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 September 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
October 31, 2001: 6,181,703
LIFELINE SYSTEMS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2001
and December 31, 2000 3
Consolidated Statements of Income and Comprehensive Income -
Three and nine months ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows - Nine
months ended September 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 6.
Exhibits and Reports on Form 8-K 17
SIGNATURES 18
-2-
LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
2001 2000
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,855 $ 4,417
Accounts receivable, net 14,329 9,223
Inventories 3,444 1,641
Net investment in sales-type leases 2,988 2,909
Prepaid expenses and other current assets 1,462 873
Prepaid income taxes 2,068 636
Deferred income taxes 1,750 1,986
--------- ----------
Total current assets 29,896 21,685
Property and equipment, net 30,075 26,406
Goodwill and other intangible assets, net 14,233 11,204
Net investment in sales-type leases 4,572 5,073
Other assets 165 160
--------- ----------
Total assets $ 78,941 $ 64,528
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,927 $ 2,576
Accrued expenses 2,430 2,063
Accrued payroll and payroll taxes 3,285 2,985
Accrued income taxes 1,575 232
Deferred revenues 850 755
Current portion of capital lease obligation 1,118 583
Current portion of long term debt 4,460 405
Product warranty and other current liabilities 400 751
Accrued restructuring and other non-recurring charges 1,006 1,341
--------- ----------
Total current liabilities 17,051 11,691
Deferred income taxes 5,782 4,897
Deferred compensation and other non-current liabilities 292 617
Long term portion of capital lease obligation 1,900 1,531
Long term debt, net of current portion 3,724 1,170
Accrued restructuring and other non-recurring charges, long term 742 1,237
--------- ----------
Total liabilities 29,491 21,143
Commitments and contingencies
Stockholders' equity:
Common stock, $.02 par value, 20,000,000 shares authorized,
6,797,238 shares issued at September 30, 2001 and 6,641,554 shares
issued at December 31, 2000 136 133
Additional paid-in capital 21,077 19,296
Retained earnings 33,590 29,126
Less: Treasury stock at cost, 621,089 shares at September 30, 2001
and December 31, 2000 (4,556) (4,556)
Notes receivable - officer (550) (550)
Accumulated other comprehensive loss/cumulative translation
adjustment (247) (64)
--------- ----------
Total stockholders' equity 49,450 43,385
--------- ----------
Total liabilities and stockholders' equity $ 78,941 $ 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 Nine months ended
September 30, September 30,
-------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues
Services $ 17,577 $ 14,396 $ 50,328 $ 41,195
Net product sales 7,669 6,375 19,888 17,623
Finance and rental income 337 389 1,029 1,102
-------- -------- -------- --------
Total revenues 25,583 21,160 71,245 59,920
-------- -------- -------- --------
Costs and expenses
Cost of services 10,778 9,421 30,840 27,133
Cost of sales 2,601 1,942 6,594 5,325
Selling, general, and administrative 8,740 7,206 25,294 20,863
Research and development 410 394 1,185 1,174
Restructuring charge and
other non-recurring charges -- 2,700 -- 2,685
-------- -------- -------- --------
Total costs and expenses 22,529 21,663 63,913 57,180
-------- -------- -------- --------
Income (loss) from operations 3,054 (503) 7,332 2,740
-------- -------- -------- --------
Other income (expense)
Interest income 39 186 135 410
Interest expense (142) (77) (304) (255)
Other income (loss) (44) -- (34) --
-------- -------- -------- --------
Total other income (expense), net (147) 109 (203) 155
-------- -------- -------- --------
Income (loss) before income taxes 2,907 (394) 7,129 2,895
Provision (benefit) for income taxes 929 (162) 2,665 1,187
-------- -------- -------- --------
Net income (loss) 1,978 (232) 4,464 1,708
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments (98) (35) (115) (73)
-------- -------- -------- --------
Comprehensive income (loss) $ 1,880 $ (267) $ 4,349 $ 1,635
======== ======== ======== ========
Net income (loss) per weighted average share:
Basic $ 0.32 $ (0.04) $ 0.73 $ 0.29
======== ======== ======== ========
Diluted $ 0.30 $ (0.04) $ 0.69 $ 0.28
======== ======== ======== ========
Weighted average shares:
Basic 6,174 5,995 6,122 5,976
======== ======== ======== ========
Diluted 6,536 5,995 6,440 6,210
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months ended
September 30,
-----------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 4,464 $ 1,708
Adjustments to reconcile net income to net cash provided
by operating activities:
Non-cash portion of non-recurring charge -- 2,700
Write off of fixed assets 13 314
Depreciation and amortization 6,686 5,554
Deferred income taxes 1,121 (282)
Deferred compensation 36 (29)
Changes in operating assets and liabilities:
Accounts receivable (5,154) 418
Inventories (1,803) 1,380
Net investment in sales-type leases 422 (253)
Prepaid expenses, other current assets and other assets (2,030) (225)
Accrued payroll and payroll taxes 321 (511)
Accounts payable, accrued expenses and other liabilities 661 607
Accrued restructuring charge (830) (226)
-------- --------
Net cash provided by operating activities 3,907 11,155
-------- --------
Cash flows from investing activities:
Additions to property and equipment (6,932) (3,017)
Business purchases and other (4,998) (6,118)
-------- --------
Net cash used in investing activities (11,930) (9,135)
-------- --------
Cash flows from financing activities:
Principal payments under long term obligations (917) (2,803)
Proceeds from issuance of long term debt 3,578 2,444
Net proceeds (payments) under short-term borrowings 3,335 --
Issuance of note to officer -- (250)
Proceeds from issuance of common stock 1,498 275
-------- --------
Net cash provided by (used in) financing activities 7,494 (334)
-------- --------
Effect of foreign exchange on cash (33) (87)
-------- --------
Net increase (decrease) in cash and cash equivalents (562) 1,599
Cash and cash equivalents at beginning of period 4,417 1,415
-------- --------
Cash and cash equivalents at end of period $ 3,855 $ 3,014
======== ========
Non-cash activity:
Capital leases $ 1,518 $ 165
Acquisition related obligation 133 660
Deferred compensation 286 215
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 September 30, 2001, the consolidated statements of income for
the three and nine months ended September 30, 2001 and 2000 and the
consolidated statements of cash flows for the nine months ended September 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 to conform to the
current year presentation.
The results of operations for the nine-month period ended September 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):
September 30, December 31,
2001 2000
------------ ------------
Inventories:
Purchased parts and assemblies $ 588 $ 80
Work-in-process 33 -
Finished goods 2,823 1,561
------------ ------------
$ 3,444 $ 1,641
============ ============
Property and equipment:
Equipment $ 25,853 $ 22,608
Furniture and fixtures 784 613
Equipment provided to customers 15,585 11,707
Equipment under capital leases 5,087 3,535
Leasehold improvements 5,312 4,984
Capital in progress 307 1,230
------------ ------------
52,928 44,677
Less: accumulated depreciation and amortization (22,853) (18,271)
------------ ------------
Total property and equipment, net $ 30,075 $ 26,406
============ ============
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. The calculation of per share earnings (loss) is as follows:
(In thousands except per share figures)
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
Basic:
------
Net income (loss) $ 1,978 ($232) $ 4,464 $ 1,708
Weighted average common shares outstanding 6,174 5,995 6,122 5,976
Net income (loss) per share, basic $ 0.32 ($0.04) $ 0.73 $ 0.29
======= ======= ======= =======
Diluted:
--------
Net income (loss) for calculating diluted earnings $ 1,978 ($232) $ 4,464 $ 1,708
per share
Weighted average common shares outstanding 6,174 5,995 6,122 5,976
Common stock equivalents 362 - 318 234
------- ------- ------- -------
Total weighted average shares 6,536 5,995 6,440 6,210
Net income (loss) per share, diluted $ 0.30 ($0.04) $ 0.69 $ 0.28
======= ======= ======= =======
For the three and nine months ended September 30, 2001, options to purchase
108,340 shares and 218,290 shares, respectively, at an average exercise price of
$23.85 and $21.08, respectively, have not been included in the computation of
diluted net income per share as their effect would have been anti-dilutive. For
the nine months ended September 30, 2000, options to purchase 477,614 shares at
an average exercise price of $18.47 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, performing
and supporting its personal response monitoring service. 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 September 30, 2001 and 2000 and the financial position as of September 30,
2001 and December 31, 2000 is presented as follows:
Dollars in Three months ended Nine months ended
thousands September 30, September 30,
--------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net Sales:
United States $ 23,747 $ 19,594 $ 65,794 $ 55,316
Canada 1,836 1,566 5,451 4,604
--------------------------------------------
$ 25,583 $ 21,160 $ 71,245 $ 59,920
============================================
Net Income (Loss):
United States $ 1,805 $ (386) $ 3,979 $ 1,289
Canada 173 154 485 419
--------------------------------------------
$ 1,978 $ (232) $ 4,464 $ 1,708
============================================
September 30, December 31,
Total Assets: 2001 2000
---------------------------
United States $ 71,944 $ 58,725
Canada 6,997 5,803
---------------------------
$ 78,941 $ 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 expected 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 September 30, 2001, accrued restructuring and other non-recurring charges of
approximately $1.7 million represents the estimated remaining cost associated
with addressing the 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 nine months ended September 30, 2001:
December 31, Amounts September 30,
2000 Utilized 2001
-----------------------------------------
Reduction of workforce $ 85 ($85) $ -
and other cash flows
Erroneous low battery
signals 2,493 (745) 1,748
-----------------------------------------
Total $ 2,578 ($830) $ 1,748
==========================================
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
September 30, 2001 the Company had $8.2 million outstanding under this line.
7. GOODWILL AND INTANGIBLES
During the first nine months of 2001, the Company recorded approximately $0.9
million of intangible assets related to provider agreements entered into with
community hospitals ("customer") 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 provide monitoring and/or business support services to existing and
future subscribers of the customer in accordance with the terms of the
agreements. The Company amortizes the acquisition costs over the initial 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. The acquisition is being accounted for as a purchase transaction, and
the resulting goodwill is being amortized over an estimated life of 10 years.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. 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.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed Of."
SFAS 144 applies to all long-lived assets (including discontinued operations)
and consequently amends Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business." SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. The Company is currently determining
the impact, if any, SFAS 144 will have 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 September 30, 2001 increased approximately
21% to $25.6 million as compared to total revenues of $21.2 million for the
quarter ended September 30, 2000. For the nine months ended September 30, 2001,
total revenues grew by nearly 19% to $71.2 million, from $59.9 million for the
same period in 2000. Total revenues include revenue generated from the assets of
SOS Industries, Inc. from the date of acquisition, which as previously
announced, were acquired by Lifeline in April 2001, and are not expected to be
accretive until next year.
Service revenues were $17.6 million for the three months ended September 30,
2001, an increase of 22% from $14.4 million for the three months ended September
30, 2000. For the nine months ended September 30, 2001, services revenues
increased 22% to $50.3 million from $41.2 million for the first nine months of
2000. Service revenues represent nearly 71% of the Company's year to date total
revenues as compared to 69% of total revenues for the first nine months of 2000.
This growth is a result of a variety of factors. The Company is continuing its
service offering strategy and achieved an 11% increase in its monitored
subscriber base to approximately 340,000 subscribers as of September 30, 2001
from 305,000 subscribers monitored at September 30, 2000. The Company also
introduced a price increase for its monitoring services in 2001 that has
resulted in higher average revenue per subscriber in 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 certain 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. 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 third quarter of 2001 increased 20% over the third
quarter of 2000 to $7.7 million from $6.4 million. For the nine months ended
September 30, 2001, net product revenues were $19.9 million, an increase of
nearly 13% from $17.6 million for the same period in 2000. During 2001, the
Company launched a newly developed site-monitoring platform for those customers
who perform their own monitoring at their local facilities. As a result, the
majority of the
-11-
increase in product revenue for the three and nine months ended September 30,
2001 is due to 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 are expected to continue. However, with a finite number of customers
who perform their own monitoring at their local facilities, the Company believes
that equipment sales in 2002 will be lower than 2001. It also continues to
believe that equipment sales will remain flat or decline in periods subsequent
to 2002 as it has experienced little or no growth in sales of its home
communicators since it began providing its customers' subscribers with the
Lifeline service, which includes monitoring and the use of Company-owned home
communicators for a single fee.
Finance and rental income, representing revenue earned from the Company's
portfolio of sales-type leases, decreased approximately 13% in the third quarter
of 2001 to $337,000, from $389,000 for the third quarter of 2000. For the nine
months ended September 30, 2001, finance and rental income declined
approximately 6% to $1.0 million from $1.1 million for the same period in 2000.
With the Company's focus on its service offerings it expects finance income to
decline in future periods because such income is directly related to product
sales.
Total recurring revenues, consisting of service revenues and finance and rental
income, continued to grow and increased 21% for the three and nine months ended
September 30, 2001 to $17.9 million and $51.4 million, respectively, from $14.8
million and $42.3 million, respectively, for the same periods in 2000. These
increases are a result of the continued growth of the Company's service
offerings which increase the Company's recurring revenue base coupled with
recurring revenues generated from the acquisition of certain assets of SOS
Industries, Inc.
Cost of services, as a percentage of service revenues, significantly improved to
61% for the three and nine months ended September 30, 2001 as compared to 65%
and 66% for the three and nine months ended September 30, 2000. The improvement
is directly associated with the Company's goal of making its service offerings
more profitable. Cost of services increased $1.4 million to $10.8 million in the
third quarter of 2001 as compared to $9.4 million for the same period in 2000.
For the nine months ended September 30, 2001, cost of services was $30.8
million, an increase of $3.7 million from $27.1 million for the same year-to-
date period in 2000. These increases were a result of a variety of factors. The
Company incurred higher amortization of goodwill along with associated
operational costs in the first nine months of 2001 as a result of the purchase
of SOS Industries, Inc. in April 2001 and the purchase of Argus Emergency
Medical Division by the Company's Canadian subsidiary, Lifeline Systems, Canada,
in the third quarter of 2000. The Company also had higher amortization of
intangible acquisition costs incurred pursuant to provider agreements entered
into with its customers for monitoring and/or business support services the
Company provides under the terms of the agreement. The Company expects a
positive improvement in its fiscal 2001 service margin as compared to its fiscal
2000 service margin.
Cost of sales was 34% and 33% of net product sales for the three and nine months
ended September 30, 2001, respectively, as compared to 30% for the three and
nine months ended September 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 has a cost that is higher as a
percentage of revenue than the cost of the Company's home communicators. The
Company is also experiencing an increase in sales of its lower margin marketing
accessories in 2001 as compared to 2000 as its customers are marketing and
growing their Lifeline service. The
-12-
Company expects cost of sales as a percentage of net product sales to remain
flat or slightly increase for the remainder of 2001.
Selling, general and administrative ("SG&A") expenses, as a percentage of total
revenues, were 34% for the three months ended September 30, 2001 and 2000. For
the nine months ended September 30, 2001 and 2000, SG&A expenses were 36% and
35% of total revenues, respectively. For the nine months ended September 30,
2001, SG&A expenses increased $4.4 million to $25.3 million from $20.9 for the
nine months ended September 30, 2000. The Company's increased expenditures are
primarily attributable to sales and marketing initiatives in 2001 that the
Company did not incur during 2000. The Company also incurred consulting fees
associated with obtaining a Tax Increment Finance ("TIF") agreement, noted
below. The Company expects that SG&A expenses will remain at the same level
during the remainder of 2001 as it continues with its sales, marketing and
business initiatives.
Research and development expenses remained consistent at approximately 2% of
total revenues for the three and nine months ended September 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 37% for the nine months ended September 30,
2001 as compared to 41% for the same period in 2000. The reduction in the
Company's effective tax rate was due to a tax credit earned under a TIF
agreement with the town of Framingham, Massachusetts, where the Company
relocated in 1999. The Company believes it will continue to receive additional
ongoing tax credits under the TIF agreement during the 12 remaining years of its
corporate headquarters lease, which should result in a future lower effective
tax rate. Excluding the tax credit, Lifeline's tax rate has been approximately
41 percent. Earnings per share for the nine months ended September 30, 2001 was
positively impacted by this tax credit by approximately $0.03 per diluted share.
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.
-13-
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed Of."
SFAS 144 applies to all long-lived assets (including discontinued operations)
and consequently amends Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business." SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. The Company is currently determining
the impact, if any, SFAS 144 will have on its financial position and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2001, the Company's portfolio of cash
and cash equivalents decreased by approximately $0.6 million to $3.8 million at
September 30, 2001 from $4.4 million at December 31, 2000. A number of factors
resulted in a decrease in the Company's cash position. The Company purchased
property and equipment amounting to $6.9 million and paid nearly $0.6 million
for intangible assets related to provider agreements entered into with its
customers for monitoring and/or business support services provided by the
Company under the terms of the agreement. The Company experienced a net
increase in its accounts receivable portfolio of approximately $5.2 million as a
result of the 16% increase in revenue in the third quarter of 2001 compared to
the fourth quarter of 2000 and a temporary negative impact of reducing the third
quarter implementation of its new billing system to practice. There was also a
net inventory increase of $1.8 million as a result of the Company's new site-
monitoring platform and new initiatives being launched by the Company. The use
of cash to finance the purchase price of certain assets of SOS Industries, Inc.
in April 2001 was offset, in part by borrowings of nearly $3.6 million.
Profitable operations of $12.3 million and net proceeds remaining of $3.3
million from short-term borrowings under the Company's available working capital
line of credit 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 September 30, 2001 the Company had made purchases of
approximately $4.4 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 September 30, 2001 the Company had $8.2 million outstanding
under this line.
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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 the availability from time to time
under 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, 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 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
home communicators 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
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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
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. Although the Company believes it
is making progress in retaining and recruiting well-trained, highly capable
people, 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 nine months
of 2001 as compared to the same period in 2000, product revenue is anticipated
to remain flat or decline as a result of the Company's strategy of providing its
customers' subscribers with the Lifeline service, which includes monitoring and
the use of Company-owned home communicators during the period of the service
coverage, for a single fee. As the Company continues with this strategy 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, Lifeline home communicators to subscribers and
accordingly following such time as a home communicator 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
home communicators, 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.
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
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risk sensitive instruments entered into for trading purposes at September 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 September 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
September 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.
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 September 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.
November 9, 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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