furnished by NASDAQ, is shown for the fiscal years indicated. High Low ------ ----- 2002 First Quarter $ 3.85 $ 2.97 ---- Second Quarter 3.74 2.72 Third Quarter 2.90 1.90 Fourth Quarter 2.46 1.65 14 2003 First Quarter $ 2.47 $ 1.70 ---- Second Quarter 3.00 1.76 Third Quarter 3.18 2.50 Fourth Quarter 4.14 2.25 As of March 19, 2004, there were 345 record holders of the Company's Common Stock. The Company did not pay dividends on its Common Stock during the two years ended December 31, 2003 and 2002 and does not anticipate paying dividends in the foreseeable future. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------------------------------------------- The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. This discussion should be read in conjunction with the financial statements and notes hereto. A. Results of Operations. --------------------- YEARS ENDED DECEMBER 31, 2003 AND 2002 The Company's gross revenues, which consist primarily of MRR, increased from $14,792,415 in 2002 to $16,568,352 in 2003, an increase of 12%. Revenue increased in 2003 due to several factors. On June 30, 2003 the Company acquired substantially all of the assets of LMA, a telephone answering service which generated approximately $730,000 of revenue in 2003. Revenue from the Company's existing OnCall telephone answering service business increased approximately $340,000 primarily due to the execution of an agreement in 2002 with an entity involved in cost management and purchasing of services on behalf of hundreds of healthcare and hospital organizations. Through the Company's continued expansion efforts in the disease management area, the Company generated approximately $350,000 of revenue in 2003 from the rental of the Health Buddy(R) unit, whereas for the same period in 2002 the Company generated revenue of approximately $50,000 from the Health Buddy(R) unit, which was launched in the second quarter of 2002. The Company has also experienced continued growth in its customer base outside the contract with the City of New York (which experienced a reduction in the number of subscribers and revenue as compared to the same period in 2002). These efforts include the continued expansion into new regions, competitive conversions, strategic partnerships with healthcare provider systems, and additional entry into Medicaid reimbursed marketplaces. This growth resulted in a net increase of approximately $270,000. The remaining increase is due to a variety of other smaller items including revenues generated from the security monitoring business. Costs related to services increased from $6,847,307 in 2002 to $7,510,430 in 2003, an increase of 10%. The increase in 2003 was due to a variety of factors. First, with the acquisition of LMA, the Company incurred approximately $295,000 15 of cost related to services in 2003. Second, in April 2003, the Company occupied a new facility to operate its emergency response center and its telephone answering service. The rent associated with this new facility and the previous facility, prior to the relocation, was approximately $270,000, while in 2002 the Company incurred approximately $70,000 in similar costs, as the telephone answering service was operating out of a Company owned building. Third, the Company added personnel to its existing OnCall telephone answering service to handle the current and future growth of that business which resulted in increase costs of approximately $140,000, as compared to 2002. Expenses relating to the rental of the Health Buddy unit in accordance with its Cooperative Licensing, Development, Services and Marketing Agreement with HHN represents approximately $105,000 of the increase and depreciation, through the purchases of its new disease management product along with the purchases of its personnel emergency response equipment, increased by approximately $105,000 for 2003, as compared to the same period in 2002. These increases of approximately $845,000 were partially offset by a reduction of personnel in the ERC and customer service departments, which is directly attributed to the relocation of the PERS monitoring center and telephone answering service into one facility, resulting in a reduction of payroll expense of $125,000 and a decrease in the telephone expense generating a reduction of approximately $55,000. Costs related to services, as a percentage of service revenue, for 2003 and 2002 was 46% and 48%, respectively. The decrease in this percentage is a result of the Company being able to generate greater sales in 2003 while maintaining payroll and related costs consistent with prior year. This decrease would have been greater in 2003, had the Company's Long Island City's rent expense of approximately $250,000 been reduced to reflect the Relocation and Employment Assistance Program (REAP) credit of up to $3,000 per employee per year relocated to this new facility; however, this indirect offset is charged to "Other Income" in the Consolidated Financial Statements (see "Other Income" discussion below). Selling, general and administrative expenses increased from $7,665,107 in 2002 to $8,128,383 in 2003, an increase of 6%. Selling, general and administrative expenses expressed as a percentage of total revenue, for 2003 and 2002 was 49% and 52%, respectively. The increase in selling, general and administrative expenses in 2003, as compared to 2002, was primarily the result of the following: o Personnel and Related Benefits The acquisition of LMA resulted in the Company incurring approximately $140,000 of administrative personnel costs in 2003. This, along with other general increases in the number of personnel as well as compensation levels, increased payroll and related benefits by approximately $50,000, as compared to the same period in 2002. o Rent Expense During 2003, rent increased by approximately $90,000, as compared to 2002. The increase in rent is due to the Company converting space, previously occupied by the ERC and customer service personnel, into additional 16 administrative offices. The acquisition of LMA added a lease obligation for the premises currently being occupied. These items, along with general increases in rent resulted in the Company's increased expense, as compared to the same period in 2002. o Insurance Expense Insurance expense increased by approximately $85,000 as compared to the same period in 2002, primarily due to the current insurance environment. o Amortization Expense Amortization expense in 2003 increased by approximately $165,000 as a result of the Company commencing amortization of its costs associated with its cooperative licensing agreement with HHN, as certain milestones were met in July 2003. Additionally, with the acquisition of LMA, the Company recorded certain intangible assets which resulted in $60,000 of amortization expense. o Depreciation Expense The increase in depreciation expense in 2003 is primarily related to the Company occupying a new state-of-the-art facility in Long Island City, New York. The Company incurred approximately $1,100,000 of costs which are now being depreciated over the estimated useful lives. Depreciation of these assets commenced upon the Company occupying the premises in April 2003, which has resulted in approximately $85,000 of depreciation expense being recorded in 2003. Other purchases, including its new ERC/Customer Service software system, have resulted in more depreciation being recognized in 2003, as compared to 2002, by approximately $25,000. These increases in selling, general and administrative expenses were offset by a reduction in the following expenses as follows: o Put Warrant Obligation In connection with the HCI acquisition, the Company issued to the selling stockholder two warrants to purchase 133,333.33 and 105,000 shares, respectively, of the Company's common stock at an exercise price of $2 per share. The warrants are exercisable until November 20, 2005 and December 20, 2005, respectively. In addition, the selling stockholder has, the option (the "Put Option"), only during a period of ten trading days, beginning on November 21, 2003 and 2005, respectively, to require the Company, under certain circumstances, to redeem the warrants at $5 or $6, respectively ("Put Factor"), less the exercise price per share of $2. In such event, the Company may, in lieu of redeeming the warrant, require the selling stockholder to exercise the warrant and pay the selling stockholder an amount equal to the Put Factor less the market price during the 10-day trading period. In November 2003, the selling stockholder exercised the Put Option on the first warrant (133,333.33 shares) and the Company elected to 17 require him to exercise the warrant such that the Company was only required to pay him $1.52 per share, representing the difference between $5.00 and the average fair value of the shares during the requisite 10-day period, or $3.48. With this, along with a valuation performed by an independent appraiser on the second warrant, the Company recognized income of approximately $29,000 in 2003 as compared to an expense of $113,000 in 2002. o Research and Development In 2003, as compared to 2002, the Company's costs related to research and development decreased by approximately $140,000. In 2002, the Company incurred research and development costs relating to its disease management product, the PERS Buddy, throughout the year. In the latter part of 2003, the PERS Buddy appliance was completed and made available for distribution. The development costs associated with this project diminished in 2003 as the Company neared the final stages. Interest expense decreased from $129,050 in 2002 to $76,513 in 2003, a decrease of 41%. The decrease in 2003 was primarily due to the Company continuing to pay down its term loan as well as fully satisfying certain of its previously executed capital leases. Other income increased from $473,502 in 2002 to $504,599 in 2003, an increase of $31,907. Other Income in 2003 includes a Relocation and Employment Assistance Program (REAP) credit in the amount of approximately $175,000. In connection with the relocation of certain operations to Long Island City, New York, the Company became eligible for the REAP credit which is based upon the number of employees relocated to this designated REAP area. The REAP is in effect for a twelve year period and during the first five years the Company will be refunded the full amount of the eligible credit. During 2003, the Company recognized a gain of approximately $170,000 from the sale of a condominium that formerly housed the HCI telephone answering service operations. Also, in 2003, other income includes approximately $75,000 relating to the replacement of activators, as compared to approximately $255,000 in 2002. Early in 2002, it was found that certain activators supplied by a vendor may be subject to battery failure, necessitating the replacement of all potentially affected activators. The vendor replaced these activators and reimbursed the Company for costs incurred in connection with this replacement program. As of March 31, 2003, the replacement program was substantially completed and the vendor paid all costs incurred by the Company in connection with this program. Additionally, other income in 2002 included an insurance recovery of $100,000 relating to the loss of certain leased medical devices and approximately $98,000, as compared to approximately $40,000 in 2003, of interest income principally relating to the investment of funds realized from the April 2002 private placement and interest accrued on the note due from the Company's principal shareholder. The Company's income before provision for income taxes in 2003 was $1,144,700 as compared to $427,619 in 2002, an increase of $717,081. The increase in 2003, as compared to 2002, resulted from an increase in the Company's service revenues and other income; partially offset by increases in costs related to services and selling and administrative costs. 18 YEARS ENDED DECEMBER 31, 2002 AND 2001 The Company's gross revenues, which consist primarily of MRR, increased from $13,946,599 in 2001 to $14,792,415 in 2002, an increase of 6%. The increase from 2001 to 2002 was primarily due to the continued success in growing its customer base outside the contract with the City of New York (which has experienced a reduction in the number of subscribers and revenue) 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 growth in its OnCall telephone answering service business primarily due to the execution of an agreement with an entity involved in cost management and purchasing of services on behalf of hundreds of healthcare and hospital organizations. Costs related to services increased from $6,522,181 in 2001 to $6,847,307 in 2002, an increase of 5%. The cost related to services in 2002, as compared to 2001, increased primarily due to the Company incurring additional payroll costs associated with the replacement of activators in the amount of approximately $200,000. The reimbursement for these expenses by the supplier was reflected in "Other Income" in the Consolidated Financial Statements (see "Other Income" discussion below). The Company also added personnel during 2002 in its telephone answering service division to handle the current and future growth of that business. This resulted in an additional $200,000 of expense in 2002, as compared to 2001. Additionally, the Company incurred approximately $75,000 of expenses relating to the leasing of the Health Buddy unit in accordance with its Cooperative Licensing, Development, Services and Marketing Agreement with HHN. These increases of approximately $475,000 were partially offset by a reduction in repair and upgrade costs associated with the medical devices as well as a reduction in the provision for lost equipment. Costs related to services, as a percentage of service revenue, for 2002 and 2001 was 48%. Selling, general and administrative expenses increased from $6,776,638 in 2001 to $7,665,107 in 2002, an increase of 13%. Selling, general and administrative expenses expressed as a percentage of total revenue, for 2002 and 2001 were 52% and 48%, respectively. The increase in selling, general and administrative expenses in 2002, as compared to 2001, was primarily the result of the following: o Personnel and Related Benefits As part of the Company's plan to market and manage its disease management products, it retained the services of additional personnel for this area. This, along with other general increases to employees, increased payroll and related benefits by approximately $400,000. The Company believed the additional personnel was a necessary prerequisite to prepare for the distribution of its disease management products. 19 o Research and Development In conjunction with the Company's plan to transition into the disease management field, the Company incurred approximately $324,000 of research and development costs in 2002, as compared to $118,000 in 2001. The cost in 2002 primarily related to research and development of its disease management product, the PERS Buddy. o Consulting Fees During 2002, the Company hired independent consultants to assist with certain advisory matters. The areas included, but were not limited to, review of internal operating systems, website enhancements and public relations. This resulted in an increase of expense from 2001 to 2002 of approximately $100,000. o Commission Expense During 2002, commission expense increased by approximately $90,000 as compared to 2001 for three principal reasons. First, in order to service its Georgia Medicaid subscribers more efficiently, the Company retained outside subcontractors who are paid on a commission basis. Secondly, an account that had been a direct pay agency account converted to a commission paid account. Third, late in 2001, an outside contractor who is paid on a commission basis was hired to handle certain accounts that were previously serviced by in house personnel. Increases in other selling, general and administrative expenses, including insurance costs, bad debt expense and amortization expense, including the write-off of deferred loan charges, were offset by a reduction of approximately $175,000 in professional fees. Interest expense decreased from $218,873 in 2001 to $129,050 in 2002, a decrease of 41%. Interest expense decreased in 2002, as compared to 2001, due to reduced borrowing levels during 2002 as well as lower interest rates. Other income increased from $86,138 in 2001 to $473,502 in 2002, an increase of $387,364. Other income increased in 2002 due to the inclusion of approximately $255,000 relating to the replacement of activators. Early in 2002, it was found that certain activators supplied by a vendor may be subject to battery failure, necessitating the replacement of all potentially affected activators. The vendor replaced these activators and reimbursed the Company for costs incurred in connection with this replacement program. Direct costs paid to third parties in connection with the replacements have been offset against other income; internal costs, including labor, are included within costs related to services in the consolidated statements of income. Additionally, other income in 2002 includes an insurance recovery of $100,000 relating to the loss of certain leased medical devices and approximately $98,000 of interest income principally relating to the investment of funds realized from the April 2002 private placement and interest accrued on the note due from the Company's principal shareholder. 20 The Company's income before provision for income taxes in 2002 was $427,619 as compared to $309,559 in 2002, an increase of $118,060. The increase in 2002, as compared to 2001, resulted from an increase in the Company's service revenues and other income; partially offset by increases in costs related to services and selling and administrative costs. B. Liquidity and Capital Resources ------------------------------- During 2003, cash provided by operating activities was $2,704,154 as compared to $1,987,891 in 2002. Cash paid for income taxes in 2003 was $166,126 as compared to $345,162 in 2002. Expenditures for fixed assets aggregated $1,781,741 in 2003 as compared to $1,347,482 in 2002. At December 31, 2003, the Company had cash of $2,192,113. In April 2002, the Company raised $2,521,939, after expenses of $208,061, 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 at an exercise price of $3.80 per share until April 2007. As part of this transaction, the Company registered for resale the common stock and the common stock underlying the warrants sold in the private placement. 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 connection with the private placement, the Company issued to the placement agent two warrants to purchase 91,000 and 22,750 shares of common stock at an exercise price of $3.83 per share and $4.17 per share, respectively. These warrants have the same terms as the warrants issued with the common stock. In May 2002, the Company obtained 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 of $1,500,000 (based on eligible receivables, as defined). Borrowings under the term loan will bear interest at either (a) LIBOR plus 3.5% or (b) the prime rate or the federal funds effective rate plus .5%, whichever is greater, plus 1.0% and the revolving credit line will bear interest at either (a) LIBOR plus 3.0% or (b) the prime rate or the federal funds effective rate plus .5%, whichever is greater, plus .5%. The Company has the option to choose between the two interest rate options under the term loan and revolving credit line. The term loan is payable in equal monthly principal payments of $25,000 over five years while the revolving credit line is available for three years. The outstanding balance on the term loan at December 31, 2003 was $1,050,000. There were no amounts outstanding on the revolving credit line at December 31, 2003. 21 The following table is a summary of contractual obligations recorded as of December 31, 2003:
--------------------------------------------------------------------------------------------------------------- Payments Due by Period --------------------------------------------------------------------------------------------------------------- Contractual Obligations Total Less than 1-3 years 4-5 years After 5 years 1 year Revolving Credit Line $ -0- $ - Debt $1,092,839 $ 323,314 $ 769,525 Capital Leases $ 209,470 $ 89,656 $ 119,814 Operating Leases $5,763,018 $ 522,128 $1,546,436 $ 629,603 $ 3,064,851 Put Warrant Obligation $ 200,000 - $ 200,000 Total Contractual Cash Obligations $7,265,327 $ 935,098 $2,635,775 $ 629,603 $ 3,064,851 ---------------------------------------------------------------------------------------------------------------
At December 31, 2003, the Company was in compliance with its loan covenants under the agreement dated May 20, 2002 and as amended on August 11, 2003. The Company's working capital on December 31, 2003 was $4,759,526 as compared to $4,806,218 on December 31, 2002. The Company believes that its present cash and working capital position combined with its borrowing availability under its credit facility and cash flow generated from operations will be sufficient to meet its cash and working capital needs for at least the next 12 months. During 2004, the Company anticipates it will make capital expenditures of approximately $1,250,000 - $1,500,000 for the production and purchase of the PERS Buddy and additional PERS systems and the continued enhancement of its management information systems. In 2003 and 2002, the Company had capital expenditures of approximately $1,780,000 and $1,350,000, respectively. OTHER FACTORS: 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 and Oceanside ERC and Customer Service facilities. The Company believes that centralization of the ERC, Customer Service and H-LINK(R) OnCall operations will provide additional efficiencies and facilitate the continued projected growth of the H-Link and Disease Management Monitoring divisions. The fifteen (15) year lease term commenced in April 2003 when the property was first occupied by the Company. The lease calls for minimum annual rentals of $269,500, subject to a 3% annual increase plus reimbursement for real estate taxes. 22 On November 1, 2001, the Company entered into a Cooperative Licensing, Development, Services and Marketing Agreement with HHN (the "HHN Agreement") pursuant to which the Company is developing, with the assistance of HHN, a new integrated appliance combining the features of the Company's PERS product with HHN's technology. Pursuant to the HHN 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 HHN's internet based disease management monitoring technology. The HHN 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. The cost of the licensing component of $1,115,000, including $115,000 of professional fees, is being amortized over a 40-month period which commenced in July 2003 upon the Company meeting certain milestones under the agreement and concludes at the end of the initial term of the Agreement. As of December 31, 2003, $295,770 of the license fee is still due to HHN and is included in accrued expenses. Since 1983, the Company has provided PERS services to the City of New York's Human Resources Administration Home Care Service Program ("HCSP"). During the years ended December 31, 2003, 2002 and 2001, the Company had revenues from this contract representing 18%, 23%, and 26%, respectively, of its total revenue. In November 2002, in response to a Request For Proposal issued by HCSP, AMAC and several other companies submitted proposals to provide PERS services on behalf of the City of New York for the period April 1, 2004 through March 31, 2007. The Company was chosen as the approved vendor and is currently reviewing the draft contract which was recently submitted to the Company by HCSP. Based on the preliminary terms of the contract, which may still be subject to negotiation, the Company would experience approximately a 20% reduction in monthly revenue relating to the HCSP contract, as the contract calls for a reduced rate per subscriber per month. As a result, the Company would also realize reduced gross margins and net income arising from this contract. The new contract is anticipated to take effect in the second quarter of 2004. The Company has previously disclosed the possibility of the renewal terms of this contract being less favorable than the prior agreement and has implemented a variety of measures in anticipation of this occurrence. Among other things, the Company has reduced its reliance on the HCSP contract from 47 percent of gross revenue in 1998, to 18% in 2003. The Company has diversified its revenue sources to four distinct revenue streams and has taken significant steps in reducing overhead. During the fourth quarter of 2003 and the first quarter of 2004, the Company has secured certain other PERS contracts and further streamlined operational processes. The Company estimates that the new contracts and cost efficiencies will significantly mitigate the financial impact of the modification to the HCSP contract. Certain related party transactions are included in Part III and in Footnotes 6 and 8 to the Consolidated Financial Statements. 23 PROJECTED VERSUS ACTUAL RESULTS The Company's revenues and net income were in line with the forecasted revenues and net income of $16,600,000 and $575,000, respectively, for the year ended December 31, 2003. RECENT ACCOUNTING PRONOUNCEMENTS: In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This statement (i) eliminates extraordinary accounting treatment for a gain or loss reported on the extinguishment of debt, (ii) eliminates inconsistencies in the accounting required for sale-leaseback transactions and certain lease modifications with similar economic effects, and (iii) amends other existing authoritative pronouncements to make technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company adopted SFAS No. 145 effective in 2003. Adoption of this statement did not have an impact on the consolidated results of operations or financial position. In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued. This statement nullifies existing guidance related to the accounting and reporting for costs associated with exit or disposal activities and requires that the fair value of a liability associated with an exit or disposal activity be recognized when the liability is incurred. Under previous guidance, certain exit costs were permitted to be accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. The provisions of this statement are required to be adopted for all exit or disposal activities initiated after December 31, 2002. This statement will not impact any liabilities recorded prior to adoption. The Company adopted SFAS No. 146 effective in 2003. Adoption of this statement did not have an impact on the consolidated results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure, an Amendment of FASB Statement 123" (SFAS 148). SFAS 148 provides new transition alternatives for companies adopting the fair value method of accounting for stock-based compensation prescribed by SFAS 123. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in tabular format. Additionally, SFAS No. 148 requires disclosures of the pro forma effect in interim financial statements. At present, the Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. The Company adopted the annual disclosure provisions of SFAS No. 148 in its financial report for the year ended December 31, 2002 and adopted the interim disclosure provisions for its financial reports in the quarter ended March 31, 2003. 24 CRITICAL ACCOUNTING POLICIES: In preparing the financial statements, the Company makes estimates, assumptions and judgments that can have a significant impact on our revenue, operating income and net income, as well as on the reported amounts of certain assets and liabilities on the balance sheet. The Company believes that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on its financial statements, so it considers these to be its critical accounting policies. Estimates in each of these areas are based on historical experience and a variety of assumptions that the Company believes are appropriate. Actual results may differ from these estimates. RESERVES FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE The Company makes ongoing assumptions relating to the collectibility of its accounts receivable. The accounts receivable amount on the balance sheet includes a reserve for accounts that might not be paid. In determining the amount of the reserve, the Company considers its historical level of credit losses. The Company also makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and it assesses current economic trends that might impact the level of credit losses in the future. As discussed in Note 1 of the financial statements, the Company recorded reserves for uncollectible accounts receivable of $643,000 and $540,000 as of December 31, 2003 and 2002, respectively. While the Company believes that the current reserves are adequate to cover potential credit losses, it cannot predict future changes in the financial stability of its customers and the Company cannot guarantee that it reserves will continue to be adequate. If actual credit losses are significantly greater than the reserves established, that would increase the general and administrative expenses and reduce the reported net income. Conversely, if actual credit losses are significantly less than the reserve, this would eventually decrease the Company's general and administrative expenses and increase the reported net income. VALUATION OF LONG-LIVED ASSETS The Company reviews long-lived assets for impairment, principally fixed assets, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of the long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will be greater that the carrying amount of its assets. Impairment is measured based on the difference between the carrying amount of the assets and their estimated fair value. VALUATION OF GOODWILL Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Under this standard, goodwill and indefinite life intangible assets are no longer amortized, but are subject to annual impairment tests. The Company completed the annual impairment test during the fourth quarter of 2003 and no impairment was determined. As described in Note 1 to the Consolidated Financial Statements, the Company tests goodwill for impairment annually or more frequently when events or circumstances 25 occur, indicating goodwill might be impaired. This process involves estimating fair value using discounted cash flow analyses. Considerable management judgment is necessary to estimate discounted future cash flows. Assumptions used for these estimated cash flows were based on a combination of historical results and current internal forecasts. The Company cannot predict certain events that could adversely affect the reported value of goodwill, which totaled $2,086,815 at December 31, 2003 and $961,731 at December 31, 2002. DEFERRED INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment and records a valuation allowance, if necessary, to reduce the deferred tax assets to the amount that is expected to be realized in future periods. Item 7. FINANCIAL STATEMENTS. -------------------- The financial statements required hereby are located on pages F-1 through F-28. Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ----------------------------------------------------------------------- None. Item 8A. DISCLOSURE CONTROLS AND PROCEDURES. ---------------------------------- Based on their evaluation as of December 31, 2003, the Company and the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective. There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting. 26 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- DIRECTORS The directors and executive officers of the Company, their ages and present positions with the Company are as follows: Name Age Position with the Company ---- --- ------------------------- Howard M. Siegel 70 Chairman of the Board, President, Chief Executive Officer and Director Jack Rhian 49 Executive Vice President, Chief Operating Officer and Director Frederic S. Siegel 34 Senior Vice President - Business Development and Director Ronald Levin 69 Director Yacov Shamash, PH.D 54 Director James F. LaPolla 54 Director Delphine Mendez de Leon 48 Director Richard Rallo 39 Chief Financial Officer INFORMATION ABOUT DIRECTORS The following is a brief summary of the background of each director: HOWARD M. SIEGEL, 70, has been the Company's Chairman of the Board, President and Chief Executive Officer and a director over the past five years. Mr. Siegel also served as the Company's Chief Financial Officer prior to September 1996. JACK RHIAN, 49, has been a director of the Company since October 2002 and Executive Vice President and Chief Operating Officer since August 2002. He joined the Company in January 2000 as Vice President and Chief Operating Officer. From November 1994 until February 1999, he served as Executive Vice President and Chief Operating Officer of Transcare New York, Inc., a medical transportation company. From March 1988 through November 1994 he served as Chief Operating Officer of Nationwide Nassau Ambulance Service. Previously, Mr. Rhian held senior management positions in companies which deliver healthcare services. Mr. Rhian holds a Masters degree in Public Administration from New York University. FREDERIC S. SIEGEL, 34, has been a director of the Company since September 1998, and has also served as Vice President of Sales and Marketing for the Company since July 1998. Mr. Siegel joined the Company in April 1994 and has held various sales and marketing positions with the Company. From October 1991 to October 1994, Mr. Siegel served as a benefits consultant for J.N. Savasta Corp. Mr. Siegel also serves as a director of Nursing Sister Homecare, a division of Catholic Health Services of Long Island. 27 JAMES F. LAPOLLA, 54, has been a director of the Company since being appointed in September 2000. Since 1982, Mr. LaPolla has been the President and Chief Executive Officer of Home Health Management Services, Inc, a 501C3 Non-for-Profit Community based Home Care Program. RONALD LEVIN, 69, has been a director of the Company since August 2001. He has also been the President of Ron Levin Associates, a financial consulting firm, since 1984. Since 1997, Mr. Levin has been a member at Eye Contact LLC, a Cohen's Fashion Optical franchise and since 1996, a member at Bayshore Eyes LLC, a Sterling Optical franchise. Mr. Levin is currently a licensed stock broker with Investec Earnst & Co. He served as Executive Vice President of D.A. Campbell Co., an international institutional stock brokerage firm, through 1998. YACOV SHAMASH, PH.D., 54, has been director of the Company since August 2001. He also serves as the Dean of the College of Engineering of the State University of New York at Stony Brook, a position he has held since 1992. Since 1990, he has served on the Board of Directors of KeyTronic Corporation, a computer hardware manufacturer. Since December 2003, he has served on the Board of Directors of Manchester Technologies, an integrator and reseller of computer systems. Since January 2004, he has served on the Board of Directors of Netsmart Technologies, a software solutions provider to the healthcare market. DELPHINE MENDEZ DE LEON, 48, has been a director of the Company since August 2002. Ms. Mendez de Leon has been, since 2001, a manager at Cap Gemini Ernst & Young, Inc., a healthcare strategy transformation consulting firm, where she managers healthcare system strategy transformation, span of control and overhead improvement efforts. From 2000 and prior to joining Cap Gemini Ernst & Young, Inc. Ms. Mendez de Leon was an independent consultant and advised various healthcare companies and hospitals, including the Company, in connection with the development of business plans, market research and program development. From 1994 to 2000, Ms. Mendez de Leon was with The Brooklyn Hospital Center, where she served as Vice-President of Operations and Planning and was responsible for administrative oversight of various medical departments, was involved in market and financial analysis, business planning, and directed 250 employees. Ms. Mendez de Leon holds an MBA from Columbia University School of Business and a Masters in Public Health from Columbia University School of Public Health. NON-DIRECTOR-SIGNIFICANT OFFICERS RICHARD RALLO, 39, joined the Company in February 2001 as the Controller and became Chief Financial Officer in April 2003. From May 1997 to February 2001, Mr. Rallo served as the Chief Financial Officer of Tradewell, Inc., a barter company. From October 1994 to April 1997, Mr. Rallo served as the Controller of Connoisseur Communications Partners L.P., a company that owned and operated radio stations. Mr. Rallo is a Certified Public Accountant and has a BS in accounting from the University of Denver. JOHN ROGERS, 57, joined the Company in 1984 as the Manager of the Emergency Response, Installation and Service Center. He became the Company's Vice President, Operations in July 1993. Additionally, he has been the Secretary of the Company since July 1993. Prior to joining the Company he was employed at Technical Liaison Corporation, a burglar alarm Company from 1969 through May 1984 as Installation & Service Manager. 28 There is no family relationship between any of the directors, executive officers or significant officers of the Company, with the exception of Howard M. Siegel and Frederic S. Siegel. Howard M. Siegel is the father of Frederic S. Siegel. AUDIT COMMITTEE The Company's Board of Directors has a separate audit committee. The Audit Committee currently consists of Mr. LaPolla, Mr. Shamash, and Mr. Levin, each of whom are independent directors as defined in Rule 4200(a)(15) of the National Association of Securities' Dealers' listing standards. The Board of Directors has determined that none of its current members meets the standard of an audit committee "financial expert," as defined by the Sarbanes-Oxley Act of 2002. The Company is currently in the process of seeking an additional director meeting the audit committee financial expert standard. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act requires the Company's officers and directors, and persons who beneficially own more than 10% of the Company's Common Stock, to file initial reports of ownership and reports of changes of ownership with the Securities and Exchange Commission and furnish copies of those reports to the Company. Ms. Mendez de Leon and Messrs Levin, LaPolla, Shamash and Rallo failed to timely file a Statement of Changes of Beneficial Ownership on Form 4. The Company is not aware of other late filings, or failures to file, any other reports required by Section 16(a) of the Exchange Act during the fiscal year ended December 31, 2003. CODE OF ETHICS The Company's Board adopted a Code of Ethics which applies to all of the Company's directors, executive officers and employees. The Code of Ethics is available upon request to the Company's Chief Executive Officer at 3265 Lawson Blvd., Oceanside, NY 11572. ITEM 10. EXECUTIVE COMPENSATION ---------------------- The following table sets forth information concerning the annual and long-term compensation of the Company's Chief Executive Officer, and the four most highly compensated employees, including three executive officers who were serving at the end of the fiscal year ended December 31, 2003, each of whose salary and bonus exceeded $100,000 for the fiscal year ended December 31, 2003, for services rendered in all capacities to the Company and its subsidiaries during the Company's 2001, 2002 and 2003 fiscal years. The listed individuals shall be hereinafter referred to as the "Named Executive Officers." 29
Long-Term Name and Annual Compensation Compensation Principal --------------------------- ------------ Position Year Salary Bonus Options(#) ---------------------------- ---- ------ ----- ------------ Howard M. Siegel 2003 $308,000 - 8,500 Chairman of the 2002 $320,000 $5,000 35,730 Board, President 2001 $290,000 $7,500 18,750 and Chief Executive Officer Jack Rhian 2003 $178,750 - 5,000 Executive Vice 2002 $161,667 $5,000 88,199 President and Chief 2001 $125,000 $6,000 18,654 Operating Officer John Lesher 2003 $130,210 - 3,500 Vice President- 2002 $132,083 $3,000 81,645 Engineering* 2001 $113,077 $3,000 15,000 Frederic S. Siegel 2003 $181,550(1) - 20,317 Senior Vice President- 2002 $200,000 $7,500 13,079 Business Development 2001 $175,000 $7,500 108,154 Richard Rallo 2003 $134,167 - 43,800 Chief Financial 2002 $123,750 $2,500 23,126 Officer 2001 $100,833 $2,500 10,000
--------------------- (1) Includes $17,650 accrued by the Company but not yet paid to Mr. F. Siegel. * Mr. Lesher has resigned as the VP of Engineering as of February 4, 2004. OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table contains information concerning options granted during the Company's 2003 fiscal year to the Named Executive Officers. All such options were granted under the Company's 2000 Stock Option Plan or 1997 Stock Option Plan. 30
Percent of Total Options Granted to Exercise Number of Employees in Price Expiration Name Options Fiscal Year Per Share Date ----------------- --------- ------------ --------- ---------- Howard M. Siegel 8,500 3.7% $2.29 01/28/13 Jack Rhian 5,000 2.1% $2.29 01/28/13 John Lesher 3,500 1.5% $2.29 01/28/13 Frederic S. Siegel 6,400 2.8% $2.29 01/28/13 13,917 6.0% $1.98 04/08/13 Richard Rallo 3,800 1.6% $2.29 01/28/13 10,000 4.3% $2.00 02/01/08 30,000 12.9% $2.50 11/05/13
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUE The following table sets forth certain information concerning the number of shares of Common Stock acquired upon the exercise of stock options during the year ended December 31, 2003 and the number and value at December 31, 2003 of shares of Common Stock subject to unexercised options held by the Named Executive Officers.
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs Options/SARs at FY-End (#) at FY-End ($) Shares Acquired Exercisable/ Exercisable/ Name On Exercise (#) Value Realized ($) Unexercisable Unexercisable ---- --------------- ------------------ ------------- ------------- Howard M. Siegel -- -- 279,922/0 $ 252,474/0 Jack Rhian -- -- 186,853/25,000 $ 248,756/0 John Lesher $48,592 $109,625 98,320/15,000 $ 66,277/0 Frederic S. Siegel -- -- 205,055/0 $ 364,608/0 Richard Rallo -- -- 76,926/10,000 $ 88,681/12,500
31 Compensation of Directors ------------------------- Pursuant to the Company's 1997 and 2000 Stock Option Plans, the Board has the authority to grant options to directors in its discretion. The Board may from time to time authorize the grant of stock options to directors in connection with attendance at Board of Director meetings, at such times and in amounts as determined by the Board in its sole discretion. The Board of Directors generally grants options to purchase 5,000 to 10,000 shares to each director per calendar year for participation in meetings of the Board. In addition, each director receives $1,500 per annum plus $750 for each meeting of the Board of Directors attended and receives $250 in connection with attendance at meetings of committees of the Board of Directors. EMPLOYMENT AGREEMENTS: On August 12, 2003, the Company entered into an employment agreement with Mr. Howard M. Siegel pursuant to which he is employed full-time as the Company's Chairman of the Board, President and Chief Executive Officer. The agreement has a term of three years and four and a half month and expires in December 2006. The agreement provides for an annual base salary of $300,000 per annum during the period beginning August 12, 2003 and ending December 31, 2003, and $315,000, $330,750 and $347,288 in each of the subsequent three fiscal years, respectively. Mr. Siegel will receive additional bonus compensation for any year that the Company's pre-tax income (as defined in the employment agreement) exceeds $1,000,000 as follows: an amount equal to 5% of the Company's pre-tax income between $1,000,000 and $2,000,000, 6% of the Company's pre-tax income between $2,000,000 and $3,000,000, 7% of the Company's pre-tax income between $3,000,000 and $4,000,000, 8% of the Company's pre-tax income between $4,000,000 and $5,000,000, 9% of the Company's pre-tax income between $5,000,000 and $6,000,000, and 10% of the Company's pre-tax income in excess of $6,000,000. In the event that Mr. Siegel should become disabled and be unable to perform his duties for a period of than one hundred eighty (180) consecutive days or an aggregate of more than one hundred eighty (180) consecutive days in any 12 month period, the Company may terminate the employment agreement after the expiration of such period. In such event, Mr. Siegel shall be entitled to receive his base salary for a period of one year from the date of his disability. In the event of his death during the term of the employment agreement, Mr. Siegel's estate or such other person as he designated will be entitled to receive his base salary for a period of one year from the date of his death. In addition, in the event there is a change in control and Mr. Siegel terminates his employment with the Company within 180 days following such change in control, Mr. Siegel will be entitled to his base salary, the additional bonus compensation described above (to the extent payable), any benefits or awards earned through his last day of employment and a lump sum payment equal to 2.99 times his average annual total compensation, as measured for the past 5 years. 32 The Company and Mr. Frederic S. Siegel, the Company's Senior Vice President, Business Development, were parties to a three-year Employment Agreement which expired on December 31, 2003, under the terms of which, the Senior Vice President, Business Development received annual base salaries of $163,804 in 2003, $200,000 in 2002 and $175,000 in 2001. The agreement also provided for additional compensation in 2003 based upon the Company achieving certain gross revenue and pre-tax income levels. Mr. Frederic S. Siegel earned $17,650 based on achievement of certain gross revenue targets. The Company and Mr. Frederic S. Siegel are in the process of completing a new employment agreement. Until a new agreement is finalized, Mr. Frederic S. Siegel is being compensated at the same base salary as he earned in 2003. On February 1, 2002, the Company entered into an amended employment agreement with Mr. Jack Rhian. The amended agreement has a term of three years and expires in January 2005, unless earlier terminated pursuant to the provisions of the Agreement dated January 31, 2000 and the provisions set forth in this agreement. The agreement provides for an annual base salary of $165,000, $180,000 and $200,000 in each fiscal year of the contract. In addition, Mr. Rhian received options to purchase up to 80,000 shares of the Company's Common Stock, of which options to purchase 30,000 shares were granted at an exercise price of $3.25 per share, 25,000 at an exercise price of $3.50 and 25,000 shares at an exercise price of $4.00. Options to purchase 30,000 shares vested on January 31, 2002, 25,000 vested on January 31, 2003 and 25,000 shares vested on January 31, 2004. The term of the options is ten years from the date of grant. Mr. Rhian will receive additional compensation for any year that the Company's pre-tax income, as defined in the employment agreement, exceeds certain thresholds. Mr. Rhian will receive an amount equal to 1% of the Company's EBIT between $1,000,000 and $1,500,000, 1.5% of the Company's EBIT between $1,500,000 and $2,000,000, 3.0% of the Company's EBIT between $2,000,000 and $2,500,000 and 4.0% of the Company's EBIT in excess of $2,500,000. In the event the Company realizes an EBIT of $3,000,000 or more in calendar year 2003 or 2004, the Company will provide Mr. Rhian with an option to purchase an additional 25,000 shares of Common Stock of the Company at a price of $3.50 per share. In the event that Mr. Rhian should become disabled and be unable to perform his duties for a period of than one hundred eighty (180) consecutive days or an aggregate of more than one hundred eighty (180) consecutive days in any 12 month period, the Company may terminate the employment agreement after the expiration of such period. In such event, Mr. Rhian shall be entitled to receive his base salary for a period of one (1) year from the date of such termination. In the event of his death during the term of the employment agreement, Mr. Rhian's estate or such other person as he designated would have been entitled to receive an amount equal to (i) four (4) months of Mr. Rhian's base salary, in the event of death during the first year of the employment agreement, eight (8) months of Mr. Rhian's base salary, in the event of death during the second year of the employment agreement, or (ii) twelve (12) months of Mr. Rhian's base salary, in the event of death during the third year of the employment agreement. 33 In addition, in the event there is a change in control and Mr. Rhian terminates his employment with the Company within 180 days following such change in control, Mr. Rhian will be entitled to his base salary, the additional compensation described above, any benefits or awards earned through his last day of employment and a lump sum payment equal to 2.99 times his average annual total compensation for the past 5 years. On February 1, 2002 the Company entered into an employment agreement with Dr. John Lesher pursuant to which he was employed full-time as the Company's Vice President of Engineering. The agreement had a term of three years and was to expire in January 2005. The agreement provided for an annual base salary of $135,000, $150,000 and $170,000 in each fiscal year of the contract. In addition, Dr. John Lesher received options to purchase up to 75,000 shares of the Company's Common Stock, of which options to purchase 30,000 shares were granted at an exercise price as of $3.25 per share, 30,000 at an exercise price of $3.50 and 15,000 shares at an exercise price of $4.00. Options to purchase 30,000 shares vested on January 31, 2002, 30,000 vested on January 31, 2003, and 15,000 vested on January 31, 2004. The term of the options is ten years from the date of grant. On February 4, 2004 Dr. Lesher resigned as the Vice President of Engineering, and agreed to remain as an employee through April 30, 2004. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ------------------------------------------------------------------ The following table contains a summary of the number of shares of Common Stock of the Company to be issued upon the exercise of options, warrants and rights outstanding at December 31, 2003, the weighted-average exercise price of those outstanding options, warrants and rights, and the number of additional shares of Common Stock remaining available for future issuance under the plans as at December 31, 2003.
EQUITY COMPENSATION PLAN INFORMATION ------------------------------------------------------------------------------------------------------------------------ Plan Category Number of Securities to be Weighted-average Number of securities issued upon exercise of exercise price of remaining available for the outstanding options, warrants outstanding options, future issuance under equity and rights warrants and rights compensation plans (excluding securities reflected in column (a)) ------------------------------------------------------------------------------------------------------------------------ Equity Compensation plans approved by security holders 1,620,207 $2.68 212,982 Equity Compensation plans not approved by security holders (*) 35,000 $3.50 - ------------------------------------------------------------------------------------------------------------------------
(*) - Five year warrant issued to consultant in 2002 for services rendered 34 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as to the ownership of shares of the Company's Common Stock, as of March 19, 2004, with respect to (a) holders known to the Company to beneficially own more than five percent of the outstanding Common Stock of the Company, (b) each director, (c) the executive officers named in the Summary Compensation Table under the caption "Executive Compensation" and (d) all directors and executive officers of the Company as a group. The Company understands that, except as noted below, each beneficial owner has sole voting and investment power with respect to all shares attributable to such owner.
Name and Address Amount and Nature of Percent of Beneficial Owner(1) Beneficial Ownership Class(2) -------------------- -------------------- -------- Howard M. Siegel 1,222,641(3) 15.8% Ron Levin 173,050(4) 2.3% 184 Greenway Road Lido Beach, NY 11561 Delphine Mendez de Leon 20,000(5) * 119 McCormack Road North Slingerlands, New York 12159 Frederic S. Siegel 291,157(6) 3.8% James F. LaPolla 25,000(7) * Home Health Management Services, Inc. 853 Broadway New York, NY 10003 Yacov Shamash, PH.D. 27,000(8) * 7 Quaker Hill Road Stony Brook, NY 11790 Jack Rhian 259,853(9) 3.4% John Lesher 103,320(10) 1.4% Richard Rallo 66,926(11) * Gregory Fortunoff 563,800(12) 7.5% 200 East 72nd Street New York, NY 10021 All directors and executive officers as a group (9 persons) 2,183,947(13) 26.0%
35 (1) Except as otherwise indicated, the address of each individual listed is c/o the Company at 3265 Lawson Boulevard, Oceanside, New York 11572. (2) Asterisk indicates less than 1%. Shares subject to options are considered outstanding only for the purpose of computing the percentage of outstanding Common Stock which would be owned by the optionee if the options were so exercised, but (except for the calculation of beneficial ownership by all directors and executive officers as a group) are not considered outstanding for the purpose of computing the percentage of outstanding Common Stock owned by any other person. (3) Includes 255,922 shares subject to currently exercisable stock options. (4) Includes 25,000 shares subject to currently exercisable stock options. Includes 25,000 shares owned by Mr. Levin's wife, to which Mr. Levin disclaims beneficial ownership. (5) Consists of 20,000 shares subject to currently exercisable stock options. (6) Includes 188,557 shares subject to currently exercisable stock options. (7) Consists of 25,000 shares subject to currently exercisable stock options. (8) Includes 25,000 shares subject to currently exercisable stock options. (9) Consists of 211,853 shares subject to currently exercisable stock options, and 48,000 shares owned by Mr. Rhian's wife. (10) Consists of 103,320 shares subject to currently exercisable stock options. (11) Consists of 61,926 shares subject to currently exercisable stock options. (12) Based on information provided in a Schedule 13D filed by the reporting person on August 5, 2003. (13) Includes options indicated in notes (3), (4), (5), (6), (7), (8), (9), (10) and (11). 36 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The Company's executive offices and back-up Emergency Response Center are located in a 5,600 square foot facility at 3265 Lawson Boulevard, Oceanside, New York. On January 1, 1995, the Company entered into a five-year operating lease with Howard M. Siegel, Chairman of the Board, Chief Executive Officer and President of the Company. In February 1998 the lease for this space and the adjoining 8,000 square foot parking lot was extended until September 30, 2007 (the "Lease"). The Lease provides for a base annual rent of $74,600, subject to a 5% annual increase plus reimbursements for real estate taxes and other operating expenses. In October 1997, the Company entered into a separate ten-year operating lease (the "1997 Lease"), for an additional 2,200 square feet of office space located in an adjacent building owned by Add on Properties, LLC, owned by Mr. H. Siegel. The 1997 Lease calls for an initial minimum annual rent of $36,000, subject to a 5% annual increase plus reimbursement for real estate taxes. In November 1999, an Addendum to the 1997 Lease was entered into for an additional 2,200 square feet at an annual rent of $39,600 subject to the same terms and conditions stated in the original lease. The Company believes that both leases have terms which are competitive and customary. The Company has entered into an employment agreements with Mr. Howard M. Siegel and Mr. Jack Rhian. See "Item 10 - Employment Agreements". The Company employs Joy Siegel as Vice President of Provider Relations. In 2003, the Company paid Ms. Siegel a salary of $80,000. Ms. Siegel is the daughter of Mr. H. Siegel. Mr. H. Siegel owed the Company $123,532 at December 31, 2001 for certain advances made to him. In July 2002, the amount due from Mr. H. Siegel, plus accrued interest, was converted into a promissory term loan. The loan bears interest at a rate of 5% per annum and is payable in monthly installments of principle and interest through September 1, 2009. The amount outstanding at December 31, 2003 and 2002 was $143,391 and $164,394, respectively. Item 13. EXHIBITS AND REPORTS ON FORM 8-K. --------------------------------- (a) Exhibits -------- Exhibit No. Identification of Exhibit ----------- ------------------------- 2(a) Asset Purchase Agreement, dated November 21, 2000, among HCI Acquisition Corp., American Medical Alert Corp., Harriet Campbell, Incorporated and Angus Campbell. (Incorporated by reference to Exhibit 2(a) of the Company's form 10-KSB for the year ended December 31, 2000.) 3(a)(i) Articles of Incorporation of Company, as amended. (Incorporated by reference to Exhibit 3(a) to the Company's Form S-1 Registration Statement under the Securities Act of 1933, filed on September 30, 1983 - File No. 2-86862). 37 3(a)(ii) Certificate of Amendment to the Company's Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 of the Company's Form 10-QSB filed with the SEC on November 14, 2002). 3(b)(i) Amended and Restated By-Laws of Company. (Incorporated by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement under the Securities Act of 1933, Commission File No. 333-6159). 3(b)(ii) Amendment to the Amended and Restated By-Laws of Company. (Incorporated by reference to Exhibit 3.1 to the Company's Form 10-QSB filed with the SEC on November 14, 2003). 3(c) Articles of Incorporation of Safe Com Inc. (Incorporated by reference to Exhibit 3(c) to the Company's Form 10-KSB for the year ended December 31, 1999). 3(d) Certificate of Incorporation of HCI Acquisition Corp. (Incorporated by reference to Exhibit 3(d) of the Company's Form 10-KSB for the year ended December 31, 2000). 3(e)* Certificate of Incorporation of Live Message America Acquisition Corp. 4.1 Stock and Warrant Purchase Agreement dated as of March 27, 2002, between the Company and certain investors. (Incorporated by reference to the Company's Registration Statement on Form S-3 filed with the SEC on May 14, 2002). 4.2 Form of Warrant to purchase shares of Common Stock, issued to certain investors. (Incorporated by reference to the Company's Registration Statement on Form S-3 filed with the SEC on May 14, 2002). 10(a)(i) Employment Agreement dated January 31, 2000 between the Company and Jack Rhian. (Incorporated by reference to Exhibit 10(c)(ii) of the Company's Amendment No. 1 to Form 10-KSB for the year ended December 31, 1999). 10(a)(ii) Amended Employment Agreement dated February 1, 2002, between the Company and Jack Rhian. (Incorporated by reference to Exhibit 10(a)(ii) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(b) Employment Agreement dated August 12, 2003 between the Company and Howard M. Siegel. (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-QSB for the quarter ended June 30, 2003). 10(c)(i) Employment Agreement dated as of January 1, 2001, between the Company and Frederic S. Siegel. (Incorporated by reference to Exhibit 10(c)(i) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(c)(ii) Letter dated March 28, 2002, amending Frederic Siegel Employment Agreement. (Incorporated by reference to Exhibit 10(c)(ii) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(d) Employment Agreement dated January 31, 2002, between the Company and Dr. John Lesher. (Incorporated by reference to Exhibit 10(d) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(e)(i) Lease for the premises located at 520 Fellowship Road, Suite C301, Mt. Laurel, New Jersey ("Mt. Laurel Lease"). (Incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1991). 38 10(e)(ii) First Amendment to the Mt. Laurel Lease. (Incorporated by reference to Exhibit 10(f) to the Company's Form 10-KSB for the year ended December 31, 1993). 10(e)(iii) Second Amendment to the Mt. Laurel Lease. (Incorporated by reference to Exhibit 10(f) to the Company's Form 10-KSB for the year ended December 31, 1996). 10(e)(iv) Third Amendment to the Mt. Laurel Lease (Incorporated by reference to Exhibit 10(g) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(e)(v) Fourth Amendment to the Mt. Laurel Lease. (Incorporated by reference to Exhibit 10(e)(v) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(f)(i) Lease for the premises located at 3265 Lawson Boulevard, Oceanside, New York. (Incorporated by reference to Exhibit 10(h) to the Company's Form 10-KSB for the year ended December 31, 1994). 10(f)(ii) Amendment to Lease for the premises located at 3265 Lawson Boulevard, Oceanside, New York (Incorporated by reference to Exhibit 10(i) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(g)(i) Lease for the premises located at 3255 Lawson Boulevard, Oceanside, New York (Incorporated by reference to Exhibit 10(j) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(g)(ii) Addendum to lease for premises located at 3255 Lawson Boulevard, Oceanside, New York. (Incorporated by reference to Exhibit 10(j)(ii) to the Company's Form 10-KSB for the year ended December 31, 1999). 10(h)(i) Lease for the premises located at 910 Church Street, Decatur, Georgia (Incorporated by reference to Exhibit 10(k) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(h)(ii) Assignment of Rents and Leases dated January 7, 1999 relating to the leased premises at 910 Church Street, Decatur, Georgia (Incorporated by reference to Exhibit 10(x) to the Company's form 10-KSB for the year ended December 31, 1998). 10(i) Lease for the premises located at 169-10 Crocheron Avenue, Flushing, New York dated September 1, 1998 by and between the Company and Roseann and Charles Rojo. (Incorporated by reference to Exhibit 10(l) of the Company's form 10-KSB for the year ended December 31, 1998). 10(j) Lease for the premises located at 475 West 55th Street, Countryside, Illinois. (Incorporated by reference to Exhibit 10(k) to the Company's Form 10-KSB for the year ended December 31, 1995.) 39 10(k) Amendment to Lease for the premises located at 475 West 55th Street, Countryside, Illinois (Incorporated by reference to Exhibit 10(n) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(l) Lease for the premises located at Store Space No. 300, 12543 North Highway 83, Parker, Colorado, dated March 9, 2000. (Incorporated by reference to Exhibit 10(l) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(m)(i) Lease for the premises located at 33-36 33rd Street, Long Island, City, New York, dated January 14, 2002. (Incorporated by reference to Exhibit 10(m)(i) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(m)(ii) Lease Amendment and Modification for the premises located at 33-36 33rd Street, Long Island City, New York. (Incorporated by reference to Exhibit 10(m)(ii) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(n) Amended 1991 Stock Option Plan. (Incorporated by reference to Exhibit 10(l) to the Company's Form 10-KSB for the year ended December 31, 1994). 10(o) 1997 Stock Option Plan (Incorporated by reference to Exhibit 10(q) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(p) 2000 Stock Option Plan. (Incorporated by reference to Exhibit A of the Company's Definitive Proxy Statement, filed with the Commission and dated June 1, 2000). 10(q) Agreement between the Company and the City of New York, dated February 22, 2002. (Incorporated by reference to Exhibit 10(p)(ii) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(r) Purchase/Leaseback Agreement dated July 13, 1999 with Celtic Leasing Corp. (Incorporated by reference to Exhibit 10(r) to the Company's Form 10-KSB for the year ended December 31, 1999). 10(t) Credit Agreement, dated as of May 20, 2002, by and between the Company and the Bank of New York. (Incorporated by reference to Exhibit 10(t) of the Company's Form 10-KSB for the year ended December 31, 2002). 10(u) Advisory Agreement dated February 6, 2002, between the Company and Cameron Associates, Inc. (Incorporated by reference to Exhibit 10(t) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(v) Cooperative Licensing, Development, Services and Marketing Agreement, dated November 1, 2001, between the Company and Health Hero Network, Inc. (Incorporated by reference to Exhibit 10.1 of the Company's Form 10-QSB filed with the SEC on November 14, 2001). 10(x) Term Promissory Note, dated June 24, 2002, issued by Howard M. Siegel in favor of the Company. (Incorporated by reference to Exhibit 10(x) of the Company's Form 10-KSB for the year ended December 31, 2002). 21(a)* Subsidiaries of the Company. 23.1* Consent of Margolin, Winer & Evens LLP. 40 31.1* Certification of Chief Executive Officer pursuant to Section 303 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ------------------- * Filed herewith. (b) Reports on Form 8-K ------------------- On December 18, 2003, 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 selection of the Company by the New York City Human Resources Administration as exclusive emergency response system vendor for Home Care Services Program. 41 Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES -------------------------------------- AUDIT FEES Audit fees billed to the Company by Margolin, Winer & Evens, LLP for its audit of the Company's financial statements and for its review of the financial statements included in the Company's Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission for 2003 and 2002 totaled $135,000 and $130,000, respectively. TAX FEES Tax fees billed to the Company by Margolin, Winer & Evens, LLP for its tax returns for the fiscal year 2003 and 2002 were $15,000 each year. OTHER FEES Other fees billed to the Company by Margolin, Winer & Evens, LLP during 2003 for all other non-audit or tax services rendered to the Company, including profit sharing plan and acquisition due diligence services, totaled $31,400. 42 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN MEDICAL ALERT CORP. By: /s/ Howard M. Siegel -------------------------------- Howard M. Siegel Chairman of the Board and President Dated: March 30, 2004 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Howard M. Siegel Chairman of the Board, March 30, 2004 --------------------------- President, Chief Executive Howard M. Siegel Officer and Director /s/ Jack Rhian Executive Vice-President, March 30, 2004 ---------------------- Chief Operating Officer and Jack Rhian Director /s/ Ronald Levin Director March 30, 2004 --------------------------- Ronald Levin /s/Delphine Mendez de Leon Director March 30, 2004 --------------------------- Delphine Mendez de Leon /s/ Frederic S. Siegel Senior Vice President, Business March 30, 2004 ---------------------------- Development and Director Frederic S. Siegel /s/ Yacov Shamash Director March 30, 2004 ---------------------- Dr. Yacov Shamash /s/ James Lapolla Director March 30, 2004 ------------------------ James F. LaPolla /s/ Richard Rallo Chief Financial Officer March 30, 2004 ---------------------------- Richard Rallo
43 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONTENTS -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS F-1 FINANCIAL STATEMENTS: Consolidated Balance Sheets F-2 and F-3 Consolidated Statements of Income F-4 Consolidated Statements of Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 and F-7 Notes to Consolidated Financial Statements F-8 - F-27 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Shareholders American Medical Alert Corp. and Subsidiaries Oceanside, New York We have audited the accompanying consolidated balance sheets of American Medical Alert Corp. and Subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Medical Alert Corp. and Subsidiaries as of December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 of the consolidated financial statements, in 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" which changed the method of accounting for goodwill and indefinite-lived intangible assets. Garden City, New York March 10, 2004 F-1 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------------------------------------------------------------
December 31, 2003 2002 ---------- ---------- ASSETS CURRENT ASSETS: Cash $ 2,192,113 $ 863,417 Marketable securities (Note 1) -- 2,057,925 Accounts receivable (net of allowance for doubtful accounts of $643,000 in 2003 and $540,000 in 2002) (Notes 1 and 12) 3,295,752 2,984,857 Notes and other receivables (Note 6) 22,077 75,792 Inventory (Note 1) 451,924 373,423 Prepaid and refundable taxes (Notes 1 and 7) 155,093 271,572 Prepaid expenses and other current assets 471,497 239,168 Deferred income taxes (Notes 1 and 7) 321,000 292,000 ---------- ---------- TOTAL CURRENT ASSETS 6,909,456 7,158,154 ---------- ---------- FIXED ASSETS - AT COST: Building (condominium unit) -- 400,000 Leased medical devices 13,228,847 12,420,270 Monitoring equipment 1,844,548 1,544,097 Furniture and equipment 1,106,969 534,767 Construction in progress -- 521,424 Leasehold improvements 720,583 219,600 Automobiles 119,218 95,169 ---------- ---------- 17,020,165 15,735,327 Less accumulated depreciation and amortization (Note 1) 10,281,000 8,514,239 ---------- ---------- 6,739,165 7,221,088 ---------- ---------- OTHER ASSETS: Long-term portion of notes receivable (Note 6) 121,314 143,391 Intangible assets (net of accumulated amortization of $1,056,196 in 2003 and $599,304 in 2002) (Notes 1, 2 and 5) 1,834,166 1,123,870 Goodwill (net of accumulated amortization of $58,868) (Notes 1, 2 and 4) 2,086,815 961,731 Other assets 148,664 218,413 Deferred income taxes (Notes 1 and 7) 97,000 154,000 ---------- ---------- 4,287,959 2,601,405 ---------- ---------- TOTAL ASSETS $17,936,580 $16,980,647 ========== ==========
-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. F-2 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------------------------------------------------------------
December 31, 2003 2002 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of notes payable (Note 3) $ 323,314 $ 293,529 Accounts payable 618,337 681,927 Accrued expenses 1,012,214 816,569 Current portion of capital lease obligations (Note 8) 89,656 158,617 Current portion of put warrant obligation (Note 9) -- 251,000 Deferred revenue (Note 1) 106,409 150,294 ------------ ------------ TOTAL CURRENT LIABILITIES 2,149,930 2,351,936 ------------ ------------ DEFERRED INCOME TAX LIABILITY (NOTES 1 AND 7) 882,000 597,000 LONG-TERM PORTION OF NOTES PAYABLE (NOTE 3) 769,525 1,079,506 LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS (NOTE 8) 119,814 156,448 LONG-TERM PORTION OF PUT WARRANT OBLIGATION (NOTE 9) 200,000 181,000 ACCRUED RENTAL OBLIGATION (NOTE 8) 108,024 55,500 ------------ ------------ TOTAL LIABILITIES 4,229,293 4,421,390 ------------ ------------ COMMITMENTS AND CONTINGENCIES (NOTES 5, 8, 9, 12, AND 14) -- -- SHAREHOLDERS' EQUITY (NOTE 9): Preferred stock, $.01 par value - Authorized, 1,000,000 shares; none issued and outstanding Common stock, $.01 par value - Authorized, 20,000,000 Issued 7,734,486 shares in 2003 and 7,470,649 in 2002 77,345 74,706 Additional paid-in capital 9,573,863 8,999,172 Retained earnings 4,162,111 3,591,411 ------------ ------------ 13,813,319 12,665,289 Less treasury stock, at cost (43,910 shares) (106,032) (106,032) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 13,707,287 12,559,257 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,936,580 $ 16,980,647 ============ ============
-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. F-3 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME --------------------------------------------------------------------------------
Years Ended December 31, 2003 2002 2001 ------------ ------------ ------------ REVENUE (NOTES 1 AND 12): Services $ 16,192,712 $ 14,408,221 $ 13,579,870 Product sales 375,640 384,194 366,729 ------------ ------------ ------------ 16,568,352 14,792,415 13,946,599 ------------ ------------ ------------ COSTS AND EXPENSES (INCOME): Costs related to services 7,510,430 6,847,307 6,522,181 Cost of products sold 212,925 196,834 205,486 Selling, general and administrative expenses 8,128,383 7,665,107 6,776,638 Interest expense 76,513 129,050 218,873 Other income (Note 10) (504,599) (473,502) (86,138) ------------ ------------ ------------ 15,423,652 14,364,796 13,637,040 ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 1,144,700 427,619 309,559 PROVISION FOR INCOME TAXES (NOTES 1 AND 7) 574,000 272,000 200,000 ------------ ------------ ------------ NET INCOME $ 570,700 $ 155,619 $ 109,559 ============ ============ ============ BASIC EARNINGS PER SHARE (NOTE 1) $ .08 $ .02 $ .02 ============ ============ ============ DILUTED EARNINGS PER SHARE (NOTE 1) $ .07 $ .02 $ .02 ============ ============ ============
-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. F-4 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------- Years Ended December 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------
COMMON STOCK ----------------------- NUMBER ADDITIONAL OF PAID-IN RETAINED TREASURY SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL --------- ----------- ----------- ----------- ----------- ----------- BALANCE - JANUARY 1, 2001 6,458,021 $ 64,580 $ 6,265,939 $ 3,326,233 $ (106,032) $ 9,550,720 EXERCISE OF STOCK OPTIONS (NOTE 9) 40,524 405 74,730 -- -- 75,135 NET INCOME FOR THE YEAR ENDED DECEMBER 31, 2001 -- -- -- 109,559 -- 109,559 --------- ----------- ----------- ----------- ----------- ----------- BALANCE - DECEMBER 31, 2001 6,498,545 64,985 6,340,669 3,435,792 (106,032) 9,735,414 EXERCISE OF STOCK OPTIONS (NOTE 9) 62,104 621 128,664 -- -- 129,285 PRIVATE PLACEMENT (NOTE 9) 910,000 9,100 2,512,839 -- -- 2,521,939 WARRANTS ISSUED (NOTE 9) -- -- 17,000 -- -- 17,000 NET INCOME FOR THE YEAR ENDED DECEMBER 31, 2002 -- -- -- 155,619 -- 155,619 --------- ----------- ----------- ----------- ----------- ----------- BALANCE - DECEMBER 31, 2002 7,470,649 74,706 8,999,172 3,591,411 (106,032) 12,559,257 EXERCISE OF STOCK OPTION (NOTE 9) 130,504 1,306 292,987 -- -- 294,293 EXERCISE OF WARRANTS (NOTE 9) 133,333 1,333 265,333 -- -- 266,666 OPTIONS ISSUED (NOTE 9) -- -- 16,371 -- -- 16,371 NET INCOME FOR THE YEAR ENDED DECEMBER 31, 2003 -- -- -- 570,700 -- 570,700 --------- ----------- ----------- ----------- ----------- ----------- BALANCE - DECEMBER 31, 2003 7,734,486 $ 77,345 $ 9,573,863 $ 4,162,111 $ (106,032) $13,707,287 ========= =========== =========== =========== =========== ===========
-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. F-5 -------------------------------------------------------------------------------- AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------
Years Ended December 31, 2003 2002 2001 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 570,700 $ 155,619 $ 109,559 Adjustments to reconcile net income to net cash provided by operating activities: Provision (credit) for deferred income taxes 313,000 90,000 (137,000) Provision for doubtful receivables 103,000 122,500 117,500 Issuance of warrants for services 16,371 17,000 -- Gain on sale of building (Note 10) (168,897) -- -- Gain on sale and leaseback of fixed assets -- (5,600) (5,600) Depreciation and amortization 2,533,606 2,094,014 2,024,588 Provision for valuation of put warrants (29,333) 113,000 130,000 Accrued interest income -- (44,548) -- Accrued rental obligation 52,524 -- 15,200 Decrease (increase) in: Accounts receivable (280,358) (241,342) (132,759) Inventory (78,501) (52,795) (16,403) Prepaid and refundable taxes 116,479 (162,244) 492,150 Prepaid expenses and other current assets (232,329) (115,181) (25,128) Other assets 13,879 (51,044) (48,152) Increase (decrease) in: Accounts payable (63,590) (117,529) (98,412) Accrued expenses (118,512) 153,648 (118,827) Deferred revenue (43,885) 32,393 (45,456) ----------- ----------- ----------- Net Cash Provided by Operating Activities 2,704,154 1,987,891 2,261,260 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Advances for note receivable -- -- (140,000) Marketable securities 2,057,925 (2,057,925) -- Repayments of notes receivable 75,792 264,877 116,887 Purchase of LMA (Note 4) (1,701,720) -- -- Purchase of HCI -- -- (272,278) Expenditures for fixed assets (1,781,741) (1,347,482) (817,440) Deposit applied on medical devices 40,320 20,355 -- Net proceeds from sale of building 521,395 -- -- Increase in goodwill (213,514) (124,227) (108,402) Payment for account acquisitions and licensing agreement (271,418) (485,185) (231,562) ----------- ----------- ----------- Net Cash Used in Investing Activities (1,272,961) (3,729,587) (1,452,795) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable $ 16,049 $ 1,787,053 $ 41,287 Repayment of notes payable (296,245) (2,359,207) (451,780) Payment of financing costs -- (77,750) -- Principal payments under capital lease obligations (180,595) (214,903) (191,658) Proceeds from private equity placement -- 2,730,000 -- Payment under put warrant obligation (202,667) -- -- Payment of fees relating to private equity placement -- (208,061) -- Exercise of stock options and warrants 560,961 129,285 75,135 ----------- ----------- ----------- Net Cash (Used in) Provided by Financing Activities (102,497) 1,786,417 (527,016) ----------- ----------- ----------- NET INCREASE IN CASH 1,328,696 44,721 281,449 CASH - BEGINNING OF YEAR 863,417 818,696 537,247 ----------- ----------- ----------- CASH - END OF YEAR $ 2,192,113 $ 863,417 $ 818,696 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during the year for: Interest $ 84,221 $ 134,053 $ 220,227 Income taxes 166,126 345,162 217,306
-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. F-6 -------------------------------------------------------------------------------- AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------
Years Ended December 31, 2003 2002 2001 ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Fixed assets recorded under capital lease obligations $ 75,000 $ 135,000 $ 98,340 During 2002, the Company entered into certain agreements relating to the purchase of trade accounts pursuant to which the Company paid cash of $50,554 and agreed to pay an additional $123,606 based upon future monitoring revenues generated by the accounts. During 2003, the Company paid $107,002 towards the additional $123,606 due. (Note 2)
-------------------------------------------------------------------------------- F-7 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. SUMMARY OF SCOPE OF BUSINESS - The Company's portfolio of services SIGNIFICANT includes, personal emergency response systems (PERS), ACCOUNTING telephone answering services (TAS), personal safety and asset POLICIES monitoring (SafeCom) and telehealth systems, which is part of the PERS segment. The Company's PERS business is to sell, rent, install, service and monitor remote communication systems with personal security and smoke/fire detection capabilities, linked to an emergency response monitoring center. In addition, the Company provides after-hours telephone answering services to the healthcare community. The Company also provides personal safety and asset monitoring to retail establishments operating in a 24/7 environment. Most recently, the Company has introduced a telehealth monitoring system. The telehealth system has two main components; the first is a patient home monitoring appliance and the second is a web based care management software program. The Company markets its products primarily to institutional customers, including long-term care providers, retirement communities, hospitals, and government agencies, physicians and group practices and individual consumers across the United States and Canada. CONSOLIDATION POLICY - The accompanying consolidated financial statements include the accounts of American Medical Alert Corp. and its wholly-owned subsidiaries; together the "Company". All material inter-company balances and transactions have been eliminated. MARKETABLE SECURITIES - The Company accounts for its marketable securities, consisting of a mutual fund, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's marketable securities have been classified as securities available for sale and, as a result, are reported at fair value. Marketable securities are available for current operations and are classified in the balance sheet as current assets. INVENTORY VALUATION - Inventory, consisting of finished goods held for resale and component parts, is valued at the lower of cost (first-in, first-out) or market. FIXED ASSETS - Depreciation is computed by the straight-line method at rates adequate to allocate the cost of applicable assets over their expected useful lives as follows: Building 20 years Leased medical devices 3 - 7 years Monitoring equipment 5 years Furniture and equipment 5 - 7 years Automobiles 3 years Amortization of leasehold improvements is provided on a straight-line basis over the shorter of the useful life of the asset or the term of the lease. -------------------------------------------------------------------------------- F-8 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- In accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviews its fixed assets and intangible assets with finite lives for impairment when there are indications that the carrying amounts of these assets may not be recoverable. No impairment losses were recorded during the three-year period ended December 31, 2003. GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill represents the cost in excess of the fair value of the tangible and identifiable intangible net assets of businesses acquired. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Under this standard, goodwill and indefinite life intangible assets are no longer amortized, but are subject to annual impairment tests. The Company completed the annual impairment test during the fourth quarter of 2003 and no impairment was determined. Future annual impairment tests will be performed in the fourth quarter. Other intangible assets with finite lives will continue to be amortized on a straight-line basis over the periods of expected benefit. The Company's other intangible assets include: (a) trade accounts and trade name (collectively, "account acquisitions") which are amortized over their estimated lives of three to ten years; (b) noncompete agreements which are being amortized over their contractual life of 5 years; (c) customer list which is being amortized over 5 years and (d) licensing agreement which is being amortized over the term of the related agreement (Note 5). ACCOUNTS RECEIVABLE - Accounts receivable are reported in the balance sheet at their outstanding principal balance net of an estimated allowance for doubtful accounts. Sales terms usually provide for payment within 30 to 60 days of billing. An allowance for doubtful accounts is estimated based upon a review of outstanding receivables, historical collection information, and existing economic conditions. During the years ended December 31, 2003, 2002 and 2001, provisions for doubtful accounts of approximately $134,000, $122,500 and $117,500, respectively, were charged to income and included in general and administrative expenses. Accounts receivable are charged against the allowance when substantially all collection efforts cease. Recoveries of accounts receivable previously charged off are recorded when received. INCOME TAXES - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," pursuant to which deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates, as well as any net operating loss or tax credit carryforwards expected to reduce taxes payable in future years. -------------------------------------------------------------------------------- F-9 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- REVENUE RECOGNITION - Revenue from renting, installation and monitoring services is recognized upon performance of such services. Revenue from the sale of medical alert devices is recognized upon delivery. Revenue from telephone answering services is recognized as services are provided. Certain of these customers are billed in advance on a semi-annual or annual basis. Unearned revenue is deferred and recognized as the services are provided. RESEARCH AND DEVELOPMENT COSTS - Research and development costs, which are expensed and included in selling, general and administrative expenses, were $181,547, $323,734 and $117,753 for the years ended December 31, 2003, 2002, and 2001, respectively. INCOME PER SHARE - Earnings per share data for the years ended December 31, 2003, 2002 and 2001 are presented in conformity with SFAS No. 128, "Earnings Per Share." The following table is a reconciliation of the numerators and denominators in computing earnings per share: -------------------------------------------------------------------------------- F-10 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amounts --------- --------- --------- 2003 ---- BASIC EPS - Income available to common stockholders $ 570,700 7,455,038 $ .08 ========= ========= ====== EFFECT OF DILUTIVE SECURITIES - Options and warrants -- 223,214 --------- --------- DILUTED EPS - Income available to common stockholders and assumed conversions $ 570,700 7,678,252 $ .07 ========= ========= ====== 2002 ---- BASIC EPS - Income available to common stockholders $ 155,619 7,188,294 $ .02 EFFECT OF DILUTIVE SECURITIES - Options and warrants -- 363,708 --------- --------- DILUTED EPS - Income available to common stockholders and assumed conversions $ 155,619 7,552,002 $ .02 ========= ========= ====== 2001 ---- BASIC EPS - Income available to common stockholders $ 109,559 6,433,275 $ .02 ====== EFFECT OF DILUTIVE SECURITIES - Options and warrants -- 106,384 --------- --------- DILUTED EPS - Income available to common stockholders and assumed conversions $ 109,559 6,539,659 $ .02 ========= ========= ====== -------------------------------------------------------------------------------- F-11 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject the Company to concentration of credit risk principally consist of accounts receivable from state and local government agencies. The risk is mitigated by the Company's procedures for extending credit, follow-up of disputes and receivable collection procedures. In addition, the Company maintains its cash in various bank accounts that at times may exceed federally insured limits. (See Note 12) RECLASSIFICATIONS - Certain amounts in the 2002 and 2001 consolidated financial statements have been reclassified to conform to the 2003 presentation. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Accounting estimates, in part, are based upon assumptions concerning future events. Amoung the more significant are those that relate to collectibility of accounts receivable and the estimated lives and recoverability of long-lived assets. Accounting estimates reflect the best judgment of management and actual results may differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires all entities to disclose the fair value of certain financial instruments in their financial statements. The Company estimates that the fair value of its cash, accounts and notes receivable, refundable taxes, accounts payable and accrued expenses approximates their carrying amounts due to the short maturity of these instruments. The carrying amount of the marketable securities and the put warrant obligation are at their fair value. Substantially all notes payable bear interest at variable rates currently available to the Company; accordingly, their carrying amounts approximate their fair value. ACCOUNTING FOR STOCK-BASED COMPENSATION - The Company's stock-based employee compensation plans are more fully described in Note 9. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions -------------------------------------------------------------------------------- F-12 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation. Year Ended December 31, ------------------------------------ 2003 2002 2001 -------- -------- -------- Net income, as reported $ 570,700 $ 155,619 $ 109,559 Deduct: Total stock-based employee compensation expense determined under fair value based method (161,115) (421,101) (244,771) -------- -------- -------- Pro forma net income (loss) $ 409,585 $(265,482) $(135,212) Earnings (loss) per share: Basic - as reported $ 0.08 $ 0.02 $ 0.02 Basic - pro forma $ 0.05 $ (0.04) $ (0.02) Diluted - as reported $ 0.07 $ 0.02 $ 0.02 Diluted - pro forma $ 0.05 $ (0.04) $ (0.02) The weighted average grant date fair value of options granted in 2003, 2002 and 2001 was $134,889, $532,701 and $221,438, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions: 2003 2002 2001 ----- ----- ----- Expected life (years) 2 2 2 Risk free interest rate 1.92% 2.95% 3.71% Expected volatility 39.06% 37.32% 41.65% Expected dividend yield -- -- -- RECENT ACCOUNTING PRONOUNCEMENTS - In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This statement (i) eliminates extraordinary accounting treatment for a gain or loss reported on the extinguishment of debt, (ii) eliminates inconsistencies in the accounting required for sale-leaseback transactions and certain lease modifications with similar economic effects, and (iii) amends other existing authoritative pronouncements to make technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company adopted SFAS No. 145 effective in 2003. Adoption of this statement did not have an impact on the consolidated results of operations or financial position. In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued. This statement nullifies existing guidance related to the accounting and reporting for costs associated with exit or disposal activities and requires that the fair value of a liability -------------------------------------------------------------------------------- F-13 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- associated with an exit or disposal activity be recognized when the liability is incurred. Under previous guidance, certain exit costs were permitted to be accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. The provisions of this statement are required to be adopted for all exit or disposal activities initiated after December 31, 2002. This statement will not impact any liabilities recorded prior to adoption. The Company adopted SFAS No. 146 effective in 2003. Adoption of this statement did not have an impact on the consolidated results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure, an Amendment of FASB Statement 123" (SFAS 148). SFAS 148 provides new transition alternatives for companies adopting the fair value method of accounting for stock-based compensation prescribed by SFAS 123. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in tabular format. Additionally, SFAS No. 148 requires disclosures of the pro forma effect in interim financial statements. At present, the Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. The Company adopted the annual disclosure provisions of SFAS No. 148 in its financial report for the year ended December 31, 2002 and adopted the interim disclosure provisions for its financial reports in the quarter ended March 31, 2003. 2. INTANGIBLE Intangible assets consist of the following: ASSETS AND GOODWILL
December 31, 2003 December 31, 2002 ------------------------ ------------------------ Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ---------- ---------- ---------- ---------- Account acquisitions $1,115,362 $ 783,946 $1,053,604 $ 569,304 Noncompete agreements 110,000 50,000 60,000 30,000 Customer list 550,000 55,000 -- -- Licensing agreement 1,115,000 167,250 609,570 -- ---------- ---------- ---------- ---------- Total $2,890,362 $1,056,196 $1,723,174 $ 599,304 ========== ========== ========== ==========
Amortization expense of intangible assets for the years ended December 31, 2003 and 2002 was approximately $457,000 and $209,000, respectively, and annual estimated amortization, based on the current amount of intangible assets, is as follows: -------------------------------------------------------------------------------- F-14 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Years Ending December 31, 2004 $668,000 2005 539,000 2006 422,000 2007 141,000 2008 64,000 Changes in the carrying amount of goodwill, all of which relate to the Company's TAS segment, for the years ended December 31, 2003 and 2002 are as follows: Balance as of January 1, 2002 $ 837,504 Additional Goodwill 124,227 ---------- Balance as of December 31, 2002 961,731 Additional Goodwill 1,125,084 ---------- Balance as of December 31, 2003 $2,086,815 ========== Additions to goodwill during 2003 include $911,570 relating to the acquisition of LMA (Note 4) and $213,514 relating to November 2000 acquisition of HCI. The 2002 addition of $124,227 also relates to the HCI acquisition which provided for additional consideration, not to exceed $550,000, to be paid based on future earnings over a six-year period. As of December 31, 2003, approximately $448,000 in additional goodwill has been recorded in connection with the HCI acquisition. The following financial information for the year ended December 31, 2001 is presented as if SFAS 142 was adopted at the beginning of such year: NET INCOME: Reported net income $109,559 Add back: Goodwill amortization, net of income tax 32,400 -------- Adjusted net income $141,959 ======== BASIC EARNINGS PER SHARE: Reported basic earnings per share $ .02 Add back: Goodwill amortization -- -------- -------------------------------------------------------------------------------- F-15 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Adjusted basic earnings per share $ .02 ======== DILUTED EARNINGS PER SHARE: Reported diluted earnings per share $ .02 Add back: Goodwill amortization -- -------- Adjusted basic earnings per share $ .02 ======== 3. LONG-TERM NOTE PAYABLE - BANK - In May 2002, the Company obtained a DEBT credit facility of $3,000,000, which includes a term loan of $1,500,000 and a revolving credit line that permits maximum borrowings of $1,500,000 (based on eligible receivables, as defined). Borrowings under the term loan will bear interest at either (a) LIBOR plus 3.5% or (b) the prime rate or the federal funds effective rate plus .5%, whichever is greater, plus 1.0% and the revolving credit line will bear interest at either (a) LIBOR plus 3.0% or (b) the prime rate or the federal funds effective rate plus .5%, whichever is greater, plus .5%. The Company has the option to choose between the two interest rate options under the term loan and revolving credit line. The term loan is payable in equal monthly principal payments of $25,000 over five years while the revolving credit line is available for three years. The outstanding balance on the term loan at December 31, 2003 and 2002 was $1,050,000 and $1,325,000, respectively. There were no amounts outstanding on the revolving credit line at December 31, 2003 or 2002. Prior to this arrangement with the bank, the amounts outstanding on the revolving credit line at December 31, 2003 or 2002. Company had a revolving credit line, term loans and a mortgage payable with another bank. All amounts due under these agreements were satisfied during 2002 from the proceeds of the $3,000,000 credit facility. AUTO LOANS - As of December 31, 2003 and 2002, the Company had automobile loans outstanding aggregating $42,839 and $48,035, respectively. PRINCIPAL PAYMENT REQUIREMENTS - Aggregate maturities of long-term debt are as follows: Years ending December 31, 2004 $ 323,314 2005 314,073 2006 304,704 2007 150,748 ----------- $ 1,092,839 =========== COVENANTS - The above agreements provide for negative and affirmative covenants including those related to capital expenditures, working capital and other borrowings. -------------------------------------------------------------------------------- F-16 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 4. ACQUISITION On June 30, 2003, in order to expand the geographical reach of its TAS segment, the Company acquired substantially all of the assets of Live Message America, Inc. ("LMA"), a New Jersey provider of telephone after-hour answering services and stand-alone voice mail services. The purchase price consisted of a cash payment of $1,607,818. In addition, the Company incurred professional fees of $93,902 in connection with this acquisition. A potential exists for the payment of additional purchase price consideration based on a percentage of gross revenue of the acquired business if certain thresholds concerning revenue and earnings are met. Such additional consideration, if any, will be accounted for as goodwill. The results of operations of LMA are included in the TAS segment as of the date of acquisition. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company received a third party valuation of certain intangible assets in determining the allocation of the purchase price. Accounts receivable $ 133,537 Property and equipment 75,000 Non-compete agreement 50,000 Customer list 550,000 Goodwill 911,570 Customer deposits (18,387) ----------- Cash paid to acquire LMA $ 1,701,720 =========== The identifiable intangible assets are being amortized on a straight-line basis over their estimated life of five years. The goodwill recognized in the acquisition is expected to be fully deductible for tax purposes. Unaudited pro forma results of operations for the years ended December 31, 2003 and 2002 as if LMA had been consolidated as of the beginning of the year follow. The pro forma results include estimates which management believes are reasonable. Pro forma Years Ended December 31, --------------------------------- 2003 2002 ------------ ------------ Revenue $ 17,310,000 $ 16,260,000 Net income 630,000 280,000 Net income per share Basic $.08 $.04 Diluted $.08 $.04 The unaudited pro forma results of operations do not purport to represent what the Company's results of operations would actually have -------------------------------------------------------------------------------- F-17 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- been had the acquisition been effected for the periods presented, or to predict the Company's results of operations for any future period. 5. LICENSING On November 1, 2001, the Company entered into a Cooperative AGREEMENT Licensing, Development, Services and Marketing Agreement with Health Hero Network, Inc. (the "Agreement") to develop a new integrated appliance combining all of the features associated with the traditional 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 royalty fees based on the service revenue derived from the enhanced PERS product. The cost of the licensing component of $1,115,000, including $115,000 of professional fees, is being amortized over a 40-month period which commenced in July 2003 upon the Company meeting certain milestones under the Agreement and concludes at the end of the initial term of the Agreement. As of December 31, 2003, $295,770 of the license fee is still due to HHN and is included in accrued expenses. 6. RELATED PARTY A previous director of the Company, who resigned during 2001, TRANSACTIONS had an ownership interest in an insurance agency that had written policies for the Company with premiums of $190,779 in 2001. Included in notes and other receivables at December 31, 2003 and 2002 is $143,391 and $164,394, respectively, due from the President and principal shareholder of the Company. In July 2002, the amount due from the shareholder, plus accrued interest, was converted into a term loan, which bears interest at a rate of 5% per annum and is payable in monthly installments of principal and interest through September 2009. See Note 8 for other related party transactions. 7. INCOME TAXES The provision (credit) for income taxes consists of the following: Years Ended December 31, ------------------------------------ 2003 2002 2001 --------- --------- --------- Current: Federal $ 124,000 $ 96,000 $ 216,000 State and local 137,000 86,000 121,000 --------- --------- --------- 261,000 182,000 337,000 --------- --------- --------- Deferred: Federal 253,000 64,000 (120,000) -------------------------------------------------------------------------------- F-18 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- State and local 60,000 26,000 (17,000) --------- --------- --------- 313,000 90,000 (137,000) --------- --------- --------- Total $ 574,000 $ 272,000 $ 200,000 ========= ========= ========= The following is a reconciliation of the statutory federal income tax rate and the effective rate of the provision for income taxes: Years Ended December 31, ------------------ 2003 2002 2001 ---- ---- ---- Statutory federal income tax rate 34% 34% 34% State and local taxes 11 17 22 Permanent differences 3 5 8 Prior year under accrual -- 5 -- Other 2 2 1 ---- ---- ---- Effective income tax rate 50% 63% 65% ==== ==== ==== The tax effects of significant items comprising the Company's deferred taxes at December 31, 2003 and 2002 are as follows:
December 31, ----------------------- 2003 2002 --------- --------- Deferred tax liabilities: Difference between book and tax bases of property $(882,000) $(597,000) --------- --------- Deferred tax assets: Reserves not currently deductible 269,000 272,000 State income tax net operating loss carryforwards -- 25,000 Put warrant expense not currently deductible 97,000 109,000 Other 52,000 40,000 --------- --------- Total 418,000 446,000 --------- --------- Net deferred tax liabilities $(464,000) $(151,000) ========= =========
8. COMMITMENTS CAPITAL LEASES - The Company is obligated under certain capital lease agreements for monitoring equipment and computer software that expire on various dates through 2006. Equipment and computer software under capital leases included in fixed assets are as follows: December 31, ----------------------- 2003 2002 --------- --------- Monitoring equipment and software $ 308,340 $ 807,603 -------------------------------------------------------------------------------- F-19 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Less accumulated depreciation (70,170) (545,603) --------- --------- $ 238,170 $ 262,000 ========= ========= The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2003:
Years ending December 31, 2004 $ 100,025 2005 100,025 2006 25,425 --------- Total minimum lease payments 225,475 Less amounts representing interest 16,005 --------- Present value of net minimum lease payments 209,470 Less current portion 89,656 --------- Obligation under capital leases, less current portion $ 119,814 =========
OPERATING LEASES - The Company rents office facilities from its President and principal shareholder pursuant to two leases, which expire in September 2007. The leases call for minimum annual rentals, subject to 5% annual increases, plus reimbursement for real estate taxes. 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 and Oceanside ERC and Customer Service facilities. The Company believes that centralization of the ERC, Customer Service and H-LINK(R) OnCall operations will provide additional efficiencies and facilitate the projected growth of the H-Link and Disease Management Monitoring operations. The fifteen (15) year lease term commenced in April 2003 when the property was first occupied by the Company. The lease calls for minimum annual rentals of $269,500, subject to a 3% annual increase plus reimbursement for real estate taxes. The Company has also entered into various other operating leases for warehouse and office space in Flushing, New York, Mt. Laurel, New Jersey, Decatur, Georgia, Countryside, Illinois and Parker, Colorado. Rent expense was $699,246 in 2003, $371,169 in 2002 and $372,062 in 2001, which includes $257,966, $264,575 and $265,417, respectively, in connection with the above noted leases with the principal shareholder. Rent expense includes real estate taxes of $48,715 in 2003, $49,229 in 2002 and $47,148 in 2001. The aggregate minimum annual rental commitments under non-cancelable operating leases are as follows: -------------------------------------------------------------------------------- F-20 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Years ending December 31, 2004 $ 565,328 2005 518,081 2006 527,638 2007 500,717 2008 310,149 Thereafter 3,384,305 ------------ $ 5,806,218 ============ Approximately 15% of the minimum annual rental commitments relate to the above noted leases with the principal shareholder. EMPLOYMENT AGREEMENTS - On August 12, 2003, the Company entered into an employment agreement with its Chairman of the Board, President and Chief Executive Officer which expires in December 2006. The agreement provides for an annual base salary of $300,000 per annum during the period beginning June 1, 2003 and ending December 31, 2003, with a 5% increase in each of the subsequent three fiscal years and includes additional compensation based on the Company meeting certain criteria relating to pre-tax income. Previously, the Company had a similar agreement with this individual. No additional compensation was paid during the three year period ended December 31, 2003. The Company has also entered into other employment agreements with certain officers and key employees in the ordinary course of business. The aggregate annual base salaries under these agreements is as follows: Years ending December 31, 2003 $ 719,000 2004 422,000 2005 347,000 ----------- $ 1,488,000 =========== In addition, certain of these employees are entitled to receive additional compensation if certain performance criteria are met. No additional compensation was paid during the three year period ended December 31, 2003. 9. COMMON In April 2002, the Company raised $2,521,939, after expenses STOCK, of $208,061, in a private equity placement of 910,000 shares WARRANTS AND of the Company's common stock and warrants to purchase 227,500 OPTIONS shares of the Company's common stock at an exercise price of $3.80 per share -------------------------------------------------------------------------------- F-21 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- until April 2007. As part of this transaction, the Company registered for resale the common stock and the common stock underlying the warrants sold in the private placement. The Company utilized 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 initiative with HHN. In connection with the private placement, the Company issued to the placement agent two warrants to purchase 91,000 and 22,750 shares of common stock at an exercise price of $3.83 per share and $4.17 per share, respectively. These warrants have the same terms as the warrants issued with the common stock. In November 2003 and February 2002, in connection with services rendered, the Company granted stock options and warrants to purchase 25,000 and 35,000 shares of common stock, respectively, exercisable for periods of ten and five years at exercise prices of $2.73 and $3.50 per share, respectively, the fair value of the stock at the dates of grant. In November 2000, in connection with the HCI acquisition, the Company issued to the selling stockholder two warrants to purchase 133,333.33 and 105,000 shares of the Company's common stock at an exercise price of $2.00 per share. The warrants are exercisable until November 20, 2005 and December 20, 2005, respectively. In addition, the selling stockholder has the option, only during a period of ten trading days, beginning on November 21, 2003 and 2005, respectively, to require the Company to redeem the warrants (the Put Option) at $5 and $6, (the Put Price) respectively, less the exercise price per share of $2. In lieu of honoring its obligation to redeem the warrants, the Company may require the selling stockholder to exercise the warrants with the Company only paying to the selling stockholder the difference between the Put Price and the market price of the common stock at the time of such exercise. The Company is released from its obligation under the Put Option if the Company's stock trades above the Put Price of each respective warrant for a period of 10 consecutive trading days. In November 2003, the selling stockholder exercised the Put Option on the first warrant (133,333.33 shares) and the Company elected to require him to exercise the warrant such that the Company was only required to pay him $1.52 per share, representing the difference between $5.00 and the average fair value of the shares during the requisite 10-day period, or $3.48. With this, along with a valuation performed by an independent appraiser on the second warrant, the Company recognized income of approximately $29,000 in 2003 as compared to an expense in 2002 and 2001 of $113,000 and $130,000, respectively. If a more than 50% change in control occurs, as defined, then under certain circumstances, the remaining warrant, unless previously exercised, is cancelled and the above noted Redemption Amount becomes payable. -------------------------------------------------------------------------------- F-22 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The Company has two stock option plans, the 1997 Stock Option Plan ("1997 Plan") and the 2000 Stock Option Plan ("2000 Plan"). The Company's 1991 Stock Option Plan ("1991 Plan") expired in 2001. Under the 1991 Plan, as amended, a maximum of 750,000 options were available for grant as either Incentive Stock Options or Nonstatutory Stock Options. The last options granted under this Plan were issued in 2001 and will expire in 2006. All options under this Plan were granted at exercise prices equal to the fair market value of the Company's common shares at the date of grant. Under the 1997 and 2000 Plans, a maximum of 750,000 and 1,250,000 options, respectively, may be granted. Options granted under both Plans may either be Incentive Stock Options ("ISOs"), within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or Nonqualified Stock Options which do not qualify as ISOs ("NQSOs"). The 1997 and 2000 Plans are administered by the Board of Directors (the "Board") or a committee of the Board (the "Administrator"). Any committee must consist of at least three members of the Board, each of whom is a "non-employee director" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934. Options granted under the 1997 and 2000 Plans will be subject to, among other things, the following terms and conditions: (a) The exercise price of each option will be determined by the Administrator; provided, however, that the exercise price of an ISO may not be less than the fair market value of the Company's common stock on the date of grant (110% of such fair market value if the optionee owns (or is deemed to own) more than 10% of the voting power of the Company). (b) The number of options granted will be determined by the Administrator. The options will be granted twice a year. To the extent permitted by law, such options will be granted as ISOs. (c) Options may be granted for terms determined by the Administrator; provided, however, that the term of an ISO may not exceed 10 years (5 years if the optionee owns (or is deemed to own) more than 10% of the voting power of the Company). In addition, under the 2000 Plan, no options may have a term exceeding ten years. (d) The maximum number of shares of the Company's common stock for which options may be granted to an employee in any calendar year is 250,000 and 300,000, respectively, under the 1997 and -------------------------------------------------------------------------------- F-23 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 2000 Plans. In addition, the aggregate fair market value of shares with respect to which ISOs may be granted to an employee which are exercisable for the first time during any calendar year may not exceed $100,000. Information with respect to options under plans is as follows:
Weighted Number Average of Exercise Shares Price --------- -------- Balance - January 1, 2001 1,002,516 $ 2.62 Granted during 2001 457,019 1.92 Forfeitures/expirations during 2001 (189,625) 2.45 Exercised during 2001 (40,524) 1.85 --------- -------- Balance - December 31, 2001 1,229,386 2.41 Granted during 2002 744,801 3.04 Forfeitures/expirations during 2002 (164,370) 2.62 Exercised during 2002 (62,104) 2.08 --------- -------- Balance - December 31, 2002 1,747,713 2.69 Granted during 2003 257,642 2.47 Forfeitures/expiration during 2003 (254,644) 2.57 Exercised during 2003 (130,504) 2.25 --------- -------- Balance - December 31, 2003 1,620,207 $ 2.68 ========= ========
At December 31, 2003, 2002 and 2001, 1,471,537, 1,522,713 and 1,149,386 options were exercisable, respectively. The following table summarizes information about the stock options outstanding at December 31, 2003:
Options Outstanding Options Exercisable ------------------------------------------------------------- ------------------------ Weighted- Average Weighted- Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- ----------- ---- ----- ----------- ----- $1.10 - $1.70 92,059 2.25 $ 1.19 92,059 $ 1.19 $1.70 - $2.60 690,931 4.93 2.18 650,931 2.17 $2.60 - $4.20 837,217 5.13 3.25 728,547 3.18 --------- ---- ------- --------- -------- 1,620,207 4.88 $ 2.68 1,471,537 $ 2.61 ========= ==== ======= ========= ========
As of December 31, 2003 144,614 and 68,368 shares of common stock are available for future grants under the 1997 and 2000 Plans, respectively. -------------------------------------------------------------------------------- F-24 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 10. OTHER INCOME Other Income for the year ended December 31, 2003 includes a Relocation and Employment Assistance Program (REAP) credit, which is refundable in full, of approximately $175,000. In connection with the relocation of certain operations to Long Island City, New York, the Company became eligible for the REAP credit which is based upon the number of employees relocated to this designated REAP area. Other Income also includes a gain of approximately $170,000 resulting from the sale of a building that formerly housed the HCI telephone answering service operations. Additionally, other income includes approximately $75,000 relating to the replacement of activators. Early in 2002, it was found that certain activators supplied by a vendor may be subject to battery failure, necessitating the replacement of all potentially affected activators. The vendor replaced these activators and reimbursed the Company for costs incurred in connection with this replacement program. Direct costs paid to third parties in connection with the replacement have been offset against other income; internal costs, including labor, are included within costs related to services in the consolidated statements of income. As of March 31, 2003, the replacement program was substantially completed. Other income for the year ended December 31, 2002 included approximately $255,000 relating to the replacement of activators. Other income also included an insurance recovery of $100,000 relating to the loss of certain leased medical devices and approximately $98,000 of interest income principally relating to the investment of funds realized from the private placement (Note 9) and interest accrued on the note due from the Company's principal shareholder (Note 6). 11. EMPLOYEE The Company sponsors a 401(k) savings plan that is available SAVINGS PLAN to all eligible employees. Participants may elect to defer a portion of their compensation, subject to an annual limitation provided by the Internal Revenue Service. The Company may make matching and/or profit sharing contributions to the plan at its discretion. The Company contributed $14,799, $15,226 and $15,391 for the years ended December 31, 2003, 2002 and 2001, respectively. 12. MAJOR Since 1983, the Company has provided Personal Emergency CUSTOMERS Response Systems ("PERS") services to the City of New York's Human Resources Administration Home Care Service Program ("HCSP"). During the years ended December 31, 2003, 2002 and 2001, the Company's revenues from this contract represented 18%, 23%, and 26%, respectively, of its total revenue. -------------------------------------------------------------------------------- F-25 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- In November 2002, in response to a Request For Proposal issued by HCSP, AMAC and several other companies submitted proposals to provide PERS services on behalf of the City of New York for the period April 1, 2004 through March 31, 2007. The Company was chosen as the approved vendor and is currently reviewing the draft contract which was recently submitted to the Company by HCSP. Based on the preliminary terms of contract, which may still be subject to negotiation, the Company would experience approximately a 20% reduction in monthly revenue relating to the HCSP contract, as the contract calls for a reduced rate per subscriber per month. As a result, the Company would also realize reduced gross margins and net income arising from this contract. The new contract is anticipated to take effect in the second quarter of 2004. The Company has previously disclosed the possibility of the renewal terms of this contract being less favorable than the prior agreement and, has implemented a variety of measures in anticipation of this occurrence. As of December 31, 2003 and 2002, accounts receivable from the contract represented 29% and 41%, respectively, of accounts receivable and leased medical devices in service under the contract represented 22% and 27%, respectively, of leased medical devices. Legal and other fees of approximately $80,000, $42,000 and $40,000 relating to the contract extension were expensed in 2003, 2002 and 2001, respectively. 13. SEGMENT The Company has three reportable segments, Personal Emergency REPORTING Response Systems ("PERS"), Telephone After-Hours Answering Services ("TAS"), and Safe Com. The table below provides a reconciliation of segment information to total consolidated information for the years ended 2003, 2002 and 2001:
2003 ---- PERS TAS Safe Com Consolidated ----------- ----------- ----------- ----------- Revenue $12,520,210 $ 3,732,250 $ 315,892 $16,568,352 Interest expense 71,094 5,418 -- 76,513 Depreciation and amortization 2,306,736 177,080 49,790 2,533,606 Income tax expense 280,000 290,000 4,000 574,000 Net income 254,542 311,308 4,850 570,700 Total assets 11,925,388 5,584,882 426,310 17,936,580 Additions to fixed assets 1,114,325 563,327 104,089 1,781,741 Additions to goodwill and intangible assets 567,188 1,725,084 -- 2,292,272
-------------------------------------------------------------------------------- F-26 AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------
2002 ---- PERS TAS Safe Com Consolidated ----------- ----------- ----------- ----------- Revenue $11,941,520 $ 2,664,361 $ 186,534 $14,792,415 Interest expense 107,935 21,115 -- 129,050 Depreciation and amortization 1,991,667 70,504 31,843 2,094,014 Income tax expense 21,000 251,000 -- 272,000 Net income (loss) 12,146 155,238 (11,765) 155,619 Total assets 14,174,094 2,534,526 272,027 16,980,647 Additions to fixed assets 1,208,822 58,260 80,400 1,347,482 Additions to goodwill and intangible assets 608,791 124,227 -- 733,018
2001 ---- PERS TAS Safe Com Consolidated ----------- ----------- ------------ ------------ Revenue $ 11,458,140 $ 2,391,522 $ 96,937 $ 13,946,599 Interest expense 161,438 57,435 -- 218,873 Depreciation and amortization 1,893,233 108,725 22,630 2,024,588 Income tax expense 51,000 149,000 -- 200,000 Net income (loss) (33,847) 185,164 (41,758) 109,559 Total assets 12,135,254 2,120,395 175,694 14,431,343 Additions to fixed assets 794,679 4,003 18,758 817,440 Additions to goodwill and intangible assets 231,562 108,402 -- 339,964
14. CONTINGENCIES The Company is aware of various threatened or pending litigation claims against the Company relating to its products and arising in the ordinary course of its business. The Company has given its insurance carrier notice of such claims and it believes there is sufficient insurance coverage to cover any such claims. In any event, the Company believes the disposition of these matters will not have a material adverse effect on the financial condition of the Company. -------------------------------------------------------------------------------- F-27 Exhibit No. Identification of Exhibit ----------- ------------------------- 2(a) Asset Purchase Agreement, dated November 21, 2000, among HCI Acquisition Corp., American Medical Alert Corp., Harriet Campbell, Incorporated and Angus Campbell. (Incorporated by reference to Exhibit 2(a) of the Company's form 10-KSB for the year ended December 31, 2000.) 3(a)(i) Articles of Incorporation of Company, as amended. (Incorporated by reference to Exhibit 3(a) to the Company's Form S-1 Registration Statement under the Securities Act of 1933, filed on September 30, 1983 - File No. 2-86862). 3(a)(ii) Certificate of Amendment to the Company's Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 of the Company's Form 10-QSB filed with the SEC on November 14, 2002). 3(b)(i) Amended and Restated By-Laws of Company. (Incorporated by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement under the Securities Act of 1933, Commission File No. 333-6159). 3(b)(ii) Amendment to the Amended and Restated By-Laws of Company. (Incorporated by reference to Exhibit 3.1 to the Company's Form 10-QSB filed with the SEC on November 14, 2003). 3(c) Articles of Incorporation of Safe Com Inc. (Incorporated by reference to Exhibit 3(c) to the Company's Form 10-KSB for the year ended December 31, 1999). 3(d) Certificate of Incorporation of HCI Acquisition Corp. (Incorporated by reference to Exhibit 3(d) of the Company's Form 10-KSB for the year ended December 31, 2000). 3(e)* Certificate of Incorporation of Live Message America Acquisition Corp. 4.1 Stock and Warrant Purchase Agreement dated as of March 27, 2002, between the Company and certain investors. (Incorporated by reference to the Company's Registration Statement on Form S-3 filed with the SEC on May 14, 2002). 4.2 Form of Warrant to purchase shares of Common Stock, issued to certain investors. (Incorporated by reference to the Company's Registration Statement on Form S-3 filed with the SEC on May 14, 2002). 10(a)(i) Employment Agreement dated January 31, 2000 between the Company and Jack Rhian. (Incorporated by reference to Exhibit 10(c)(ii) of the Company's Amendment No. 1 to Form 10-KSB for the year ended December 31, 1999). 10(a)(ii) Amended Employment Agreement dated February 1, 2002, between the Company and Jack Rhian. (Incorporated by reference to Exhibit 10(a)(ii) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(b) Employment Agreement dated August 12, 2003 between the Company and Howard M. Siegel. (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-QSB for the quarter ended June 30, 2003). 10(c)(i) Employment Agreement dated as of January 1, 2001, between the Company and Frederic S. Siegel. (Incorporated by reference to Exhibit 10(c)(i) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(c)(ii) Letter dated March 28, 2002, amending Frederic Siegel Employment Agreement. (Incorporated by reference to Exhibit 10(c)(ii) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(d) Employment Agreement dated January 31, 2002, between the Company and Dr. John Lesher. (Incorporated by reference to Exhibit 10(d) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(e)(i) Lease for the premises located at 520 Fellowship Road, Suite C301, Mt. Laurel, New Jersey ("Mt. Laurel Lease"). (Incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1991). 10(e)(ii) First Amendment to the Mt. Laurel Lease. (Incorporated by reference to Exhibit 10(f) to the Company's Form 10-KSB for the year ended December 31, 1993). 10(e)(iii) Second Amendment to the Mt. Laurel Lease. (Incorporated by reference to Exhibit 10(f) to the Company's Form 10-KSB for the year ended December 31, 1996). 10(e)(iv) Third Amendment to the Mt. Laurel Lease (Incorporated by reference to Exhibit 10(g) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(e)(v) Fourth Amendment to the Mt. Laurel Lease. (Incorporated by reference to Exhibit 10(e)(v) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(f)(i) Lease for the premises located at 3265 Lawson Boulevard, Oceanside, New York. (Incorporated by reference to Exhibit 10(h) to the Company's Form 10-KSB for the year ended December 31, 1994). 10(f)(ii) Amendment to Lease for the premises located at 3265 Lawson Boulevard, Oceanside, New York (Incorporated by reference to Exhibit 10(i) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(g)(i) Lease for the premises located at 3255 Lawson Boulevard, Oceanside, New York (Incorporated by reference to Exhibit 10(j) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(g)(ii) Addendum to lease for premises located at 3255 Lawson Boulevard, Oceanside, New York. (Incorporated by reference to Exhibit 10(j)(ii) to the Company's Form 10-KSB for the year ended December 31, 1999). 10(h)(i) Lease for the premises located at 910 Church Street, Decatur, Georgia (Incorporated by reference to Exhibit 10(k) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(h)(ii) Assignment of Rents and Leases dated January 7, 1999 relating to the leased premises at 910 Church Street, Decatur, Georgia (Incorporated by reference to Exhibit 10(x) to the Company's form 10-KSB for the year ended December 31, 1998). 10(i) Lease for the premises located at 169-10 Crocheron Avenue, Flushing, New York dated September 1, 1998 by and between the Company and Roseann and Charles Rojo. (Incorporated by reference to Exhibit 10(l) of the Company's form 10-KSB for the year ended December 31, 1998). 10(j) Lease for the premises located at 475 West 55th Street, Countryside, Illinois. (Incorporated by reference to Exhibit 10(k) to the Company's Form 10-KSB for the year ended December 31, 1995.) 10(k) Amendment to Lease for the premises located at 475 West 55th Street, Countryside, Illinois (Incorporated by reference to Exhibit 10(n) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(l) Lease for the premises located at Store Space No. 300, 12543 North Highway 83, Parker, Colorado, dated March 9, 2000. (Incorporated by reference to Exhibit 10(l) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(m)(i) Lease for the premises located at 33-36 33rd Street, Long Island, City, New York, dated January 14, 2002. (Incorporated by reference to Exhibit 10(m)(i) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(m)(ii) Lease Amendment and Modification for the premises located at 33-36 33rd Street, Long Island City, New York. (Incorporated by reference to Exhibit 10(m)(ii) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(n) Amended 1991 Stock Option Plan. (Incorporated by reference to Exhibit 10(l) to the Company's Form 10-KSB for the year ended December 31, 1994). 10(o) 1997 Stock Option Plan (Incorporated by reference to Exhibit 10(q) to the Company's Form 10-KSB for the year ended December 31, 1997). 10(p) 2000 Stock Option Plan. (Incorporated by reference to Exhibit A of the Company's Definitive Proxy Statement, filed with the Commission and dated June 1, 2000). 10(q) Agreement between the Company and the City of New York, dated February 22, 2002. (Incorporated by reference to Exhibit 10(p)(ii) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(r) Purchase/Leaseback Agreement dated July 13, 1999 with Celtic Leasing Corp. (Incorporated by reference to Exhibit 10(r) to the Company's Form 10-KSB for the year ended December 31, 1999). 10(t) Credit Agreement, dated as of May 20, 2002, by and between the Company and the Bank of New York. (Incorporated by reference to Exhibit 10(t) of the Company's Form 10-KSB for the year ended December 31, 2002). 10(u) Advisory Agreement dated February 6, 2002, between the Company and Cameron Associates, Inc. (Incorporated by reference to Exhibit 10(t) of the Company's Form 10-KSB for the year ended December 31, 2001). 10(v) Cooperative Licensing, Development, Services and Marketing Agreement, dated November 1, 2001, between the Company and Health Hero Network, Inc. (Incorporated by reference to Exhibit 10.1 of the Company's Form 10-QSB filed with the SEC on November 14, 2001). 10(x) Term Promissory Note, dated June 24, 2002, issued by Howard M. Siegel in favor of the Company. (Incorporated by reference to Exhibit 10(x) of the Company's Form 10-KSB for the year ended December 31, 2002). 21(a)* Subsidiaries of the Company. 23.1* Consent of Margolin, Winer & Evens LLP. 31.1* Certification of Chief Executive Officer pursuant to Section 303 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ------------------- * Filed herewith.