SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2001 Commission File Number 0-13617
LIFELINE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2537528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Lawrence Street
Framingham, Massachusetts 01702-8156
(Address of principal executive offices) (Zip Code)
(508) 988-1000
(Registrant's telephone number, including area code)
________________
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock $0.02 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days. Yes X No_________
------
Number of shares outstanding of the issuer's class of common stock as of April
30, 2001: 6,101,233
LIFELINE SYSTEMS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 2001
and December 31, 2000 3
Consolidated Statements of Income and Comprehensive Income -
Three months ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows - Three months
ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6-10
ITEM 2.
Management's Discussion and Analysis of Results of
Operations and Financial Condition 11-16
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
ITEM 6.
Exhibits and Reports on Form 8-K 16
SIGNATURES 17
-2-
LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2001 2000
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,719 $ 4,417
Accounts receivable, net 9,510 9,223
Inventories 1,775 1,641
Net investment in sales-type leases 2,907 2,909
Prepaid expenses and other current assets 997 873
Prepaid income taxes 636 636
Deferred income taxes 1,759 1,986
---------- ----------
Total current assets 19,303 21,685
Property and equipment, net 27,331 26,406
Goodwill and other intangible assets, net 10,945 11,204
Net investment in sales-type leases 4,825 5,073
Other assets 306 160
---------- ----------
Total assets $ 62,710 $ 64,528
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,900 $ 2,576
Accrued expenses 2,412 2,063
Accrued payroll and payroll taxes 1,107 2,985
Deferred revenues 799 755
Current portion of capital lease obligation 650 583
Current portion of long term debt 452 405
Product warranty and other current liabilities 615 983
Accrued restructuring and other non-recurring charges 1,079 1,341
---------- ----------
Total current liabilities 9,014 11,691
Deferred income taxes 4,673 4,897
Deferred compensation and other non-current liabilities 577 617
Long term portion of capital lease obligation 1,497 1,531
Long term debt, net of current portion 1,069 1,170
Accrued restructuring and other non-recurring charges, long term 1,237 1,237
---------- ----------
Total liabilities 18,067 21,143
Commitments and contingencies
Stockholders' equity:
Common stock, $.02 par value, 20,000,000 shares authorized, 6,673,187
shares issued at March 31, 2001 and 6,641,554 shares
issued at December 31, 2000 133 133
Additional paid-in capital 19,609 19,296
Retained earnings 30,244 29,126
Less: Treasury stock at cost, 621,089 shares at March 31, 2001
and December 31, 2000 (4,556) (4,556)
Notes receivable - officer (550) (550)
Accumulated other comprehensive loss/cumulative translation adjustment (237) (64)
---------- ----------
Total stockholders' equity 44,643 43,385
---------- ----------
Total liabilities and stockholders' equity $ 62,710 $ 64,528
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands except for per share data)
(Unaudited)
Three months ended
March 31,
--------------------------
2001 2000
---- ----
Revenues
Services $ 15,806 $ 13,104
Net product sales 5,385 5,322
Finance and rental income 373 361
---------- -----------
Total revenues 21,564 18,787
---------- -----------
Costs and expenses
Cost of services 9,510 8,759
Cost of sales 1,858 1,692
Selling, general, and administrative 7,851 6,461
Research and development 391 334
---------- -----------
Total costs and expenses 19,610 17,246
---------- -----------
Income from operations 1,954 1,541
---------- -----------
Other income (expense)
Interest income 57 102
Interest expense (71) (84)
Other income (expense) (44) 5
---------- -----------
Total other income (expense), net (58) 23
---------- -----------
Income before income taxes 1,896 1,564
Provision for income taxes 778 641
---------- -----------
Net income 1,118 923
Other comprehensive income, net of tax
Foreign currency translation adjustments (102) (8)
---------- -----------
Comprehensive Income $ 1,016 $ 915
========== ===========
Net income per weighted average share:
Basic $ 0.18 $ 0.16
========== ===========
Diluted $ 0.18 $ 0.15
========== ===========
Weighted average shares:
Basic 6,047 5,952
========== ===========
Diluted 6,307 6,160
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended
March 31,
---------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 1,118 $ 923
Adjustments to reconcile net income to net cash provided
by operating activities:
Write off of fixed assets - 38
Depreciation and amortization 2,163 1,789
Deferred income taxes 3 499
Deferred compensation (35) (130)
Changes in operating assets and liabilities:
Accounts receivable (333) 1,203
Inventories (134) 843
Net investment in sales-type leases 250 (104)
Prepaid expenses, other current assets and other assets (274) (333)
Accrued payroll and payroll taxes (1,857) (1,334)
Accounts payable, accrued expenses and other liabilities (303) (1,254)
Income taxes payable (218) -
Accrued restructuring charge (262) (83)
-------- --------
Net cash provided by operating activities 118 2,057
-------- --------
Cash flows from investing activities:
Additions to property and equipment (2,273) (589)
Business purchases and other (521) (789)
-------- --------
Net cash used in investing activities (2,794) (1,378)
-------- --------
Cash flows from financing activities:
Principal payments under long term obligations (259) (220)
Proceeds from issuance of long term debt - 1,000
Net proceeds (payments) under short-term borrowings 47 -
Proceeds from issuance of common stock 242 153
-------- --------
Net cash provided by financing activities 30 933
-------- --------
Effect of foreign exchange on cash (52) (14)
-------- --------
Net increase (decrease) in cash and cash equivalents (2,698) 1,598
Cash and cash equivalents at beginning of period 4,417 1,415
-------- --------
Cash and cash equivalents at end of period $ 1,719 $ 3,013
======== ========
Non-cash activity:
Capital leases $ 192 $ 129
Deferred compensation 71 130
The accompanying notes are an integral part of these consolidated financial
statements.
5
LIFELINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The information furnished has been prepared from the accounts without audit.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments necessary, consisting only of those of a
normal recurring nature, to present fairly its consolidated financial
position as of March 31, 2001 and the consolidated statements of income and
cash flows for the three months ended March 31, 2001 and 2000.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, these statements should be read in
conjunction with the consolidated financial statements and the related notes
included in the Company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission on March 30, 2001, for the year ended
December 31, 2000.
Certain amounts in the prior year have been reclassified from cost of sales
to revenue to conform to the current year presentation.
The results of operations for the three-month period ended March 31, 2001
are not necessarily indicative of the results expected for the full year.
2. Details of certain balance sheet captions are as follows (in thousands):
March 31, December 31,
2001 2000
------------- ------------
Inventories:
Purchased parts and assemblies $ 87 $ -
Work-in-process - -
Finished goods 1,688 1,641
------------- -----------
$ 1,775 $ 1,641
============= ===========
Property and equipment:
Equipment $ 22,952 $ 22,608
Furniture and fixtures 613 613
Equipment leased to others 12,618 11,707
Equipment under capital leases 3,727 3,535
Leasehold improvements 5,186 4,984
Capital in progress 1,896 1,230
------------- -----------
46,992 44,677
Less: accumulated depreciation and amortization (19,661) (18,271)
------------- -----------
Total property and equipment, net $ 27,331 $ 26,406
============= ===========
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. The calculation of per share earnings is as follows:
(In thousands except per share figures)
Three months ended
March 31,
------------------------------
2001 2000
---------- ----------
Basic:
------
Net income $ 1,118 $ 923
Weighted average common shares outstanding 6,047 5,952
Net income per share, basic $ 0.18 $ 0.16
========== ==========
Diluted:
--------
Net income for calculating diluted earnings per share $ 1,118 $ 923
Weighted average common shares outstanding 6,047 5,952
Common stock equivalents 260 208
---------- ----------
Total weighted average shares 6,307 6,160
Net income per share, diluted $ 0.18 $ 0.15
========== ==========
For the three months ended March 31, 2001 and 2000, options to purchase 345,087
and 558,464 shares, respectively at an average exercise price of $19.81 and
$17.64, respectively have not been included in the computation of diluted net
income per share as their effect would have been anti-dilutive.
4. SEGMENT INFORMATION
The Company is active in one business segment: designing, marketing, monitoring
and supporting its personal response units. The Company maintains sales,
marketing and monitoring operations in both the United States and Canada.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. SEGMENT INFORMATION (continued)
Geographic Segment Data
Net sales from external customers are based on the location of the customer.
Geographic information related to the results of operations for the periods
ended March 31, 2001 and 2000 and the financial position as of March 31, 2001
and December 31, 2000 is presented as follows:
March 31, March 31,
2001 2000
---------------------------
Net Sales:
United States $ 19,816 $ 17,301
Canada 1,748 1,486
---------------------------
$ 21,564 $ 18,787
===========================
Net Income:
United States $ 982 $ 797
Canada 136 126
---------------------------
$ 1,118 $ 923
===========================
March 31, December 31,
2001 2000
--------------------------
Total Assets:
United States $ 56,686 $ 58,725
Canada 6,024 5,803
--------------------------
$ 62,710 $ 64,528
==========================
5. RESTRUCTURING AND NON RECURRING CHARGES
In September 2000, the Company recorded a pre-tax non-recurring charge of
approximately $2.7 million for costs it expects to incur to address erroneous
low-battery signals in some of its personal help buttons. Included in the
non-recurring charge are anticipated material and mailing costs for exchanging
buttons, providing hospital programs with higher inventory levels for the
planned swap, and the cost of installer visits to subscriber homes to replace
the buttons.
At March 31, 2001, accrued restructuring and other non-recurring charges of
approximately $2.3 million included nearly $73,000 of total remaining severance
costs, previously disclosed, and $2.2 million of costs associated with the
anticipated cost of addressing erroneous low-battery signals in personal help
buttons.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. RESTRUCTURING AND NON RECURRING CHARGES (continued)
The following is a roll-forward of accrued restructuring and non-recurring
charges for the three months ended March 31, 2001:
December 31, Amounts March 31,
2000 Utilized 2001
--------------------------------------------
Reduction of workforce $85 ($12) $73
and other cash flows
Erroneous low battery 2,493 (250) 2,243
signals
--------------------------------------------
Total $2,578 ($262) $2,316
============================================
6. LONG TERM DEBT
In June 1999, the Company entered into an amended $10.0 million line of credit
which was originally obtained in April 1998. The agreement contains several
covenants, including the Company maintaining certain levels of financial
performance and capital structure. These financial covenants include a
requirement for a current ratio of at least 1.5 to 1.0 and a leverage ratio of
no more than 1.0 to 1.0. In addition, there are certain negative covenants that
include limitations on the Company's capital and other expenditures,
restrictions on the Company's capacity to obtain additional debt financing,
restrictions on the disposition of the Company's assets, and restrictions on its
investment portfolio. The line of credit matures on June 30, 2002, and as of
March 31, 2001 the Company had $1.5 million outstanding under this line.
7. GOODWILL AND INTANGIBLES
During the first three months of 2001, the Company paid approximately $0.5
million to local community hospitals for conversion to services provided by the
Company. The intangible assets related to these agreements consist of the cost
of purchasing the rights to service and/or manage the personal response systems
program located in various stand-alone facilities. These agreements allow the
Company to monitor and provide other related services to existing and future
subscribers over the term of the agreements. The Company amortizes the
acquisitions costs over the life of the agreements, which is typically five
years.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. SUBSEQUENT EVENT
In April 2001, the Company acquired certain assets formerly owned by SOS
Industries, Inc. a personal response service provider based in New Smyrna Beach,
Florida with more than 10,000 subscribers located in 37 states. The purchase
price was $3.8 million plus $250 for every subscriber in excess of 10,000 who
signs an agreement to be monitored by the Company. Approximately $2.5 million
was paid at the closing with the remainder to be paid within 90 days after the
closing. The acquisition will be accounted for as a purchase transaction, and
any resulting goodwill will be amortized over an estimated life of 10 years.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This and other reports, proxy statements, and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, with respect to, among other
things, the Company's future revenues, operating income, or earnings per share.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. There are a number of factors of which the Company is aware that may
cause the Company's actual results to vary materially from those forecast or
projected in any such forward-looking statement. These factors include, without
limitation, those set forth below under the caption "Certain Factors That May
Affect Future Results." The Company's failure to successfully address any of
these factors could have a material adverse effect on the Company's future
results of operations.
RESULTS OF OPERATIONS
Total revenues for the quarter ended March 31, 2001 increased nearly 15% to
$21.6 million as compared to total revenues of $18.8 million for the quarter
ended March 31, 2000.
Service revenues, at $15.8 million for the first quarter of 2001, represented
approximately 73% of the Company's first quarter total revenues. This increase,
up from $13.1 million or 70% of total revenues for the first quarter of 2000, is
a result of the Company's continued service offering strategy and reflects a 12%
increase in the Company's monitored subscriber base to approximately 319,000
subscribers as of March 31, 2001 from the 285,000 subscribers monitored at the
end of the first quarter of 2000 as well as a price increase for its monitoring
services which resulted in a higher average revenue per subscriber in the first
quarter of 2001 as compared to the same period in 2000. The Company's ability to
sustain the current level of service revenue growth depends on its ability to
continue to make improvements in service delivery, expand the market for its
personal response services, convert community hospital programs to services
provided by the Company and increase its focus on referral development and
innovative partner relationships in new channels of distribution. The Company
believes that the high quality of its services and its commitment to providing
caring and rapid response to the at-risk elderly and the physically challenged
will be factors in meeting this challenge.
Net product revenues for the first quarter of 2001 increased slightly to $5.4
million from $5.3 million for the same period in 2000. The Company sold more of
its units during the first quarter of 2001 versus the first quarter of 2000.
However, large volume discounts during the quarter and a slight shift in the mix
of product sold to lower priced products substantially offset any potential
favorable increase in product revenue. The Company still expects declining
product sales in future periods as it continues packaging products and services
into a single service offering.
Finance and rental income, representing income earned from the Company's
portfolio of sales-type leases, increased 3% to $373,000 for the three months
ended March 31, 2001 from $361,000 recorded for the same period in the previous
year. With the Company's focus on its service business segment it expects
finance income to decline in future periods because leasing is directly related
to its product business.
-11-
Total recurring revenues, consisting of service revenues and finance and rental
income, rose to $16.2 million for the three months ended March 31, 2001 and
represented 75% of total revenue as compared to $13.5 million and 72% of total
revenue for the three months ended March 31, 2000. This 20% increase in
recurring revenue and the increase as a percentage of total revenue reflect the
Company's continued focus on its service business segment. The Company expects
its recurring revenues to continue to increase in future periods.
Cost of services increased to $9.5 million from $8.8 million from the comparable
prior period as a result of a variety of factors. The Company incurred higher
amortization of goodwill along with associated operational costs in the first
quarter of 2001 as a result of the purchase of Argus Emergency Medical Division
in the third quarter of 2000. The Company also had higher amortization of
continued intangible acquisition costs for agreements entered into with
community hospitals for conversion to services provided by the Company.
Information technology consultants and information technology professionals
hired for the CareSystem platform also impacted cost of services for the first
quarter of 2001 as compared to the same period last year. However, cost of
services, as a percentage of service revenues, was 60% for the first quarter of
2001, a significant improvement from the 67% in the first quarter of 2000 and is
aligned with the Company's goal of making its service offerings more profitable.
The Company expects gradual improvement in its service margins in 2001.
Cost of sales was 35% of net product sales for the three months ended March 31,
2001 as compared to 32% for the three months ended March 31, 2000. Cost of sales
was higher as a percentage of net product sales than the comparable prior period
due to large product volume discounts which resulted in a lower average selling
price and therefore lower margins. Also, with the significant improvements in
the Company's service delivery, its customers are having renewed interest in
marketing and growing their Lifeline service. As a result, the Company also
experienced an increase in sales of its lower margin marketing accessories as
compared to the same period in 2000. The Company expects to maintain cost of
sales at a relatively consistent percentage of net product sales for the
remainder of 2001.
Selling, general and administrative ("SG&A") expenses as a percentage of total
revenues was 36% for the first quarter of 2001 as compared to 34% for the first
quarter of 2000. Actual first quarter SG&A expenditures increased $1.4 million
to $7.9 million for the first quarter of 2001 from $6.5 million for the same
period in 2000. The Company's increased expenditures are primarily attributable
to sales and marketing initiatives in the first quarter of 2001 that the Company
did not incur during the first quarter of 2000. Increased information technology
personnel and consultants in the first quarter of 2001 as compared to the same
period in 2000 also contributed to the increased SG&A expenses. The Company
expects an increase in SG&A expenses during 2001 as it continues with its sales,
marketing and business initiatives, but believes that these expenses will be
lower as a percentage of total revenues than in 2000.
Research and development expenses were nearly 2% of total revenues for the
quarters ended March 31, 2001 and 2000. Research and development efforts are
focused on ongoing product improvements and developments. The Company expects to
maintain or slightly increase these expenses as percentage of total revenues for
the remainder of 2001.
The Company's effective tax rate was 41.0% for the three months ended March 31,
2001 and 2000.
-12-
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2001, the Company's portfolio of cash
and cash equivalents decreased $2.7 million to $1.7 million at March 31, 2001
from $4.4 million at December 31, 2000. The decrease was mainly attributable to
payments of approximately $2.3 million in employee bonuses and purchases of
property and equipment amounting to $2.3 million. The Company also paid
approximately $0.5 million to local community hospitals for conversions to
services provided by the Company. This represented the cost of purchasing the
rights to service and/or manage the personal response systems program previously
operated by the local community hospitals. Profitable operations of $3.2 million
helped to offset these expenditures.
The Company is party to Master Lease Agreements for up to $5.6 million for
furniture, computers, security systems and other related equipment purchases.
For financial reporting purposes, these leases are recorded as capital leases
and accordingly the associated assets are being depreciated over their estimated
useful life. As of March 31, 2001 the Company had made purchases of
approximately $3.1 million under these agreements.
In June 1999, the Company entered into an amended $10.0 million line of credit
which was originally obtained in April 1998. The agreement has two components,
the first of which is a working capital line of credit, the other, the ability
to convert up to five million dollars into a five-year fixed loan. The working
capital line of credit's interest rate is based on the London Interbank Offered
Rate (LIBOR), while the fixed loan is at the bank's prime interest rate. The
agreement contains several covenants, including the Company maintaining certain
levels of financial performance and capital structure. These financial covenants
include a requirement for a current ratio of at least 1.5 to 1.0 and a leverage
ratio of no more than 1.0 to 1.0. In addition, there are certain negative
covenants that include limitations on the Company's capital and other
expenditures, restrictions on the Company's capacity to obtain additional debt
financing, restrictions on the disposition of the Company's assets, and
restrictions on its investment portfolio. This line of credit matures on June
30, 2002, and as of March 31, 2001 the Company had $1.5 million outstanding
under this line.
The Company expects that funding requirements for operations and in support of
future growth are expected to be met primarily from operating cash flow,
existing cash and marketable securities and its $10.0 million line of credit.
The Company expects these sources will be sufficient to finance the cash needs
of the Company through the next twelve months. This includes the continued
investment in its response center platform, the requirements of its internally
funded lease financing program, the second quarter acquisition of certain assets
formerly owned by SOS Industries, Inc., any future potential acquisitions and
other investments in support of its current business.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
The Company completed the transition of its United States subscribers to its new
CareSystem call center platform during 1999 and experienced certain software
design deficiencies in connection with
-13-
the transition, which it has worked to resolve. The Company may continue to
experience problems associated with this new information technology. There can
be no assurance that the Company will realize the intended benefits from the new
system.
The Company is currently experiencing a battery-related issue with some of its
personal help buttons worn by subscribers. Certain personal help buttons are
erroneously transmitting low battery signals. While the buttons that exhibit
this erroneous low battery condition still contain sufficient power to activate
the communicator when the button is pressed and do not place the Company's
subscribers at risk, the Company believes it is prudent to replace those buttons
exhibiting this condition. The Company recorded a non-recurring charge of
approximately $2.7 million in the third quarter of 2000 for costs it expects to
incur to address this issue, including anticipated material and mailing costs
for exchanging buttons, providing hospital programs with higher inventory levels
for the planned swap, and support for the cost of installer visits to subscriber
homes to replace the button. The Company cannot be certain that the charge it
recorded to address this issue will be sufficient to cover all of its associated
expenses, or that its reputation, business, financial condition or results of
operations will not be otherwise affected. In addition, the Company has changed
its battery vendor. The Company cannot be certain that it will not experience
disruption related to such change.
During the third quarter of 1999, the Company completed the outsourcing of the
manufacturing of its personal response equipment to the Ademco Group, a division
of Honeywell International, Inc. This decision represented a change in the
Company's manufacturing strategy, as it no longer supports a manufacturing site
at its corporate location. There can be no assurance that the Company will
realize the intended cost savings it anticipates, or that it will not experience
delays in obtaining products from Ademco as a result of process difficulties,
component shortages or for other reasons. Any such delay could have a material
adverse effect on the Company's business, financial condition, or results of
operations.
The Company's results are partially dependent on its ability to develop services
and products that keep pace with continuing technological changes, evolving
industry standards, changing subscriber preferences and new service and product
introductions by the Company's competitors. Lifeline's future success will
depend on its ability to enhance its existing services and products (including
accessories), to introduce new service and product offerings to meet and adapt
to changing customer requirements and emerging technologies on a timely basis
and to offer such products and services at competitive prices. There can be no
assurance that Lifeline will be successful in identifying, developing,
manufacturing or marketing new services and products or enhancing its existing
services and products on a timely basis or that Lifeline will be able to offer
such services and products at competitive prices. Also, there can be no
assurance that services, products or technologies developed by others will not
render Lifeline's services or products noncompetitive or obsolete.
The Company's growth is dependent on its ability to increase the number of
subscribers served by its monitoring centers. The Company's ability to continue
to increase service revenue is a key factor in its long-term growth, and there
can be no assurance that the Company will be able to do so. The Company's
failure to increase service revenue could have a material adverse effect on the
Company's business, financial condition, or results of operations.
The Company's monitoring operations are concentrated principally in its
corporate headquarters facility. Although the Company believes that it has
constructed safeguards to protect against system failures, the disruption of
service at its monitoring facility, whether due to telephone or electrical
-14-
failures, earthquakes, fire, weather or other similar events or for any other
reason, could have a material adverse effect on the Company's business,
financial condition, or results of operations.
The Company believes that its future success will depend in large part upon its
ability to attract and retain key personnel, especially in its information
technology department. Although the Company believes it is making progress in
retaining and recruiting well-trained, highly capable people despite a very
competitive employment market, there can be no assurance that the Company will
continue to be successful in attracting and retaining such personnel.
While the Company has maintained its product revenue during the first quarter of
2001 as compared to the first quarter of 2000, product revenue is anticipated to
decline as a result of the Company's strategy of combining service and hardware
offerings to support the transition to a service oriented business. As the
Company continues growing its service business segment to increase its recurring
revenue, there can be no assurance that service revenue will increase at a rate
sufficient to offset the expected decrease in higher margin product revenue both
on a quarterly and annual basis. Moreover, the Company's product sales are
ordinarily made to healthcare providers that establish their own Lifeline
programs. These healthcare providers typically rent, rather than sell, the
Lifeline products to subscribers and accordingly following such time as a
product is no longer used by a subscriber, it is returned to the healthcare
provider and becomes available for rent to another subscriber. As a result of
this use and reuse of the Company's products, sales of such products are
dependent on growth in the number of subscribers and on the ability of the
Company to encourage its healthcare provider customers to replace their existing
inventory by continuing to enhance its products with new features.
The Company may expand its operations through the acquisition of additional
businesses, such as its recent acquisition of certain assets formerly owned by
SOS Industries, Inc. in April 2001. There can be no assurance that the Company
will be able to identify, acquire or profitably manage additional businesses or
successfully integrate any acquired businesses into the Company without
substantial expenses, delays or other operational or financial problems. In
addition, acquisitions may involve a number of special risks, including
diversion of management's attention, failure to retain key acquired personnel,
unanticipated events, contingent liabilities and amortization of acquired
intangible assets. There can be no assurance that the acquired businesses, if
any, will achieve anticipated revenues or earnings.
-15-
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." The Company
had no holdings of derivative financial or commodity-based instruments or other
market risk sensitive instruments entered into for trading purposes at March 31,
2001. As described in the following paragraphs, the Company believes that it
currently has no material exposure to interest rate and foreign currency
exchange rate risks in its instruments entered into for other than trading
purposes.
Interest rates
The Company's balance sheet includes a revolving credit facility and a term loan
that are subject to interest rate risk. Both loans are priced at floating rates
of interest, with a base of LIBOR or prime rate at the Company's option. As a
result of these factors, at any given time, a change in interest rates could
result in either an increase or decrease in the Company's interest expense. The
Company performed a sensitivity analysis as of March 31, 2001 to assess the
potential effect of a 100 basis point increase or decrease in interest rates and
concluded that short-term changes in interest rates should not materially affect
the Company's consolidated financial position, results of operations or cash
flows.
Foreign currency exchange rates
The Company's earnings are affected by fluctuations in the value of the U.S.
Dollar as compared to the Canadian Dollar, as a result of the sale of its
products and services in Canada and translation adjustments associated with the
conversion of the Company's Canadian subsidiary into the reporting currency
(U.S. Dollar). As such, the Company's exposure to changes in Canadian exchange
rates could impact the Company's consolidated financial position, results of
operations or cash flows. The Company performed a sensitivity analysis as of
March 31, 2001 to assess the potential effect of a 10% increase or decrease in
Canadian foreign exchange rates and concluded that short-term changes in
Canadian exchange rates should not materially affect the Company's consolidated
financial position, results of operations or cash flows. The Company's
sensitivity analysis of the effects of changes in foreign currency exchange
rates did not factor in a potential change in sales levels or local prices for
its services/products.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K - No reports on Form 8-K were filed for the
three months ended March 31, 2001.
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LIFELINE SYSTEMS, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
May 11, 2001 LIFELINE SYSTEMS, INC.
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Date Registrant
/s/ Ronald Feinstein
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Ronald Feinstein
Chief Executive Officer
/s/ Dennis M. Hurley
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Dennis M. Hurley
Senior Vice President of Finance and
Administration, Principal Financial
and Accounting Officer
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