**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-QSB**

 

**QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For Quarter Ended September 30,2005**

** **

**Commission File Number 1-8635**

 

**AMERICAN MEDICAL ALERT CORP.**

(Exact Name ofRegistrant as Specified in its Charter)

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

 

**3265Lawson Boulevard, Oceanside, New York 11572**

(Address ofprincipal executive offices)

(Zip Code)

 

**(516) 536-5850**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  ý No o

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: 8,694,092 shares of $.01 par value common stock as of November 9,2005.

 

 

----

 

AMERICAN MEDICALALERT CORP. AND SUBSIDIARIES

 

INDEX

 
| Part I  | Financial  Information                                                                                       |   |
|--------------|--------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                         |   |
|         | Report of  Independent Registered Public Accounting Firm                                                     |   |
|         |                                                                                                         |   |
|         | Condensed  Consolidated Balance Sheets for September 30, 2005 and December 31,  2004               |   |
|         |                                                                                                         |   |
|         | Condensed  Consolidated Statements of Income for the Nine Months Ended  September 30, 2005 and 2004     |   |
|         |                                                                                                         |   |
|         | Condensed  Consolidated Statements of Income for the Three Months Ended  September 30, 2005 and 2004    |   |
|         |                                                                                                         |   |
|         | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  September 30, 2005 and 2004 |   |
|         |                                                                                                         |   |
|         | Notes to Condensed  Consolidated Financial Statements                                                        |   |
|         |                                                                                                         |   |
|         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                  |   |
|         |                                                                                                         |   |
|         | Controls and  Procedures                                                                                     |   |
|         |                                                                                                         |   |
| Part II | Other Information                                                                                            |   |

 

----

 

Report of Independent RegisteredPublic Accounting Firm

 

Board of Directors andShareholders

American Medical AlertCorp. and Subsidiaries

Oceanside, New York

 

We have reviewed the accompanyingcondensed consolidated balance sheet of American Medical Alert Corp. andSubsidiaries (the “Company”) as of September 30, 2005 and the relatedcondensed consolidated statements of income for the nine-month and three-monthperiods ended September 30, 2005 and 2004 and cash flows for the nine-monthsended September 30, 2005 and 2004. These interim financial statements arethe responsibility of the Company’s management.

 

We conducted our reviewsin accordance with the standards of the Public Company Accounting OversightBoard (United States). A review of interim financial information consistsprincipally of applying analytical procedures and making inquiries of personsresponsible for financial and accounting matters. It is substantially less inscope than an audit conducted in accordance with the standards of the PublicCompany Accounting Oversight Board, the objective of which is the expression ofan opinion regarding the financial statements taken as a whole. Accordingly, wedo not express such an opinion.

 

Based on our reviews, we are not aware of any materialmodifications that should be made to the condensed consolidated interimfinancial statements referred to above for them to be in conformity withaccounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheet of American Medical Alert Corp. and Subsidiaries asof December 31, 2004, and the related consolidated statements of income,shareholders’ equity and cash flows for the year then ended (not presentedherein), and in our report dated March 25, 2005, except for Notes 3 and 5,as to which the date is March 30, 2005, we expressed an unqualifiedopinion on those consolidated financial statements. In our opinion, theinformation set forth in the accompanying condensed consolidated balance sheetas of December 31, 2004 is fairly stated, in all material respects, inrelation 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 9, 2005                     |

 

1

----

 

**PART I- FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

AMERICAN MEDICALALERT CORP. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                       | ** ** | **September 30,  2005 (Unaudited)** | ** ** | **Dec. 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------|------------|
| ASSETS                                                                                                                           |       |                                     |       |                   |       |
| CURRENT ASSETS                                                                                                                   |       |                                     |       |                   |       |
| Cash                                                                                                                             |       | $                                        | 4,072,273  |                   | $          | 3,186,852 |   |
| Accounts  receivable (net of allowance for doubtful accounts of $743,000 and $728,000)                                           |       | 4,127,625                                |       | 3,389,076              |       |
| Note receivable                                                                                                                  |       | 23,793                                   |       | 23,207                 |       |
| Inventory                                                                                                                        |       | 493,494                                  |       | 696,736                |       |
| Prepaid expenses  and other current assets                                                                                       |       | 746,463                                  |       | 434,057                |       |
| Deferred income  taxes                                                                                                           |       | 397,000                                  |       | 448,000                |       |
|                                                                                                                             |       |                                     |       |                   |       |
| Total Current  Assets                                                                                                            |       | 9,860,648                                |       | 8,177,928              |       |
|                                                                                                                             |       |                                     |       |                   |       |
| FIXED ASSETS                                                                                                                     |       |                                     |       |                   |       |
| (Net of accumulated depreciation and amortization)                                                                               |       | 7,164,882                                |       | 7,046,925              |       |
|                                                                                                                             |       |                                     |       |                   |       |
| OTHER ASSETS                                                                                                                     |       |                                     |       |                   |       |
| Long-term  portion of note receivable                                                                                            |       | 79,926                                   |       | 98,107                 |       |
| Intangible  assets (net of accumulated amortization of $2,136,262 and $1,685,646)                                                |       | 1,480,035                                |       | 1,492,389              |       |
| Goodwill (net of  accumulated amortization of $58,868)                                                                           |       | 2,794,559                                |       | 2,563,864              |       |
| Other assets                                                                                                                     |       | 379,431                                  |       | 121,803                |       |
| Deferred income  taxes                                                                                                           |       | 163,000                                  |       | 138,000                |       |
|                                                                                                                             |       | 4,896,951                                |       | 4,414,163              |       |
|                                                                                                                             |       |                                     |       |                   |       |
| TOTAL ASSETS                                                                                                                     |       | $                                        | 21,922,481 |                   | $          | 19,639,016 |   |
|                                                                                                                             |       |                                     |       |                   |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                       |       |                                     |       |                   |       |
|                                                                                                                             |       |                                     |       |                   |       |
| CURRENT  LIABILITIES:                                                                                                            |       |                                     |       |                   |       |
| Current portion  of notes payable                                                                                                |       | $                                        | 293,760    |                   | $          | 300,814 |   |
| Accounts payable                                                                                                                 |       | 707,130                                  |       | 559,453                |       |
| Accrued expenses  and taxes payable                                                                                              |       | 1,270,166                                |       | 1,354,857              |       |
| Current portion  of capital lease obligations                                                                                    |       | 48,398                                   |       | 94,743                 |       |
| Current portion  of put warrant obligation                                                                                       |       | —                                   |       | 10,000                 |       |
| Deferred revenue                                                                                                                 |       | 113,082                                  |       | 15,834                 |       |
| Total Current  Liabilities                                                                                                       |       | 2,432,536                                |       | 2,335,701              |       |
|                                                                                                                             |       |                                     |       |                   |       |
| DEFERRED INCOME  TAX LIABILITY                                                                                                   |       | 1,100,000                                |       | 1,099,000              |       |
| LONG-TERM  PORTION OF NOTES PAYABLE                                                                                              |       | 258,558                                  |       | 496,444                |       |
| LONG-TERM  PORTION OF CAPITAL LEASE OBLIGATIONS                                                                                  |       | —                                   |       | 24,458                 |       |
| ACCRUED RENTAL  OBLIGATION                                                                                                       |       | 181,130                                  |       | 143,630                |       |
| OTHER  LIABILITIES                                                                                                               |       | 205,000                                  |       | 261,884                |       |
| TOTAL  LIABILITIES                                                                                                               |       | 4,177,224                                |       | 4,361,117              |       |
|                                                                                                                             |       |                                     |       |                   |       |
| COMMITMENTS AND  CONTINGENT LIABILITIES                                                                                          |       | —                                   |       | —                 |       |
|                                                                                                                             |       |                                     |       |                   |       |
| SHAREHOLDERS’ EQUITY                                                                                                        |       |                                     |       |                   |       |
| Preferred stock,  $.01 par value – authorized, 1,000,000 shares; none issued and outstanding                                |       |                                     |       |                   |       |
| Common stock,  $.01 par value – authorized 20,000,000 shares; issued 8,692,552 shares in  2005 and 8,078,043 shares in 2004 |       | 86,925                                   |       | 80,780                 |       |
| Additional  paid-in capital                                                                                                      |       | 12,486,466                               |       | 10,730,434             |       |
| Retained  earnings                                                                                                               |       | 5,277,898                                |       | 4,572,717              |       |
|                                                                                                                             |       | 17,851,289                               |       | 15,383,931             |       |
| Less treasury  stock, at cost (43,910 shares)                                                                                    |       | (106,032                                 | )          | (106,032               | )          |
| Total  Shareholders’ Equity                                                                                                 |       | 17,745,257                               |       | 15,277,899             |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                 |       | $                                        | 21,922,481 |                   | $          | 19,639,016 |   |

 

See accompanying notes tocondensed financial statements.

 

2

----

 

AMERICAN MEDICALALERT CORP. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)

 
| ** **                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Revenues:                                            |       |                                     |       |   |   |
| Services                                             |       | $                                        | 15,947,129 |   | $ | 14,048,534 |   |
| Product sales                                        |       | 214,017                                  |       | 221,579 |   |
|                                                 |       | 16,161,146                               |       | 14,270,113 |   |
| Costs and Expenses (Income):                         |       |                                     |       |   |   |
| Costs related to  services                           |       | 7,626,323                                |       | 6,530,238 |   |
| Costs of  products sold                              |       | 117,835                                  |       | 128,721 |   |
| Selling, general  and administrative expenses        |       | 7,303,891                                |       | 6,627,392 |   |
| Interest expense                                     |       | 32,695                                   |       | 44,985 |   |
| Other income                                         |       | (275,779                                 | )          | (214,355 | ) |
|                                                 |       |                                     |       |   |   |
| Income before Provision for Income Taxes             |       | 1,356,181                                |       | 1,153,132 |   |
|                                                 |       |                                     |       |   |   |
| Provision for Income Taxes                           |       | 651,000                                  |       | 543,000 |   |
|                                                 |       |                                     |       |   |   |
| NET INCOME                                           |       | $                                        | 705,181    |   | $ | 610,132 |   |
|                                                 |       |                                     |       |   |   |
| Net income per share:                                |       |                                     |       |   |   |
| Basic                                                |       | $                                        | .08        |   | $ | .08 |   |
| Diluted                                              |       | $                                        | .08        |   | $ | .07 |   |
|                                                 |       |                                     |       |   |   |
| Weighted average number of common shares outstanding |       |                                     |       |   |   |
| Basic                                                |       | 8,370,315                                |       | 7,862,958 |   |
|                                                 |       |                                     |       |   |   |
| Diluted                                              |       | 9,067,566                                |       | 8,425,940 |   |

 

See accompanying notes tocondensed financial statements.

 

3

----

 

AMERICAN MEDICAL ALERTCORP. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)

 
| ** **                                           | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Revenues:                                            |       |                                      |       |   |   |
| Services                                             |       | $                                         | 5,437,236  |   | $ | 4,866,217 |   |
| Product sales                                        |       | 58,016                                    |       | 78,967 |   |
|                                                 |       | 5,495,252                                 |       | 4,945,184 |   |
| Costs and Expenses (Income):                         |       |                                      |       |   |   |
| Costs related to  services                           |       | 2,751,447                                 |       | 2,300,113 |   |
| Costs of  products sold                              |       | 33,152                                    |       | 50,504 |   |
| Selling, general  and administrative expenses        |       | 2,414,347                                 |       | 2,243,053 |   |
| Interest expense                                     |       | 9,607                                     |       | 13,734 |   |
| Other income                                         |       | (104,202                                  | )          | (60,030 | ) |
|                                                 |       |                                      |       |   |   |
| Income before Provision for Income Taxes             |       | 390,901                                   |       | 397,810 |   |
|                                                 |       |                                      |       |   |   |
| Provision for Income Taxes                           |       | 188,000                                   |       | 168,000 |   |
|                                                 |       |                                      |       |   |   |
| NET INCOME                                           |       | $                                         | 202,901    |   | $ | 229,810 |   |
|                                                 |       |                                      |       |   |   |
| Net income per share:                                |       |                                      |       |   |   |
| Basic                                                |       | $                                         | .02        |   | $ | .03 |   |
| Diluted                                              |       | $                                         | .02        |   | $ | .03 |   |
|                                                 |       |                                      |       |   |   |
| Weighted average number of common shares outstanding |       |                                      |       |   |   |
| Basic                                                |       | 8,616,542                                 |       | 7,990,632 |   |
|                                                 |       |                                      |       |   |   |
| Diluted                                              |       | 9,277,566                                 |       | 8,564,184 |   |

 

See accompanying notes tocondensed financial statements.

 

4

----

 

AMERICAN MEDICALALERT CORP. AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Cash Flows From Operating Activities:                                              |       |                                    |       |   |   |
|                                                                               |       |                                    |       |   |   |
| Net income                                                                         |       | $                                       | 705,181    |   | $ | 610,132 |   |
|                                                                               |       |                                    |       |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                    |       |   |   |
| Provision for  deferred income taxes                                               |       | 27,000                                  |       | 7,000 |   |
| Depreciation and  amortization                                                     |       | 2,193,377                               |       | 2,236,289 |   |
| Provision  (credit) for valuation of put warrant                                   |       | (10,000                                 | )          | 40,000 |   |
| Decrease  (increase) in:                                                           |       |                                    |       |   |   |
| Accounts  receivable                                                               |       | (725,601                                | )          | (803,877 | ) |
| Inventory                                                                          |       | 203,242                                 |       | 49,620 |   |
| Prepaid and  refundable taxes                                                      | ** ** | **—**                              |       | 155,093 |   |
| Prepaid expenses  and other current assets                                         |       | (312,406                                | )          | (126,043 | ) |
| Other assets                                                                       |       | —                                  |       | (3,868 | ) |
| Increase  (decrease) in:                                                           |       |                                    |       |   |   |
| Accounts  payable, accrued expenses and other                                      |       | 43,602                                  |       | 191,030 |   |
| Deferred revenue                                                                   |       | 97,248                                  |       | (2,397 | ) |
|                                                                               |       |                                    |       |   |   |
| Net Cash Provided by Operating Activities                                          |       | 2,221,643                               |       | 2,352,979 |   |
|                                                                               |       |                                    |       |   |   |
| Cash Flows From Investing Activities:                                              |       |                                    |       |   |   |
| Expenditures for  fixed assets                                                     |       | (1,849,055                              | )          | (1,983,089 | ) |
| Purchase of  alphaconnect                                                          |       | —                                  |       | (767,956 | ) |
| Purchase of Long  Island Message Center, Inc.                                 |       | (443,643                                | )          | — |   |
| Repayment of  notes receivable                                                     |       | 17,595                                  |       | 16,454 |   |
| Deposit on  equipment and software                                                 |       | (232,625                                | )          | — |   |
| Increase in  goodwill                                                              |       | —                                  |       | (103,855 | ) |
| Security deposit  on property                                                      |       | (36,666                                 | )          | — |   |
| Payment for  account acquisitions and licensing agreement                          |       | (238,262                                | )          | (90,934 | ) |
|                                                                               |       |                                    |       |   |   |
| Net Cash (Used In) Investing Activities                                            |       | (2,782,656                              | )          | (2,929,380 | ) |
|                                                                               |       |                                    |       |   |   |
| Cash Flows From Financing Activities:                                              |       |                                    |       |   |   |
| Principal  payments under capital lease obligation                                 |       | (70,803                                 | )          | (67,356 | ) |
| Proceeds from  notes payable                                                       | ** ** | **—**                              |       | 62,065 |   |
| Repayment of  notes payable                                                        |       | (244,940                                | )          | (248,296 | ) |
| Proceeds upon  exercise of stock options                                           |       | 1,762,177                               |       | 972,434 |   |
|                                                                               |       |                                    |       |   |   |
| Net Cash Provided by Financing Activities                                          |       | 1,446,434                               |       | 718,847 |   |
|                                                                                    |            |                                         |            |  |  |  |  |

 

See accompanying notes to condensed financial statements.

 

5

----

 
| ** **                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                              |       |                                     |       |   |   |
| Net Increase in  Cash                             |       | $                                        | 885,421    |   | $ | 142,446 |   |
|                                              |       |                                     |       |   |   |
| Cash, Beginning  of Period                        |       | 3,186,852                                |       | 2,192,113 |   |
|                                              |       |                                     |       |   |   |
| Cash, End of  Period                              |       | $                                        | 4,072,273  |   | $ | 2,334,559 |   |
|                                              |       |                                     |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |       |                                     |       |   |   |
|                                              |       |                                     |       |   |   |
| CASH PAID DURING THE PERIOD FOR INTEREST          |       | $                                        | 35,468     |   | $ | 41,235 |   |
|                                              |       |                                     |       |   |   |
| CASH PAID DURING THE PERIOD FOR INCOME TAXES      |       | $                                        | 211,521    |   | $ | 92,960 |   |

 

See accompanying notes tocondensed financial statements.

 

6

----

 

AMERICAN MEDICALALERT CORP. AND SUBSIDIARIES

 

Notes to CondensedConsolidated Financial Statements

(Unaudited)

 

1.                                       General:

 

Thesefinancial statements should be read in conjunction with the financialstatements and notes thereto for the year ended December 31, 2004 includedin the Company’s Annual Report on Form 10-KSB.

 

2.                                       Results ofOperations:

 

In theopinion of management, the accompanying unaudited condensed financialstatements contain all adjustments (consisting only of normal recurringaccruals) necessary to present fairly the financial position as of September 30,2005 and the results of operations for the nine and three months ended September 30,2005 and 2004, and cash flows for the nine months ended September 30, 2005and 2004.

 

Theaccounting policies used in preparing these financial statements are the sameas those described in the December 31, 2004 financial statements.

 

Theresults of operations for the nine and three months ended September 30,2005 are not necessarily indicative of the results to be expected for any otherinterim period or for the full year.

 

3.                                       NewPronouncements:

 

In June 2005,the FASB issued SFAS No. 154, a replacement of APB No. 20 and SFAS No. 3.  SFAS No. 154 applies to all voluntarychanges in accounting principle and changes the requirements for accounting forand reporting of a change in accounting principle to be applied retrospectivelywith all prior period financial statements presented on the new accountingprinciple.  SFAS No. 154 iseffective for accounting changes and correction of errors made in fiscal yearsbeginning after December 15, 2005. The Company’s results of operations and financial condition will only beimpacted by SFAS No. 154 if it implements changes in accounting principlethat are addressed by the standard or discovers in future periods, errors whichrequire correction.

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment which isa revision of SFAS No. 123, Accounting for Stock-Based Compensation. Thestatement supercedes APB Opinion No. 25, Accounting for Stock Issued toEmployees, and its related implementation guidance. SFAS No. 123R requiresall entities to recognize compensation expense in an amount equal to the fair-valueof share-based payments. Upon adoption, the fair value of all employee stockoption awards will be expensed in the Company’s statement of income, typically,over the related vesting period of the options. SFAS No. 123R requires theuse

 

7

----

 

of fairvalue to measure share-based awards issued to employees, computed at the dateof grant. Additionally, SFAS No. 123R requires companies to recordcompensation expense for the unvested portion of previously granted awards asthey continue to vest, as calculated previously and included in the companiesprior period pro forma disclosures under SFAS No. 123. SFAS No. 123Ralso requires the tax benefit of tax deductions in excess of recognizedcompensation costs to be reported as a financing cash flow, rather than as anoperating cash flow as required under current literature. The Company willadopt SFAS No. 123R beginning with the fiscal 2006 first quarter, asrequired. The impact of adoption of SFAS 123R cannot be determined at this timebecause it will partially depend on levels of share based payment granted inthe future.  However, had the Companyadopted SFAS 123R in prior periods, the impact of that standard would haveapproximated the impact of SFAS 123 as shown in Note 5 (see discussion onAccounting for Stock Based Compensation).

 

In November 2004,the FASB issued SFAS 151, Inventory Costs – An Amendment of ARB No. 43,Chapter 4 (“SFAS 151”), which is the result of its effort to converge U.S.accounting standards for inventories with International Accounting Standards.SFAS 151 requires idle facility expenses, freight, handling costs, and wastedmaterial (spoilage) costs to be recognized as current-period charges and notincluded in overhead. It also requires that allocation of fixed productionoverhead cost to inventory be based on normal capacity of the productionfacilities. SFAS 151 is effective for inventory costs incurred during fiscalyears beginning after June 15, 2005. The Company has not determined the effectof adopting SFAS 151.

 

4.                                       FixedAssets:

 

TheCompany’s PERS equipment is subject to approval from the Federal CommunicationsCommission (“FCC”). In November 2004, the Company received an inquiry fromthe Federal Communications Commission. In response to that inquiry the Companyhas determined that certain versions of its PERS equipment emit levels of radiofrequency energy that exceed applicable standards designed to reduce the possibilityof interference with radio communications. Although this issue poses no safety or functionality risk tosubscribers, the Company is in the process of establishing a corrective actionplan with the FCC.

 

TheCompany is currently working with the FCC to determine an action plan toestablish a timeframe to complete an upgrade program for the affected PERSequipment and the amount of a potential payment to the FCC.  At this time the Company is unable todetermine whether it is probable that a liability has been incurred;accordingly, no estimate of the potential payment to the FCC has beenrecorded.  However, the Company believesthe payment could range between $50,000 and $160,000, although substantiallyhigher amounts are possible based on the discretion of the FCC.  The Company believes the FCC will allow theupgrade program to run substantially parallel with the normal recycling of theCompany’s PERS equipment. Under this assumption the only additional cost to beincurred will be the incremental cost to bring the units into compliance withthe FCC regulations.  However, in certaininstances, the Company has accelerated the exchange of PERS equipment inprograms and has thus incurred additional cost.

 

8

----

 

Through September 30,2005, the Company has expensed approximately $670,000 in connection with thismatter, of which approximately $190,000, primarily relating to costs associatedwith the replacement of equipment, legal fees and other professional fees, wasrecorded in 2005.  The remaining $480,000was charged to expense in the fourth quarter of 2004, which primarily relatedto costs to be incurred in excess of normal repair and refurbishment costs.

 

If theCompany is required to complete the PERS and related equipment modifications ina shorter period of time than is anticipated, significant additional costs willbe incurred inasmuch as unscheduled service calls will be required.

 

5.                                       Accountingfor Stock-Based Compensation:

 

TheCompany has three stock-based employee compensation plans and additional outstandingoptions under a fourth plan which has expired. The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issuedto Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, asall options granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.  The following table illustrates the effect onnet income and earnings per share if the Company had applied the fair valuerecognition provisions of FASB Statement No. 123, “Accounting forStock-Based Compensation,” to stock-based compensation.

 
| ** **                                                                                                    | ** ** | **Nine Months Ended September 30,** | ** ** | **Three Months Ended September 30****,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                                 | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income, as  reported                                                                                      |       | $                                        | 705,181    |                                          | $          | 610,132 |   | $ | 202,901 |   | $ | 229,810 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based method, net of tax |       | (42,048                                  | )          | (97,537                                       | )          | (21,270 | ) | (15,897 | ) |
| Pro forma net  income                                                                                         |       | $                                        | 663,133    |                                          | $          | 512,595 |   | $ | 181,631 |   | $ | 213,913 |   |
|                                                                                                          |       |                                     |       |                                          |       |   |   |   |   |
| Earnings per  share:                                                                                          |       |                                     |       |                                          |       |   |   |   |   |
| Basic - as  reported                                                                                          |       | $                                        | 0.08       |                                          | $          | 0.08 |   | $ | 0.02 |   | $ | 0.03 |   |
| Basic - pro  forma                                                                                            |       | $                                        | 0.08       |                                          | $          | 0.07 |   | $ | 0.02 |   | $ | 0.03 |   |
| Diluted - as  reported                                                                                        |       | $                                        | 0.08       |                                          | $          | 0.07 |   | $ | 0.02 |   | $ | 0.03 |   |
| Diluted - pro  forma                                                                                          |       | $                                        | 0.07       |                                          | $          | 0.06 |   | $ | 0.02 |   | $ | 0.02 |   |

 

The weighted average grant date fair value of options granted duringthe nine months ended September 30, 2005 and 2004 was $49,900 and $110,492,respectively.  During the three monthsended September 30, 2005 and 2004 the fair value of options granted was $38,400and $24,443, respectively.

 

The fair value of options at date of grant was estimated using theBlack-Scholes model with the following weighted average assumptions:

 

9

----

 
| ** **              | ** ** | **Nine Months Ended September 30,** | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | **2005**                                 | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                    |       |                                     |       |                                      |       |   |   |   |   |
| Expected life (years)   |       | 2                                        |       | 2                                         |       | 2 |   | 2 |   |
| Risk free interest rate |       | 3.95                                     | %          | 2.42                                      | %          | 4.01 | % | 2.68 | % |
| Expected volatility     |       | 19.45                                    | %          | 42.75                                     | %          | 19.38 | % | 43.07 | % |
| Expected dividend yield |       | —                                   |       | —                                    |       | — |   | — |   |

 

6.                                       EarningsPer Share:

 

Earnings per share data for the nine and three monthsended September 30, 2005 and 2004 is presented in conformity with SFAS No. 128,“Earnings Per Share”.

 

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

 
| ** **                                                                     | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amounts** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|------------------------|------------|
|                                                                           |       |                    |       |                      |       |                   |       |
| Nine Months  September 30, 2005                                           |       |                    |       |                      |       |                   |       |
|                                                                           |       |                    |       |                      |       |                   |       |
| Basic EPS -  Income available to common stockholders                           |       | $                       | 705,181    |                      | 8,370,315  |                   | $          | .08 |   |
| Effect of  dilutive securities - Options and warrants                          |       | —                  |       | 697,251                   |       |                   |       |
| Diluted EPS -  Income available to common stockholders and assumed conversions |       | $                       | 705,181    |                      | 9,067,566  |                   | $          | .08 |   |
|                                                                           |       |                    |       |                      |       |                   |       |
| Three Months  September 30, 2005                                          |       |                    |       |                      |       |                   |       |
|                                                                           |       |                    |       |                      |       |                   |       |
| Basic EPS - Income  available to common stockholders                           |       | $                       | 202,901    |                      | 8,616,542  |                   | $          | .02 |   |
| Effect of  dilutive securities - Options and warrants                          |       | —                  |       | 661,024                   |       |                   |       |
| Diluted EPS -  Income available to common stockholders and assumed conversions |       | $                       | 202,901    |                      | 9,277,566  |                   | $          | .02 |   |
|                                                                           |       |                    |       |                      |       |                   |       |
| Nine Months  September 30, 2004                                           |       |                    |       |                      |       |                   |       |
|                                                                           |       |                    |       |                      |       |                   |       |
| Basic EPS -  Income available to common stockholders                           |       | $                       | 610,132    |                      | 7,862,958  |                   | $          | .08 |   |
| Effect of dilutive  securities - Options and warrants                          |       | —                  |       | 562,982                   |       |                   |       |
| Diluted EPS -  Income available tocommon stockholders and assumed conversions  |       | $                       | 610,132    |                      | 8,425,940  |                   | $          | .07 |   |
|                                                                           |       |                    |       |                      |       |                   |       |
| Three Months  Ended September 30, 2004                                    |       |                    |       |                      |       |                   |       |
|                                                                           |       |                    |       |                      |       |                   |       |
| Basic EPS - Income  available to common stockholders                           |       | $                       | 229,810    |                      | 7,990,632  |                   | $          | .03 |   |
| Effect of  dilutive securities - Options and warrants                          |       | —                  |       | 573,552                   |       |                   |       |
| Diluted EPS -  Income available to common stockholders and assumed conversions |       | $                       | 229,810    |                      | 8,564,184  |                   | $          | .03 |   |

 

10

----

 

7.                                       Acquisitions:

 

On May 17, 2005, the Company acquiredsubstantially all of the assets of Long Island Message Center, Inc., a LongIsland, New York based provider of telephone after-hour answering services.  The purchase price was $397,712 and consistedof an initial cash payment of $318,170 and future cash payments of $79,542 tobe paid to the Seller after nine months from the date of the executedagreement.  The Company also recordedbroker and professional fees of approximately $28,000 and $19,000, respectively.  The purchase price exceeded the fair value ofthe net assets acquired as the Company acquired this entity with the intentionof consolidating this entity with HCI Acquisition Corp’s call center operation andexpanding its presence in this geographical area.  The results of operations of Long IslandMessage Center, Inc. are included in the TAS segment as of the date ofacquisition.

 

The following tablesummarizes the fair values of the assets acquired at the date ofacquisition.  The Company received athird party valuation of certain intangible assets in determining theallocation of the purchase price.

 
| Accounts  receivable                                   |   | $       | 12,948  |   |
|--------------------------------------------------------|--------|---------|---------|--------|
| Non-compete agreement                                  |   | 25,000  |    |
| Customer list                                          |   | 175,000 |    |
| Goodwill                                               |   | 230,695 |    |
|                                                   |   |    |    |
| Cost to acquire Long Island Message  Center, Inc. |   | $       | 443,643 |   |

 

On April 12, 2004, the Company acquiredsubstantially all of the assets of alphaCONNECT, Inc., a New Jersey basedprovider of telephone after-hour answering services and stand-alone voice mailservices.  The purchase price was$691,956 and consisted of an initial cash payment of $563,816 and future cashpayments of $51,256 and $76,884 to be paid to the Seller after the first andsecond year anniversaries from the date of the executed agreement,respectively.  The Company also paidprofessional fees of approximately $76,000. A potential exists for the payment of additional purchase priceconsideration if certain thresholds concerning revenue are met by the acquired business.  The first measurement date for this potentialadditional purchase

 

11

----

 

price consideration was April 1, 2005 and noadditional purchase price consideration was required.  The second measurement date is April 1,2006.  The purchase price exceeded thefair value of the net assets acquired as the Company acquired this entity withthe intention of consolidating this entity with Live Message America, Inc.,its previously acquired New Jersey based provider of telephone answeringservices, and expanding its presence in this geographical area.  The consolidation of this entity with LiveMessage America, Inc. was completed in the third quarter of 2004.  The results of operations of alphaCONNECT, Inc.are included in the TAS segment as of the date of acquisition.

 

The following tablesummarizes the fair values of the assets acquired at the date ofacquisition.  The Company received athird party valuation of certain intangible assets in determining the allocationof the purchase price.

 
| Accounts  receivable                    |   | $       | 19,762  |   |
|-----------------------------------------|--------|---------|---------|--------|
| Fixed assets                            |   | 25,000  |    |
| Non-compete agreement                   |   | 25,000  |    |
| Customer list                           |   | 325,000 |    |
| Goodwill                                |   | 373,194 |    |
|                                    |   |    |    |
| Cost to acquire alphaCONNECT, Inc. |   | $       | 767,956 |   |

 

Unaudited pro forma results of operations for the nineand three months ended September 30, 2005 and 2004 as if Long IslandMessage Center, Inc and alphaCONNECT, Inc. had been consolidated as of thebeginning of the earliest period presented follow.  The pro forma results include estimates whichmanagement believes are reasonable.

 
| ** **           | ** ** | **Nine Months Ended September 30,** | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **2005**                                 | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue              |       | $                                        | 16,339,000 |                                      | $          | 14,761,000 |   | $ | 5,495,000 |   | $ | 5,064,000 |   |
| Net income           |       | 722,000                                  |       | 656,000                                   |       | 203,000 |   | 241,000 |   |
| Net income per share |       |                                     |       |                                      |       |   |   |   |   |
| Basic                |       | $                                        | .09        |                                      | $          | .08 |   | $ | .02 |   | $ | .03 |   |
| Diluted              |       | $                                        | .08        |                                      | $          | .08 |   | $ | .02 |   | $ | .03 |   |

 

The unaudited pro forma results ofoperations for the nine and three months ended September 30, 2005 and 2004do not purport to represent what the Company’s results of operations wouldactually have been had the acquisition been effected for the period presented,or to predict the Company’s results of operations for any future period.

 

8.                                       MajorCustomers:

 

Since1983, the Company has provided Personal Emergency Response Systems (“PERS”)services to the City of New York’s Human Resources Administration Home CareService Program (“HCSP”).  The Companyhas been operating since 1993 with a contract to provide HCSP with theseservices, which has been extended for 1-2 year periods since 1993, the lastsuch extension through June 30, 2006. During the nine months ended September 30, 2005 and 2004,

 

12

----

 

theCompany’s revenue from this contract represented 13% and 15%, respectively, ofits total revenue.

 

In November 2002,a new Request for Proposals (“RFP”) was issued by HRA to provide emergencyresponse services to HCSP from April 1, 2004 through March 31,2007.  After receiving notification fromthe City of New York’s Human Resources Administration (“HRA”) that the Companywas selected as the approved vendor under the RFP to provide PERS services tothe Home Care Services Program to Medicaid Eligible individuals, the Companysubsequently received notification from HRA that it canceled the RFP “in thebest interest of the City of New York.”  TheCompany was advised that the cancellation of the RFP is not related to anyperformance issue or negative reflection upon the Company.  Concurrently, the Company was advised of HRA’sdecision to issue a new contract extension to the Company through June 2005under the terms of the contract that the Company has been operating under since1993.  The Company has since receivedthis contract extension and also has received a subsequent extension which goesthrough June 2006.  In accordancewith the original contract and consistent with previous extensions, HRA has theright to terminate the contract without cause or “in the best interest of theCity of New York” upon thirty days written notice.  HRA has also advised the Company that HRA plansto issue a new RFP with respect to PERS services in the future.  As of November 9, 2005, a new RFP hasnot been issued.

 

TheCompany cannot determine (i) when the terms of the new RFP will bepublished, (ii) what the terms of the new RFP will be, (iii) how longthe current contract terms will remain in effect or (iv) whether AMAC willbe the successful bidder on the new RFP (and if so, under what terms andconditions).  While the Company hasreduced its dependence on revenue from HCSP, if the Company does not maintainthis contract, a significant amount of the Company’s revenue could be lost,albeit over a protracted period, which could have a material adverse effect onoperating results and cash flows. The Company continues to implement a varietyof operational efficiencies, as well as continuing to enhance and diversify itsother revenue streams, to offset the impact, if any, in the event of thisoccurrence.

 

As of September 30,2005 and December 2004, accounts receivable from the contract represented 18%of accounts receivable. Medical devices in service under the contractrepresented approximately 16% and 18%, respectively, of the total medicaldevices used for primary monitoring.

 

13

----

 

9.                                       SegmentReporting:

 

The Company has three reportable segments, (i) Health and SafetyMonitoring Systems (“HSMS”), (ii) Telephone Answering Services andSolutions for the Healthcare Community (“TAS”), and (iii) Safe Com.

 

The table below provides a reconciliation of segment information tototal consolidated information for the nine and three months ended September 30,2005 and 2004:

 

2005

 
| ** **                                 | ** ** | **HSMS**   | ** ** | **TAS**   | ** ** | **Safe Com** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------|------------|--------------|------------|------------------|------------|
| Nine Months Ended September 30, 2005  |       |       |       |      |       |         |       |             |       |
| Revenue                                    |       | $          | 10,857,159 |      | $          | 4,965,407    |       | $                | 338,580    |   | $ | 16,161,146 |   |
| Income before provision for income taxes   |       | 584,769    |       | 742,231   |       | 29,181       |       | 1,356,181        |       |
| Total assets                               |       | 12,872,812 |       | 8,128,008 |       | 921,661      |       | 21,922,481       |       |
|                                       |       |       |       |      |       |         |       |             |       |
| ** **                                 | ** ** | **HSMS**   | ** ** | **TAS**   | ** ** | **Safe Com** | ** ** | **Consolidated** | ** ** |
| Three Months Ended September 30, 2005 |       |       |       |      |       |         |       |             |       |
| Revenue                                    |       | $          | 3,635,677  |      | $          | 1,748,455    |       | $                | 111,120    |   | $ | 5,495,252 |   |
| Income before provision for income taxes   |       | 206,376    |       | 168,992   |       | 15,533       |       | 390,901          |       |

 

2004

 
| ** **                                 | ** ** | **HSMS**   | ** ** | **TAS**   | ** ** | **Safe Com** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------|------------|--------------|------------|------------------|------------|
| Nine Months Ended September 30, 2004  |       |       |       |      |       |         |       |             |       |
| Revenue                                    |       | $          | 10,025,417 |      | $          | 3,967,386    |       | $                | 277,310    |   | $ | 14,270,113 |   |
| Income before provision for income taxes   |       | 473,267    |       | 617,601   |       | 62,264       |       | 1,153,132        |       |
| Total assets                               |       | 12,300,412 |       | 6,538,481 |       | 623,365      |       | 19,462,258       |       |
|                                       |       |       |       |      |       |         |       |             |       |
| ** **                                 | ** ** | **HSMS**   | ** ** | **TAS**   | ** ** | **Safe Com** | ** ** | **Consolidated** | ** ** |
| Three Months Ended September 30, 2004 |       |       |       |      |       |         |       |             |       |
| Revenue                                    |       | $          | 3,413,430  |      | $          | 1,434,755    |       | $                | 96,999     |   | $ | 4,945,184 |   |
| Income before provision for income taxes   |       | 172,341    |       | 210,299   |       | 15,170       |       | 397,810          |       |

 

14

----

 

10.                                 Commitmentsand Contingencies:

 

In addition to the FCC inquiry described in Note 4, theCompany is aware of various threatened or pending litigation claims against theCompany relating to its products and services and other claims arising in theordinary course of its business.  TheCompany has given its insurance carrier notice of such claims and it believesthere is sufficient insurance coverage to cover any such claims.   Currently, there are no litigation claimsfor which an estimate of loss, if any, can be reasonably made as they are inthe preliminary stages and therefore, no liability or corresponding insurancereceivable has been recorded.

 

The Company entered into two operating lease agreementsfor additional space in Long Island City, New York.  The leases shall commence upon the landlorddelivering possession of the premises and will run through March 31, 2018.  The leases call for minimum annual rentals of$220,000 and $115,000, respectively, subject to annual increases.  This space will be used to expand the Company’stelephone answering service operation and PERS customer service and emergencyresponse center and house the Company’s distribution center and accounting department.

 

11.                                 SubsequentEvents:

 

On October 3, 2005, the Company acquiredsubstantially all of the assets of North Shore Answering Service, a provider oftelephone after-hour answering services and stand-alone voice mail services,for approximately $2.7 million.  Of the totalpurchase price, 80% was paid at closing and the remaining 20% will be paid toSeller on the first year anniversary of the agreement.

 

**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**.

 

The following discussion and analysis providesinformation which management believes is relevant to an assessment andunderstanding of the Company’s results of operations and financialcondition.  This discussion and analysisshould be read in conjunction with the consolidated financial statementscontained in the latest Annual Report on Form 10-KSB dated December 31,2004.

 

*Statements contained in thisQuarterly Report on Form 10-QSB include “forward-looking statements”within the meaning of Section 27A of the Securities Act and Section 21Eof the Exchange Act, including, in particular and without limitation,statements contained herein under the heading “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”  Forward-looking statements involve known andunknown risks, uncertainties and other factors which could cause the Company’sactual results, performance and achievements, whether expressed or implied bysuch forward-looking statements, not to occur or be realized. These includeuncertainties relating to government regulation, technological changes, ourexpansion plans, our contract with the City of New York and product liabilityrisks.  Such forward-looking statementsgenerally are based upon the Company’s best estimates of future*

 

15

----

* *

*results, performance orachievement, based upon current conditions and the most recent results ofoperations.  Forward-looking statementsmay be identified by the use of forward-looking terminology such as “may,” “will,”“expect,” “believe,” “estimate,” “project,” “anticipate,” “continue” or similarterms, variations of those terms or the negative of those terms.*

 

*You should carefully consider such risks,uncertainties and other information, disclosures and discussions which containcautionary statements identifying important factors that could cause actualresults to differ materially from those provided in the forward-lookingstatements. Readers should carefully review the risk factors and any othercautionary statements contained in the Company’s Annual Report on Form 10-KSBand other public filings.  The Companyundertakes no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.*

* *

**Overview:**

 

The Company’s primary business is the provision of callcenter monitoring services and solutions through (1) the development andmarketing of healthcare solutions and monitoring systems (“HSMS”)that includepersonal emergency response systems, telehealth/disease management monitoringsystems and medication management systems; (2) telephone answeringservices and solutions for the healthcare community; (3) pharmacy securitymonitoring systems.  The Company’sproducts and services are primarily marketed to the healthcare community,including home care, durable medical equipment, medical facility, hospice,pharmacy, managed care and other healthcare oriented organizations.  The Company also offers certain products andservices directly to consumers.  Until2000, the Company’s principal business was the marketing of personal emergencyresponse systems (“PERS”), a device that allows a patient to signal anemergency response center for help in the event of a debilitating illness oraccident.  Beginning in 2000, the Companybegan a program of product diversification and customer base expansion todecrease its reliance on a single product line by marketing complementary callcenter and monitoring services to the healthcare community.

 

In November 2000, the Companydiversified its products/service mix to include telephone answering services (“TAS”)for professionals in the healthcare community when the Company’s HCIAcquisition Corp. subsidiary acquired the assets of a telephone answering service.  The rationale to enter this segment hadseveral components, including targeting the market functioning as theintermediary for the PERS customer base, leveraging existing infrastructurecapability, and establishing an additional significant revenue source.  Growth in the TAS market has beenaccomplished through internally generated sales coupled with three additionalacquisitions.  The TAS segment nowaccounts for approximately 32% of the Company’s revenues.  The Company believes that TAS will continueto be a significant business segment going forward and intends to pursuefurther acquisitions in this area. The TAS business provided revenue ofapproximately $6.5 million per year, based on trailing twelve months revenue,and is currently  the Company’s mostprofitable segment.

 

During 2004, the Company broadenedits capabilities to service specialized allied healthcare providers includinghome care, hospice and other healthcare subspecialties. The Company believes itidentified other communication needs as expressed by the expanded TAS clientbase and has developed specialized healthcare communication solutions to meetthese needs.

 

16

----

 

The Company intends to increase itsservice offerings to significantly expand the TAS reporting segment.

 

In April 2003, the Companyopened a one hundred seat communications center in Long Island City, NY. Thecenter is equipped with state-of-the-art telephony and computer equipment whichis driven by proprietary software platforms designed specifically for AMAC’s 24hour emergency monitoring and customer service activities (PERS) and its TASbusiness.  The center is capable ofaccommodating significant future growth.

 

In 2001, the Company identified anew market opportunity approaching based on emerging demographic trends.  The aging and significant baby boomerpopulation as well as increased life expectancies will manifest a large,fragile and chronically ill older population with an expressed preference foraccessing healthcare services from home. New technologies available and under continuous refinement permit thereporting of certain vital signs and indices of a patient’s well-being withoutthe presence and cost of a visiting nurse or other home healthcarepersonnel.  With an established presencein the home from our PERS product, the Company entered into a marketing andtechnology agreement with Health Hero Network, Inc. in 2001 to embark on aresearch and development project.  Theresult of the project was the Company’s entrance into the telehealth/diseasemanagement monitoring market and the commercial introduction in the fourthquarter of 2003 of a device known as the PERS Buddy®.  This appliance combines the Company’straditional PERS device with Health Hero’s interactive dialogues which allowspatients to self-report on various conditions to enable daily monitoring andproactive intervention by the healthcare community.  The PERS Buddy® is designed for patients withchronic conditions such as congestive heart failure, diabetes, asthma andcoronary artery disease. The Company believes that the new field of reportingand monitoring, which is becoming widely known as “telehealth”, will continueto expand based on increasing acceptance by the medical profession and governmentreimbursement policies, as well as further clinical and econometric studiesconcluding that telehealth is both clinically effective and reduces cost.  The Company is focusing research anddevelopment efforts to broaden its offerings of products and services in thetelehealth field.

 

To round out the Company’sportfolio of home monitoring offerings, the Company secured certain exclusiverights to a medication reminder appliance in 1999, which is marketed under thename Med-Time®. The Company sells its device to the same customer baseutilizing PERS services as well as through web retailers and directly toconsumers.  The Company is in the processof redesigning and upgrading this appliance.

 

The Company continues to view itstwo core business segments, HSMS and TAS, as the main contributors to theCompany’s cash flow from operations.

 

The Company’s third reportingsegment, Safe Com pharmacy security monitoring systems, offers equipment andsecurity monitoring to pharmacies and other 24/7 retail organizations.  Safe Com’s monitoring services are providedat the Company’s communication center in Long Island City, New York.  The Safe

 

17

----

 

Com platform utilizes the basicPERS technology with a modified application. Although currently providing a small annual revenue contribution, theCompany believes a significant opportunity exists and will continue to test themarket potential into 2006.

 

The Company believes that theoverall mix of cash flow generating from HSMS and TAS services, combined withits emphasis on developing products and services in the telehealth field,provides the correct blend of stability and growth opportunity.  The Company believes this strategy will enableit to maintain and increase its role in the healthcare communications field.

 

**Components of Statementsof Income by Operating Segment**

 

The following table shows the components of theStatement of Income for the nine and three months ended September 30, 2005and 2004.

 
| ** **                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| **In  thousands (000’s)**             | ** ** | **2005**                                  |       | **%**                                    | ** ** | **2004** |   | **%** | ** ** | **2005** | ** ** | **%** | ** ** | **2004** |   | **%** | ** ** |
| Revenues                                   |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| HSMS                                       |       | 3,636                                     |       | **66**                                   | **%**      | 3,413 |   | **69** | **%** | 10,857 | ** ** | **67** | **%** | 10,026 |   | **70** | **%** |
| TAS                                        |       | 1,748                                     |       | **32**                                   | **%**      | 1,435 |   | **29** | **%** | 4,965 | ** ** | **31** | **%** | 3,967 |   | **28** | **%** |
| Safe Com                                   |       | 111                                       |       | **2**                                    | **%**      | 97 |   | **2** | **%** | 339 | ** ** | **2** | **%** | 277 |   | **2** | **%** |
| ** **                                 | ** ** | ** **                                |       | ** **                               | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Total Revenues                             |       | 5,495                                     |       | **100**                                  | **%**      | 4,945 |   | **100** | **%** | 16,161 | ** ** | **100** | **%** | 14,270 |   | **100** | **%** |
|                                       |       |                                      |       |                                     | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   |   |
| Cost of Services and Goods Sold            |       |                                      |       |                                     | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   |   |
| HSMS                                       |       | 1,699                                     |       | **47**                                   | **%**      | 1,546 |   | **45** | **%** | 4,946 | ** ** | **46** | **%** | 4,495 |   | **45** | **%** |
| TAS                                        |       | 1,017                                     |       | **58**                                   | **%**      | 747 |   | **52** | **%** | 2,596 | ** ** | **52** | **%** | 2,024 |   | **51** | **%** |
| Safe Com                                   |       | 68                                        |       | **61**                                   | **%**      | 57 |   | **59** | **%** | 202 | ** ** | **60** | **%** | 140 |   | **51** | **%** |
| ** **                                 | ** ** | ** **                                |       | ** **                               | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Total Cost of  Services and Goods Sold     |       | 2,784                                     |       | **51**                                   | **%**      | 2,350 |   | **48** | **%** | 7,744 | ** ** | **48** | **%** | 6,659 |   | **47** | **%** |
| ** **                                 | ** ** | ** **                                |       | ** **                               | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Gross Profit                               | ** ** | ** **                                |       | ** **                               | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| HSMS                                       |       | 1,937                                     |       | **53**                                   | **%**      | 1,867 |   | **55** | **%** | 5,911 | ** ** | **54** | **%** | 5,531 |   | **55** | **%** |
| TAS                                        |       | 731                                       |       | **42**                                   | **%**      | 688 |   | **48** | **%** | 2,369 | ** ** | **48** | **%** | 1,943 |   | **49** | **%** |
| Safe Com                                   |       | 43                                        |       | **39**                                   | **%**      | 40 |   | **41** | **%** | 137 | ** ** | **40** | **%** | 137 |   | **49** | **%** |
| ** **                                 | ** ** | ** **                                |       | ** **                               | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Total Gross  Profit                        |       | 2,711                                     |       | **49**                                   | **%**      | 2,595 |   | **52** | **%** | 8,417 | ** ** | **52** | **%** | 7,611 |   | **53** | **%** |
| ** **                                 | ** ** | ** **                                |       | ** **                               | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Selling, General & Administrative |       | 2,414                                     |       | **44**                                   | **%**      | 2,243 |   | **45** | **%** | 7,304 | ** ** | **45** | **%** | 6,627 |   | **46** | **%** |
| Interest Expense                           |       | 10                                        |       | **0**                                    | **%**      | 14 |   | **0** | **%** | 33 | ** ** | **0** | **%** | 45 |   | **0** | **%** |
| Other Income                               |       | (105                                      | )          | **(2**                                   | **)%**     | (60 | ) | **(1** | **)%** | (276 | ) | **(2** | **)%** | (214 | ) | **(2** | **)%** |
| ** **                                 | ** ** | ** **                                |       | ** **                               | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Income before Income Taxes                 |       | 391                                       |       | **7**                                    | **%**      | 398 |   | **8** | **%** | 1,356 | ** ** | **8** | **%** | 1,153 |   | **8** | **%** |
| ** **                                 | ** ** | ** **                                |       | ** **                               | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Provision for Income Taxes                 |       | 188                                       |       |                                     | ** ** | 168 |   |   | ** ** | 651 | ** ** | ** ** | ** ** | 543 |   | ** ** | ** ** |
| ** **                                 | ** ** | ** **                                |       | ** **                               | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Net Income                                 |       | 203                                       |       |                                     | ** ** | 230 |   |   | ** ** | 705 | ** ** | ** ** | ** ** | 610 |   | ** ** | ** ** |

 

**Note:**The percentages for Costof Services and Goods Sold and Gross Profit are calculated based on apercentage of revenue.

 

18

----

 

**Results of Operations:**

 

The Company has three distinct operating businesssegments, which are HSMS, TAS and Safe Com. The HSMS and TAS are the two significant segments which generate andproduce approximately 98% of the Company’s revenue and net income, while SafeCom has a minimal impact on these areas; therefore, the operations of Safe Comare not further analyzed below.

 

**Three Months Ended September 30,2005 Compared to Three Months Ended September 30, 2004**

 

**Revenues:**

 

**HSMS**

 

Revenues, which consist primarily of monthly rentalrevenues, increased approximately $223,000, or 7%, for the three months ended September 30,2005 as compared to the same period in 2004. Monthly rental revenues represent revenues that are generated from theleasing and monitoring of the medical devices placed in subscribers’residences. The increase is primarily attributed to the following factor:

 

•                  The Companycontinues to experience growth in its customer base. This has largely beenaccomplished through subscriber growth within its existing customer base. Thelargest growth continues to be as a result of an agreement, which was executedin November 2003, whereby over 3,000 Personal Emergency Response Systems(PERS) were placed online from December 2003 through the first quarter of2004.  The Company continues to servicethis account which now has grown to approximately 5,100 PERS online.  This resulted in approximately $100,000increase in revenue as compared to the same period last year.  The remaining increase in revenue is from theexecution of new agreements as well as monthly fee increases to certainsubscribers. The Company anticipates that it will continue to grow itssubscriber base and corresponding revenue through its continued sales andmarketing efforts.

 

**TAS**

 

The increase in revenues of approximately $313,000, or22%, for the three months ended September 30, 2005 as compared to the sameperiod in 2004 was primarily due to the following:

 

•                  The Company continuesto experience revenue growth within its existing telephone answering servicebusinesses of approximately $198,000, as compared to the same period in2004.  This growth is due to theexecution of new agreements with healthcare and hospital organizations inconjunction with new daytime communication service offerings, as well asincreases in its physician base. The Company has experienced strong growth

 

19

----

 

and anticipates that itwill continue to grow this business segment with further expansion intohealthcare and hospital organizations and to physicians through its marketingstrategies.

 

•                  In May 2005,the Company purchased the assets of a telephone answering service business,Long Island Message Center, Inc. (“LIMC”). As a result of this acquisition, the Company earned approximately $115,000of revenue during the three months ended September 30, 2005.  The Company believes this acquisition willhelp facilitate growth within the Long Island/New York metro area.

 

**Costs Related to Services and Goods Sold:**

 

**HSMS**

 

Costs related to services and goods increased byapproximately $153,000 for the three months ended September 30, 2005 ascompared to the same period in 2004, an increase of 10%, primarily due to thefollowing:

 

•                  The Companyincurred increased costs of approximately $45,000 relating to repairs andupgrades associated with its PERS and related equipment, as compared to thesame period in 2004, when only minimal charges for repairs and upgrades wereincurred. In 2004, as a result of the Company having a significant number ofunits, including the enhanced PERS device, manufactured, only minimal repairsand upgrades were performed.   As theCompany has determined not to manufacture the enhanced PERS device in 2005, theCompany has concentrated on repairs and upgrades of its existing PERS unitswhich have been returned from the field.

 

•                  Inresponse to an FCC inquiry, the Company has determined that certain versions ofits PERS and related equipment emit levels of radio frequency energy thatexceed applicable standards designed to reduce the possibility of interferencewith radio communications.  Although thisissue poses no safety or functionality risk to subscribers, the Company is inthe process of establishing a corrective action plan with the FCC to satisfy thismatter.  With this process stillunderway, the Company has accelerated the exchange of units in certain programs.  The Company incurred approximately $55,000associated with this exchange of units during the three months ended September 30,2005, whereas no such costs were incurred for the same period in 2004.

 

•                  The Company incurredincreased payroll costs of approximately $30,000 within its distributionfacility.  This was primarily due to theCompany hiring additional personnel and incurring overtime due to the highvolume of units passing through the facility, which was partially a result of theaccelerated exchange of units in certain programs.

 

**TAS:**

 

Costs related to services and goods increased byapproximately $270,000 for the three months ended September 30, 2005 ascompared to the same period in 2004, an increase of 36%, primarily due to thefollowing:

 

20

----

 

•                  With thecontinued increase in business in its existing telephone answering services,specifically in its new daytime answering service offerings, the Companycontinues to hire additional telephone answering service supervisors andoperators in its Long Island City location. In addition, the Company initiated a pay rate increase to all its supervisorsand operators in an effort to stabilize employee tenure with the Company.  These personnel additions along with generalpay rate increases and associated payroll taxes has accounted for approximately$210,000 of increased costs as compared to the same period in 2004.  As the Company continues to grow its customerbase and revenues, it will continue to evaluate personnel levels and determineif additional personnel are necessary.

 

•                  In May 2005,the Company purchased the assets of a telephone answering service business,Long Island Message Center, Inc. (“LIMC”). As a result of this acquisition, the Company incurred operationalexpenses of approximately $50,000 during the three months ended September 30,2005.  On October 3, 2005 theCompany acquired substantially all of the assets of North Shore AnsweringService and plans to consolidate the LIMC operation with this newly acquiredtelephone answering service in an effort to reduce labor costs.

 

**Selling, General and Administrative Expenses:**

 

Selling, general and administrative expenses increasedby approximately $171,000 for the three months ended September 30, 2005 ascompared to the same period in 2004, an increase of 8%.  The increase is primarily attributable to thefollowing:

 

•                  The Company’slegal expenses increased by approximately $75,000 as compared to the sameperiod in the prior year.  This was attributedto an increase in general corporate matters.

 

•                  Marketingexpenses increased by approximately $40,000 due to the Company hiringadditional sales personnel to assist in the marketing of its PERS and diseasemanagement offerings and increased commissions were paid to in-house salespersonnel, which are directly related to increased revenues in 2005.

 

•                  In conjunctionwith the Company’s increased service offerings and revenue growth in the TASarea, the Company, in 2004, established a separate department for personnel totrain operators on an ongoing basis relating to its existing and its newservice offerings.  This additionalpersonnel resulted in approximately $40,000 increase in expense as compared tothe prior year.  The Company has nowfully established this department and believes it is contributing significantlyto the economic leveraging of its operational infrastructure.

 

There were other smaller increases in selling, generaland administrative expenses which arose out of the normal course of businesssuch as commissions and freight, which were partially offset by a reduction inrent and amortization expense.

 

**Interest Expense:**

 

Interest expense for the three months ended September 30,2005 and 2004 was approximately $10,000 and $14,000, respectively.  The decrease of $4,000, or 29%, was primarilydue to the Company continuing to pay down its term loan and its capital leaseobligations.

 

21

----

 

**Other Income:**

 

Other income for the threemonths ended September 30, 2005 and 2004 was approximately $105,000 and $60,000,respectively. Other Income for the three months ended September 30, 2005and 2004 includes a Relocation and Employment Assistance Program (“REAP”)credit in the approximate amounts of $82,500 and $57,000, respectively.  In connection with the relocation of certainoperations to Long Island City, New York in April 2003, the Company becameeligible for the REAP credit which is based upon the number of employeesrelocated to this designated REAP area. The REAP is in effect for a twelve yearperiod; during the first five years the Company will be refunded the fullamount of the eligible credit and, thereafter, the benefit will be availableonly as a credit against New York City income taxes.

 

**Income Before Provision for Income Taxes:**

 

The Company’s income before provision for income taxesfor the three months ended September 30, 2005 was approximately $391,000as compared to $398,000 for the same period in 2004. The decrease of $7,000 forthe three months ended September 30, 2005 primarily resulted from an increasein the Company’s costs related to services and selling, general andadministrative costs offset by an increase in the Company’s service revenues.

 

**Nine Months Ended September 30,2005 Compared to Nine Months Ended September 30, 2004**

 

**Revenues:**

 

**HSMS**

 

Revenues, which consist primarily of monthly rentalrevenues, increased approximately $831,000, or 8%, for the nine months ended September 30,2005 as compared to the same period in 2004. Monthly rental revenues represent revenues that are generated from theleasing and monitoring of the medical devices placed in subscriber’sresidences. The increase is primarily attributed to the following factors:

 

•                  The Company continuesto experience growth in its customer base. This has largely been accomplishedthrough subscriber growth within its existing customer base which accounted forapproximately $625,000 of the increased revenue. The largest growth continuesto be as a result of an Agreement, which was executed in November 2003, wherebyover 3,000 Personal Emergency Response Systems (PERS) were placed online from December 2003through the first quarter of 2004.  TheCompany continues to service this account which now has grown to approximately 5,100PERS online.  This resulted inapproximately $305,000 increase in revenue as compared to the same period lastyear.

 

•                  In 2004, theCompany initiated and executed a new agreement with a home healthcare agencywhereby PERS were placed online.  Sinceinception, this account has grown to approximately 800 subscribers and accountsfor approximately $85,000 increase in revenue as compared to the same period inthe prior year.

 

22

----

 

The remaining increase inrevenue is from the execution of other new agreements as well as monthly feeincreases to certain subscribers. The Company anticipates that it will continueto grow its subscriber base and corresponding revenue through its continuedsales and marketing efforts.

 

**TAS**

 

The increase in revenues of approximately $998,000, or25%, for the nine months ended September 30, 2005 as compared to the sameperiod in 2004 was primarily due to the following:

 

•                  The Companyexperienced revenue growth within its existing telephone answering servicebusinesses of approximately $833,000, as compared to the same period in2004.  This growth is due to theexecution of new agreements with healthcare and hospital organizations inconjunction with new daytime communication service offerings, as well asincreases in its physician base. The Company has experienced strong growth andanticipates that it will continue to grow this business segment with furtherexpansion into healthcare and hospital organizations and to physicians throughits marketing strategies.

 

•                  In May 2005,the Company purchased the assets of a telephone answering service business,Long Island Message Center, Inc. (“LIMC”). As a result of this acquisition, the Company earned approximately $165,000of revenue through September 30, 2005. The Company believes this acquisition will help facilitate its growthwithin the Long Island/New York geographical area.

 

**Costs Related to Services and Goods Sold:**

 

**HSMS**

 

Costs related to services and goods increased byapproximately $451,000 for the nine months ended September 30, 2005 ascompared to the same period in 2004, an increase of 10%, primarily due to thefollowing:

 

•                  The Company has incurredapproximately $150,000 more of costs relating to repairs and upgradesassociated with its PERS and related equipment, as compared to the same periodin 2004, when only minimal charges for repairs and upgrades were incurred.  In 2004, as a result of the Company having asignificant number of units, including the enhanced PERS device, manufactured,only minimal repairs and upgrades were performed.   As the Company has determined not tomanufacture the enhanced PERS device in 2005, the Company has concentrated onrepairs and upgrades of its existing PERS units which have been returned fromthe field.

 

•                  With thepurchase of a minimal number of enhanced PERS devices in 2005, the Companycapitalized less overhead costs as compared to the same period in 2004.  In 2004, the Company purchased a significantnumber of enhanced PERS devices and, therefore, capitalized a greater amount ofoverhead costs.  The Company onlypurchased a minimal number of enhanced PERS devices in 2005 as it wasevaluating enhanced technology with respect to the disease management productand determined not to produce any more of the current enhanced PERSdevices.  On June 30, 2005, the Companyamended its agreement with Health Hero Network whereby the Company will

 

23

----

 

purchase an upgradeddisease management product moving forward. As a result, the Company had approximately $110,000 more unabsorbedoverhead in 2005 as compared to the same period in 2004.

 

•                  During the latter part of2004 and during the course of 2005, the Company has hired additional ITpersonnel to assist in the managing of the Company’s network systems,implementation of new systems and developing enhancements of serviceapplications to its customers.  As a resultof these additional personnel, the Company incurred approximately $60,000 ofincreased costs during the nine month period ended September 30, 2005 ascompared to the same period in the prior year.

 

•                  In response to an FCCinquiry, the Company has determined that certain versions of its PERS andrelated equipment emit levels of radio frequency energy that exceed applicablestandards designed to reduce the possibility of interference with radiocommunications.  Although this issueposes no safety or functionality risk to subscribers, the Company is in theprocess of establishing a corrective action plan with the FCC to satisfy thismatter.  With this process stillunderway, the Company has accelerated the exchange of units in certain programs.  The Company incurred approximately $55,000associated with this exchange of units during the nine months ended September 30,2005, whereas no such costs were incurred for the same period in 2004.

 

These increases werepartially offset by a reduction of personnel and overtime in both the ERC andcustomer service departments.  This isprimarily the result of the Company commencing cross training its customerservice and ERC personnel in 2005, within the call center.  Also, additional personnel and overtime wasrequired in 2004, as a result of the Company executing an agreement wherebyover 3,000 PERS were placed online from December 2003 through the firstquarter of 2004. This reduction amounted to approximately $110,000.

 

**TAS:**

 

Costs related to services and goods increased byapproximately $572,000 for the nine months ended September 30, 2005 ascompared to the same period in 2004, an increase of 28%, primarily due to thefollowing:

 

•                  With the continuedincrease in business in its existing telephone answering services, specificallyin its new daytime answering service offerings, the Company continues to hireadditional telephone answering service supervisors and operators in its LongIsland City location.  In addition, theCompany initiated a pay rate increase to all its supervisors and operators inan effort to stabilize employee tenure with the Company.  These personnel additions along with generalpay rate increases and associated payroll taxes has accounted for approximately$410,000 of increased costs as compared to the same period in 2004.  As the Company continues to grow its customerbase and revenues, it will continue to evaluate personnel levels and determineif additional personnel are necessary.

 

•                  In May 2005,the Company purchased the assets of a telephone answering service business,Long Island Message Center, Inc. (“LIMC”). As a result of this acquisition, the Company incurred operationalexpenses of approximately $80,000 through September 30, 2005.  On October 3, 2005 the Company acquiredsubstantially all of the assets of North Shore Answering Service and plans toconsolidate the LIMC operation with this newly acquired telephone answeringservice in an effort to reduce labor costs.

 

24

----

 

**Selling, General and Administrative Expenses:**

 

Selling, general and administrative expenses increasedby approximately $677,000 for the nine months ended September 30, 2005 ascompared to the same period in 2004, an increase of 10%.  The increase is primarily attributable to thefollowing:

 

•                  The Company’slegal expenses increased by approximately $255,000 as compared to the sameperiod in the prior year.  The Companyincurred approximately $55,000 of legal expense with respect to working withthe FCC to determine an action plan to establish a timeframe to complete anupgrade program for certain PERS units which did not meet applicable FCCstandards.  In response to an FCCinquiry, the Company determined that certain versions of its PERS equipmentemitted levels of radio frequency energy that exceeded applicable standardsdesigned to reduce the possibility of interference with radio communications. Inaddition, the Company has incurred approximately $60,000 of legal expensesrelated to negotiations and the execution of an amendment to a supplieragreement.  The Company has also incurredadditional legal expense for other general corporate matters of approximately $140,000as compared to the same period in the prior year.

 

•                  Marketingexpenses increased by approximately $140,000 due to the Company hiring additionalsales personnel to assist in the marketing of its PERS and disease managementofferings and increased commissions were paid to in-house sales personnel, whichare directly related to increased revenues in 2005.

 

•                  In conjunctionwith the Company’s increased daytime answering service offerings and revenuegrowth in the TAS area, the Company, in 2004, established a separate divisionfor personnel to train operators on an ongoing basis relating to its existingand its new daytime service offerings.  Thisadditional personnel resulted in approximately $200,000 increase in expense ascompared to the prior year.  The Companyhas now fully established this department and believes it is contributingsignificantly to the economic leveraging of its operational infrastructure.

 

There were other smaller increases in selling, generaland administrative expenses which arose out of the normal course of businesssuch as administrative salaries, bad debt expense and depreciation, which wereoffset by a reduction in rent and warrant expense.

 

**Interest Expense:**

 

Interest expense for the nine months ended September 30,2005 and 2004 was approximately $33,000 and $45,000, respectively.  The decrease of $12,000, or 27%, wasprimarily due to the Company continuing to pay down its term loan and itscapital lease obligations.

 

**Other Income:**

 

Other income for the ninemonths ended September 30, 2005 and 2004 was approximately $276,000 and $214,000,respectively. Other Income for the nine months ended September 30, 2005and 2004 includes a Relocation and Employment Assistance Program (“REAP”)credit in the approximate amounts of $240,000 and $171,000, respectively.  In connection with the relocation of certainoperations to Long Island City, New York in April 2003, the Company becameeligible for the REAP credit which is based upon the number of employeesrelocated to

 

25

----

 

this designated REAParea. The REAP is in effect for a twelve year period; during the first fiveyears 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 YorkCity income taxes.

 

**Income Before Provision for Income Taxes:**

 

The Company’s income before provision for income taxesfor the nine months ended September 30, 2005 was approximately $1,356,000as compared to $1,153,000 for the same period in 2004. The increase of $203,000for the nine months ended September 30, 2005 primarily resulted from anincrease in the Company’s service revenues and other income offset by anincrease in the Company’s costs related to services and selling, general andadministrative costs.

 

**Liquidity and Capital Resources**

 

The Company has a credit facility of $3,000,000, whichincludes a term loan of $1,500,000 and a revolving credit line that permitsmaximum borrowings of $1,500,000 (based on eligible receivables, asdefined).  Prior to an amendment of thecredit facility agreement in March 2005, borrowings under the term loan boreinterest at either (a) LIBOR plus 3.5% or (b) the prime rate or thefederal funds effective rate plus .5%, whichever is greater, plus 1.0% and therevolving credit line will bear interest at either (a) LIBOR plus 3.0% or (b) theprime rate or the federal funds effective rate plus .5%, whichever is greater,plus .5%.  The Company has the option tochoose between the two interest rate options under the term loan and revolvingcredit line.  The term loan is payable inequal monthly principal payments of $25,000 over five years while the revolvingcredit line, as amended, is now available through May 2008.  The outstanding balance on the term loan at September 30,2005 was $500,000.  There were no amountsoutstanding on the revolving credit line at September 30, 2005.

 

On March 28, 2005, the Company amended its loandocuments whereby the borrowings under the term loan will bear interest ateither (a) LIBOR plus 2.25% or (b) the prime rate or the federalfunds effective rate plus .5%, whichever is greater, and the revolving creditline will bear interest at either (a) LIBOR plus 2.0% or (b) theprime rate or the federal funds effective rate plus .5%, whichever isgreater.  The revolving credit line hasalso been extended for an additional three (3) years and is now availablethrough May 2008.  Additionally,certain of the covenants were amended.

 

At September 30, 2005, the Company was in compliancewith its loan covenants under the agreement dated May 20, 2002 and asamended on August 11, 2003 and March 28, 2005.

 

26

----

 

The following table is asummary of contractual obligations as of September 30, 2005:

 
| ** **                    | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------|------------|----------------------------|------------|
| **Contractual  Obligations**  | ** ** | **Total**                  | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Revolving Credit Line         |       | $                          | - 0 -      |   |   |   |   |   |   |   |   |   |
| Debt (a)                      |       | $                          | 552,318    |   | $ | 293,760 |   | $ | 258,558 |   |   |   |   |   |
| Capital Leases (b)            |       | $                          | 48,398     |   | $ | 48,398 |   |   |   |   |   |   |   |
| Operating Leases (c)          |       | $                          | 9,356,089  |   | $ | 613,488 |   | $ | 2,124,815 |   | $ | 1,411,846 |   | $ | 5,205,940 |   |
| Total Contractual Obligations |       | $                          | 9,956,805  |   | $ | 955,646 |   | $ | 2,383,373 |   | $ | 1,411,846 |   | $ | 5,205,940 |   |

 

----

(a)          –Debt includes the Company’s term loan of $500,000 which matures in June 2007,as well as loans associated with the purchase of automobiles.

 

(b)         –Capital lease obligations relate to the purchase of the Company’s new CustomerService/Emergency Response software and the purchase of telephone answeringservice equipment.  Both of these capitalleases mature in January 2006.

 

(c)          –Operating leases include rental of facilities at various locations within theUnited States.  These operating leasesinclude the rental of the Company’s call center, warehouse and the officefacilities.  These operating leases havevarious maturity dates.  The Companycurrently leases office space from the Chief Executive Officer and principalshareholder pursuant to a lease which expires in September 2007.  The Company leased a second building from theChief Executive Officer and principal shareholder until October 2004, atwhich time the Company was released from its obligation.  The lease obligations include two recentlyexecuted leases which will commence rent payments upon the Landlord deliveringpossession of the premises.  It isestimated that rent will commence in April 2006.

 

Net cash provided byoperating activities was approximately $2.2 million for the nine months ended September 30,2005, as compared to approximately $2.4 million for the same period in 2004.During 2005, increases in cash provided by operating activities from depreciationand amortization of approximately $2.2 million and net earnings ofapproximately $0.7 million were offset by an increase in trade receivables ofapproximately $0.7 million. The increase in trade receivables is primarily dueto the expansion of the Company’s customer base, specifically as it relates toTAS, and a slow down of collections as result of a select number of customersprocessing payments in a slower manner.   As the Company has expanded its customer basewith its new daytime service offerings, receivables related to these customersnow exist.  The Company has alsoexperienced a slow down in collections, primarily as a result in system updatesmade by certain customers which has impacted the Company’s billing andcollection process.  The Company continuesto update its systems and processes accordingly in an attempt to collect these amountson a more timely basis.

 

Net cash used ininvesting activities for the nine months ended September 30, 2005 wasapproximately $2.8 million as compared to $2.9 million in the same period in2004.  The primary components of net cashused in investing activities in 2005 and 2004 were capital expenditures and theacquisition of telephone answering service businesses.  Net cash used in investing activities forcapital expenditures for 2005 and 2004 were approximately $1.8 and $2.0million,

 

27

----

 

respectively, and for acquisitionsof telephone answering service businesses was approximately $0.4 for $0.8million, respectively.  Additionally,2005 also includes approximately 0.2 million of a deposit on equipment andsoftware.  Capital expenditures for 2005 primarilyrelate to the continued production and purchase of the traditional PERSsystem.  In 2004, capital expendituresprimarily related to the production and purchase of its traditional PERS and enhancedPERS systems and the enhancement of its telephony equipment.

 

Cash flows for the ninemonths ended September 30, 2005 provided by financing activities were approximately$1.4 million compared to cash provided by financing activities of $.7 millionfor the same period in 2004.  The primary components ofcash flow provided by financing activities in 2005 and 2004 were proceedsreceived from the exercise of stock options and warrants.  The proceeds from the exercise of both stockoptions and warrants were approximately $1.8 and $1.0million in 2005 and 2004, respectively. The primary components of cash used in financing activities during 2005and 2004 were the repayment of debt of approximately $0.3 million in each year.

 

During the next twelve months, the Company anticipatesit will make capital expenditures of approximately $2.5 – $3.0 million for theproduction and purchase of the enhanced PERS and traditional PERS systems andenhancements to its computer operating systems. This amount is subject to fluctuations based on customer demand. TheCompany also anticipates incurring approximately $0.4 - $0.6 million of costsrelating to research and development of its enhanced PERS and Med-Timedispenser.  In July 2005, theCompany has entered into a technology, licensing, development, distribution andmarketing agreement with a supplier for its HSMS sector.  Pursuant to this agreement the Company willexpend approximately $0.4 million over the next twelve to eighteen months.  In addition, assuming the upgrade program whichthe Company is working with the FCC to finalize is to run substantiallyparallel with the normal recycling of the Company’s PERS equipment, the Companyanticipates paying approximately $0.3 million relating to the FCC matter overthe next twelve months.

 

As of September 30,2005, the Company had approximately $4.1 million in cash and the Company’sworking capital was approximately $7.4 million. The Company believes that with its present cash balance and withoperations of the business generating positive cash flow, it will be able tomeet its cash, working capital and capital expenditure needs for at least thenext twelve months. The Company also has a revolving credit line, which expiresin May 2008 that permits borrowings up to $1.5 million of which no amountswere outstanding at September 30, 2005.

 

Off-Balance SheetArrangements:

 

As of September 30,2005, the Company has not entered into any off-balance sheet arrangements thatare reasonably likely to have an impact on the Company’s current and futurefinancial condition.

 

28

----

 

Other Factors:

 

On October 3, 2005, the Company acquiredsubstantially all of the assets of North Shore Answering Service, a provider oftelephone after-hour answering services and stand-alone voice mail services,for approximately $2.7 million.  Of thetotal purchase price, 80% was paid at closing and the remaining 20% will bepaid to Seller on the first year anniversary of the agreement.

 

The Company entered into two operating leaseagreements for additional space in Long Island City, New York.  The leases shall commence upon the landlorddelivering possession of the premises and will run through March 31,2018.  The leases call for minimum annualrentals of $220,000 and $115,000, respectively, subject to a annualincrease.  This space will be used toexpand the Company’s telephone answering service operation and PERS customerservice and emergency response center and house the Company’s distributioncenter and accounting department.

 

On May 17, 2005, the Company acquiredsubstantially all of the assets of Long Island Message Center, Inc., aLong Island New York based provider of telephone after-hour answering servicesand stand-alone voice mail services.  Thepurchase price was $397,712 and consisted of an initial cash payment of$318,170 and future cash payments of $79,542 to be paid to the Seller afternine months from the date of the executed agreement.  The Company also recorded broker andprofessional fees of approximately $28,000 and $19,000, respectively.

 

On April 12, 2004, the Company acquiredsubstantially all of the assets of alphaCONNECT, Inc., a New Jersey basedprovider of telephone after-hour answering services and stand-alone voice mailservices.  The purchase price was$691,956 and consisted of an initial cash payment of $563,816 and future cashpayments of $51,256 and $76,884 to be paid to the Seller after the first andsecond year anniversaries from the date of the executed agreement,respectively.  The Company also paidprofessional fees of $76,000.  Apotential exists for the payment of additional purchase price consideration ifcertain thresholds concerning revenue are met by the acquired business.  The first measurement date for this potentialadditional purchase price consideration was April 1, 2005 and noadditional purchase price consideration was required. The second measurementdate is April 1, 2006.

 

On January 14, 2002, the Company entered into anoperating lease agreement for space in Long Island City, New York in an effortto consolidate its HCI and Oceanside ERC and Customer Service facilities.  The Company believes that centralization ofthe ERC, Customer Service and H-LINK® OnCall operations will provide additionalefficiencies and facilitate the continued projected growth of the H-LINK andPERS divisions.  The fifteen (15) yearlease term commenced in April 2003 when the property was first occupied bythe Company.  The lease calls for minimumannual rentals of $269,500, subject to a 3% annual increase plus reimbursementfor real estate taxes.

 

On November 1, 2001, the Company entered into aCooperative Licensing, Development, Services and Marketing Agreement with HHN(the “HHN Agreement”) pursuant to which the Company developed, with theassistance of HHN, a new integrated appliance combining the features of theCompany’s PERS product with HHN’s technology. Pursuant to the HHN Agreement, the Company was the exclusivemanufacturer and distributor in the United States, of

 

29

----

 

an enhanced PERS system that combines the Company’straditional safety monitoring features with HHN’s internet based diseasemanagement monitoring technology.  TheHHN Agreement, which had a minimum five-year term (“initial term”), and providedfor the payment by the Company of certain fees based on the service revenuederived from the enhanced PERS product, was amended on June 30, 2005.  The amendment includes an extension of the initialterm for an additional three years, and converted the exclusive license to anon-exclusive one.  The cost of thelicensing component of $1,115,000, including $115,000 of professional fees, whichhas been paid in full, was being amortized over a 40-month period whichcommenced in July 2003 upon the Company meeting certain milestones underthe agreement.  With this extension ofthe initial term, the Company is amortizing the remaining value of thelicensing component as of June 30, 2005 over the revised initial term ofthe Agreement.  Additionally, if certainacceptance criteria are met, the Company will be required to purchase a minimumof 1,500 devices over the term of the Agreement at an estimated aggregate cost of$450,000.

 

Since 1983, the Company has provided PersonalEmergency Response Systems (“PERS”) services to the City of New York’s HumanResources Administration Home Care Service Program (“HCSP”).  The Company has been operating since 1993with a contract to provide HCSP with these services, which has been extendedfor 1-2 year periods since 1993, the last such extension through June 30,2006.  During the nine months ended September 30,2005 and 2004, the Company’s revenues from this contract represented 13% and 15%,respectively, of its total revenue.

 

In November 2002,a new Request for Proposals (“RFP”) was issued by HRA to provide emergencyresponse services to HCSP from April 1, 2004 through March 31,2007.  After receiving notification fromthe City of New York’s Human Resources Administration (“HRA”) that the Companywas selected as the approved vendor under the RFP to provide PERS services tothe Home Care Services Program to Medicaid Eligible individuals, the Companysubsequently received notification from HRA that it canceled the RFP “in thebest interests of the City of New York.” The Company was advised that the cancellation of the RFP is not relatedto any performance issue or negative reflection upon the Company.  Concurrently, the Company was advised of HRA’sdecision to issue a new contract extension to the Company through June 2005under the terms of the contract that the Company has been operating under since1993.  The Company has since receivedthis contract extension and also has received a subsequent extension which goesthrough June 2006.  In accordancewith the original contract and consistent with previous extensions, HRA has theright to terminate the contract without cause or “in the best interest of theCity of New York” upon thirty days written notice.  HRA has also advised the Company that theyplan to issue a new RFP with respect to PERS services in the future. As of November 9,2005, a new RFP has not been issued.

 

TheCompany cannot determine (i) when the terms of the new RFP will bepublished, (ii) what the terms of the new RFP will be, (iii) how longthe current contract terms will remain in effect or (iv) whether AMAC willbe the successful bidder on the new RFP (and if so, under what terms andconditions).  While the Company hasreduced its dependence on revenue from HCSP, if the Company does not maintainthis contract, a significant amount of the Company’s revenue could be lost,albeit over a protracted period, which could have a material adverse effect on

 

30

----

 

operatingresults and cash flows. The Company continues to implement a variety ofoperational efficiencies, as well as continuing to enhance and diversify itsother revenue streams, to offset the impact, if any, in the event of thisoccurrence.

 

As of September 30,2005 and December 2004, accounts receivable from the contract represented 18%,of accounts receivable.  Medical devicesin service under the contract represented approximately 16% and 18%,respectively, of the total medical devices in service for primary monitoring.

 

No other single contract or customer represents more than 6% of theCompany’s revenue.

 

The Company’s PERS and related equipmentis subject to approvals under the rules of the Federal Communication Commission(“FCC”). In November 2004, the Company received an inquiry from theFederal Communications Commission. In response to that inquiry the Company hasdetermined that certain versions of its PERS and related equipment emit levelsof radio frequency energy that exceed applicable standards designed to reducethe possibility of interference with radio communications.  Although this issue poses no safety orfunctionality risk to subscribers, the Company is in the process ofestablishing a corrective action plan with the FCC to satisfy this matter.

 

The Company is currently working with the FCC to determinean action plan to establish a timeframe to complete an upgrade program for theaffected PERS and related equipment and the amount of a payment to the FCC. Atthis time the Company is unable to determine whether it is probable that aliability has been incurred; accordingly, no estimate of the potential paymentto the FCC has been recorded.  However,the Company believes the payment could range between $50,000 and $160,000,although substantially higher amounts are possible based on the discretion ofthe FCC.  The Company believes the FCCwill allow the upgrade program to run substantially parallel with the normalrecycling of the Company’s PERS equipment. Under this assumption the onlyadditional cost to be incurred will be the incremental cost to bring the unitsinto compliance with the FCC regulations. However, in certain instances, the Company has accelerated the exchangeof the PERS equipment.

 

Through September 30,2005, the Company has expensed approximately $670,000 in connection with thismatter, of which approximately $190,000, primarily relating to costs associatedwith the replacement of equipment, legal fees and other professional fees, wasrecorded in 2005.  The remaining $480,000was charged to expense in the fourth quarter of 2004, which primarily relatedto costs to be incurred in excess of normal repair and refurbishment costs.

 

**Recent Accounting Pronouncements:**

 

In June 2005, the FASB issued SFAS No. 154, a replacement ofAPB No. 20 and SFAS No. 3. SFAS No. 154 applies to all voluntary changes in accountingprinciple and changes the requirements for accounting for and reporting of achange in accounting principle to be applied

 

31

----

 

retrospectively with all prior period financial statements presented onthe new accounting principle.  SFAS No. 154is effective for accounting changes and correction of errors made in fiscalyears beginning after December 15, 2005. The Company’s results of operations and financial condition will only beimpacted by SFAS No. 154 if it implements changes in accounting principlethat are addressed by the standard or discovers in future periods, errors whichrequire correction.

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment which isa revision of SFAS No. 123, Accounting for Stock-Based Compensation. Thestatement supercedes APB Opinion No. 25, Accounting for Stock Issued toEmployees, and its related implementation guidance. SFAS No. 123R requiresall entities to recognize compensation expense in an amount equal to thefair-value of share-based payments. Upon adoption, the fair value of allemployee stock option awards will be expensed in the Company’s statement ofincome, typically, over the related vesting period of the options. SFAS No. 123Rrequires the use of fair value to measure share-based awards issued toemployees, computed at the date of grant. Additionally, SFAS No. 123Rrequires companies to record compensation expense for the unvested portion ofpreviously granted awards as they continue to vest, as calculated previouslyand included in the companies prior period pro forma disclosures under SFAS No. 123.SFAS No. 123R also requires the tax benefit of tax deductions in excess ofrecognized compensation costs to be reported as a financing cash flow, ratherthan as an operating cash flow as required under current literature. TheCompany will adopt SFAS No. 123R beginning with the fiscal 2006 firstquarter, as required. The impact of adoption of SFAS 123R cannot be determinedat this time because it will partially depend on levels of share based paymentgranted in the future.  However, had theCompany adopted SFAS 123R in prior periods, the impact of that standard wouldhave approximated the impact of SFAS 123 as shown in Note 5 (see discussion onAccounting for Stock Based Compensation).

 

In November 2004,the FASB issued SFAS Statement No. 151, Inventory Costs – An Amendment ofARB No. 43, Chapter 4 (“SFAS 151”), which is the result of its effort toconverge U.S. accounting standards for inventories with InternationalAccounting Standards. SFAS 151 requires idle facility expenses, freight,handling costs, and wasted material (spoilage) costs to be recognized ascurrent-period charges and not included in overhead. It also requires thatallocation of fixed production overhead cost to inventory be based on normalcapacity of the production facilities. SFAS 151 is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. TheCompany has not determined the effect of adopting SFAS 151.

 

**Critical Accounting Policies:**

 

In preparing the financial statements, the Companymakes estimates, assumptions and judgments that can have a significant impacton our revenue, operating income and net income, as well as on the reportedamounts of certain assets and liabilities on the balance sheet.  The Company believes that the estimates,assumptions and judgments involved in the accounting policies described belowhave the greatest potential impact on its financial statements due to the

 

32

----

 

materiality of the accounts involved, and therefore,considers these to be its critical accounting policies.  Estimates in each of these areas are based onhistorical experience and a variety of assumptions that the Company believesare appropriate. Actual results may differ from these estimates.

 

**Reserves for UncollectibleAccounts Receivable**

 

The Company makes ongoingassumptions relating to the collectibility of its accounts receivable.  The accounts receivable amount on the balancesheet includes a reserve for accounts that might not be paid.  In determining the amount of the reserve, theCompany considers its historical level of credit losses.  The Company also makes judgments about thecreditworthiness of significant customers based on ongoing credit evaluations,and it assesses current economic trends that might impact the level of creditlosses in the future. The Company recorded reserves for uncollectible accountsreceivable of $743,000 as of September 30, 2005, which is equal to 15.25%of total accounts receivable.  While theCompany believes that the current reserves are adequate to cover potentialcredit losses, it cannot predict future changes in the financial stability ofits customers and the Company cannot guarantee that its reserves will continueto be adequate.  For each 1% that actualcredit losses exceed the reserves established, there would be an increase ingeneral and administrative expenses and a reduction in reported net income ofapproximately $49,000. Conversely, for each 1% that actual credit losses areless than the reserve, this would decrease the Company’s general andadministrative expenses and increase the reported net income by approximately$49,000.

 

**Fixed Assets**

 

Fixed assets are statedat cost.  Depreciation for financialreporting purposes is being provided by the straight-line method over theestimated useful lives of the related assets. The valuation and classification of these assets and the assignment ofuseful depreciable lives involves significant judgments and the use ofestimates.  Fixed assets are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.  Historically, impairment losses have not beenrequired.  Any change in the assumption ofestimated useful lives could either result in a decrease or increase the Company’sfinancial results.  A decrease inestimated useful life would reduce the Company’s net income and an increase inestimated useful life would increase the Company’s net income.  If the estimated useful lives of the PERSmedical device were decreased by one year, the cost of goods related toservices would increase and net income would decrease by approximately $175,000per annum.  Conversely, if the estimateduseful lives of the PERS medical device were increased by one year, the cost ofgoods related to services would decrease and net income would increase byapproximately $140,000 per annum.

 

**Valuation of Goodwill**

 

Pursuant to Statement ofFinancial Accounting Standards No. 142, “Goodwill and Other IntangibleAssets,” goodwill and indefinite life intangible assets are no longeramortized, but are subject to annual impairment tests.  To date, the Company has not been required torecognize an impairment of goodwill. The Company tests goodwill for impairment

 

33

----

 

annually or morefrequently when events or circumstances occur indicating goodwill might beimpaired. This process involves estimating fair value using discounted cashflow analyses. Considerable management judgment is necessary to estimatediscounted future cash flows. Assumptions used for these estimated cash flowswere based on a combination of historical results and current internalforecasts.  The Company cannot predictcertain events that could adversely affect the reported value of goodwill, whichtotaled $2,794,559 and $2,563,864 at September 30, 2005 and December 31,2004, respectively.  If the Company wereto experience a significant adverse impact on goodwill, it would negativelyimpact the Company’s net income.

 

**Item3.  Controlsand Procedures.**

 

As of the end of the period covered by this report,the Company carried out an evaluation, under the supervision and with theparticipation of its Chief Executive Officer, President and the Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures. Based on this evaluation, the Chief Executive Officer,President and the Chief Financial Officer concluded that the Company’s controlsand procedures are effective to ensure that information required to bedisclosed by the Company in the reports filed by it under the Securities andExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, andinclude controls and procedures designed to ensure that information required tobe disclosed by the Company in such reports is accumulated and communicated tothe Company’s management, including the Chief Executive Officer, President andChief Financial Officer of the Company, as appropriate to allow timelydecisions regarding required disclosure.

 

There were no changes in the Company’s internalcontrol over financial reporting that occurred during the quarter ended September 30,2005 that has materially affected, or is reasonably likely to affect, theCompany’s internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**Item 1.****           LegalProceedings**

 

The Company is aware of various threatened or pendinglitigation claims against the Company relating to its products and services andother claims arising in the ordinary course of its business.  The Company has given its insurance carriernotice of such claims and it believes there is sufficient insurance coverage tocover any such claims.   Currently, thereare no litigation claims for which an estimate of loss, if any, can bereasonably made as they are in the preliminary stages and therefore, noliability or corresponding insurance receivable has been recorded.

 

34

----

 

**Item 2.  UnregisteredSales of Equity Securities and Use of Proceeds**

 

On September 13, 2005, the Company issued 7,500shares of Common Stock to an investor of the Company, pursuant to an exerciseof a warrant, for a total purchase price of $28,500.  The shares were issued without registrationin reliance on Section 4(2) of the Securities Act of 1933, asamended, and Rule 506 promulgated thereunder, and in reliance on thepurchaser’s representation as to its status as an accredited investor, and thatit was acquiring the shares for investment purposes and not with a view to anysale or distribution.  In addition, theshares bore a 1933 Act restrictive legend.

 

On October 14, 2005, the Company issued 250shares of Common Stock to an investor of the Company, pursuant to an exerciseof a warrant, for a total purchase price of $950.  The shares were issued without registrationin reliance on Section 4(2) of the Securities Act of 1933, asamended, and Rule 506 promulgated thereunder, and in reliance on thepurchaser’s representation as to its status as an accredited investor, and thatit was acquiring the shares for investment purposes and not with a view to anysale or distribution.  In addition, theshares bore a 1933 Act restrictive legend.

 

On October 14, 2005, the Company issued 5,000shares of Common Stock to an investor of the Company, pursuant to an exerciseof a warrant, for a total purchase price of $19,000.  The shares were issued without registrationin reliance on Section 4(2) of the Securities Act of 1933, asamended, and Rule 506 promulgated thereunder, and in reliance on thepurchaser’s representation as to its status as an accredited investor, and thatit was acquiring the shares for investment purposes and not with a view to anysale or distribution.  In addition, theshares bore a 1933 Act restrictive legend.

 

On October 25, 2005, the Company issued 22,750shares of Common Stock to a consultant of the Company, pursuant to an exerciseof a warrant, for a total purchase price of $94,867.50.  The shares were issued without registrationin reliance on Section 4(2) of the Securities Act of 1933, asamended, and Rule 506 promulgated thereunder, and in reliance on thepurchaser’s representation as to its status as an accredited investor, and thatit was acquiring the shares for investment purposes and not with a view to anysale or distribution.  In addition, theshares bore a 1933 Act restrictive legend.

 

**Item 4.****           Submissionof Matters to a Vote of Security Holders**

 

On August 18, 2005, the Company held its 2005 AnnualMeeting of Shareholders (the “2005 Meeting”).

 

At the 2005Meeting, the Company’s shareholders (i) elected seven directors to serveuntil the 2005 Annual Meeting of Shareholders and until their successors shallbe elected and qualified, (ii) approved the Company’s 2005 Stock IncentivePlan, and (iii) ratified the selection of Margolin, Winer & EvensLLP as the Company’s independent auditors for the fiscal year ending December 31,2005.

 

35

----

 

**1.****                                     **Thevote with respect to the election of directors was as follows:

 
| **Name** | ** ** | **For**             | ** ** | **Authority Withheld** | ** ** |
|----------|------------|---------------------|------------|------------------------|------------|
| (a)      |       | Howard M. Siegel    |       | 7,939,144              |       | 49,700 |   |   |
| (b)      |       | James LaPolla       |       | 7,928,644              |       | 60,200 |   |   |
| (c)      |       | Jack Rhian          |       | 7,939,144              |       | 49,700 |   |   |
| (d)      |       | Frederick Siegel    |       | 7,928,644              |       | 60,200 |   |   |
| (e)      |       | Ronald Levin        |       | 6,119,303              |       | 1,869,541 |   |   |
| (f)      |       | Yacov Shamash       |       | 7,938,944              |       | 49,900 |   |   |
| (g)      |       | John S.T. Gallagher |       | 7,938,644              |       | 50,200 |   |   |

 

**2.****                                     **Theproposal to approve the Company’s 2005 Stock Incentive Plan was approved by thefollowing vote:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|----------------------|------------|
| 5,240,213 |       | 594,467     |       | 14,670      |       | 2,139,494            |       |

 

**3.****                                     **Theproposal to ratify the selection of Margolin, Winer & Evens LLP as theCompany’s independent auditors for the fiscal year ending December 31,2004, was approved by the following vote:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 7,882,582 |       | 22,242      |       | 84,020      |       |

 

**Item 5.  OtherInformation.**

 

On November 11,2005, the Company entered into an employment agreement (the “EmploymentAgreement”) with Jack Rhian, whereby Mr. Rhian will be employed for aperiod of 5 years beginning on January 1, 2006 as the Company’s Presidentand Chief Operating Officer.  Mr. Rhianis currently a director, the President and Chief Operating Officer of theCompany. Mr. Rhian will be entitled to receive the following base salaryamounts: 240,000 per annum, for the period beginning January 1, 2006 andending December 31, 2006; $260,000 per annum, for the period beginning January 1,2007 and ending December 31, 2007; $280,000 per annum, for the periodbeginning January 1, 2008 and ending December 31, 2008; $300,000 perannum, for the period beginning January 1, 2009 and ending December 31,2009; and $300,000 per annum, for the period beginning January 1, 2010 andending December 31, 2010.

 

In addition, Mr. Rhianwill be granted the following bonus compensation stock grants: (i) 50,000shares, to vest in 5 equal installments of 10,000 on each of December 31,2006, 2007, 2008, 2009 and 2010, subject to the condition that Mr. Rhianremains employed by the Company on each such applicable date; provided,however, that in the event of a change in control (as defined in the EmploymentAgreement) if the Company or its successor pursuant to such change in control,as applicable, and Mr. Rhian either agree to continue the EmploymentAgreement or to enter into a new employment agreement mutually acceptable tothe Company or its successor and Mr. Rhian in lieu of the EmploymentAgreement, then any such shares which remain

 

36

----

 

unvested, shallvest immediately upon the mutual agreement of the Company or its successor and Mr. Rhianto continue this Agreement or to enter into a new agreement, (ii) up to80,000 shares based on the Company’s earnings before deduction of interest andtaxes (“EBIT”), as set forth in the Company’s audited financial statements forthe applicable fiscal year, meeting or exceeding the EBIT performance goals setforth below, and (iii) 2,000 shares of common stock per year, for a totalof up to 10,000 shares of common stock over the employment period, based on theCompany’s total revenues, as set forth in the Company’s audited financialstatements for the applicable fiscal year, meeting or exceeding an amount equalto at least 115% of the Company’s total revenues for the prior fiscal year.

 

EBIT Targets For 2006 –2010

 
| **EBIT growth over prior fiscal  year** | ** ** | **# of Shares** | ** ** |
|-----------------------------------------|------------|-----------------|------------|
|                                    |       |            |       |
| 15.0 – 17.49%                      |       | 8,000 shares    |       |
| 17.5 – 19.99%                      |       | 9,000 shares    |       |
| 20.0 – 22.49%                      |       | 10,500 shares   |       |
| 22.5 – 24.99%                      |       | 13,000 shares   |       |
| 25.0% - or more                         |       | 16,000 shares   |       |

 

In the event thatthe minimum EBIT growth percentage is not met for a particular fiscal year,Employee will have the opportunity to earn back the minimum performance bonusgrant for such fiscal year as follows: if the EBIT growth percentage in thesubsequent fiscal year combined with the EBIT growth percentage of the priorfiscal year exceeds 30%, then the number of percentage points needed to beadded to the prior fiscal year’s EBIT growth percentage to equal 15%, shall bededucted from the subsequent fiscal year EBIT growth percentage and added tothe prior fiscal year EBIT growth percentage, and Employee shall be granted8,000 shares of common stock for the prior fiscal year, and an additionalnumber of shares of common stock for the subsequent fiscal year shall be granteddetermined based on the above formula taking into account the reducedsubsequent year EBIT growth percentage.

 

To the extentshares to be granted pursuant to (ii) or (iii) above exceed 50,000,they will only be granted if shareholder approval of such grant is obtained. Ifsuch shareholder approval is not obtained prior to the time any such shares areearned by Mr. Rhian, then Mr. Rhian shall not be entitled to andshall not be granted any such shares.  Inaddition, all of the above grants are subject to the execution of a stock grantagreement evidencing the terms of such grants.

 

Unless Mr. Rhianis terminated for Cause (as defined in the Employment Agreement), in the eventthat the Company does not offer Mr. Rhian to enter into a writtenemployment agreement with terms and conditions no less favorable thansubstantially the same terms and conditions as the Employment Agreement tobegin immediately following the expiration of the Employment Agreement, Mr. Rhianshall receive payment of base salary, based on the then applicable salarylevel, for a period of twelve (12) months from the date of the expiration ofthe Employment Agreement.

 

37

----

 

In the event that Mr. Rhianshould become disabled and be unable to perform his duties for a period of onehundred eighty (180) consecutive days or an aggregate of more than one hundredeighty (180) consecutive days in any 12 month period, the Company may terminatethe Employment Agreement after the expiration of such period.

 

In the event ofhis death during the term of the Employment Agreement, Mr. Rhian’s estateor such other person as he designated will be entitled to receive his basesalary for a period of one year from the date of his death.

 

In addition, inthe event there is a change in control (as defined in the Employment Agreement)and Mr. Rhian’s employment with the Company is terminated within 180 daysfollowing such change in control under certain conditions, Mr. Rhian willbe entitled to a lump sum payment equal to 2.99 times his average annual totalcompensation, as measured for the past 5 years, in lieu of any remainingobligations of the Company under the Employment Agreement.

 

A copy of theEmployment Agreement is attached to this Form 10-QSB as Exhibit 10.1.

 

On August 10, 2005and October 25, 2005, respectively, the Company entered into operating leaseswith Garden Spires Associates LP for approximately 17,500 square feet ofadditional space at the Company’s Long Island City, New York location. Theleases will, commence upon the landlord delivering possession of the premises,which is expected to occur in early 2006, and will run through March 31, 2018.The leases call for minimum annual rentals of $220,000 and $115,000,respectively, payable monthly and subject to annual increases. The Companycurrently leases space at this location through an operating lease agreementwith Garden Spires Associates LP which was executed in 2002.

 

**Item 6.  Exhibits.**

 
| **No.** | ** ** | **Description**                                                                                                                         |
|---------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                    |
| 10.1    |       | Employment Agreement  between the Company and Jack Rhian, dated November 11, 2005                                                  |
| 10.2    |       | 2005 Stock Incentive Plan  (incorporated by reference to the Company’s Proxy Statement filed with the  SEC on June 30, 2005). |
| 31.1    |       | Certification of CEO Pursuant to Section 302 of  the Sarbanes Oxley Act of 2002                                                    |
| 31.2    |       | Certification of President Pursuant to  Section 302 of the Sarbanes Oxley Act of 2002                                              |
| 31.3    |       | Certification of CFO Pursuant to Section 302 of  the Sarbanes Oxley Act of 2002                                                    |
| 32.1    |       | Certification of CEO Pursuant to Section 906 of  the Sarbanes Oxley Act of 2002                                                    |
| 32.2    |       | Certification of President Pursuant to  Section 906 of the Sarbanes Oxley Act of 2002                                              |
| 32.3    |       | Certification of CFO Pursuant to Section 906 of  the Sarbanes Oxley Act of 2002                                                    |

 

38

----

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Company has duly caused this report to be signed onits behalf by the undersigned thereunto duly authorized.

 

 
|                           | **AMERICAN MEDICAL ALERT CORP.** |                            |
|--------------------------------|----------------------------------|---------------------------------|
|                           |                             |
|                           |                             |
| Dated:  November 14, 2005 |                             | By:                             |    /s/  Howard M. Siegel |   |
|                           |                             | Name:                           | Howard M. Siegel |
|                           |                             | Title:                          | Chairman of the Board,  Chief Executive Officer |
|                           |                             |                            |
|                           |                             |
|                           | By:                              |  /s/ Richard Rallo         |   |
|                           |                             | Name: Richard Rallo             |
|                           |                             | Title: Chief Financial  Officer |
|                                |                                  |                                 |  |  |  |  |

 

39

----