AMAC American Medical Alert Corp. (MM)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011.

 

OR

   

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission File Number 001-08635

 

AMERICAN MEDICAL ALERT CORP.

(Exact Name of Registrant as Specified in its Charter)

 

New York		11-2571221
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

36-36 33 rd Street, Long Island City, New York 11106

(Address of principal executive offices)

(Zip Code)

 

(212) 879-5700

 (Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 Yes x   No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the  preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x   No ¨

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 on the Exchange Act).

Yes ¨    No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 9,631,777 shares of $.01 par value common stock as of November 9, 2011.

  

AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES

 

INDEX	PAGE
Part I Financial Information
Report of Independent Registered Public Accounting Firm	1
Condensed Consolidated Balance Sheets for September 30, 2011  and December 31, 2010	2
Condensed Consolidated Statements of Income for the  Nine Months Ended September 30, 2011 and 2010	3
Condensed Consolidated Statements of Income (Loss) for the  Three Months Ended September 30, 2011 and 2010	4
Condensed Consolidated Statements of Cash Flows for  the Nine Months Ended September 30, 2011 and 2010	5
Notes to Condensed Consolidated Financial Statements	7
Management’s Discussion and Analysis of  Financial Condition and Results of Operations	19
Quantitative and Qualitative Disclosures About Market Risk	39
Controls and Procedures	40
Part II Other Information	40

  

 

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

American Medical Alert Corp. and Subsidiaries

Long Island City, New York

We have reviewed the accompanying condensed consolidated balance sheet of American Medical Alert Corp. and Subsidiaries (the “Company”) as of September 30, 2011 and the related condensed consolidated statements of income (loss) for the nine-month and three-month periods ended September 30, 2011 and 2010 and cash flows for the nine-months ended September 30, 2011 and 2010. These interim financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of American Medical Alert Corp. and Subsidiaries as of December 31, 2010, and the related consolidated statements of income, shareholders’ equity and cash flows for the year then ended (not presented herein), and in our report dated March 31, 2011 we expressed an unqualified opinion on those consolidated financial statements based on our audit and the report of other auditors with respect to the Company’s investment in Lifecomm, LLC.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Margolin, Winer & Evens LLP

Margolin, Winer & Evens LLP

Garden City, New York

November 14, 2011

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements .

 

AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30, 2011 (Unaudited)				Dec. 31, 2010
ASSETS
CURRENT ASSETS
Cash		$	7,329,277			$	4,090,528
Accounts receivable
(net of allowance for doubtful accounts of $483,800 and $452,000)			8,276,818				7,497,367
Inventory, net of non-current portion			983,137				1,005,488
Prepaid income taxes			208,621				610,479
Prepaid expenses and other current assets			382,795				364,747
Deferred income tax asset			173,000				219,000
Total Current Assets			17,353,648				13,787,609
FIXED ASSETS
(Net of accumulated depreciation and amortization)			6,382,035				7,195,019
OTHER ASSETS
Intangible assets
(net of accumulated amortization of $7,258,278 and $6,864,657)			1,065,314				1,350,936
Goodwill			10,842,352				10,842,352
Investment in limited liability company			1,474,157				2,970,210
Other assets (including inventory of $481,135 and $407,615)			1,602,744				1,371,359
			14,984,567				16,534,857
TOTAL ASSETS		$	38,720,250			$	37,517,485
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt		$	420,000			$	660,000
Accounts payable			1,134,185				732,849
Accrued expense – acquisitions			95,214				105,807
Accrued expenses			2,240,216				2,013,152
Deferred revenue			312,183				231,825
Total Current Liabilities			4,201,798				3,743,633
DEFERRED INCOME TAX LIABILITY			1,182,000				1,228,000
LONG-TERM DEBT, Net of Current Portion			1,850,000				2,150,000
CUSTOMER DEPOSITS			87,574				101,499
ACCRUED RENTAL OBLIGATION			565,603				566,235
ACCRUED EXPENSE - ACQUISITION			0				72,300
TOTAL LIABILITIES			7,886,975				7,861,667
COMMITMENTS AND CONTINGENT LIABILITIES			0				0
SHAREHOLDERS’ EQUITY
Preferred stock, $.01 par value – authorized, 1,000,000 shares; none issued and outstanding
Common stock, $.01 par value – authorized 20,000,000 shares; issued 9,675,478 shares in 2011 and 9,618,083 shares in 2010			96,755				96,181
Additional paid-in capital			16,958,016				16,606,018
Retained earnings			13,915,081				13,090,196
			30,969,852				29,792,395
Less treasury stock, at cost (48,573 shares in 2011 and 2010)			(136,577	)			(136,577	)
Total Shareholders’ Equity			30,833,275				29,655,818
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	38,720,250			$	37,517,485

See accompanying notes to condensed financial statements.

AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Nine Months Ended September 30,
		2011				2010
Revenues:
Services		$	31,599,894			$	29,070,455
Product sales			544,595				562,325
			32,144,489				29,632,780
Costs and Expenses (Income):
Costs related to services			14,739,347				13,342,562
Costs of products sold			259,097				260,253
Selling, general and administrative expenses			13,751,663				12,134,682
Interest expense			40,421				45,258
Equity in net loss from investment in limited liability company			1,496,053				507,512
Other income			(59,977	)			(77,468	)
Income before Provision for Income Taxes			1,917,885				3,419,981
Provision for Income Taxes			1,093,000				1,402,000
NET INCOME		$	824,885			$	2,017,981
Net income per share:
Basic		$	.09			$	.21
Diluted		$	.08			$	.21
Weighted average number of common shares outstanding:
Basic			9,586,143				9,544,931
Diluted			9,830,367				9,842,901

See accompanying notes to condensed financial statements.

  

 

AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

		Three Months Ended September 30,
		2011				2010
Revenues:
Services		$	11,024,917			$	9,805,692
Product sales			168,272				203,696
			11,193,189				10,009,388
Costs and Expenses (Income):
Costs related to services			5,149,730				4,464,062
Costs of products sold			76,353				92,423
Selling, general and administrative expenses			5,321,282				4,369,598
Interest expense			12,413				18,991
Equity in net loss from investment in limited liability company			424,141				391,385
Other income			(36,667	)			(17,777	)
Income before Provision for Income Taxes			245,937				690,706
Provision for Income Taxes			290,000				283,000
NET INCOME (LOSS)		$	(44,063	)		$	407,706
Net income (loss) per share:
Basic		$	(.00	)		$	.04
Diluted		$	(.00	)		$	.04
Weighted average number of common shares outstanding
Basic			9,605,183				9,559,005
Diluted			9,605,183				9,858,343

See accompanying notes to condensed financial statements.

AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Nine Months Ended September 30,
		2011				2010
Cash Flows From Operating Activities:
Net income		$	824,885			$	2,017,981
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,347,742				2,794,776
Stock compensation charge			146,972				197,990
Equity in net loss from investment in limited liability company			1,496,053				507,512
Decrease (increase) in:
Accounts receivable			(779,451	)			(252,729	)
Inventory			(51,169	)			(277,384	)
Prepaid income taxes			401,858				(163,777	)
Prepaid expenses and other current assets			(18,048	)			(104,251	)
Increase (decrease) in:
Accounts payable, accrued expenses and other			613,844				516,657
Deferred revenue			80,358				38,385
Net Cash Provided by Operating Activities			5,063,044				5,275,160
Cash Flows From Investing Activities:
Expenditures for fixed assets			(1,245,651	)			(913,151	)
Purchase of Alpha Message Center, Inc.			0				(577,977	)
Purchase – account acquisition			(108,000	)			0
Payment of Investment in limited liability company			0				(4,150,336	)
Decrease (increase) in other assets			(53,351	)			4,798
Net Cash Used In Investing Activities			(1,407,002	)			(5,636,666	)
Cash Flows From Financing Activities:
Proceeds from long-term debt			0				2,000,000
Repayment of long-term debt			(540,000	)			(1,506,666	)
Payment of accrued expense - acquisitions			(82,893	)			(73,346	)
Proceeds upon exercise of stock options			205,600				47,394
Payment of loan financing costs			0				(4,370	)
Dividends paid			0				(1,901,879	)
Net Cash Used In Financing Activities			(417,293	)			(1,438,867	)

See accompanying notes to condensed financial statements.

AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

		Nine Months Ended September 30,
		2011				2010
Net Increase (Decrease) in Cash		$	3,238,749			$	(1,800,373	)
Cash, Beginning of Period			4,090,528				5,498,448
Cash, End of Period		$	7,329,277			$	3,698,075
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR INTEREST		$	43,089			$	42,699
CASH PAID DURING THE PERIOD FOR INCOME TAXES		$	705,963			$	1,551,769
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING  AND FINANCING ACTIVITIES:
Accrued expense – acquisitions / additional goodwill
- American Mediconnect Inc.		$	0			$	38,298
- Alpha Message Center, Inc.		$	0			$	200,000
Other assets, deposits on equipment transferred to fixed asset		$	0			$	21,875
Other assets, deposits on product transferred to inventory		$	0			$	105,476

See accompanying notes to condensed financial statements.

  

AMERICAN MEDICAL ALERT CORP. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

General:

 

These financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2010 included in the Annual Report on Form 10-K for the year ended December 31, 2010 of American Medical Alert Corp.

 

2.	Results of Operations:

 

The accompanying condensed 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.

 

In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of September 30, 2011 and the results of operations for the nine and three months ended September 30, 2011 and 2010 and cash flows for the nine months ended September 30, 2011 and 2010.

 

The accounting policies used in preparing these financial statements are the same as those described in the December 31, 2010 financial statements.

 

The results of operations for the nine and three months ended September 30, 2011 are not necessarily indicative of the results to be expected for any other interim period or for the full year.

 

3.	Recent Accounting Pronouncements:

 

In December 2010, the FASB issued Update 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations”. The amendments in Update 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Update 2010-29 also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributed to the business combination included in the pro forma financial data. The Company is required to adopt all the provisions of Update 2010-29 for any business combinations for which the acquisition date is on or after January 1, 2011. The impact of the provisions of this guidance on the Company’s consolidated financial statements depends upon the nature, terms and size of the acquisitions it will consummate in the future.

In December 2010, the FASB issued Update 2010-28, “Intangibles - Goodwill and Other (Topic 350)”.  Update 2010-28 modifies the first step of the goodwill impairment test to include reporting units with zero or negative carrying amounts. For these reporting units, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any; when it is more likely than not that a goodwill impairment exists. Update 2010-28 is effective for fiscal years and interim periods beginning after December 15, 2010.  The adoption of this guidance did not have a material impact on the consolidated financial statements of the Company.

 

4.	Accounting for Stock-Based Compensation:

 

Stock based compensation is recorded in accordance with ASC Topic 718, Compensation – Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payments to employees, including grants of stock and employee stock options, based on estimated fair values.

 

The Company granted options to purchase 10,000 shares of common stock during the nine months ended September 30, 2011.  No options were granted during the nine months ended September 30, 2010.

 

The following tables summarize stock option activity for the nine months ended September 30, 2011 and 2010 .

 

2011
										Weighted
										Average
						Weighted				Remaining				Aggregate
		Number of				Average				Contractual				Intrinsic
		Options				Option Price				Term (years)				Value
Balance at January 1			718,343			$	3.85
Granted			10,000				5.85
Exercised			(40,000	)			5.14
Expired/Forfeited			(25,650	)			6.86
Balance at September 30			662,693			$	3.69				1.32			$	3,117,657
Vested and exercisable			644,419			$	3.62				1.27			$	3,071,789

 

 

2010
										Weighted
										Average
						Weighted				Remaining				Aggregate
		Number of				Average				Contractual				Intrinsic
		Options				Option Price				Term (years)				Value
Balance at January 1			894,785			$	4.29
Granted			-				-
Exercised			(11,513	)			4.12
Expired/Forfeited			(30,000	)			6.49
Balance at September 30			853,272			$	4.22				1.82			$	1,669,401
Vested and exercisable			825,572			$	4.16				1.74			$	1,662,347

 

The aggregate intrinsic value of options exercised during the nine months ended September 30, 2011 and September 30, 2010 were $10,400 and $29,074, respectively.  There were 18,274 and 27,700 nonvested stock options outstanding as of September 30, 2011 and 2010, respectively.  See Note 14 regarding the vesting of these options in connection with the merger agreement.

The following table summarizes stock-based compensation expense related to all share-based payments recognized in the condensed consolidated statements of income (loss).

 

		Three Months				Three Months
		Ended September 30,				Ended September 30
		2011				2010
Stock options		$	7,310			$	8,000
Stock grants – other			-				64,663
Service based awards			23,598				32,037
Performance based awards			-				(67,129	)
Tax benefit			(28,016	)			(15,393	)
Stock-based compensation expense, net of tax		$	2,892			$	22,178

		Nine Months				Nine Months
		Ended September 30,				Ended September 30
		2011				2010
Stock options		$	43,411			$	8,000
Stock grants – other			32,765				86,422
Service based awards			70,796				96,109
Performance based awards			-				7,459
Tax benefit			(83,759	)			(81,165	)
Stock-based compensation expense, net of tax		$	63,213			$	116,825

Stock Grants - Other

The non-employee members of the Board of Directors have an option to elect at the beginning of each calendar year to receive either shares of common stock or cash at the end of each quarter as compensation for services provided as members of the Board of Directors and other committees.  Share grants issued vest immediately, but are subject to a one-year restriction on transfer.  In accordance with the merger agreement executed in September 2011 (see Note 14), after June 30, 2011, the non-employee members of the Board of Directors no longer have an option to receive stock as compensation for services.

 

Service Based Awards

In January 2006, May 2007, January 2009 and December 2010 the Company granted 50,000, 22,000, 12,000 (net of 9,500 shares waived by an executive) and 46,500 restricted shares, respectively, to certain executives in respect of services rendered but at no monetary cost.  These shares vest over periods ranging from 2 to 5 years, on December 31 of each year.  The Company records the compensation expense on a straight-line basis over the vesting period.  Fair value for restricted stock awards is based on the Company's closing common stock price on the date of grant.   There were 84,000 shares and 63,000 shares vested as of September 30, 2011 and 2010, respectively.  The aggregate grant date fair value of restricted stock grants was $830,845.  The vesting period of the January 2006 and May 2007 grants expired on December 31, 2010.  As of September 30, 2011 and 2010, the Company had approximately $212,000 and $34,000, respectively, of total unrecognized compensation costs related to nonvested restricted stock units expected to be recognized over a weighted average period of 2.25 years.  See Note 14 regarding the vesting of these restricted stock units in connection with the merger agreement.

Performance Based Awards

In January 2006 and May 2007, respectively, the Company granted share awards for up to 90,000 shares (up to 18,000 shares per year through December 31, 2010) and 46,000 shares (up to 11,500 shares per year through December 31, 2010) to certain executives.  Vesting of such shares was contingent upon the Company achieving certain specified consolidated gross revenue and Earnings before Interest and Taxes (“EBIT”) objectives in each of the fiscal years ending December 31, 2006 through December 31, 2010.  The fair value of the performance shares (aggregate value of $909,400) was based on the closing trade value of the Company’s stock on the date of grant and assumed that performance goals would be achieved.  The fair value of the shares was expensed over the performance period for those shares that were expected to ultimately vest.  If such objectives were not met, no compensation cost was recognized and any recognized compensation cost was reversed.  All performance based awards were either earned or forfeited as of December 31, 2010.  During 2011, there were no performance shares vesting and there were no unrecognized compensation costs related to performance share awards.  As of September 30, 2010, 57,250 shares were vested and there was approximately $37,000 of total unrecognized compensation costs related to nonvested share awards.

 

5.	Earnings Per Share:

 

Earnings per share data for the nine and three months ended September 30, 2011 and 2010 is presented in conformity with ASC Topic 250, Earnings Per Share.

 

The following table is a reconciliation of the numerators and denominators in computing earnings per share:

		Income (Loss)				Shares				Per-Share
Nine Months Ended September 30, 2011		(Numerator)				(Denominator)				Amounts
Basic EPS - Income available to common stockholders		$	824,885				9,586,143			$	.09
Effect of dilutive securities -
Options and warrants			-				244,224
Diluted EPS - Income available to common stockholders and assumed conversions		$	824,885				9,830,367			$	.08
Three Months Ended September 30, 2011
Basic EPS -Income available /(loss) attributable to common stockholders		$	(44,063	)			9,605,183			$	(.00	)
Effect of dilutive securities -
Options and warrants			-				-
Diluted EPS - Income available to common stockholders and assumed conversions		$	(44,063	)			9,605,183			$	(.00	)
Nine Months Ended September 30, 2010
Basic EPS - Income available to common stockholders		$	2,017,981				9,544,931			$	.21
Effect of dilutive securities -
Options and warrants			-				297,970
Diluted EPS - Income available to common stockholders and assumed conversions		$	2,017,981				9,842,901			$	.21
Three Months Ended September 30, 2010
Basic EPS -Income available to common stockholders		$	407,706				9,559,005			$	.04
Effect of dilutive securities -
Options and warrants			-				299,338
Diluted EPS - Income available to common stockholders and assumed conversions		$	407,706				9,858,343			$	.04

 

6.

Goodwill

Changes in the carrying amount of goodwill, all of which relates to the Company’s TBCS segment, for the nine months ended September 30, 2011 and 2010 are as follows:

Nine Months Ended September 30, 2011
Balance as of January 1, 2011		$	10,842,352
Additional Goodwill			-
Balance as of September 30, 2011		$	10,842,352
Nine Months Ended September 30, 2010
Balance as of January 1, 2010		$	10,255,983
Additional Goodwill			486,510
Balance as of September 30, 2010		$	10,742,493

The addition to goodwill during the nine months ended September 30, 2010 consists of $448,212 which relates to the acquisition of Alpha Message Center, Inc. in September 2010 and $38,298 which relates to the additional purchase price of American Mediconnect, Inc. based on the cash receipts from the clinical trials portion of the business.

7.	Acquisition:

On September 29, 2010, the Company acquired substantially all of the assets of Alpha Message Center, Inc. (“Alpha”),   a New Jersey based company that provides telephone after-hours answering and pager services.  The purchase price of this acquisition consisted of an initial cash payment of $577,977 and an accrual of $200,000, which represented the estimated fair value (derived using significant unobservable inputs categorized within Level 3 of the fair value hierarchy) of the contingent consideration expected to be paid through September 2012.  The contingent consideration is based on the acquisition agreement that calls for the Company to pay the former owner of Alpha fourteen percent (14%) of the cash expected to be collected by the Company, excluding sales taxes, from certain revenue generated by Alpha through September 2012.  The Company estimated the future contingent consideration expected to be paid based upon Alpha’s historic revenue data.  As of September 30, 2011, $104,786 has been paid to the former owner based on cash receipts.  The Company also incurred finder and professional fees of approximately $57,000, which were included in selling, general and administrative expenses for the nine months ended September 30, 2010.  The results of operations of Alpha are included in the Telephone Based Communications Services (“TBCS”) segment as of the date of acquisition.

 

The following table summarizes the adjusted estimated fair values of the assets acquired at the date of acquisition.

Accounts receivable		$	4,906
Fixed assets			25,000
Non-compete agreement			15,000
Customer list			185,000
Goodwill			548,071
Cost to acquire Alpha		$	777,977

The purchase price of the acquisition exceeded the fair value of the identifiable net assets acquired inasmuch as the acquisition was consummated to enable the Company to strengthen its position in the area where it was already operating.  Furthermore, the acquisition was for the business' future cash flows and net earnings as opposed to solely for the identifiable tangible and intangible assets.

The results of operations for Alpha are included in the condensed consolidated statements of income (loss) for the nine and three months ended September 30, 2011.  On a pro forma basis, had the Alpha acquisition taken place as of the beginning of 2010, the Company’s results of operations for the nine and three months ended September 30, 2010 would not have been materially affected.

8.	Investment in Limited Liability Company

On May 12, 2010, the Company entered into a limited liability company agreement with Hughes Telematics, Inc. and Qualcomm Incorporated to design, develop, finance and operate a mobile PERS system.  The Company invested $4,000,000 and incurred $150,336 in professional fees to acquire a minority interest (approximately 10%) in the new company, Lifecomm, LLC (“Lifecomm”). As part of this transaction, the Company borrowed $2,000,000 from its bank to partially finance this transaction.  In addition, pursuant to the limited liability company agreement, the Company has agreed to fund its share ($200,000) of a stand-by equity commitment for Lifecomm’s benefit, if required.  As of September 30, 2011, the Company’s exposure to loss is limited to the recorded equity investment balance of $1,474,157 and its share ($200,000) of a stand-by equity commitment, if required.

Hughes Telematics, Inc. (“HTI”), parent of Lifecomm and the party who has a controlling financial interest in Lifecomm, has determined that Lifecomm is a variable interest entity and that HTI is the primary beneficiary.

Lifecomm is a development stage company that has yet to generate any revenue, and has generated a pre-tax net loss of $6,595,242 and $2,282,762 during the nine and three months ended September 30, 2011 ($10,217,134 during the period from inception, May 12, 2010 to September 30, 2011).  Lifecomm will continue to generate losses until the next generation mobile PERS is completed and commercialized, which is anticipated to be in early 2012.

 

In accordance with the limited liability company agreement, profits are generally allocated to members in the amount of and in proportion to their ownership of the outstanding membership units.  Losses are generally allocated to members in the amount of and in proportion to their unreturned capital contributions, which for the purposes of determining the allocation of losses is defined as the aggregate of (i) cash contributions, (ii) the fair value of other contributed assets and (iii) the value of in-kind services contributed by the members through the date of determination, less (iv) the fair value of any assets distributed to the members; provided, however, that any losses generated through May 12, 2012 will be generally allocated to the members first in the amount of and in proportion to the unreturned capital contributions attributable to only the cash contributions and the value of in-kind services contributed by the members through the date of determination and then in the amount of and in proportion to the unreturned capital contributions attributable to the fair value of other contributed assets.

During the nine and three months ended September 30, 2011, the Company recorded a pre-tax net loss of $1,496,053 and $424,141, respectively ($2,676,179 during the period from inception, May 12, 2010 to September 30, 2011) for its share of losses from the equity investment in Lifecomm.  The equity loss primarily relates to research and development costs as well as other selling, general and administrative expenses incurred for the development of the next generation mobile PERS.  As the development continues to progress, the Company expects that its share of equity loss will continue throughout 2011 until the next generation mobile PERS is completed and commercialized, which is anticipated to be in early 2012.

In connection with the formation of Lifecomm, the Company entered into a Value Added Reseller Agreement (“VAR Agreement”) with Lifecomm.  Under the VAR Agreement, the Company will be a reseller of the Mobile PERS Solution in the United States, as well as a preferred provider of the emergency assistance call center (“EACC”) component of the Mobile PERS Solution provided by Lifecomm to customers.  The Company will be the sole provider of the EACC to the customers to whom it resells the Mobile PERS Solution.  The term of the VAR Agreement is perpetual, subject to termination as set forth therein.  The VAR Agreement contains standard indemnification provisions for agreements of this nature.

9.	Long-term Debt:

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. The term loan was payable in equal monthly principal installments of $50,000 over five years commencing January 2006.  This term loan was paid in full during the second quarter of 2010 without any prepayment charge.

 

During 2006, the 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 certain acquisitions.  These term loans are payable over five years in equal monthly principal installments of $41,666.67 and $26,666.67, respectively. Additionally, certain of the covenants were amended.  The $2,500,000 term loan was paid in full during the second quarter of 2010 without any prepayment charge.

 

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.  In June 2010, the term of the revolving credit line was extended through June 2013.

 

On May 12, 2010, the Company’s credit facility was amended whereby the Company obtained an additional $2,000,000 in the form of a term loan, the proceeds of which were utilized to partially finance its investment in Lifecomm relating to the development of a mobile PERS system.  This term loan is payable over five years in equal monthly principal installments of $33,333.33, commencing June 1, 2010.  The interest rate is the same as the previous term loans secured by the Company, as described above.

 

As of September 30, 2011, June 30, 2011 and March 31, 2011, the Company was in compliance with its financial covenants in its loan agreement.  As of September 30, 2010, June 30, 2010 and March 31, 2010, the Company was in compliance with its financial covenants in its loan agreement.

10.	Provision for Income Taxes:

The Company records its tax provision (or benefit) on an interim basis using an estimated annual effective tax rate.  For the nine and three months ended September 30, 2011 the Company increased the estimated effective tax rate to reflect the impact of certain non-deductible expenses incurred in connection with the merger agreement described in Note 14.

11.	Dividends:

On December 16, 2009, the Company declared a dividend in the amount of $0.10 per share, or $950,364, which was accrued as of December 31, 2009.  The dividend was payable to the shareholders of record as of December 28, 2009.  The dividend was paid on January 15, 2010.

 

On July 19, 2010, the Company declared a dividend in the amount of $0.10 per share, or $951,515, which was payable to the shareholders of record as of September 13, 2010. The dividend was paid on September 29, 2010.

 

12.	Segment  Reporting:

The Company has two reportable segments, (i) Health and Safety Monitoring Systems (“HSMS”) and (ii) Telephone Based Communication Services (“TBCS”).

 

The table below provides a reconciliation of segment information to total consolidated information for the nine and three months ended September 30, 2011 and 2010:

 

 

2011
		HSMS				TBCS				Consolidated
Nine Months Ended September 30, 2011
Revenue		$	15,756,852			$	16,387,637			$	32,144,489
Income (loss) before provision for income taxes*			(24,153	)			1,942,038				1,917,885
Total assets			16,886,040				21,834,210				38,720,250
		HSMS				TBCS				Consolidated
Three Months Ended September 30, 2011
Revenue		$	5,327,687			$	5,865,502			$	11,193,189
Income (loss) before provision for income taxes*			(574,374	)			820,311				245,937

2010
		HSMS				TBCS				Consolidated
Nine Months Ended September 30, 2010
Revenue		$	15,412,503			$	14,220,277			$	29,632,780
Income before provision for income taxes*			2,148,705				1,271,276				3,419,981
Total assets			17,823,172				19,409,266				37,232,438
		HSMS				TBCS				Consolidated
Three Months Ended September 30, 2010
Revenue		$	5,178,607			$	4,830,781			$	10,009,388
Income before provision for income taxes*			242,563				448,143				690,706

 

* Income before provision for income taxes within the HSMS segment includes the Company’s share of equity in net loss from its investment in limited liability company and merger-related expenses as follows:

Equity in net loss from investment in limited liability company		September 30, 2011				September 30, 2010
Nine Months Ended		$	1,496,053			$	507,512
Three Months Ended		$	424,141			$	391,385

Merger-related expense		September 30, 2011				September 30, 2010
Nine Months Ended		$	980,000				-
Three Months Ended		$	625,950				-

13.	Commitments and Contingencies:

The Company is aware of various threatened or pending litigation claims against the Company relating to its products and services and other claims arising in the ordinary course of its business.  At September 30, 2011 and 2010, no material liabilities have been recorded in the accompanying financial statements.  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 results of operations and financial condition of the Company.

14.	Merger Agreement with Tunstall :