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 June 30, 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 this issuer's class of common stock as of July
31, 2001: 6,169,795
LIFELINE SYSTEMS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 2001
and December 31, 2000 3
Consolidated Statements of Income and Comprehensive Income -
Three and six months ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows - Six
months ended June 30, 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 4.
Submission of Matters to a Vote of Security Holders 17
ITEM 6.
Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2001 2000
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 2,559 $ 4,417
Accounts receivable, net 10,484 9,223
Inventories 2,067 1,641
Net investment in sales-type leases 2,895 2,909
Prepaid expenses and other current assets 1,465 873
Prepaid income taxes 961 636
Deferred income taxes 1,557 1,986
---------- -----------
Total current assets 21,988 21,685
Property and equipment, net 29,830 26,406
Goodwill and other intangible assets, net 14,630 11,204
Net investment in sales-type leases 4,536 5,073
Other assets 165 160
----------- -----------
Total assets $ 71,149 $ 64,528
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,964 $ 2,576
Accrued expenses 2,011 2,063
Accrued payroll and payroll taxes 2,155 2,985
Deferred revenues 859 755
Current portion of capital lease obligation 1,076 583
Current portion of long term debt 653 405
Product warranty and other current liabilities 2,243 983
Accrued restructuring and other non-recurring charges 816 1,341
----------- -----------
Total current liabilities 11,777 11,691
Deferred income taxes 4,796 4,897
Deferred compensation and other non-current liabilities 408 617
Long term portion of capital lease obligation 2,068 1,531
Long term debt, net of current portion 3,361 1,170
Accrued restructuring and other non-recurring charges, long term 1,237 1,237
----------- -----------
Total liabilities 23,647 21,143
Commitments and contingencies
Stockholders' equity:
Common stock, $.02 par value, 20,000,000 shares authorized,
6,788,350 shares issued at June 30, 2001 and 6,641,554 shares
issued at December 31, 2000 136 133
Additional paid-in capital 20,962 19,296
Retained earnings 31,612 29,126
Less: Treasury stock at cost, 621,089 shares at June 30, 2001
and December 31, 2000 (4,556) (4,556)
Notes receivable - officer (550) (550)
Accumulated other comprehensive loss/cumulative translation adjustment (102) (64)
----------- -----------
Total stockholders' equity 47,502 43,385
----------- -----------
Total liabilities and stockholders' equity $ 71,149 $ 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 Six months ended
June 30, June 30,
-------------------------------- ----------------------------------
2001 2000 2001 2000
------------- ------------- -------------- --------------
Revenues
Services $ 16,945 $ 13,695 $ 32,751 $ 26,799
Net product sales 6,834 5,926 12,219 11,248
Finance and rental income 319 352 692 713
------------- ------------- -------------- --------------
Total revenues 24,098 19,973 45,662 38,760
------------- ------------- -------------- --------------
Costs and expenses
Cost of services 10,552 8,953 20,062 17,712
Cost of sales 2,135 1,691 3,993 3,383
Selling, general, and administrative 8,703 7,196 16,554 13,657
Research and development 384 446 775 780
Restructuring charge and
other non-recurring charges - (15) - (15)
------------- ------------- -------------- --------------
Total costs and expenses 21,774 18,271 41,384 35,517
------------- ------------- -------------- --------------
Income from operations 2,324 1,702 4,278 3,243
------------- ------------- -------------- --------------
Other income (expense)
Interest income 39 117 96 224
Interest expense (90) (94) (162) (178)
Other income 53 - 10 -
------------- ------------- -------------- --------------
Total other income (expense), net 2 23 (56) 46
------------- ------------- -------------- --------------
Income before income taxes 2,326 1,725 4,222 3,289
Provision for income taxes 958 707 1,736 1,348
------------- ------------- -------------- --------------
Net income 1,368 1,018 2,486 1,941
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments 80 (30) (22) (38)
------------- ------------- -------------- --------------
Comprehensive income $ 1,448 $ 988 $ 2,464 $ 1,903
============= ============= ============== ==============
Net income per weighted average share:
Basic $ 0.22 $ 0.17 $ 0.41 $ 0.33
============= ============= ============== ==============
Diluted $ 0.21 $ 0.16 $ 0.39 $ 0.31
============= ============= ============== ==============
Weighted average shares:
Basic 6,144 5,977 6,096 5,967
============= ============= ============== ==============
Diluted 6,486 6,196 6,393 6,180
============= ============= ============== ==============
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)
Six months ended
June 30,
---------------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 2,486 $ 1,941
Adjustments to reconcile net income to net cash provided
by operating activities:
Write off of fixed assets - 314
Depreciation and amortization 4,382 3,614
Deferred income taxes 328 676
Deferred compensation 36 (211)
Changes in operating assets and liabilities:
Accounts receivable (1,275) 694
Inventories (426) 1,347
Net investment in sales-type leases 551 (176)
Prepaid expenses, other current assets and other assets (923) 105
Accrued payroll and payroll taxes (824) (1,032)
Accounts payable, accrued expenses and other liabilities (781) (436)
Accrued restructuring charge (525) (164)
----------- -----------
Net cash provided by operating activities 3,029 6,672
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (5,078) (1,544)
Business purchases and other (3,323) (3,044)
----------- -----------
Net cash used in investing activities (8,401) (4,588)
----------- -----------
Cash flows from financing activities:
Principal payments under long term obligations (541) (449)
Proceeds from issuance of long term debt 2,393 -
Net proceeds (payments) under short-term borrowings 248 -
Issuance of note to officer - (250)
Proceeds from issuance of common stock 1,425 379
----------- -----------
Net cash provided by (used in) financing activities 3,525 (320)
----------- -----------
Effect of foreign exchange on cash (11) (37)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,858) 1,727
Cash and cash equivalents at beginning of period 4,417 1,415
----------- -----------
Cash and cash equivalents at end of period $ 2,559 $ 3,142
=========== ===========
Non-cash activity:
Capital leases $ 1,405 $ 129
Acquisition related obligation 1,495 285
Deferred compensation 244 -
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
LIFELINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 2001 and the consolidated statements of
income and cash flows for the three and six months ended June 30, 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 six-month period ended June 30, 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):
June 30, December 31,
2001 2000
------------ ------------
Inventories:
Purchased parts and assemblies $ 271 $ -
Work-in-process - -
Finished goods 1,796 1,641
------------ ------------
$ 2,067 $ 1,641
============ ============
Property and equipment:
Equipment $ 23,278 $ 22,608
Furniture and fixtures 784 613
Equipment leased to others 14,691 11,707
Equipment under capital leases 4,940 3,535
Leasehold improvements 5,309 4,984
Capital in progress 2,086 1,230
------------ ------------
51,088 44,677
Less: accumulated depreciation and amortization (21,258) (18,271)
------------ ------------
Total property and equipment, net $ 29,830 $ 26,406
============ ============
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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 Six months ended
June 30, June 30,
--------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Basic:
-----
Net income $1,368 $1,018 $2,486 $1,941
Weighted average common shares outstanding 6,144 5,977 6,096 5,967
Net income per share, basic $ 0.22 $ 0.17 $ 0.41 $ 0.33
======= ======= ======= =======
Diluted:
-------
Net income for calculating diluted earnings per share $1,368 $1,018 $2,486 $1,941
Weighted average common shares outstanding 6,144 5,977 6,096 5,967
Common stock equivalents 342 219 297 213
------- ------- ------- -------
Total weighted average shares 6,486 6,196 6,393 6,180
Net income per share, diluted $ 0.21 $ 0.16 $ 0.39 $ 0.31
======= ======= ======= =======
For the three and six months ended June 30, 2001 options to purchase 207,160 and
284,660 shares, respectively, at an average exercise price of $21.35 and $20.17,
respectively, have not been included in the computation of diluted net income
per share as their effect would have been anti-dilutive. For the three and six
months ended June 30, 2000 options to purchase 482,584 shares at an average
exercise price of $18.21 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 and
marketing 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 June 30, 2001 and 2000 and the financial position as of June 30, 2001 and
December 31, 2000 is presented as follows:
Dollars in Three months ended Six months ended
thousands June 30, June 30,
---------------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net Sales:
United States $22,231 $18,428 $42,047 $35,722
Canada 1,867 1,545 3,615 3,038
---------------------------------------------------
$24,098 $19,973 $45,662 $38,760
===================================================
Net Income:
United States $ 1,192 $ 879 $ 2,174 $ 1,676
Canada 176 139 312 265
---------------------------------------------------
$ 1,368 $ 1,018 $ 2,486 $ 1,941
===================================================
June 30, December 31,
2001 2000
--------------------------
Total Assets:
United States $64,483 $58,725
Canada 6,666 5,803
--------------------------
$71,149 $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 June 30, 2001, accrued restructuring and other non-recurring charges of
approximately $2.0 million included approximately $27,000 of total remaining
severance costs, previously disclosed, and $2.0 million of costs associated with
addressing erroneous low-battery signals in personal help buttons, as described
in the preceding paragraph.
-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 six months ended June 30, 2001:
December 31, Amounts June 30,
2000 Utilized 2001
-----------------------------------
Reduction of workforce $ 85 ($58) $ 27
and other cash flows
Erroneous low battery
signals 2,493 (467) 2,026
-----------------------------------
Total $2,578 ($525) $2,053
===================================
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
June 30, 2001 the Company had $4.0 million outstanding under this line.
7. GOODWILL AND INTANGIBLES
During the first six months of 2001, the Company recorded approximately $0.7
million of intangible assets related to agreements entered into with 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 acquisition costs over the
life of the agreements, which is typically five years
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 subscribers located in 37 states. The purchase price was $3.8
million plus $250 for every subscriber in excess of 10,000 who signed an
agreement to be monitored by the Company within 90 days after the closing.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. GOODWILL AND INTANGIBLES (continued)
Approximately $2.5 million of the purchase price was paid at the closing with
the remainder paid within 90 days after the closing. The acquisition is being
accounted for as a purchase transaction, and the resulting goodwill is being
amortized over an estimated life of 10 years.
8. CHANGE IN ACCOUNTING ESTIMATE
During the second quarter of 2001, the Company analyzed the acquisitions of
AlertCall, Inc. and Lutheran Social Services which were both distributors of the
Company's personal response products and services, and TelCare, Inc. which
provided personal response services similar to those of the Company's. As a
result of this analysis, the Company revised its estimate of the useful lives of
these business acquisitions from five years to ten years. The change in estimate
resulted in an after-tax savings of approximately $78,000 and an after-tax
diluted earnings per share of $0.01 for the three and six months ending June 30,
2001.
9. RECENT ACCOUNTING PRONOUCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is currently assessing but has not yet determined the impact of SFAS 142
on its financial position and results of operations.
-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 June 30, 2001 increased nearly 21% to $24.1
million as compared to total revenues of $20.0 million for the quarter ended
June 30, 2000. For the six months ended June 30, 2001, total revenues were
$45.7 million, 18% greater than total revenues of $38.8 million for the same
period in 2000. Total revenues include revenue generated from the assets of SOS
Industries, Inc., which as previously announced, were acquired by Lifeline in
April 2001, and are not expected to be accretive until next year.
Service revenues grew 24% for the three months ended June 30, 2001 to $16.9
million from $13.7 million for the same period in 2000. For the six months
ended June 30, 2001, services revenues were $32.8 million, an increase of 22%
from $26.8 million for the first half of 2000. Service revenues represent
nearly 72% of the Company's year to date total revenues as compared to 69% of
total revenues for the first six months of 2000. This growth is a result of a
variety of factors. The Company is continuing its service offering strategy and
achieved a 14% increase in its monitored subscriber base to approximately
332,000 subscribers as of June 30, 2001 from 292,000 subscribers monitored at
June 30, 2000. The Company also introduced a price increase for its monitoring
services in 2001 which resulted in a higher average revenue per subscriber in
the first half of 2001 as compared to the same period in 2000. The increase in
service revenues and subscribers is also due in part to the acquisition of the
assets of SOS Industries, Inc., as mentioned above. 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 second quarter of 2001 increased 15% over the
second quarter of 2000 to $6.8 million from $5.9 million. For the six months
ended June 30, 2001, net product revenues were $12.2 million, an increase of
nearly 9% from $11.2 million for the same period in 2000. During the second
quarter of 2001, the Company launched a newly developed site-monitoring platform
for those customers who perform their own monitoring. The majority of the
increase in
-11-
product revenue during the second quarter is a result of sales of this new
platform. The Company expects that product sales will be favorably impacted for
the remainder of 2001 as sales of this new platform is expected to continue.
However, the Company continues to believe that equipment sales will remain flat
or decline in future periods as it has historically experienced little or no
growth in sales of its product since the Company began packaging products and
services into a single service offering.
Finance and rental income, representing revenue earned from the Company's
portfolio of sales-type leases, decreased approximately 9% in the second quarter
of 2001 to $319,000, from $352,000 for the second quarter of 2000. For the six
months ended June 30, 2001, finance and rental income declined approximately 3%
to $692,000 from $713,000 for the same period in 2000. 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.
Total recurring revenues, consisting of service revenues and finance and rental
income, increased 23% for the three months ended June 30, 2001 to $17.3 million
from $14.0 million for the same period in 2000. For the six months ended June
30, 2001, total recurring revenues increased 22% to $33.4 million from $27.5
million for the first half of 2000. These increases reflect the continued
expansion of the Company's service business segment with its focus on increasing
the Company's recurring revenue base coupled with recurring revenues generated
from the acquisition of SOS Industries, Inc.
Cost of services increased to $20.1 million for the six months ended June 30,
2001 from $17.7 million for 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 half of 2001 as a result of the
purchase of SOS Industries, Inc. in April 2001 and the purchase of Argus
Emergency Medical Division in the third quarter of 2000. The Company also had
higher amortization of intangible acquisition costs incurred pursuant to
agreements entered into with community hospitals for conversion to services
provided by the Company. However, cost of services, as a percentage of service
revenues, significantly improved to 62% and 61% for the three and six months
ended June 30, 2001 as compared to 65% and 66% for the same periods in 2000 and
is aligned with the Company's goal of making its service offerings more
profitable. The Company expects a positive improvement in its fiscal 2001
service margin as compared to its fiscal 2000 service margin.
Cost of sales was 31% and 33% of net product sales for the three and six months
ended June 30, 2001, respectively, as compared to 29% and 30% for the three and
six months ended June 30, 2000. Cost of sales was higher as a percentage of net
product sales than the comparable periods in 2000 due in part to sales of the
Company's new site monitored platform which maintains a cost that is higher than
the cost of the Company's home communicators. The Company also experienced an
increase in sales of its lower margin marketing accessories as compared to the
same periods in 2000 as its customers are marketing and growing their Lifeline
service. The Company expects a slight increase in cost of sales as a percentage
of net product sales for the remainder of 2001.
Selling, general and administrative ("SG&A") expenses, as a percentage of total
revenues, were 36% for the three and six months ended June 30, 2001 as compared
to 36% and 35% during the second quarter and six months ended June 30, 2000.
For the six months ended June 30, 2001, SG&A expenses increased $2.9 million to
$16.6 million from $13.7 for the six months ended June 30, 2000. The Company's
increased expenditures are primarily attributable to sales and marketing
initiatives in
-12-
the first half of 2001 that the Company did not incur during the first half of
2000. Increased information technology personnel and consultants in the first
half 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 approximately consistent with 2000 as a
percentage of total revenues.
Research and development expenses remained consistent at approximately 2% of
total revenues for the three and six months ended June 30, 2001 and 2000.
Research and development efforts are focused on ongoing product improvements and
developments. The Company expects to maintain these expenses at a consistent
percentage of total revenues for the remainder of 2001.
The Company's effective tax rate was 41% for the six months ended June 30, 2001
and 2000.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is currently assessing but has not yet determined the impact of SFAS 142
on its financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2001, the Company's portfolio of cash and
cash equivalents decreased by more than $1.8 million to $2.6 million at June 30,
2001 from $4.4 million at December 31, 2000. The decrease in cash was mainly
attributable to payments of approximately $2.3 million in employee bonuses, a
net increase in the Company's accounts receivable portfolio of approximately
$1.3 million as a result of the 18% increase in revenue, and purchases of
property and equipment amounting to $5.1 million. The use of cash to finance the
purchase price of the assets of SOS Industries, Inc. in April 2001 was offset,
in part by borrowings of nearly $2.4 million. The Company also paid
approximately $0.5 million to 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 $7.2 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
-13-
leases are recorded as capital leases and accordingly the associated assets are
being depreciated over their estimated useful life. As of June 30, 2001 the
Company had made purchases of approximately $4.3 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 June 30, 2001 the Company had $4.0 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. There can be no assurance that the
Company will realize the intended benefits from the new system.
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 a previously
disclosed battery-related 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. 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
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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. 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 revenue growth is dependent on its ability to increase the number
of subscribers served by its monitoring centers while continuing to sell its
product to its healthcare programs. 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 and product 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
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's product revenue has increased during the first half of 2001
as compared to the first half of 2000, product revenue is anticipated to remain
flat 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 or new
technology.
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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.
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 June 30,
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 June 30, 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
June 30, 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.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 16, 2001. The
stockholders of the Company elected members of the Board of Directors and
ratified the selection of PricewaterhouseCoopers LLP as the Company's
accountants for 2001.
NUMBER OF SHARES OF COMMON STOCK
--------------------------------
BROKER
FOR AGAINST ABSTAINED NON- VOTES
--- ------- --------- ----------
Carolyn C. Roberts 4,575,742 - 43,871 -
Gordon C. Vineyard, M.D. 4,589,006 - 30,607 -
Ratification of appointment of
PricewaterhouseCoopers LLP 4,604,732 10,631 4,250 -
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 June 30, 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.
August 10, 2001 LIFELINE SYSTEMS, INC.
----------------------- ----------------------
Date Registrant
/s/ Ronald Feinstein
--------------------
Ronald Feinstein
Chief Executive Officer
/s/ Dennis M. Hurley
--------------------
Dennis M. Hurley
Senior Vice President of Finance and
Administration, Principal Financial
and Accounting Officer
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