**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-QSB**

 

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

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**ForQuarter Ended June 30, 2005**

 

**CommissionFile Number 1-8635**

 

**AMERICAN MEDICAL ALERT CORP.**

(Exact Name of Registrant asSpecified in its Charter)

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

 

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

(Address of principal executiveoffices)

(Zip Code)

 

**(516) 536-5850**

(Registrant’s telephone number,including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  ý  No o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date: 8,614,142 shares of$.01 par value common stock as of August 10, 2005.

 

 

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AMERICAN MEDICAL ALERT CORP.AND SUBSIDIARIES

 
| INDEX                                                                                                 |   |
|-------------------------------------------------------------------------------------------------------|--------|
|                                                                                                  |   |
| Part I  Financial  Information                                                         |   |
|                                                                                                  |   |
| Report of Independent Registered Public  Accounting Firm                                              |   |
|                                                                                                  |   |
| Condensed Consolidated Balance Sheets for June 30,  2005 and December 31, 2004              |   |
|                                                                                                  |   |
| Condensed Consolidated Statements of Income  for the Six Months Ended June 30, 2005 and 2004     |   |
|                                                                                                  |   |
| Condensed  Consolidated Statements of Income for the Three Months Ended June 30,  2005 and 2004  |   |
|                                                                                                  |   |
| Condensed Consolidated Statements of Cash  Flows for the Six Months Ended June 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 Registered Public Accounting Firm

 

Board of Directors and Shareholders

American Medical Alert Corp. and Subsidiaries

Oceanside, New York

 

We have reviewed the accompanying condensed consolidated balance sheetof American Medical Alert Corp. and Subsidiaries (the “Company”) as of June 30,2005 and the related condensed consolidated statements of income for thesix-month and three-month periods ended June 30, 2005 and cash flows forthe six-months ended June 30, 2005 and 2004. These interim financialstatements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). A review of interimfinancial information consists principally of applying analytical proceduresand making inquiries of persons responsible for financial and accountingmatters. It is substantially less in scope than an audit conducted inaccordance with the standards of the Public Company Accounting Oversight Board,the objective of which is the expression of an opinion regarding the financialstatements taken as a whole. Accordingly, we do 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 presented herein),and in our report dated March 25, 2005, except for Notes 3 and 5, as towhich the date is March 30, 2005, we expressed an unqualified opinion onthose consolidated financial statements. In our opinion, the information setforth in the accompanying condensed consolidated balance sheet as of December 31,2004 is fairly stated, in all material respects, in relation to theconsolidated balance sheet from which it has been derived.

 

 
| /s/ Margolin, Winer & Evens LLP |   |
|------------------------------------------|--------|
|                                     |
| Margolin, Winer & Evens LLP     |
| Garden City, New York                    |
|                                     |
| August 10, 2005                     |

 

1

----

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

AMERICANMEDICAL ALERT CORP. AND SUBSIDIARIESCONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                                                       | ** ** | **June 30, 2005** | ** ** | **Dec. 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                       | ** ** | **(Unaudited)**        | ** ** | ** **             | ** ** |
| ASSETS                                                                                                                           |       |                   |       |                   |       |
|                                                                                                                             |       |                   |       |                   |       |
| CURRENT ASSETS                                                                                                                   |       |                   |       |                   |       |
| Cash                                                                                                                             |       | $                      | 4,494,408  |                   | $          | 3,186,852 |   |
| Accounts receivable                                                                                                              |       |                   |       |                   |       |
| (net of allowance for doubtful accounts of  $733,000 and $728,000)                                                               |       | 3,924,246              |       | 3,389,076              |       |
| Note receivable                                                                                                                  |       | 23,793                 |       | 23,207                 |       |
| Inventory                                                                                                                        |       | 642,985                |       | 696,736                |       |
| Prepaid expenses and other current assets                                                                                        |       | 655,812                |       | 434,057                |       |
| Deferred income taxes                                                                                                            |       | 395,000                |       | 448,000                |       |
|                                                                                                                             |       |                   |       |                   |       |
| Total Current Assets                                                                                                             |       | 10,136,244             |       | 8,177,928              |       |
|                                                                                                                             |       |                   |       |                   |       |
| FIXED ASSETS                                                                                                                     |       |                   |       |                   |       |
| (Net of accumulated depreciation and  amortization)                                                                              |       | 6,598,439              |       | 7,046,925              |       |
|                                                                                                                             |       |                   |       |                   |       |
| OTHER ASSETS                                                                                                                     |       |                   |       |                   |       |
| Long-term portion of note receivable                                                                                             |       | 86,062                 |       | 98,107                 |       |
| Intangible assets                                                                                                                |       |                   |       |                   |       |
| (net of accumulated amortization of  $2,028,554 and $1,685,646)                                                                  |       | 1,438,184              |       | 1,492,389              |       |
| Goodwill (net of accumulated amortization  of $58,868)                                                                           |       | 2,794,559              |       | 2,563,864              |       |
| Other assets                                                                                                                     |       | 315,653                |       | 121,803                |       |
| Deferred income taxes                                                                                                            |       | 159,000                |       | 138,000                |       |
|                                                                                                                             |       | 4,793,458              |       | 4,414,163              |       |
|                                                                                                                             |       |                   |       |                   |       |
| TOTAL ASSETS                                                                                                                     |       | $                      | 21,528,141 |                   | $          | 19,639,016 |   |
|                                                                                                                             |       |                   |       |                   |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                        |       |                   |       |                   |       |
|                                                                                                                             |       |                   |       |                   |       |
| CURRENT LIABILITIES:                                                                                                             |       |                   |       |                   |       |
| Current portion of notes payable                                                                                                 |       | $                      | 320,640    |                   | $          | 300,814 |   |
| Accounts payable                                                                                                                 |       | 410,050                |       | 559,453                |       |
| Accrued expenses and taxes payable                                                                                               |       | 1,526,651              |       | 1,354,857              |       |
| Current portion of capital lease  obligations                                                                                    |       | 72,341                 |       | 94,743                 |       |
| Current portion of put warrant obligation                                                                                        |       | —                 |       | 10,000                 |       |
| Deferred revenue                                                                                                                 |       | 27,010                 |       | 15,834                 |       |
| Total Current Liabilities                                                                                                        |       | 2,356,692              |       | 2,335,701              |       |
|                                                                                                                             |       |                   |       |                   |       |
| DEFERRED INCOME TAX LIABILITY                                                                                                    |       | 1,077,000              |       | 1,099,000              |       |
| LONG-TERM PORTION OF NOTES PAYABLE                                                                                               |       | 337,697                |       | 496,444                |       |
| LONG-TERM PORTION OF CAPITAL LEASE  OBLIGATIONS                                                                                  |       | —                 |       | 24,458                 |       |
| ACCRUED RENTAL OBLIGATION                                                                                                        |       | 168,630                |       | 143,630                |       |
| OTHER LIABILITIES                                                                                                                |       | 205,000                |       | 261,884                |       |
| TOTAL LIABILITIES                                                                                                                |       | 4,145,019              |       | 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 8,642,248 shares in 2005 and 8,078,043 shares in  2004 |       | 86,422                 |       | 80,780                 |       |
| Additional paid-in capital                                                                                                       |       | 12,327,735             |       | 10,730,434             |       |
| Retained earnings                                                                                                                |       | 5,074,997              |       | 4,572,717              |       |
|                                                                                                                             |       | 17,489,154             |       | 15,383,931             |       |
| Less treasury stock, at cost (43,910  shares)                                                                                    |       | (106,032               | )          | (106,032               | )          |
| Total Shareholders’ Equity                                                                                                  |       | 17,383,122             |       | 15,277,899             |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                  |       | $                      | 21,528,141 |                   | $          | 19,639,016 |   |

 

Seeaccompanying notes to condensed financial statements.

 

2

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AMERICANMEDICAL ALERT CORP. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OFINCOME(Unaudited)

 
| ** **                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Revenues:                                             |       |                               |       |   |   |
| Services                                              |       | $                                  | 10,509,893 |   | $ | 9,182,317 |   |
| Product sales                                         |       | 156,001                            |       | 142,612 |   |
|                                                  |       | 10,665,894                         |       | 9,324,929 |   |
| Costs and Expenses (Income):                          |       |                               |       |   |   |
| Costs related to services                             |       | 4,874,876                          |       | 4,230,125 |   |
| Costs of products sold                                |       | 84,683                             |       | 78,217 |   |
| Selling, general and administrative  expenses         |       | 4,889,544                          |       | 4,384,339 |   |
| Interest expense                                      |       | 23,088                             |       | 31,251 |   |
| Other income                                          |       | (171,577                           | )          | (154,325 | ) |
|                                                  |       |                               |       |   |   |
| Income before Provision for Income Taxes              |       | 965,280                            |       | 755,322 |   |
|                                                  |       |                               |       |   |   |
| Provision for Income Taxes                            |       | 463,000                            |       | 375,000 |   |
|                                                  |       |                               |       |   |   |
| NET INCOME                                            |       | $                                  | 502,280    |   | $ | 380,322 |   |
|                                                  |       |                               |       |   |   |
| Net income per share:                                 |       |                               |       |   |   |
| Basic                                                 |       | $                                  | .06        |   | $ | .05 |   |
| Diluted                                               |       | $                                  | .06        |   | $ | .05 |   |
|                                                  |       |                               |       |   |   |
| Weighted average number of common shares  outstanding |       |                               |       |   |   |
| Basic                                                 |       | 8,247,202                          |       | 7,799,121 |   |
|                                                  |       |                               |       |   |   |
| Diluted                                               |       | 8,962,567                          |       | 8,356,818 |   |

 

See accompanying notes to condensed financialstatements.

 

3

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| ** **                                            | ** ** | **Three Months****Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Revenues:                                             |       |                                    |       |   |   |
| Services                                              |       | $                                       | 5,358,181  |   | $ | 4,695,570 |   |
| Product sales                                         |       | 69,143                                  |       | 75,881 |   |
|                                                  |       | 5,427,324                               |       | 4,771,451 |   |
| Costs and Expenses (Income):                          |       |                                    |       |   |   |
| Costs related to services                             |       | 2,408,135                               |       | 2,170,487 |   |
| Costs of products sold                                |       | 55,027                                  |       | 42,027 |   |
| Selling, general and administrative  expenses         |       | 2,513,506                               |       | 2,223,151 |   |
| Interest expense                                      |       | 10,684                                  |       | 15,334 |   |
| Other income                                          |       | (88,809                                 | )          | (80,068 | ) |
|                                                  |       |                                    |       |   |   |
| Income before Provision for Income Taxes              |       | 528,781                                 |       | 400,520 |   |
|                                                  |       |                                    |       |   |   |
| Provision for Income Taxes                            |       | 253,000                                 |       | 200,000 |   |
|                                                  |       |                                    |       |   |   |
| NET INCOME                                            |       | $                                       | 275,781    |   | $ | 200,520 |   |
|                                                  |       |                                    |       |   |   |
| Net income per share:                                 |       |                                    |       |   |   |
| Basic                                                 |       | $                                       | .03        |   | $ | .03 |   |
| Diluted                                               |       | $                                       | .03        |   | $ | .02 |   |
|                                                  |       |                                    |       |   |   |
| Weighted average number of common shares  outstanding |       |                                    |       |   |   |
| Basic                                                 |       | 8,397,848                               |       | 7,880,438 |   |
|                                                  |       |                                    |       |   |   |
| Diluted                                               |       | 9,045,989                               |       | 8,517,524 |   |

 

See accompanying notes to condensed financialstatements.

 

4

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AMERICAN MEDICAL ALERT CORP.AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                         | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Cash Flows From Operating Activities:                                              |       |                              |       |   |   |
|                                                                               |       |                              |       |   |   |
| Net income                                                                         |       | $                                 | 502,280    |   | $ | 380,322 |   |
|                                                                               |       |                              |       |   |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                              |       |   |   |
| Provision for deferred income taxes                                                |       | 10,000                            |       | 7,000 |   |
| Depreciation and amortization                                                      |       | 1,449,165                         |       | 1,459,638 |   |
| Provision (credit) for valuation of put  warrant                                   |       | (10,000                           | )          | 40,000 |   |
| Decrease (increase) in:                                                            |       |                              |       |   |   |
| Accounts receivables                                                               |       | (522,222                          | )          | (639,881 | ) |
| Inventory                                                                          |       | 53,751                            |       | 26,693 |   |
| Prepaid and refundable taxes                                                       | ** ** | **—**                        |       | 155,093 |   |
| Prepaid expenses and other current assets                                          |       | (221,755                          | )          | (173,508 | ) |
| Other assets                                                                       |       | —                            |       | (3,868 | ) |
| Increase (decrease) in:                                                            |       |                              |       |   |   |
| Accounts payable, accrued expenses and  other                                      |       | (9,493                            | )          | 643,831 |   |
| Deferred revenue                                                                   |       | 11,176                            |       | (70,531 | ) |
|                                                                               |       |                              |       |   |   |
| Net Cash Provided by Operating Activities                                          |       | 1,262,902                         |       | 1,824,789 |   |
|                                                                               |       |                              |       |   |   |
| Cash Flows From Investing Activities:                                              |       |                              |       |   |   |
| Expenditures for fixed assets                                                      |       | (649,996                          | )          | (1,440,216 | ) |
| Purchase of alphaconnect                                                           |       | —                            |       | (767,956 | ) |
| Purchase of Long Island Message Center, Inc                                        |       | (443,643                          | )          | — |   |
| Repayment of notes receivable                                                      |       | 11,459                            |       | 10,901 |   |
| Deposit on equipment and software                                                  |       | (201,625                          | )          | — |   |
| Increase in goodwill                                                               |       | —                            |       | (103,855 | ) |
| Payment for account acquisitions and                                               |       |                              |       |   |   |
| licensing agreement                                                                |       | (88,703                           | )          | (54,274 | ) |
|                                                                               |       |                              |       |   |   |
| Net Cash (Used In) Investing Activities                                            |       | (1,372,508                        | )          | (2,355,400 | ) |
|                                                                               |       |                              |       |   |   |
| Cash Flows From Financing Activities:                                              |       |                              |       |   |   |
| Principal payments under capital lease  obligation                                 |       | (46,860                           | )          | (44,778 | ) |
| Proceeds from notes payable                                                        | ** ** | **—**                        |       | 62,065 |   |
| Repayment of notes payable                                                         |       | (138,921                          | )          | (165,144 | ) |
| Proceeds upon exercise of stock options                                            |       | 1,602,943                         |       | 811,802 |   |
|                                                                               |       |                              |       |   |   |
| Net Cash Provided by Financing Activities                                          |       | 1,417,162                         |       | 663,945 |   |
|                                                                                    |            |                                   |            |  |  |  |  |

 

Seeaccompanying notes to condensed financial statements.

 

5

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| ** **                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|
| ** **                                         | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|                                               |       |                               |       |   |   |
| Net Increase in Cash                               |       | $                                  | 1,307,556  |   | $ | 133,334 |   |
|                                               |       |                               |       |   |   |
| Cash, Beginning of Period                          |       | 3,186,852                          |       | 2,192,113 |   |
|                                               |       |                               |       |   |   |
| Cash, End of Period                                |       | $                                  | 4,494,408  |   | $ | 2,325,447 |   |
|                                               |       |                               |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION: |       |                               |       |   |   |
|                                               |       |                               |       |   |   |
| CASH PAID DURING THE PERIOD FOR INTEREST           |       | $                                  | 20,338     |   | $ | 27,501 |   |
|                                               |       |                               |       |   |   |
| CASH PAID DURING THE PERIOD FOR INCOME  TAXES      |       | $                                  | 187,964    |   | $ | 83,163 |   |

 

See accompanying notes to condensed financial statements.

 

6

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AMERICAN MEDICAL ALERT CORP.AND SUBSIDIARIES

 

Notes to Condensed Consolidated 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 of Operations:

 

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 June 30,2005 and the results of operations for the six and three months ended June 30,2005 and 2004, and cash flows for the six months ended June 30, 2005 and2004.

 

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 six and three months ended June 30, 2005 arenot necessarily indicative of the results to be expected for any other interimperiod or for the full year.

 

3.             New Pronouncements:

 

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 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.

 

7

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Additionally,SFAS No. 123R requires companies to record compensation expense for theunvested portion of previously granted awards as they continue to vest, ascalculated previously and included in the companies prior period pro formadisclosures under SFAS No. 123. SFAS No. 123R also requires the taxbenefit of tax deductions in excess of recognized compensation costs to bereported as a financing cash flow, rather than as an operating cash flow asrequired under current literature. The Company will adopt SFAS No. 123Rbeginning with the fiscal 2006 first quarter, as required. The impact ofadoption of SFAS 123R cannot be determined at this time because it willpartially depend on levels of share based payment granted in the future.  However, had the Company adopted SFAS 123R inprior periods, the impact of that standard would have approximated the impactof SFAS 123 as shown in Note 5 (see discussion on Accounting for Stock BasedCompensation).

 

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.

 

4.             Fixed Assets:

 

TheCompany’s PERS equipment is subject to approval from the Federal CommunicationCommission (“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 thepossibility 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.

 

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 been recorded.  However, the Company believes the paymentcould range between $50,000 and $160,000, although substantially higher amountsare 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.

 

Through June 30,2005, the Company has expensed approximately $610,000 in connection with thismatter, of which approximately $130,000, primarily relating to legal and

 

8

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otherprofessional fees, was recorded in 2005. The remaining $480,000 was charged to expense in the fourth quarter of2004, which primarily related to costs to be incurred in excess of normalrepair 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.             Accounting for Stock-BasedCompensation:

 

TheCompany has two stock-based employee compensation plans and additionaloutstanding options under a third plan which has expired.  The Company accounts for those plans underthe recognition and measurement principles of APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of FASB Statement No. 123, “Accountingfor Stock-Based Compensation,” to stock-based compensation.

 
| ** **                                                                                                    | ** ** | **Six Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                           | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income, as reported                                                                                       |       | $                                  | 502,280    |                                 | $          | 380,322 |   | $ | 275,781 |   | $ | 200,520 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method, net of tax |       | (20,778                            | )          | (78,938                              | )          | (20,778 | ) | (38,575 | ) |
| Pro forma net income                                                                                          |       | $                                  | 481,502    |                                 | $          | 301,384 |   | $ | 255,003 |   | $ | 161,945 |   |
|                                                                                                          |       |                               |       |                                 |       |   |   |   |   |
| Earnings per share:                                                                                           |       |                               |       |                                 |       |   |   |   |   |
| Basic - as reported                                                                                           |       | $                                  | 0.06       |                                 | $          | 0.05 |   | $ | 0.03 |   | $ | 0.03 |   |
| Basic - pro forma                                                                                             |       | $                                  | 0.06       |                                 | $          | 0.04 |   | $ | 0.03 |   | $ | 0.02 |   |
| Diluted - as reported                                                                                         |       | $                                  | 0.06       |                                 | $          | 0.05 |   | $ | 0.03 |   | $ | 0.02 |   |
| Diluted - pro forma                                                                                           |       | $                                  | 0.05       |                                 | $          | 0.04 |   | $ | 0.03 |   | $ | 0.02 |   |

 

The weighted average grant datefair value of options granted during the six months ended June 30, 2005and 2004 was $11,500 and $86,049, respectively. During the three months ended June 30, 2005 and 2004 the fair valueof options granted was $11,500 and $77,151, respectively.

 

The fair value of options atdate of grant was estimated using the Black-Scholes model with the followingweighted average assumptions:

 

9

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| ** **              | ** ** | **Six Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **              | ** ** | **2005**                           | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                    |       |                               |       |                                 |       |   |   |   |   |
| Expected life (years)   |       | 2                                  |       | 2                                    |       | 2 |   | 2 |   |
| Risk free interest rate |       | 3.64                               | %          | 2.36                                 | %          | 3.64 | % | 2.46 | % |
| Expected volatility     |       | 19.83                              | %          | 42.68                                | %          | 19.83 | % | 43.03 | % |
| Expected dividend yield |       | —                             |       | —                               |       | — |   | — |   |

 

6.             Earnings Per Share:

 

Earnings per share data for the six and three monthsended June 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** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|------------------------|------------|
| Six Months  June 30, 2005                                                 |       |                    |       |                      |       |                   |       |
|                                                                           |       |                    |       |                      |       |                   |       |
| Basic EPS - Income available to common  stockholders                           |       | $                       | 502,280    |                      | 8,247,202  |                   | $          | .06 |   |
| Effect of dilutive securities - Options and  warrants                          |       | —                  |       | 715,365                   |       |                   |       |
| Diluted EPS - Income available to common  stockholders and assumed conversions |       | $                       | 502,280    |                      | 8,962,567  |                   | $          | .06 |   |
|                                                                           |       |                    |       |                      |       |                   |       |
| Three Months June 30, 2005                                                |       |                    |       |                      |       |                   |       |
| Basic EPS -Income available to common  stockholders                            |       | $                       | 275,781    |                      | 8,397,848  |                   | $          | .03 |   |
| Effect of dilutive securities - Options and  warrants                          |       | —                  |       | 648,141                   |       |                   |       |
| Diluted EPS - Income available to common  stockholders and assumed conversions |       | $                       | 275,781    |                      | 9,045,989  |                   | $          | .03 |   |
|                                                                           |       |                    |       |                      |       |                   |       |
| Six Months June 30, 2004                                                  |       |                    |       |                      |       |                   |       |
|                                                                           |       |                    |       |                      |       |                   |       |
| Basic EPS - Income available to common  stockholders                           |       | $                       | 380,322    |                      | 7,799,121  |                   | $          | .05 |   |
| Effect of dilutive securities - Options and  warrants                          |       | —                  |       | 557,697                   |       |                   |       |
| Diluted EPS - Income available to common  stockholders and assumed conversions |       | $                       | 380,322    |                      | 8,356,818  |                   | $          | .05 |   |
|                                                                           |       |                    |       |                      |       |                   |       |
| Three Months Ended June 30, 2004                                          |       |                    |       |                      |       |                   |       |
|                                                                           |       |                    |       |                      |       |                   |       |
| Basic EPS -Income available to common  stockholders                            |       | $                       | 200,520    |                      | 7,880,438  |                   | $          | .03 |   |
| Effect of dilutive securities - Options and  warrants                          |       | —                  |       | 637,086                   |       |                   |       |
| Diluted EPS - Income available to common  stockholders and assumed conversions |       | $                       | 200,520    |                      | 8,517,524  |                   | $          | .02 |   |

 

10

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7.             Acquisitions:

 

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 answeringservices.  The purchase price was$397,712 and consisted of an initial cash payment of $318,170 and future cashpayments of $79,542 to be paid to the Seller after nine months from the date ofthe executed agreement.  The Company alsorecorded broker and professional fees of approximately $28,000 and $19,000,respectively.  The purchase priceexceeded the fair value of the net assets acquired as the Company acquired thisentity with the intention of consolidating this entity with HCI AcquisitionCorp’s call center operation and expanding its presence in this geographicalarea.  The results of operations of LongIsland Message Center, Inc. are included in the TAS segment as of the dateof 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 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 acquiredbusiness.  The first measurement date forthis potential additional purchase price consideration was April 1, 2005and no additional 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

 

11

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based provider of telephone answering services, andexpanding 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 theallocation of 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 sixand three months ended June 30, 2005 and 2004 as if Long Island MessageCenter, 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.

 
| ** **           | ** ** | **Six Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **           | ** ** | **2005**                           | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue              |       | $                                  | 10,844,000 |                                 | 9,697,000  |   | $ | 5,487,000 |   | 4,890,000 |   |
| Net income           |       | 519,000                            |       | 415,000                              |       | 281,000 |   | 212,000 |   |
| Net income per share |       |                               |       |                                 |       |   |   |   |   |
| Basic                |       | $                                  | .06        |                                 | $          | .05 |   | $ | .03 |   | $ | .03 |   |
| Diluted              |       | $                                  | .06        |                                 | $          | .05 |   | $ | .03 |   | $ | .02 |   |

 

The unaudited pro forma resultsof operations for the six and three months ended June 30, 2005 and 2004 donot 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.             Major Customers:

 

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 six months ended June 30, 2005 and 2004, the Company’srevenue from this contract represented 13% and 15%, respectively, of its totalrevenue.

 

12

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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.” 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 the Cityof New York” upon thirty days written notice. HRA has also advised the Company that HRA plans to issue a new RFP withrespect to PERS services in the future. As of August 10, 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 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 June 30, 2005 and December 2004, accounts receivablefrom the contract represented 17% and 18%, respectively, of accountsreceivable. Medical devices in service under the contract representedapproximately 16% and 18%, respectively, of the total medical devices used forprimary monitoring. 

 

9.             Segment Reporting:

 

The Company has threereportable segments, (i) Health and Safety Monitoring Systems (“HSMS”), (ii) TelephoneAnswering Services and Solutions for the Healthcare Community (“TAS”), and (iii) SafeCom.

 

13

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The table below provides areconciliation of segment information to total consolidated information for thesix and three months ended June 30, 2005 and 2004:

 

2005

 
| ** **                                       | ** ** | **HSMS**   | ** ** | **TAS**   | ** ** | **Safe Com** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|------------|-----------|------------|--------------|------------|------------------|------------|
| Six Months Ended June 30, 2005              |       |       |       |      |       |         |       |             |       |
| Revenue                                          |       | $          | 7,221,482  |      | $          | 3,216,952    |       | $                | 227,460    |   | $ | 10,665,894 |   |
| Income before provision for income taxes         |       | 378,393    |       | 573,239   |       | 13,648       |       | 965,280          |       |
| Total assets                                     |       | 12,911,854 |       | 7,771,924 |       | 844,363      |       | 21,528,141       |       |
|                                             |       |       |       |      |       |         |       |             |       |
| ** **                                       | ** ** | **HSMS**   | ** ** | **TAS**   | ** ** | **Safe Com** | ** ** | **Consolidated** | ** ** |
| Three Months Ended June 30, 2005            |       |       |       |      |       |         |       |             |       |
| Revenue                                          |       | $          | 3,682,753  |      | $          | 1,638,391    |       | $                | 106,180    |   | $ | 5,427,324 |   |
| Income (loss) before provision for income  taxes |       | 233,069    |       | 297,695   |       | (1,983       | )          | 528,781          |       |

 

2004

 
| ** **                               | ** ** | **PERS**   | ** ** | **TAS**   | ** ** | **Safe Com** | ** ** | **Consolidated** | ** ** |
|------------------------------------------|------------|------------|------------|-----------|------------|--------------|------------|------------------|------------|
| Six Months Ended June 30, 2004      |       |       |       |      |       |         |       |             |       |   |   |   |   |
| Revenue                                  |       | $          | 6,611,987  |      | $          | 2,532,631    |       | $                | 180,311    |   | $ | 9,324,929 |   |
| Income before provision for income taxes |       | 300,926    |       | 407,302   |       | 47,094       |       | 755,322          |       |
| Total assets                             |       | 12,743,018 |       | 6,275,193 |       | 552,661      |       | 19,570,872       |       |
|                                     |       |       |       |      |       |         |       |             |       |
| ** **                               | ** ** | **PERS**   | ** ** | **TAS**   | ** ** | **Safe Com** | ** ** | **Consolidated** | ** ** |
| Three Months Ended June 30, 2004    |       |       |       |      |       |         |       |             |       |
| Revenue                                  |       | $          | 3,341,769  |      | $          | 1,340,995    |       | $                | 88,687     |   | $ | 4,771,451 |   |
| Income before provision for income taxes |       | 175,758    |       | 204,388   |       | 20,374       |       | 400,520          |       |

 

10.           Commitmentsand Contingencies:

 

In addition to the FCC inquiry described in Note 4,the Company is aware of various threatened or pending litigation claims againstthe Company relating to its products and services and other claims arising inthe ordinary 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.

 

14

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**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 this Quarterly Reporton Form 10-QSB include “forward-looking statements” within the meaning of Section 27Aof the Securities Act and Section 21E of the Exchange Act, including, inparticular and without limitation, statements contained herein under theheading “Management’s Discussion and Analysis of Financial Condition andResults of Operations.”  Forward-lookingstatements involve known and unknown risks, uncertainties and other factorswhich could cause the Company’s actual results, performance and achievements,whether expressed or implied by such forward-looking statements, not to occuror be realized. These include uncertainties relating to government regulation,technological changes, our expansion plans, our contract with the City of NewYork and product liability risks.  Suchforward-looking statements generally are based upon the Company’s bestestimates of future results, performance or achievement, based upon currentconditions and the most recent results of operations.  Forward-looking statements may be identifiedby the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,”“estimate,” “project,” “anticipate,” “continue” or similar terms, variations ofthose 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’sprimary business is the provision of call center monitoring services andsolutions through (1) the development and marketing of healthcaresolutions and  monitoring systems (“HSMS”)that include personal emergency response systems, telehealth/disease managementmonitoring systems and medication management systems; (2) telephoneanswering services 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 an

 

15

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emergency responsecenter for help in the event of a debilitating illness or accident.  Beginning in 2000, the Company began aprogram of product diversification and customer base expansion to decrease its reliance on a single product line bymarketing complementary call center and monitoring services to the healthcarecommunity.

 

In November 2000,the Company diversified its products/service mix to include telephone answeringservices (“TAS”) for professionals in the healthcarecommunity when the Company’s HCI Acquisition Corp. subsidiary acquired theassets of a telephone answering service. The rationale to enter this segment had several components, includingtargeting the market functioning as the intermediary for the PERS customerbase, leveraging existing infrastructure capability, and establishing anadditional significant revenue source. Growth in the TAS market has been accomplished through internallygenerated sales coupled with two additional acquisitions.  The TAS segment now accounts for 30% of theCompany’s revenues.  The Company believesthat TAS will continue to be a significant business segment going forward andintends to pursue further acquisitions in this area. The TAS business providedrevenue of approximately $6.1 million per year, based on trailing twelve monthsrevenue, and is currently theCompany’s most profitable segment.

 

During 2004, theCompany has broadened its capabilities to service specialized allied healthcareproviders including home care, hospice and other healthcare subspecialties. TheCompany believes it has identified other communication needs as expressed bythe expanded TAS client base. Inresponse to these expressed needs, the Company has developed specializedhealthcare communication solutions. These solutions are creating additionalopportunities for long-term revenue enhancement.  The Company intends to increase its serviceofferings to significantly expand the TAS reporting segment.

 

In April 2003,the Company opened a one hundred seat communications center in Long IslandCity, NY. The center is equipped with state-of-the-art telephony and computerequipment which is driven by proprietary software platforms designedspecifically for AMAC’s 24 hour emergency monitoring and customer serviceactivities (PERS) and its TAS business. The center is capable of accommodating significant future growth.

 

In 2001, theCompany identified a new market opportunity approaching based on emergingdemographic trends.  The aging andsignificant baby boomer population as well as increased life expectancies willmanifest a large, fragile and chronically ill older population with anexpressed preference for accessing healthcare services from home.  New technologies available and undercontinuous refinement permit the reporting of certain vital signs and indicesof a patient’s well-being without the presence and cost of a visiting nurse orother home healthcare personnel.  With anestablished presence in the home from our PERS product, the Company enteredinto a marketing and technology agreement with Health Hero Network, Inc.in 2001 to embark on a research and development project.  The result of the project was the Company’sentrance into the telehealth/disease management monitoring market and thecommercial introduction in the fourth quarter of 2003 of a device known as thePERS Buddy®.  This appliance combines theCompany’s traditional PERS device with Health Hero’s interactive dialogueswhich allows patients to self-report on various conditions to enable dailymonitoring and proactive intervention

 

16

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by the healthcarecommunity.  The PERS Buddy® is designedfor patients with chronic conditions such as congestive heart failure,diabetes, asthma and coronary artery disease. The Company believes that the newfield of reporting and monitoring, which is becoming widely known as “telehealth”,will continue to expand based on increasing acceptance by the medicalprofession and government reimbursement policies, as well as further clinicaland econometric studies concluding that telehealth is both clinically effectiveand reduces cost. The Company is focusing research and development efforts to broadenits offerings of products and services in the telehealth field.

 

To round out theCompany’s portfolio of home monitoring offerings, the Company secured certainexclusive rights to a medication reminder appliance in 1999, which is marketedunder the name Med-Time®. The Company sells its device to the same customerbase utilizing PERS services as well as through web retailers and directly toconsumers.  The Company is planning toredesign and upgrade the appliance in 2005 based on customer feedback.

 

The Companycontinues to view its two core business segments, HSMS and TAS, as the maincontributors to the Company’s cash flow from operations.

 

The Company’s thirdreporting segment, Safe Com pharmacy security monitoring systems, offersequipment and security monitoring to pharmacies and other 24/7 retailorganizations.  Currently, 581 stores aremonitored with this technology.  Safe Com’smonitoring services are provided at the Company’s communication center in LongIsland City, New York.  The Safe Complatform utilizes the basic PERS technology with a modified application.  Although currently providing a small annualrevenue contribution, the Company believes a significant opportunity exists andwill continue to test the market potential into 2005.

 

The Companybelieves that the overall mix of cash flow generating from HSMS and TASservices, combined with its emphasis on developing products and services in thetelehealth field, provides the correct blend of stability and growthopportunity.  The Company believes thisstrategy will enable it to maintain and increase its role in the healthcarecommunications field.

 

17

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**Components of Statementsof Income by Operating Segment**

 

The following table shows the components of theStatement of Income for the six and three months ended June 30, 2005 and2004.

 
| ** **                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **In thousands (000’s)**              | ** ** | **2005**                             | ** ** | **%**                              | ** ** | **2004** | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** | **2004** | ** ** | **%** | ** ** |
| ** **                                 | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                   |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| HSMS                                       |       | 3,683                                |       | **68**                             | **%**      | 3,341 | ** ** | **70** | **%** | 7,221 |   | **68** | **%** | 6,612 | ** ** | **71** | **%** |
| TAS                                        |       | 1,638                                |       | **30**                             | **%**      | 1,341 | ** ** | **28** | **%** | 3,217 |   | **30** | **%** | 2,533 | ** ** | **27** | **%** |
| Safe Com                                   |       | 106                                  |       | **2**                              | **%**      | 89 | ** ** | **2** | **%** | 228 |   | **2** | **%** | 180 | ** ** | **2** | **%** |
| ** **                                 | ** ** | ** **                           |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total Revenues                             |       | 5,427                                |       | **100**                            | **%**      | 4,771 | ** ** | **100** | **%** | 10,666 |   | **100** | **%** | 9,325 | ** ** | **100** | **%** |
|                                       |       |                                 |       |                               | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   |   |
| Cost of Services and Goods Sold            |       |                                 |       |                               | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   |   |
| HSMS                                       |       | 1,596                                |       | **43**                             | **%**      | 1,499 | ** ** | **45** | **%** | 3,246 |   | **45** | **%** | 2,949 | ** ** | **45** | **%** |
| TAS                                        |       | 803                                  |       | **49**                             | **%**      | 673 | ** ** | **50** | **%** | 1,579 |   | **49** | **%** | 1,277 | ** ** | **50** | **%** |
| Safe Com                                   |       | 63                                   |       | **59**                             | **%**      | 40 | ** ** | **45** | **%** | 134 |   | **59** | **%** | 82 | ** ** | **46** | **%** |
| ** **                                 | ** ** | ** **                           |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total Cost of Services and Goods Sold      |       | 2,462                                |       | **45**                             | **%**      | 2,212 | ** ** | **46** | **%** | 4,959 |   | **46** | **%** | 4,308 | ** ** | **46** | **%** |
| ** **                                 | ** ** | ** **                           |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross Profit                               | ** ** | ** **                           |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| HSMS                                       |       | 2,087                                |       | **57**                             | **%**      | 1,842 | ** ** | **55** | **%** | 3,975 |   | **55** | **%** | 3,663 | ** ** | **55** | **%** |
| TAS                                        |       | 835                                  |       | **51**                             | **%**      | 668 | ** ** | **50** | **%** | 1,638 |   | **51** | **%** | 1,256 | ** ** | **50** | **%** |
| Safe Com                                   |       | 43                                   |       | **41**                             | **%**      | 49 | ** ** | **55** | **%** | 94 |   | **41** | **%** | 98 | ** ** | **54** | **%** |
| ** **                                 | ** ** | ** **                           |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total Gross Profit                         |       | 2,965                                |       | **55**                             | **%**      | 2,559 | ** ** | **54** | **%** | 5,707 |   | **54** | **%** | 5,017 | ** ** | **54** | **%** |
| ** **                                 | ** ** | ** **                           |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, General & Administrative |       | 2,514                                |       | **46**                             | **%**      | 2,223 | ** ** | **47** | **%** | 4,890 |   | **46** | **%** | 4,385 | ** ** | **47** | **%** |
| Interest Expense                           |       | 11                                   |       | **0**                              | **%**      | 15 | ** ** | **0** | **%** | 23 |   | **0** | **%** | 31 | ** ** | **0** | **%** |
| Other Income                               |       | (89                                  | )          | **(2**                             | **)%**     | (80 | ) | **(2** | **)%** | (171 | ) | **(2** | **)%** | (154 | ) | **(2** | **)%** |
| ** **                                 | ** ** | ** **                           |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income before Income Taxes                 |       | 529                                  |       | **10**                             | **%**      | 401 | ** ** | **8** | **%** | 965 |   | **9** | **%** | 755 | ** ** | **8** | **%** |
| ** **                                 | ** ** | ** **                           |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for Income Taxes                 |       | 253                                  |       |                               |       | 200 |   |   | ** ** | 463 |   | ** ** | ** ** | 375 | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **                           |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income                                 |       | 276                                  |       |                               |       | 201 |   |   | ** ** | 502 |   | ** ** | ** ** | 380 | ** ** | ** ** | ** ** |

 

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

 

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

 

**Revenues:**

 

**HSMS**

 

Revenues, which consist primarily of monthly rentalrevenues, increased approximately $342,000, or 10%, for the three months ended June 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:

 

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•                  TheCompany continues to experience growth in its customer base. This has largelybeen accomplished through subscriber growth within its existing customer base.The largest growth continues to be from an agreement, which was executed in November 2003,whereby over 3,000 Personal Emergency Response Systems (PERS) were placedonline from December 2003 through the first quarter of 2004.  The Company continues to service this accountwhich now has grown to approximately 4,800 PERS online.  This resulted in approximately $115,000increase 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 $297,000, or22%, for the three months ended June 30, 2005 as compared to the sameperiod in 2004 was primarily due to the following:

 

•                  TheCompany experienced revenue growth within its existing telephone answeringservice businesses of approximately $280,000, 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.

 

•                  InMay 2005, the Company purchased the assets of a telephone answeringservice business, Long Island Message Center, Inc. (“LIMC”).  As a result of this acquisition, the Company earnedapproximately $50,000 of revenue through June 30, 2005.  The Company believes this acquisition willhelp facilitate growth within the Long Island/New York metro area.

 

These increases inrevenues were partially offset by a decrease in revenues of $35,000 relating tocustomer attrition associated with the alphaCONNECT, Inc. acquisition.  In the third quarter of 2004, the Companyconsolidated this operation into the Audubon, New Jersey facility.  During the transition, some customerattrition was experienced, however, now that the transition is complete, theCompany is focusing on future growth opportunities for this business.

 

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

 

**HSMS**

 

Costs related to services and goods increased byapproximately $97,000 for the three months ended June 30, 2005 as comparedto the same period in 2004, an increase of 6%, primarily due to the following:

 

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•                  TheCompany incurred increased costs of approximately $55,000 relating to repairsand upgrades associated with its PERS and related equipment, as compared to thesame period in 2004, when only minimal charges for repairs and upgrades wereincurred.  As a result of the Companymanufacturing and purchasing less devices, specifically the enhanced PERSdevice, for the three months ended June 30, 2005, the Company has repairedand upgraded more of its existing units which have been returned from thefield. In comparison to 2004, the Company had a significant number of units,including the enhanced PERS device, manufactured and purchased, and, therefore,only minimal repairs and upgrades were performed.

 

•                  Withthe Company making no purchases of the enhanced PERS devices in 2005, theCompany capitalized no overhead costs relating to this device.  In 2004, the Company purchased a significantnumber of enhanced PERS devices and, therefore, capitalized a greater amount ofoverhead costs.  The Company has made nofurther purchases of the enhanced PERS device for the three months ended June 30,2005 as it was evaluating enhanced technology with respect to the diseasemanagement product and determined not to produce any more of the currentenhanced PERS devices.  On June 30,2005, the Company amended its agreement with Health Hero Network whereby theCompany will purchase an upgraded disease management product moving forward.  As a result, the Company had approximately$110,000 more unabsorbed overhead in 2005 as compared to the same period in2004.

 

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 cross training its customer service and ERCpersonnel in 2005, within the call center. This reduction amounted toapproximately $45,000.

 

**TAS:**

 

Costs related to services and goods increased byapproximately $130,000 for the three months ended June 30, 2005 ascompared to the same period in 2004, an increase of 19%, primarily due to thefollowing:

 

•                  Withthe increase in business in its existing telephone answering services,including its new daytime answering service offerings, the Company hiredadditional telephone answering service supervisors and operators in its LongIsland City location.  These personneladditions along with general pay rate increases and associated payroll taxes haveaccounted for approximately $100,000 of increased costs as compared to the sameperiod in 2004.  As the Company continuesto grow its customer base and revenues, it will continue to evaluate personnellevels and determine if additional personnel are necessary.

 

•                  InMay 2005, the Company purchased the assets of a telephone answeringservice business, Long Island Message Center, Inc. (“LIMC”).  As a result of this acquisition, the Company incurredoperational expenses of approximately $30,000 through June 30, 2005.  The Company is planning to consolidate thisoperation into its Long Island City call center facility in the third quarterof 2005.

 

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**Selling, General and Administrative Expenses:**

 

Selling, general and administrative expenses increasedby approximately $291,000 for the three months ended June 30, 2005 ascompared to the same period in 2004, an increase of 13%.  The increase is primarily attributable to thefollowing:

 

•                  TheCompany’s legal expenses increased by approximately $110,000 as compared to thesame period in the prior year.  TheCompany has incurred approximately $55,000 of legal expenses related tonegotiations and the execution of an amendment to a supplier agreement.  The Company has also incurred additional legalexpense for other general corporate matters of approximately $55,000 ascompared to the same period in the prior year.

 

•                  Inthe second half 2004 and in January 2005, the Company hired additionalsales personnel to assist in the marketing of its PERS and disease managementofferings.  In addition, increasedcommissions were paid to in-house sales personnel, which are directly relatedto increased revenues in 2005.  As aresult of these items, the Company incurred approximately $70,000 of increasedexpenses.

 

•                  Inconjunction with the Company’s increased service offerings and revenue growthin the TAS area, the Company, in 2004, established a separate department forpersonnel to train operators on an ongoing basis relating to its existing andits new service offerings.  Thisadditional personnel resulted in approximately $80,000 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 bad debt expense, which were partially offset by a reduction in rent.

 

**Interest Expense:**

 

Interest expense for the three months ended June 30,2005 and 2004 was approximately $11,000 and $15,000, respectively.  The decrease of $4,000, or 27%, was primarilydue to the Company continuing to pay down its term loan and its capital leaseobligations.

 

**Other Income:**

 

Other income for the three months ended June 30, 2005 and 2004 wasapproximately $89,000 and $80,000, respectively. Other Income for the threemonths ended June 30, 2005 and 2004 includes a Relocation and EmploymentAssistance Program (“REAP”) credit in the approximate amounts of $82,500 and$57,000, respectively.  In connectionwith the relocation of certain operations to Long Island City, New York in April 2003,the Company became eligible for the REAP credit which is based upon the numberof employees relocated to this designated REAP area. The REAP is in effect fora twelve year period; during the first five years the Company will be refundedthe full amount of the eligible credit and, thereafter, the benefit will beavailable only as a credit against New York City income taxes.

 

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**Income Before Provision for Income Taxes:**

 

The Company’s income before provision for income taxesfor the three months ended June 30, 2005 was approximately $529,000 ascompared to $401,000 for the same period in 2004. The increase of $128,000 forthe three months ended June 30, 2005 primarily resulted from an increasein the Company’s service revenues offset by an increase in the Company’s costsrelated to services and selling, general and administrative costs.

 

**Six Months Ended June 30,2005 Compared to Six Months Ended June 30, 2004**

 

**Revenues:**

 

**HSMS**

 

Revenues, which consist primarily of monthly rentalrevenues, increased approximately $609,000, or 9%, for the six months ended June 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:

 

•                  TheCompany continues to experience growth in its customer base. This has largelybeen accomplished through subscriber growth within its existing customer base.The largest growth continues to be from an Agreement, which was executed in November 2003,whereby over 3,000 Personal Emergency Response Systems (PERS) were placedonline from December 2003 through the first quarter of 2004.  The Company continues to service this accountwhich now has grown to approximately 4,800 PERS online.  This resulted in approximately $245,000increase in revenue as compared to the same period last year.

 

•                  In2004, the Company initiated and executed a new agreement with a home healthcareagency whereby PERS were placed online. Since inception, this account has grown to approximately 650 subscribersand accounts for approximately $50,000 increase in revenue as compared to thesame period in the prior year.

 

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 $684,000, or27%, for the six months ended June 30, 2005 as compared to the same periodin 2004 was primarily due to the following:

 

•                  TheCompany experienced revenue growth within its existing telephone answeringservice businesses of approximately $540,000, 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 and

 

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anticipates that it willcontinue to grow this business segment with further expansion into healthcareand hospital organizations and to physicians through its marketing strategies.

 

•                  InMay 2005, the Company purchased the assets of a telephone answeringservice business, Long Island Message Center, Inc. (“LIMC”).  As a result of this acquisition, the Company earnedapproximately $50,000 of revenue through June 30, 2005.  The Company believes this acquisition willhelp facilitate its growth within the Long Island/New York geographical area.

 

•                  OnApril 12, 2004, the Company purchased the assets of a telephone answeringservice business, alphaCONNECT, Inc., located in Voorhees, NewJersey.  For the six months ended June 30,2005, the accounts obtained in this acquisition generated approximately$200,000 of revenues as compared to $130,000 in the same period in 2004.  In the third quarter of 2004, the Companyconsolidated this operation into the Audubon, New Jersey facility.  During the transition, some customerattrition was experienced, however, now that the transition is completed; theCompany is now focusing on future growth opportunities for this business.

 

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

 

**HSMS**

 

Costs related to services and goods increased byapproximately $297,000 for the six months ended June 30, 2005 as comparedto the same period in 2004, an increase of 10%, primarily due to the following:

 

•                  TheCompany incurred approximately $105,000 of costs 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.  As a result of the Companymanufacturing and purchasing less devices in the first half of 2005,  the Company has repaired and upgraded more ofits existing units which have been returned from the field In the first half of2004, the Company had a significant number of units, including the enhancedPERS device, manufactured, and, therefore, only minimal repairs and upgradeswere performed.

 

•                  Withthe purchase 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 was evaluatingenhanced technology with respect to the disease management product anddetermined not to produce any more of the current enhanced PERS devices.  On June 30, 2005, the Company amendedits agreement with Health Hero Network whereby the Company will purchase anupgraded disease management product moving forward.  As a result, the Company had approximately$200,000 more unabsorbed overhead in 2005 as compared to the same period in2004.

 

•                  InOctober 2004, the Company engaged a consultant to assist in the engineeringand inventory fulfillment aspects of the business.  In addition, this consultant has also beenengaged to assist in performing tasks relating to an inquiry received from theFederal

 

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Communications Commission(“FCC”).  During the first half of 2005the Company incurred expenses of approximately $95,000 for these services.  This consultant is continuing to assist inthe engineering aspects of the business while his tasks relating to the FCCinquiry and inventory fulfillment aspects have been reduced.  These costs were partially offset byapproximately $50,000 due to a reduction in engineering personnel.

 

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 $302,000 for the six months ended June 30, 2005 as comparedto the same period in 2004, an increase of 24%, primarily due to the following:

 

•                  Withthe increase in business in its existing telephone answering services,including its new daytime answering service offerings, the Company hiredadditional telephone answering service supervisors and operators in its LongIsland City location.  These personneladditions along with general pay rate increases and associated payroll taxeshas accounted for approximately $200,000 of increased costs as compared to thesame period in 2004.  As the Companycontinues to grow its customer base and revenues, it will continue to evaluatepersonnel levels and determine if additional personnel are necessary.

 

•                  InMay 2005, the Company purchased the assets of a telephone answeringservice business, Long Island Message Center, Inc. (“LIMC”).  As a result of this acquisition, the Company incurredoperational expenses of approximately $30,000 through June 30, 2005.  The Company is planning to consolidate thisoperation into its Long Island City call center facility in the third quarterof 2005.

 

•                  TheCompany’s costs related to services and goods for the first half of 2005increased by approximately $40,000. This is a result of the Company acquiringalphaCONNECT, Inc. in April 2004, and therefore only realizing threemonths of expense in 2004 as compared to six months of expense for the sameperiod in 2005.

 

**Selling, General and Administrative Expenses:**

 

Selling, general and administrative expenses increasedby approximately $505,000 for the six months ended June 30, 2005 ascompared to the same period in 2004, an increase of 12%.  The increase is primarily attributable to thefollowing:

 

•                  TheCompany’s legal expenses increased by approximately $180,000 as compared to thesame period in the prior year.  TheCompany incurred approximately $55,000 of legal expense with respect to workingwith the FCC to determine an action plan to establish a timeframe to completean upgrade 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

 

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exceeded applicablestandards designed to reduce the possibility of interference with radiocommunications. In addition, the Company has incurred approximately $55,000 oflegal expenses related to negotiations and the execution of an amendment to asupplier agreement.  The Company has alsoincurred additional legal expense for other general corporate matters ofapproximately $70,000 as compared to the same period in the prior year.

 

•                  Inthe second half 2004 and in January 2005, the Company hired additionalsales personnel to assist in the marketing of its PERS and disease managementofferings.  In addition, increasedcommissions were paid to in-house sales personnel, which are directly relatedto increased revenues in 2005.  As aresult of these items, the Company incurred approximately $120,000 of increasedexpenses in the first half of 2005.

 

•                  Inconjunction with the Company’s increased daytime answering service offeringsand revenue growth in the TAS area, the Company, in 2004, established a separatedepartment for personnel to train operators on an ongoing basis relating to itsexisting and its new daytime service offerings. This additional personnel resulted in approximately $160,000 increase inexpense as compared to the prior year. The Company has now fully established this department and believes it iscontributing significantly  to theeconomic 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 bad debt expense, administrative salaries and depreciation, which wereoffset by a reduction in rent and warrant expense.

 

**Interest Expense:**

 

Interest expense for the six months ended June 30,2005 and 2004 was approximately $23,000 and $31,000, respectively.  The decrease of $8,000, or 26%, was primarilydue to the Company continuing to pay down its term loan and its capital leaseobligations.

 

**Other Income:**

 

Other income for the six months ended June 30, 2005 and 2004 wasapproximately $171,000 and $154,000, respectively. Other Income for the sixmonths ended June 30, 2005 and 2004 includes a Relocation and EmploymentAssistance Program (“REAP”) credit in the approximate amounts of $157,000 and$120,000, respectively.  In connectionwith the relocation of certain operations to Long Island City, New York in April 2003,the Company became eligible for the REAP credit which is based upon the numberof employees relocated to this designated REAP area. The REAP is in effect fora twelve year period; during the first five years the Company will be refundedthe full amount of the eligible credit and, thereafter, the benefit will beavailable only 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 six months ended June 30, 2005 was approximately $965,000 ascompared to $755,000 for the same period in 2004. The

 

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increase of $210,000 for the six months ended June 30,2005 primarily resulted from an increase in the Company’s service revenuesoffset by an increase in the Company’s costs related to services and selling,general and administrative costs.

 

**Liquidity and Capital Resources**

 

The Company has acredit facility of $3,000,000, which includes a term loan of $1,500,000 and arevolving credit line that permits maximum borrowings of $1,500,000 (based oneligible receivables, as defined).  Priorto an amendment of the credit facility agreement in March 2005, borrowingsunder the term loan bore interest at either (a) LIBOR plus 3.5% or (b) theprime rate or the federal funds effective rate plus .5%, whichever is greater,plus 1.0% and the revolving credit line will bear interest at either (a) LIBORplus 3.0% or (b) the prime rate or the federal funds effective rate plus..5%, whichever is greater, plus .5%.  TheCompany has the option to choose between the two interest rate options underthe term loan and revolving credit line. The term loan is payable in equal monthly principal payments of $25,000over five years while the revolving credit line, as amended, is now availablethrough May 2008.  The outstandingbalance on the term loan at June 30, 2005 was $600,000.  There were no amounts outstanding on therevolving credit line at June 30, 2005.

 

On March 28,2005, the Company amended its loan documents whereby the borrowings under theterm loan will bear interest at either (a) LIBOR plus 2.25% or (b) theprime rate or the federal funds effective rate plus .5%, whichever is greater,and the revolving credit line will bear interest at either (a) LIBOR plus2.0% or (b) the prime rate or the federal funds effective rate plus .5%,whichever is greater.  The revolvingcredit line has also been extended for an additional three (3) years andis now available through May 2008. Additionally, certain of the covenants were amended.

 

At December 31,2004, the Company was in compliance with its loan covenants under the agreementdated May 20, 2002 and as amended on August 11, 2003 and March 28,2005.

 

The following table is a summary of contractual obligations as of June 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)                      |       | $                          | 658,337    |   | $ | 320,640 |   | $ | 337,697 |   |   |   |   |   |
| Capital Leases (b)            |       | $                          | 72,341     |   | $ | 72,341 |   |   |   |   |   |   |   |
| Operating Leases (c)          |       | $                          | 4,744,855  |   | $ | 455,041 |   | $ | 1,102,265 |   | $ | 658,219 |   | $ | 2,529,330 |   |
| Total Contractual Obligations |       | $                          | 5,475,533  |   | $ | 848,022 |   | $ | 1,439,962 |   | $ | 658,219 |   | $ | 2,529,330 |   |

 

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(a)          • Debt includes the Company’s termloan of $600,000 which matures in June 2007, as well as loans associatedwith the purchase of automobiles.

 

(b)         • Capital lease obligations relateto the purchase of the Company’s new Customer Service/Emergency Responsesoftware and the purchase of telephone answering service equipment.  Both of these capital leases mature in January 2006.

 

(c)          • Operating leases include rentalof facilities at various locations within the United States.  These operating leases include the rental ofthe Company’s call center, warehouse and the office facilities.  These operating leases have various maturitydates.  The Company currently leasesoffice space from the Chief Executive Officer and principal shareholderpursuant 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.

 

Net cash provided by operating activities was approximately $1.3million for the six months ended June 30, 2005, as compared toapproximately $1.8 million for the same period in 2004. During 2005, increasesin cash provided by operating activities from depreciation and amortization ofapproximately $1.4 million and net earnings of approximately $0.5 million wereoffset by an increase in trade receivables of approximately $0.5 million. Theincrease in trade receivables is primarily due to the expansion of its customerbase, specifically as it relates to TAS, and a slow down of collections asresult of a select number of customers processing payments in a slower manner.   As the Company has expanded its customerbase with its new daytime service offerings, receivables related to thesecustomers now exist.  The Company hasalso experienced 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 Companycontinues to update its systems and processes accordingly in an attempt tocollect these amounts on a more timely basis.

 

Net cash used in investing activities for the six months ended June 30,2005 was approximately $1.4 million as compared to $2.4 million in the sameperiod in 2004.  The primary componentsof net cash used in investing activities in 2005 and 2004 were capitalexpenditures and the acquisition of telephone answering servicebusinesses.  Net cash used in investingactivities for capital expenditures for 2005 and 2004 were approximately $0.6and $1.4 million, respectively and for acquisitions of telephone answeringservice businesses was approximately $0.4 for $0.8 million, respectively.  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 andenhanced PERS systems and the enhancement of its telephony equipment.

 

Cash flows for the six months ended June 30, 2005 provided byfinancing activities were approximately $1.4 million compared to cash providedby financing activities of $.7 million for the same period in 2004.  The primary components of cash flow provided by financingactivities in 2005 and 2004 were proceeds received from the exercise of stockoptions and warrants.  The

 

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proceeds from theexercise of both stock options and warrants were approximately $1.6 and $0.8 million in 2005 and 2004,respectively.  The primary components ofcash used in financing activities during 2005 and 2004 were the repayment ofdebt of approximately $0.2 million ineach 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 $0.5 - $0.7 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 $0.5 million over the next twelve to eighteen months.  In addition, assuming the upgrade programwhich the 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 June 30, 2005, the Company had approximately $4.5 million incash and the Company’s working capital was approximately $7.8 million.  The Company believes that with its presentcash balance and with operations of the business generating positive cash flow,it will be able to meet its cash, working capital and capital expenditure needsfor at least the next twelve months. The Company also has a revolving creditline, which expires in May 2008 that permits borrowings up to $1.5 millionof which no amounts were outstanding at June 30, 2005.

 

Off-Balance Sheet Arrangements:

 

As of June  30, 2005, the Company has not entered into anyoff-balance sheet arrangements that are reasonably likely to have an impact onthe Company’s current and future financial condition.

 

Other Factors:

 

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

 

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purchase price consideration if certain thresholdsconcerning 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 an enhanced PERS systemthat combines the Company’s traditional safety monitoring features with HHN’sinternet based disease management monitoring technology.  The HHN Agreement, which had a minimumfive-year term (“initial term”), and provided for the payment by the Company ofcertain fees based on the service revenue derived from the enhanced PERSproduct, was amended on June 30, 2005. The amendment includes an extension of the initial term for anadditional three years, and converted the exclusivelicense to a non-exclusive one. The cost of the licensing component of $1,115,000, including $115,000 ofprofessional fees, which has been paid in full, was being amortized over a 40-monthperiod which commenced in July 2003 upon the Company meeting certainmilestones under the agreement.  Withthis extension of the initial term, the Company will amortize the remainingvalue of the licensing component at June 30, 2005 over the revised initialterm of the Agreement.  Additionally, ifcertain acceptance criteria are met, the Company will be required to purchase aminimum of 1,500 devices over the term of the Agreement at an estimatedaggregate 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 six months ended June 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

 

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to theHome 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 the Cityof New York” upon thirty days written notice. HRA has also advised the Company that they plan to issue a new RFP withrespect to PERS services in the future. As of August 10, 2005, a new RFPhas 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 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 June 30, 2005 and December 2004, accounts receivablefrom the contract represented 17% and 18%, respectively, of accountsreceivable.  Medical devices in serviceunder the contract represented approximately 16% and 18%, respectively, of thetotal medical devices in service for primary monitoring.

 

No other single contractor customer represents more than 6% of the Company’s revenue.

 

The Company’s PERS and related equipment is subject to approvals under the rules of theFederal Communication Commission (“FCC”). In November 2004, the Companyreceived an inquiry from the Federal Communications Commission. In response tothat inquiry the Company has determined that certain versions of its PERS and related equipment emit  levels of radio frequency energy that exceedapplicable standards designed to reduce the possibility of interference withradio communications.  Although thisissue poses no safety or functionality risk to subscribers, the Company is in the process ofestablishing a corrective action plan with the FCC to satisfy this matter.

 

The Company iscurrently working with the FCC to determine an action plan to establish atimeframe to complete an upgrade program for the affected PERS and related equipment and the amountof a 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

 

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substantially parallel with the normal recycling of the Company’s PERSequipment. Under this assumption, the only additional cost to be incurred willbe the incremental cost to bring the units into compliance with the FCCregulations.

 

As of June 30,2005, the Company has expensed approximately $610,000 in connection with thismatter.  The Company anticipates thetotal charge to complete this upgrade program to range from $800,000 to$1,200,000.  If the Company is required tocomplete the PERS equipment and related equipment upgrades in a shorter periodof time than is anticipated, significant additional costs will be incurredinasmuch as unscheduled service calls will be required.

 

**Recent Accounting Pronouncements:**

 

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 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).

 

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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 themateriality of the accounts involved, and therefore, considers these to be itscritical accounting policies.  Estimatesin each of these areas are based on historical experience and a variety of assumptionsthat the Company believes are appropriate. Actual results may differ from theseestimates.

 

**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 $733,000 as of June 30, 2005, which is equal to 15.74% oftotal 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 of approximately$47,000. Conversely, for each 1% that actual credit losses are less than thereserve, this would decrease the Company’s general and administrative expensesand increase the reported net income by approximately $47,000.

 

**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.

 

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The valuation andclassification of these assets and the assignment of useful depreciable livesinvolves significant judgments and the use of estimates.  Fixed assets are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Historically, impairment losses have not been required.  Any change in the assumption of estimateduseful 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 $165,000per 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 $135,000 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 impairmentannually or more frequently when events or circumstances occur indicating goodwillmight be impaired. This process involves estimating fair value using discountedcash flow 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,which totaled $2,794,559 and $2,563,864 at June 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.

 

**Item 3. Controls and Procedures.**

 

As of the end of the period covered by this report, the Company carriedout an evaluation, under the supervision and with the participation of itsChief Executive Officer, President and the Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures. Based on this evaluation, the Chief Executive Officer, President andthe Chief Financial Officer concluded that the Company’s controls andprocedures are effective to ensure that information required to be disclosed bythe Company in the reports filed by it under the Securities and Exchange Act of1934, as amended, is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and include controls andprocedures designed to ensure that information required to be disclosed by theCompany in such reports is accumulated and communicated to the Company’smanagement, including the Chief Executive Officer, President and ChiefFinancial Officer of the Company, as appropriate to allow timely decisionsregarding required disclosure.

 

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There were no changes in the Company’s internalcontrol over financial reporting that occurred during the quarter ended June 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.

 

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

 

On June 24, 2005, the Company issued 12,500shares of Common Stock to an investor of the Company, pursuant to an exerciseof a warrant, for a total purchase price of $47,500.  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.

 

**Item 6.  Exhibits.**

 
| **No.** | ** ** | **Description**                                                                            |
|---------|------------|--------------------------------------------------------------------------------------------|
|    |       |                                                                                       |
| 3(ii)   |       | Bylaws of the Company as amended to date                                                   |
| 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       |

 

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**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: August 12, 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 |
|                                  |                                  |  |  |  |  |

 

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