|
In
thousands (000’s)
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
%
|
|
2006
|
|
%
|
|
2007
|
|
%
|
|
2006
|
|
%
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSMS
|
|
|
4,340
|
|
|
49
|
%
|
|
3,990
|
|
|
51
|
%
|
|
12,849
|
|
|
49
|
%
|
|
11,970
|
|
|
53
|
%
|
|
TBCS
|
|
|
4,431
|
|
|
51
|
%
|
|
3,795
|
|
|
49
|
%
|
|
13,524
|
|
|
51
|
%
|
|
10,761
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
8,771
|
|
|
100
|
%
|
|
7,785
|
|
|
100
|
%
|
|
26,373
|
|
|
100
|
%
|
|
22,731
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Services and Goods Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSMS
|
|
|
1,878
|
|
|
43
|
%
|
|
1,846
|
|
|
46
|
%
|
|
5,602
|
|
|
44
|
%
|
|
5,367
|
|
|
45
|
%
|
|
TBCS
|
|
|
2,397
|
|
|
54
|
%
|
|
2,012
|
|
|
53
|
%
|
|
7,073
|
|
|
52
|
%
|
|
5,855
|
|
|
54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Cost of Services and Goods Sold
|
|
|
4,275
|
|
|
49
|
%
|
|
3,858
|
|
|
50
|
%
|
|
12,675
|
|
|
48
|
%
|
|
11,222
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSMS
|
|
|
2,462
|
|
|
57
|
%
|
|
2,144
|
|
|
54
|
%
|
|
7,247
|
|
|
56
|
%
|
|
6,603
|
|
|
55
|
%
|
|
TBCS
|
|
|
2,034
|
|
|
46
|
%
|
|
1,783
|
|
|
47
|
%
|
|
6,451
|
|
|
48
|
%
|
|
4,906
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Gross Profit
|
|
|
4,496
|
|
|
51
|
%
|
|
3,927
|
|
|
50
|
%
|
|
13,698
|
|
|
52
|
%
|
|
11,509
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General & Administrative
|
|
|
4,161
|
|
|
47
|
%
|
|
3,465
|
|
|
45
|
%
|
|
12,084
|
|
|
46
|
%
|
|
10,156
|
|
|
45
|
%
|
|
Interest
Expense
|
|
|
121
|
|
|
1
|
%
|
|
87
|
|
|
1
|
%
|
|
376
|
|
|
1
|
%
|
|
263
|
|
|
1
|
%
|
|
Other
Income
|
|
|
(525
|
)
|
|
(6
|
)%
|
|
(135
|
)
|
|
(2
|
)%
|
|
(871
|
)
|
|
(3
|
)%
|
|
(393
|
)
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
|
740
|
|
|
8
|
%
|
|
511
|
|
|
7
|
%
|
|
2,110
|
|
|
8
|
%
|
|
1,484
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
317
|
|
|
|
|
|
232
|
|
|
|
|
|
913
|
|
|
|
|
|
680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
423
|
|
|
|
|
|
279
|
|
|
|
|
|
1,197
|
|
|
|
|
|
804
|
|
|
|
|
Note:
The
percentages for Cost of Services and Goods Sold and Gross Profit are calculated
based on a percentage of revenue.
Results
of Operations:
The
Company has two distinct operating business segments, which are HSMS and
TBCS.
Prior to January 1, 2007, the Company reported three reportable segments;
HSMS,
TBCS and Safe Com. Since the business activities of Safe Com fall within
the
Health and Safety monitoring line of business, the Company included the
activities of its Safe Com segment in its HSMS segment.
Three
Months Ended September 30, 2007 Compared to Three Months Ended September
30,
2006
Revenues
:
HSMS
Revenues,
which consist primarily of monthly rental revenues, increased approximately
$350,000, or 9%, for the three months ended September 30, 2007 as compared
to
the same period in 2006. Monthly rental revenues represent revenues that
are
generated from the leasing and monitoring of the medical devices placed in
subscribers’ residences. The increase is primarily attributed to the
following:
|
|
§
|
The
Company continues to experience growth primarily in its existing
customer
base. The largest growth continues to be as a result of an agreement
with
a west coast managed care organization, which was executed in November
2003. The number of Personal Emergency Response Systems (“PERS”) in
service under this agreement has more than doubled since its inception
and
has resulted in approximately $70,000 more revenue in 2007 as compared
to
the same period in 2006. The Company anticipates that the growth
in this
account will continue for the balance of
2007.
|
|
|
§
|
In
late 2006 and in 2007, the Company has executed new agreements
with
various customers whereby PERS were placed online. Since inception,
the
subscriber base associated with these agreements has grown throughout
2007
and accounted for an approximate $230,000 increase in revenue during
the
three months ended September 30, 2007 as compared to the same period
in
the prior year. The Company anticipates that the growth from these
new
agreements will continue for the balance of
2007.
|
TBCS
The
increase in revenues of approximately $636,000, or 17%, for the three months
ended September 30, 2007 as compared to the same period in 2006 was primarily
due to the following:
|
|
§
|
In
December 2006, the Company purchased the assets of
American
Mediconnect, Inc. and PhoneScreen, Inc.
As
a result of this acquisition, the Company realized approximately
$630,000
of revenue in the three months ended September 30, 2007. The Company
completed this acquisition to further facilitate its expansion
of its
telephone answering services businesses and allow them to increase
its
market base outside the Northeast geographical
area.
|
In
2007,
with regard to the TBCS segment, the Company shifted
its
focus
from an acquisition driven growth strategy, to one that will place primary
emphasis on internally driven business development efforts. For 2008, the
Company is looking to pursue additional acquisitions in the TBCS segment
which
will compliment its existing call center infrastructure.
Costs
Related to Services and Goods Sold:
HSMS
Costs
related to services and goods increased by approximately $32,000 for the
three
months ended September 30, 2007 as compared to the same period in 2006, a
decrease of 2%, primarily due to the following:
|
|
§
|
During
the third quarter the Company recorded a write down of fixed assets
of its
PERS Buddy device in the approximate amount of $111,000. The Company
determined that the PERS Buddy would only be used on a minimal
basis due
to technical issues regarding some of the circuit boards associated
with
these devices.
|
|
|
§
|
During
2006, the Company relocated its fulfillment and warehouse
distribution center into Long Island City, New York from Mt. Laurel,
New
Jersey. As part of this relocation process, the Company also took
the
upgrade and repairs of its PERS units in-house, which required
the Company
to hire additional employees. These items accounted for approximately
$60,000 of increased costs as compared to the same period in the
prior
year, which were partially offset by the reduction in costs related
to
repairs and upgrades.
|
These
increases were partially offset by:
The
Company capitalized additional labor and overhead costs in the three months
ended September 30, 2007 as compared to the same period in 2006 resulting
in a
decrease in expense by approximately $70,000. The Company has increased
purchases of its PERS device and associated components requiring additional
labor to properly prepare these products, including quality assurance,
programming and packaging, to be shipped. The Company has increased
its purchases due to the increased volume as a result of new agreements with
various customers.
TBCS:
Costs
related to services and goods increased by approximately $385,000 for the
three
months ended September 30, 2007 as compared to the same period in 2006, an
increase of 19%, primarily due to the following:
|
|
§
|
During
2006, as discussed above, the Company purchased the assets of a
telephone
answering service businesses which resulted in additional costs
related to
services for the three months ended September 30, 2007 of approximately
$345,000.
|
|
|
§
|
In
July 2007 the Company opened a new call center. During the third
quarter
the Company hired call center operators which resulted in payroll
and
related payroll costs of approximately $70,000. The Company plans
to
continue to expand this call center throughout the remainder of
2007 and
into 2008. In connection with opening this new call center, the
Company is eligible to receive certain incentives going forward
which will
help to offset some of these costs. These costs were partially
offset by
the Company reducing call center operators at its existing call
centers.
|
Selling,
General and Administrative Expenses:
Selling,
general and administrative expenses increased by approximately $696,000 for
the
three months ended September 30, 2007 as compared to the same period in 2006,
an
increase of 20%. The increase is primarily attributable to the
following:
|
|
§
|
The
Company incurred approximately $277,000 of additional selling,
general and
administrative expenses, as compared to the same period in 2006,
as a
result of the acquisition of a telephone answering service businesses
in
December 2006. The more significant expenses consist primarily of
salaries and related payroll taxes as well as amortization relating
to
customer lists and non-compete
agreements.
|
|
|
§
|
An
executive entered into a new employment agreement effective January
1, 2007. As a result of this new agreement, the Company recorded
approximately $47,000 of additional compensation expense, including
stock
compensation expenses, for the three months ended September 30,
2007 as
compared to the same period in 2006.
|
|
|
§
|
The
Company has incurred approximately $52,000 of additional travel
and
entertainment expense as compared to the same period in 2006, as
a result
of the Company executing on its opening of a new call center which
has
required travel expenses as well as conducting meetings with new
and
existing customers, including Walgreen’s to facilitate
growth.
|
|
|
§
|
The
Company incurred approximately $42,000 of additional costs relating
to
advertising/marketing expense, as compared to the same period in
2006.
This is primarily due to costs incurred with regard to an internet
advertising campaign through one of its TBCS locations and costs
related to the production of marketing materials associated with
the
Walgreen’s Ready Response™ Program.
|
|
|
§
|
In
conjunction with various new programs and agreements, the Company
has
hired additional marketing and sales personnel. As a result of
this, the
Company recorded an increase in payroll and payroll related costs
of
approximately $60,000.
|
There
were other increases in selling, general and administrative expenses which
arose
out of the normal course of business such as accounting fees, printing expense
and depreciation expense, which were partially offset by a reduction in legal
fees.
Interest
Expense:
Interest
expense for the three months ended September 30, 2007 and 2006 was approximately
$121,000 and $87,000, respectively. The increase was primarily due to the
Company borrowing additional funds in December 2006 of $1,600,000 for the
purpose of financing its acquisitions of AMI.
Other
Income:
Other
income for the three months ended September 30, 2007 and 2006 was approximately
$525,000 and $135,000, respectively. Other Income for the three months ended
September 30, 2007 and 2006 includes a Relocation and Employment Assistance
Program (“REAP”) credit in the approximate amounts of $118,000 and $104,000,
respectively. In connection with the relocation of certain operations to
Long
Island City, New York in April 2003, 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; during the first
five
years the Company will be refunded the full amount of the eligible credit
and,
thereafter, the benefit will be available only as a credit against New York
City
income taxes. Additionally, Other Income for the three months ended September
30, 2007 includes approximately $425,000 with respect to a settlement agreement
for matters related to certain product and warranty disputes.
Income
Before Provision for Income Taxes:
The
Company’s income before provision for income taxes for the three months ended
September 30, 2007 was approximately $740,000 as compared to $511,000 for
the
same period in 2006. The increase of $229,000 for the three months ended
September 30, 2007 primarily resulted from an increase in the Company's other
income offset by an increase in the Company’s selling, general and
administrative costs.
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
Revenues
:
HSMS
Revenues,
which consist primarily of monthly rental revenues, increased approximately
$879,000, or 7%, for the nine months ended September 30, 2007 as compared
to the
same period in 2006. Monthly rental revenues represent revenues that are
generated from the leasing and monitoring of the medical devices placed in
subscribers’ residences. The increase is primarily attributed to the
following:
|
|
§
|
The
Company continues to experience growth primarily in its existing
customer
base. The largest growth continues to be as a result of an agreement
with
a west coast managed care organization, which was executed in November
2003. The number of Personal Emergency Response Systems (“PERS”) in
service under this agreement has more than doubled since its inception
and
has resulted in approximately $230,000 more revenue in 2007 as
compared to
the same period in 2006. The Company anticipates that the growth
in this
account will continue for the balance of
2007.
|
|
|
§
|
In
late 2006 and in 2007, the Company has executed new agreements
with
various customers whereby PERS were placed online. Since inception,
the
subscriber base associated with these agreements has grown throughout
2007
and accounted for an approximate $430,000 increase in revenue during
the
three months ended September 30, 2007 as compared to the same period
in
the prior year. The Company anticipates that the growth from these
new
agreements will continue for the balance of
2007.
|
|
|
§
|
In
December 2006, the Company purchased subscribers utilizing PERS
from a
third party who previously was a customer of the Company. As a
result of
this transaction, the Company has generated approximately $135,000
of
additional revenue for the nine months ended September 30, 2007
as
compared to the same period last year.
|
|
|
§
|
In
the second half of 2006, the Company increased its product sales
to
retirement communities. During 2006, the Company developed new
software
and is now selling this in conjunction with hardware to retirement
communities for the purposes of monitoring their residents. This
resulted
in approximately a $74,000 increase in product sales in 2007 as
compared
to the same period in 2006.
|
TBCS
The
increase in revenues of approximately $2,763,000, or 26%, for the nine months
ended September 30, 2007 as compared to the same period in 2006 was primarily
due to the following:
|
|
§
|
During
2006, the Company purchased the assets of two separate telephone
answering
service businesses which resulted in additional revenue for the
nine
months ended September 30, 2007, as compared to the same period
in 2006,
of approximately $2,636,000. The acquisitions were as follows:
|
|
|
o
|
In
March 2006, the Company purchased the assets of MD OnCall and Capitol
Medical Bureau (collectively “MD OnCall”). As a result of this
acquisition, the Company realized approximately $621,000 of additional
revenue in the first nine months of 2007 as compared to the same
period in
2006. The Company completed this acquisition to facilitate its
expansion
into the Northeast geographical
area.
|
|
|
o
|
In
December 2006, the Company purchased the assets of
American
Mediconnect, Inc. and PhoneScreen, Inc.
As
a result of this acquisition, the Company realized approximately
$2,015,000 of revenue in the first nine months of 2007. The Company
completed this acquisition to further facilitate its expansion
of its
telephone answering services businesses and allow them to increase
its
market base outside the Northeast geographical
area.
|
In
2007,
with regard to the TBCS segment, the Company shifted
its
focus
from an acquisition driven growth strategy, to one that will place primary
emphasis on internally driven business development efforts. For 2008, the
Company is looking to pursue additional acquisitions in the TBCS segment
which
will compliment its existing call center infrastructure.
Costs
Related to Services and Goods Sold:
HSMS
Costs
related to services and goods increased by approximately $235,000 for the
nine
months ended September 30, 2007 as compared to the same period in 2006, an
increase of 4%, primarily due to the following:
|
|
§
|
The
relocation of the Company’s fulfillment and warehouse distribution center
into Long Island City, New York from Mt. Laurel, New Jersey during
the
second quarter of 2006 resulted in increased rent expense due to
the
Company leasing more space and paying a higher rate per square
foot for
rent. As part of this relocation process, the Company also took
the
upgrade and repairs of its PERS units in-house, which required
the Company
to hire additional employees, including a Manager of Engineering
and
Fulfillment. These items accounted for approximately $240,000 of
increased
costs as compared to the same period in the prior year, which were
offset
by the reduction in costs related to repairs and upgrades of approximately
$100,000 which were previously performed by a third party vendor.
|
|
|
§
|
During
2006 and into 2007, the Company has increased the number of personnel
working in its Emergency Response Center (“ERC”) department which
accounted for increased costs of approximately $106,000 in 2007
as
compared to the same period in 2006. The Company hired additional
personnel due to the increased volume of calls which is directly
correlated to the increased subscriber base, as well as to prepare
for the
rollout of the Walgreen’s Ready Response™ Program, which is now in
progress.
|
|
|
§
|
During
the third quarter the Company recorded a write down of fixed assets
of its
PERS Buddy device in the approximate amount of $111,000. The Company
determined that the PERS Buddy would only be used on a minimal
basis due
to matters regarding product and warranty disputes relating to
some of the
boards associated with these
devices.
|
|
|
§
|
The
Company has incurred additional depreciation expense of approximately
$130,000 primarily due to the increased purchases made during the
latter
part of 2006 and 2007. The increased purchases is a result of the
increase
in the number of subscribers
online.
|
These
increases were offset by the Company capitalizing labor and overhead costs
in
2007 as compared to the same period in 2006 resulting in a decrease in expense
by approximately $250,000. The Company has increased purchases of its PERS
devices and associated components requiring additional labor to properly
prepare
these products, including quality assurance, programming and packaging, to
be
shipped. The Company has increased its purchases due to the increased volume
as
a result of new agreements with various customers.
TBCS:
Costs
related to services and goods increased by approximately $1,218,000 for the
nine
months ended September 30, 2007 as compared to the same period in 2006, an
increase of 21%, primarily due to the following:
|
|
§
|
During
2006, as discussed above, the Company purchased the assets of two
separate
telephone answering service businesses which resulted in additional
costs
related to services for the nine months ended September 30, 2007
of
approximately $1,418,000. The increased costs related to services
in
regard to the acquisitions were as follows: MD OnCall approximated
$315,000 and AMI approximated
$1,103,000.
|
|
|
§
|
In
July 2007 the Company opened a new call center. During the third
quarter
the Company hired call center operators which resulted in payroll
and
related payroll costs of approximately $70,000. The Company plans
to
continue to expand this call center throughout the remainder of
2007 and
into 2008. In connection with opening this new call center, the
Company is eligible to receive certain incentives going forward
which will
help to offset some of these costs.
|
|
|
§
|
During
the latter part of 2006 and into 2007, the Company reduced the
number of
telephone answering service operators at its existing call centers.
This
has been accomplished through overall efficiencies which are being
realized by the Company throughout its TBCS segment. Additionally,
the
Company is now utilizing its newly established call center and
has
allocated some of the call volume to this location. This accounted
for a
reduction in costs of approximately $114,000 at its existing call
centers
for the period ended September 30, 2007 as compared to the same
period in
2006. As the Company continues to realize these operational efficiencies
and utilize its new call center, it will continue to evaluate personnel
levels and continue to evaluate the consolidation strategy of its
communications infrastructure, yielding greater per seat through-put
with
an associated reduction in overall labor
expense.
|
Selling,
General and Administrative Expenses:
Selling,
general and administrative expenses increased by approximately $1,928,000
for
the nine months ended September 30, 2007 as compared to the same period in
2006,
an increase of 19%. The increase is primarily attributable to the
following:
|
|
§
|
The
Company incurred approximately $946,000 of additional selling,
general and
administrative expenses, as compared to the same period in 2006,
as a
result of the acquisition of two telephone answering service businesses
during 2006. The more significant expenses relate to salaries and
related payroll taxes and amortization relating to customer lists
and
non-compete agreements.
|
|
|
§
|
The
Company incurred approximately $105,000 of additional costs relating
to
advertising/marketing expense, as compared to the same period in
2006.
This is primarily due to costs incurred with regard to an internet
advertising campaign through one of its TBCS locations and costs
related to the production of marketing materials associated with the
Walgreen’s Ready Response™ Program.
|
|
|
§
|
In
conjunction with various new programs and agreements, the Company
has
hired additional marketing and sales personnel. As a result of
this, the
Company recorded an increase in this expense of approximately
$107,000.
|
|
|
§
|
The
Company purchased subscribers utilizing PERS from a third party
in
December 2006. As part of this transaction, it was agreed that
the third
party would continue to manage and service these accounts on behalf
of the
Company. As a result of this arrangement, the Company pays an
administrative fee to this third party amounting to approximately
$96,000.
|
|
|
§
|
The
Company incurred increased costs of approximately $69,000, as compared
to
the same period in 2006, associated with the research and development.
These costs primarily associated with the new generation Med-Time
dispenser, smoke detector and retirement community flush mount
console
unit. The Company continues to move forward with the development
of these
new generation products and anticipates having them available within
the
next three to nine months.
|
There
were other increases in selling, general and administrative expenses which
arose
out of the normal course of business such as accounting expense, amortization
expense and travel and entertainment expense which were partially offset
by
decreases in legal and bad debt expense.
Interest
Expense:
Interest
expense for the nine months ended September 30, 2007 and 2006 was approximately
$376,000 and $263,000, respectively. The increase was primarily due to the
Company borrowing additional funds in March 2006 of $2,500,000 and in December
2006 of $1,600,000 for the purpose of financing its acquisitions of MD OnCall
and AMI, respectively.
Other
Income:
Other
Income for the nine months ended September 30, 2007 and 2006 was approximately
$871,000 and $393,000, respectively. Other Income for the nine months ended
September 30, 2007 and 2006 includes a Relocation and Employment Assistance
Program (“REAP”) credit in the approximate amounts of $237,000 and $202,000,
respectively. In connection with the relocation of certain operations to
Long
Island City, New York in April 2003, 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; during the first
five
years the Company will be refunded the full amount of the eligible credit
and,
thereafter, the benefit will be available only as a credit against New York
City
income taxes. Additionally, Other Income for the nine months ended September
30,
2007 includes approximately $425,000 with respect to a settlement agreement
for
matters related to certain product and warranty disputes.
Income
Before Provision for Income Taxes:
The
Company’s income before provision for income taxes for the nine months ended
September 30, 2007 was approximately $2,110,000 as compared to $1,484,000
for
the same period in 2006. The increase of $626,000 for the nine months ended
September 30, 2007 primarily resulted from an increase in the Company's service
revenues and other income offset by an increase in the Company’s costs related
to services and selling, general and administrative costs.
Liquidity
and Capital Resources:
As
of
January 1, 2006 the Company had a credit facility arrangement for $4,500,000
which included a revolving credit line which permitted borrowings of $1,500,000
(based on eligible receivables as defined) and a $3,000,000 term loan payable
in
equal monthly principal installments of $50,000 over five years commencing
January 2006.
In
March
2006 and December 2006, the Company’s credit facility was amended whereby the
Company obtained an additional $2,500,000 and $1,600,000 of term loans, the
proceeds of which were utilized to finance the acquisitions of MD OnCall
and
AMI. These term loans are payable over five years in equal monthly principal
installments of $41,666.67 and $26,666.67, respectively. Additionally, one
of
the covenants was amended.
In
December 2006, the credit facility was amended to reduce the interest rates
charged by the bank such that borrowings under the term loan will bear interest
at either (a) LIBOR plus 2.00% or (b) the prime rate or the federal funds
effective rate plus .5%, whichever is greater, and the revolving credit line
will bear interest at either (a) LIBOR plus 1.75% or (b) the prime rate or
the
federal funds effective rate plus .5%, whichever is greater. The LIBOR
interest rate charge shall be adjusted in .25% intervals based on the Company’s
ratio of Consolidated Funded Debt to Consolidated EBITDA. In the third quarter
of 2007, the interest rate was reduced by .25% based on this ratio. The Company
has the option to choose between the two interest rate options under the
amended
term loan and revolving credit line. Borrowings under the credit facility
are
collateralized by substantially all of the assets of the Company.
On
April
30, 2007, the Company amended its credit facility whereby the term of the
revolving credit line was extended through June 2010 and the amount of credit
available under the revolving credit line was increased to
$2,500,000.
As
of
September 30, 2007 the Company was not in compliance with one of its financial
covenants in its loan agreement. The lender waived the non-compliance as
of such
date and entered into an amendment to the credit facility.
The
following table is a summary of contractual obligations as of September 30,
2007:
|
|
|
Payments
Due by Period
|
|
|
Contractual
Obligations
|
|
Total
|
|
Less
than 1 year
|
|
1-3
years
|
|
4-5
years
|
|
After
5 years
|
|
|
Revolving
Credit Line
|
|
$
|
1,100,000
|
|
|
|
|
$
|
1,100,000
|
|
|
|
|
|
|
|
|
Debt
(a)
|
|
$
|
5,309,275
|
|
$
|
1,531,170
|
|
$
|
3,698,105
|
|
$
|
80,000
|
|
|
|
|
|
Capital
Leases (b)
|
|
$
|
84,494
|
|
$
|
41,289
|
|
$
|
43,205
|
|
|
|
|
|
|
|
|
Operating
Leases (c)
|
|
$
|
8,439,154
|
|
$
|
922,211
|
|
$
|
2,316,615
|
|
$
|
1,495,833
|
|
$
|
3,704,495
|
|
|
Purchase
Commitments (d)
|
|
$
|
1,815,746
|
|
$
|
1,815,746
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense (e)
|
|
$
|
871,232
|
|
$
|
397,508
|
|
$
|
472,774
|
|
$
|
950
|
|
|
|
|
|
Acquisition
related Commitment (f)
|
|
$
|
305,776
|
|
$
|
305,776
|
|
|
|
|
|
|
|
|
|
|
|
Total
Contractual Obligations
|
|
$
|
17,925,677
|
|
$
|
5,013,700
|
|
$
|
7,630,699
|
|
$
|
1,576,783
|
|
$
|
3,704,495
|
|
|
|
(a)
|
-
Debt includes the Company’s aggregate term loans of $7,100,000 which
mature in 2010 and 2011, as well as loans associated with the purchase
of
automobiles.
|
|
|
(b)
|
-
Capital lease obligations relate to the telephone answering service
equipment. These capital leases mature in the second quarter of
2009.
|
|
|
(c)
|
-
Operating leases include rental of facilities at various locations
within
the United States. These operating leases include the rental of
the
Company’s call center, warehouse and the office facilities. These
operating leases have various maturity dates. The Company currently
leases
office space from the Chairman and principal shareholder pursuant
to a
lease which expires in March 2008.
|
|
|
(d)
|
-
Purchase
commitments relate to orders for the Company’s traditional
PERS.
|
|
|
(e)
|
-
Interest expense relates to interest on the Company’s revolving credit
line and debt at the Company’s current rate of
interest.
|
|
|
(f)
|
-
Acquisition related commitment relates to holdback associated with
acquisition of a telephone answering service made by the company.
This
commitment is due in December 2007.
|
Net
cash
provided by operating activities was approximately $4.3 million for the nine
months ended September 30, 2007, as compared to approximately $3.3 million
for
the same period in 2006. During 2007, increases in cash provided by operating
activities from depreciation and amortization of approximately $3.1 million,
increase in liabilities of $1.0 million and net earnings of approximately
$1.2
million were partially offset by an increase in trade receivables of
approximately $0.6 million. The components of depreciation and amortization
primarily relate to the purchases of the Company’s traditional PERS product and
the customer lists associated with the acquisition of telephone answering
service businesses. The increase in liabilities is due to an increase in
the
purchase of its PERS product not paid for at September 30, 2007, 2007 taxes
and
timing of payments of other expenses in the ordinary course of business.
The
increase in trade receivables is primarily due to the Company consummating
an
acquisition in December 2006, which resulted in approximately $0.4 million
of
increased receivables through the normal course of business. Increases in
cash
provided by operating activities during 2006 were the result of depreciation
and
amortization of approximately $1.6 million, increase in liabilities of $0.8
million and net earnings of approximately $0.5 million. These increases were
partially offset by an increase in trade receivables of approximately $0.8
million.
Net
cash
used in investing activities for the nine months ended September 30, 2007
was
approximately $3.4 million as compared to $6.6 million in the same period
in
2006. The primary component of net cash used in investing activities in 2007
was
capital expenditures of approximately $3.2 million. Capital expenditures
in 2007
primarily related to the continued production and purchase of the traditional
PERS system. The primary components of net cash used in investing activities
in
2006 were the acquisition of telephone answering service businesses and capital
expenditures of $3.3 and $2.9 million, respectively.
Cash
flows for the nine months ended September 30, 2007 used in financing activities
were approximately $0.4 million compared to cash flows provided by financing
activities of $2.2 million for the same period in 2006. The primary component
of
cash flow used in financing activities in 2007 was the payments of long-term
debt of approximately $1.1 million. This was partially offset by proceeds
received from the exercise of the Company’s stock options and warrants of
approximately $0.4 million and the additional borrowings used under its
revolving credit facility of approximately $0.4 million. The primary component
of cash flow provided by financing activities in 2006 was proceeds received
from
additional borrowings of $2.5 million which were primarily used for the
acquisition of a telephone answering service.
During
the next twelve months, the Company anticipates it will make capital
expenditures of approximately $3.25 - $3.75 million for the production and
purchase of the traditional PERS systems and telehealth systems, enhancements
to
its computer operating systems and the production of its Med-Time pill dispenser
(this includes outstanding purchase orders issued to purchase approximately
$1.8
million of the traditional PERS systems). This amount is subject to fluctuations
based on customer demand. The Company also anticipates incurring approximately
$0.2 - $0.4 million of costs relating to research and development of its
telehealth product, Med-Time dispenser and retirement community flush mount
console unit. In July 2005, the Company entered into a technology, licensing,
development, distribution and marketing agreement with a supplier for its
HSMS
sector. Pursuant to this agreement the Company anticipates spending
approximately $0.2 - $0.4 million over the next twelve to eighteen months.
As
of
September 30, 2007, the Company had approximately $1.3 million in cash and
the
Company’s working capital was approximately $3.9 million. The Company believes
that with its present cash balance and with operations of the business
generating positive cash flow, it will be able to meet its cash, working
capital
and capital expenditure needs for at least the next twelve months. The Company
also has a revolving credit line, which expires in June 2010 that permits
borrowings up to $2.5 million, of which $1.1 million was outstanding at
September 30, 2007.
Off-Balance
Sheet Arrangements
:
As
of
September 30, 2007, the Company has not entered into any off-balance sheet
arrangements that have or are reasonably likely to have a current of future
effect on the Company’s current and future financial condition, revenues or
expenses,
results
of operations, liquidity, capital expenditures or capital resources that
is
material to investors
.
Other
Factors
:
In
August
2007 the Company entered into a settlement agreement whereby a third party
has
agreed to reimburse the Company in a net amount of $425,000 for matters related
to certain product and warranty disputes. This reimbursement is associated
with
costs that have primarily been incurred in previous years relating to
engineering, payroll and related costs and depreciation pertaining to the
affected assets. The Company anticipates receiving this reimbursement over
approximately two years. As a result of this agreement, the Company has
recorded an amount of $425,000 to Other Income. The Company has also recorded
a
write-down on the assets affected of approximately $111,000 which is reflected
in the Cost of Services.
On
December 21, 2006, the Company acquired substantially all of the assets
of
American
Mediconnect, Inc. and PhoneScreen, Inc.,
Illinois
based companies under common ownership (collectively “AMI”)
.
American Mediconnect, Inc. is a provider of telephone after-hour answering
services primarily focused on hospitals, physicians and other health care
providers. PhoneScreen, Inc. is a provider of call center and compliance
monitoring services to hospitals, pharmaceutical companies and clinical resource
organizations. The purchase price was $2,028,830 and consisted of an initial
cash payment of $1,493,730, common stock valued at $229,324 and a future
cash
payment of $305,776, which is due in December 2007. In addition, for the
three
years following the acquisition, the Company is required to pay AMI an amount
equal to twenty-five (25%) percent of the cash receipts collected by the
Company, excluding sales taxes, from the PhoneScreen business. For the period
ended September 30, 2007, the Company recorded $151,160 due to Seller based
on
PhoneScreen cash receipts. The Company also incurred professional fees of
approximately $65,000. A potential exists for the payment of additional purchase
price consideration if certain thresholds concerning revenues and earnings
of
the acquired business are met as of December 31, 2007, 2008 and 2009.
On
March
10, 2006, the Company acquired substantially all of the assets of
MD
OnCall, a Rhode Island based company and Capitol Medical
Bureau,
a
Maryland based company (collectively "MD OnCall")
,
providers of telephone after-hour answering services and stand-alone voice
mail
services. The purchase price was $3,382,443 and consisted of an initial cash
payment of $2,696,315, common stock valued at $343,064, and future cash payments
of $343,064, which was paid in full as of March 2007. The Company also
incurred finder and professional fees of approximately $181,000. A
potential exists for payments of additional purchase price consideration
if
certain thresholds concerning revenue and earnings of the acquired business are
met as of March 31, 2007, 2008 and 2009. The first threshold as of March
31,
2007 was not met.
During
2005, the Company entered into two operating lease agreements for additional
space at its Long Island City, New York, location in order to consolidate
its
warehouse and distribution center and accounting department into this location.
The leases, which commenced in January 2006 and expire in March 2018, call
for
minimum annual rentals of $220,000 and $122,000, respectively, and are subject
to increases in accordance with the term of the agreements. The Company is
also
responsible for the reimbursement of real estate taxes.
On
January 14, 2002, the Company entered into an operating lease agreement for
space in Long Island City, New York, in order to consolidate its HCI TBCS
and
PERS ERC/ Customer Service facilities. The centralization of the ERC,
Customer Service and H-LINK® OnCall operations has provided certain operating
efficiencies and allowed for continued growth of the H-LINK and PERS
divisions. The fifteen (15) year lease term commenced in April 2003.
The lease calls for minimum annual rentals of $307,900, subject to a 3% annual
increase plus reimbursement for real estate taxes.
On
November 1, 2001, the Company entered into a five-year Cooperative Licensing,
Development, Services and Marketing Agreement with HHN (the “HHN Agreement”)
pursuant to which the Company developed,
with the
assistance of HHN
,
a
new
integrated appliance combining the features of the Company’s PERS product with
HHN’s technology
.
The
agreement was amended on June 30, 2005 and includes an extension of the initial
term for an additional three years, through October 31, 2009.
Since
1983, the Company has provided Personal Emergency Response Systems (“PERS”)
services to the City of New York’s Human Resources Administration (“HRA”) Home
Care Service Program ("HCSP"). The Company has been operating since 1993
with a
contract to provide HCSP with these services, which has been extended for
1-2
year periods since this time.
In
September 2006, HRA issued a bid proposal relating to the providing of the
PERS
services which are the subject of the Company’s contract. In October 2007, the
Company was informed they were awarded the contract with respect to this
proposal and executed such contract. The contract term is two years, commencing
September 21, 2007, with two options to renew in favor of HRA for two additional
two year terms. Under the terms of the agreement, a downward rate adjustment
was
made in conjunction with reduced equipment requirements from previous years.
The
impact of this reduced rate is estimated to reduce this contract’s contribution
to gross revenues by approximately $270,000 and its contribution to net income
by approximately $130,000 on an annual basis. During the nine months ended
September 30, 2007 and 2006, the Company’s revenue from this contract
represented 7
%
and
9%,
respectively,
of its total revenue.
As
of
September 30, 2007 and December 31, 2006, accounts receivable from the contract
represented 9% of accounts receivable and medical devices in service under
the
contract represented approximately 13% and 14% of medical devices, respectively.
Recent
Accounting Pronouncements:
In
July 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”) was
issued, clarifying the accounting for uncertainty in tax positions. This
Interpretation requires that we recognize in our financial statements, the
impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of the beginning of our 2007 fiscal
year,
with the cumulative effect of the change in accounting principle recorded
as an
adjustment to opening retained earnings. The Company adapted FIN 48 as of
January 2007 and the adoption of this Interpretation did not have a material
impact on the consolidated results of operations or financial position.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which
defines fair value, establishes guidelines for measuring fair value and expands
disclosure regarding fair value measurements. SFAS No. 157 does not require
new
fair value measurements but rather eliminates inconsistencies in guidance
found
in various prior accounting pronouncements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007.
We do not expect the adoption of SFAS No. 157 to have a material effect on
our
financial statements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 108, “Financial Statements - Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements”. SAB No. 108 provides interpretive guidance on how the effects of
prior year uncorrected misstatements should be considered when quantifying
misstatements in the current year financial statements. SAB No. 108 is effective
for years ending after November 15, 2006. The adoption of the provisions
of SAB
No. 108 did not have a material impact on the financial position or results
of
operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities ("SFAS 159"). SFAS 159 provides companies
with
an option to report selected financial assets and liabilities at fair value.
SFAS 159 also establishes presentation and disclosure requirements designed
to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities and to provide additional
information that will help investors and other financial statement users
to more
easily understand the effect of the company's choice to use fair value on
its
earnings. Finally, SFAS 159 requires entities to display the fair value of
those
assets and liabilities for which the company has chosen to use fair value
on the
face of the balance sheet. SFAS 159 is effective as of the beginning of an
entity's first fiscal year beginning after November 15, 2007. Early adoption
is
permitted as of the beginning of the previous fiscal year provided that the
entity makes that choice in the first 120 days of that fiscal year and also
elects to apply the provisions of SFAS 157 (see above). The Company is currently
assessing the impact of SFAS 159.
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 due to the
materiality of the accounts involved, and therefore, 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. The Company recorded
reserves for uncollectible accounts receivable of $589,000 as of September
30,
2007, which is equal to 9.6% of total accounts receivable. 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 its reserves will continue
to be
adequate. For each 1% that actual credit losses exceed the reserves established,
there would be an increase in general and administrative expenses and a
reduction in reported net income of approximately $62,000. Conversely, for
each
1% that actual credit losses are less than the reserve, this would decrease
the
Company’s general and administrative expenses and increase the reported net
income by approximately $62,000.
Fixed
Assets
Fixed
assets are stated at cost. Depreciation for financial reporting purposes
is
being provided by the straight-line method over the estimated useful lives
of
the related assets. The valuation and classification of these assets and
the
assignment of useful depreciable lives involves significant judgments and
the
use of estimates. Fixed assets are reviewed for impairment whenever events
or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. Historically, impairment losses have not been required. Any
change in the assumption of estimated useful lives could either result in
a
decrease or increase the Company’s financial results. A decrease in estimated
useful life would reduce the Company’s net income and an increase in estimated
useful life would increase the Company’s net income. If the estimated useful
lives of the PERS medical device were decreased by one year, the cost of
goods
related to services would increase and net income would decrease by
approximately $185,000 per annum. Conversely, if the estimated useful lives
of
the PERS medical device were increased by one year, the cost of goods related
to
services would decrease and net income would increase by approximately $145,000
per annum.
Valuation
of Goodwill
Pursuant
to Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets,” goodwill and indefinite life intangible assets are no longer
amortized, but are subject to annual impairment tests. To date, the Company
has
not been required to recognize an impairment of goodwill. The Company tests
goodwill for impairment annually or more frequently when events or circumstances
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 $9,691,663
and
$9,532,961 at September 30, 2007 and December 31, 2006, respectively. If
the
Company were to experience a significant adverse impact on goodwill, it would
negatively impact the Company’s net income.
Accounting
for Stock-Based Awards
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123R, "Share-Based Payment." Prior to January 1, 2006, the Company had
applied the intrinsic value method of accounting for stock options granted
to
our employees and directors under the provisions of Accounting Principles
Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation." Accordingly, employee and director compensation expense was
recognized only for those options whose exercise price was less than the
market
value of our common stock at the measurement date.
The
Company adopted the fair value recognition provisions of SFAS No. 123R, using
the modified prospective transition method. Under the modified prospective
method, (i) compensation expense for share-based awards granted prior to
January
1, 2006 are recognized over the remaining service period using the compensation
cost calculated for pro forma disclosure purposes under SFAS No. 123 and
(ii)
compensation expense for all share-based awards granted subsequent to December
31, 2005 are based on the grant date fair value estimated in accordance with
the
provisions of SFAS No. 123R. Results for periods prior to January 1, 2006
have
not been restated. As a result of adopting SFAS No. 123R, the Company recorded
a
pre-tax expense of approximately $266,000 and $141,000 for stock-based
compensation for the nine months ended September 30, 2007 and 2006,
respectively.
The
determination of fair value of share-based payment awards to employees and
directors on the date of grant using the Black-Scholes model is affected
by the
Company's stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited
to the expected stock price volatility over the term of the awards, and actual
and projected employee stock option exercise behaviors.