<PAGE>
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, 2000 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, 2000: 5,989,483
<PAGE>
LIFELINE SYSTEMS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 2000
and December 31, 1999 3
Consolidated Statements of Income and Comprehensive Income -
Three and six months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - Six
months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-10
ITEM 2.
Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-16
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
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<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,142 $ 1,415
Accounts receivable, net 8,537 9,247
Inventories 1,258 2,605
Net investment in sales-type leases 2,689 2,310
Prepaid expenses and other current assets 1,035 832
Prepaid income taxes 704 1,013
Deferred income taxes 1,525 1,788
------- -------
Total current assets 18,890 19,210
Property and equipment, net 25,440 26,852
Net investment in sales-type leases 5,544 5,747
Goodwill and other intangible assets, net 8,002 5,551
Other assets 26 25
------- -------
Total assets $57,902 $57,385
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 646 $ 1,801
Accrued expenses 2,912 2,224
Accrued payroll and payroll taxes 1,093 2,133
Accrued income taxes 401 140
Deferred revenues 791 846
Current portion of capital lease obligation 533 478
Current portion of long term debt 405 405
Product warranty and other current liabilities 337 458
Accrued restructuring and other non-recurring charges 492 656
------- -------
Total current liabilities 7,610 9,141
Deferred income taxes 5,005 4,592
Deferred compensation 348 559
Other non-current liabilities 215 -
Long term portion of capital lease obligation 1,606 1,779
Long term debt, net of current portion 1,373 1,575
------- -------
Total liabilities 16,157 17,646
Commitments and contingencies
Stockholders' equity:
Common stock, $.02 par value, 20,000,000 shares authorized,
6,604,872 shares issued at June 30, 2000 and 6,563,657
shares issued at December 31, 1999 132 131
Additional paid-in capital 19,004 18,626
Retained earnings 27,882 25,941
Less: Treasury stock at cost, 621,089 shares at June 30, 2000
and December 31, 1999 (4,556) (4,556)
Notes receivable - officers (650) (400)
Accumulated other comprehensive loss/cumulative
translation adjustment (67) (3)
------- -------
Total stockholders' equity 41,745 39,739
------- -------
Total liabilities and stockholders' equity $57,902 $57,385
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Services $ 13,689 $ 11,481 $ 26,786 $ 22,477
Net product sales 5,813 5,705 11,034 10,527
Finance and rental income 352 389 713 797
----------- ----------- ---------- ------------
Total revenues 19,854 17,575 38,533 33,801
----------- ----------- ---------- ------------
Costs and expenses
Cost of services 8,947 6,819 17,699 13,210
Cost of sales 1,578 1,487 3,169 2,787
Selling, general, and administrative 7,196 6,223 13,657 12,512
Research and development 446 380 780 785
Restructuring charge and
other non-recurring charges (15) 2,200 (15) 2,200
------------ ----------- ----------- ------------
Total costs and expenses 18,152 17,109 35,290 31,494
------------ ----------- ----------- ------------
Income from operations 1,702 466 3,243 2,307
------------ ----------- ----------- ------------
Other income (expense)
Interest income 117 59 224 157
Interest expense (94) (31) (178) (39)
Other income - - - 503
------------ ------------ ----------- ------------
Total other income, net 23 28 46 621
------------ ------------ ----------- ------------
Income before income taxes 1,725 494 3,289 2,928
Provision for income taxes 707 159 1,348 1,132
------------ ------------ ----------- ------------
Net income 1,018 335 1,941 1,796
Other comprehensive income, net of tax
Foreign currency translation adjustments (30) 62 (38) 93
------------ ------------ ----------- ------------
Comprehensive income $ 988 $ 397 $ 1,903 $ 1,889
============ ============ =========== ============
Net income per weighted average share:
Basic $ 0.17 $ 0.06 $ 0.33 $ 0.31
============ ============ =========== ============
Diluted $ 0.16 $ 0.05 $ 0.31 $ 0.28
============ ============ =========== ============
Weighted average shares:
Basic 5,977 5,862 5,967 5,856
============ ============ =========== ============
Diluted 6,196 6,295 6,180 6,339
============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,941 $ 1,796
Adjustments to reconcile net income to net cash provided
by operating activities:
Write off of fixed assets 314 379
Depreciation and amortization 3,614 2,553
Deferred income taxes 676 (259)
Deferred compensation (211) (8)
Changes in operating assets and liabilities:
Accounts receivable 694 (243)
Inventories 1,347 (1,176)
Net investment in sales-type leases (176) (550)
Prepaid expenses, other current assets and other assets 105 (543)
Accrued payroll and payroll taxes (1,032) (1,341)
Accounts payable, accrued expenses and other liabilities (700) (1,498)
Income taxes payable 264 (142)
Accrued restructuring charge (164) 1,452
----------- ----------
Net cash provided by operating activities 6,672 420
----------- ----------
Cash flows from investing activities:
Purchases of investments - (2,640)
Sales and maturities of investments - 7,356
Additions to property and equipment (1,544) (5,757)
Business purchases and other (3,044) -
----------- ----------
Net cash used in investing activities (4,588) (1,041)
----------- ----------
Cash flows from financing activities:
Principal payments under long term obligations (1,474) (81)
Proceeds from issuance of debt 1,025 -
Issuance of note to officer (250) -
Proceeds from issuance of common stock 379 299
----------- ----------
Net cash provided by (used in) financing activities (320) 218
----------- ----------
Effect of foreign exchange on cash (37) 92
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,727 (311)
Cash and cash equivalents at beginning of period 1,415 2,702
---------- ----------
Cash and cash equivalents at end of period $ 3,142 $ 2,391
========== ==========
Non-cash activity:
Capital leases $ 129
Acquisition related obligation 285
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
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 June 30, 2000, the consolidated results of its operations for
the three and six months ended June 30, 2000 and 1999 and cash flows for the
six months ended June 30, 2000 and 1999.
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 and Form 10-K/A-1, as
filed with the Securities and Exchange Commission on March 30, 2000 and April
28, 2000, respectively, for the year ended December 31, 1999.
Certain amounts in the prior year have been reclassified from selling,
general, and administrative expenses to cost of services to conform to the
current year presentation.
The results of operations for the six-month period ended June 30, 2000 are
not necessarily indicative of the results expected for the full year.
2. Details of certain balance sheet captions are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Property and equipment:
Equipment $21,926 $21,442
Furniture and fixtures 613 597
Equipment leased to others 13,960 12,935
Equipment under capital leases 3,299 3,170
Leasehold improvements 4,927 4,885
Capital in progress 394 786
-------- ------------
45,119 43,815
Less: accumulated depreciation
and amortization (19,679) (16,963)
-------- ------------
$25,440 $26,852
======== ============
</TABLE>
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. The calculation of per share earnings is as follows:
(In thousands except per share figures)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
-----
Net income $ 1,018 $ 335 $ 1,941 $ 1,796
Weighted average common shares outstanding 5,977 5,862 5,967 5,856
Net income per share, basic $ 0.17 $ 0.06 $ 0.33 $ 0.31
======= ====== ======= =======
Diluted:
-------
Net income for calculating diluted
earnings per share $ 1,018 $ 335 $ 1,941 $ 1,796
Weighted average common shares outstanding 5,977 5,862 5,967 5,856
Common stock equivalents 219 433 213 483
------- ------ ------- -------
Total weighted average shares 6,196 6,295 6,180 6,339
Net income per share, diluted $ 0.16 $ 0.05 $ 0.31 $ 0.28
======= ====== ======= =======
</TABLE>
4. OTHER INCOME
In February 1999, the Company negotiated a buyout of its old corporate
headquarters facility lease. Pursuant to the arrangement, payments were made to
the Company during 1999 dependent on space becoming available in the old
facility. The Company received a payment of approximately $0.5 million during
the first quarter of 1999, net of applicable negotiation fees, and recorded this
payment as other income.
5. 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.
GEOGRAPHIC SEGMENT DATA
Net revenues to external customers are based on the location of the customer.
Geographic information related to the results of operations for the periods
ended June 30, 2000 and 1999 and the financial position as of June 30, 2000 and
December 31, 1999 is presented as follows:
-7-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
Three months ended Six months ended
Dollars in June 30, June 30,
thousands ------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Net Sales:
United States $18,315 $16,208 $35,508 $31,284
Canada 1,539 1,367 3,025 2,517
-------------------------------------------------------------------
$19,854 $17,575 $38,533 $33,801
===================================================================
Net Income:
United States $ 879 $ 222 $ 1,676 $ 1,582
Canada 139 113 265 214
--------------------------------------------------------------------
$ 1,018 $ 335 $ 1,941 $ 1,796
====================================================================
June 30, December 31,
Total Assets: 2000 1999
--------------------------------------
<S> <C> <C>
United States $ 53,799 $ 53,970
Canada 4,103 3,415
--------------------------------------
$ 57,902 $ 57,385
======================================
</TABLE>
6. RESTRUCTURING AND NON RECURRING CHARGES
In June 1999, the Company recorded a pre-tax restructuring charge of
approximately $2.2 million. Nearly $1.7 million was recorded as a result of the
outsourcing of the Company's equipment manufacturing operations to Ademco, an
international manufacturer of electronic equipment and a division of Honeywell
International, Inc. This charge included approximately $1.3 million of costs
related to the reduction in the Company's manufacturing workforce, and nearly
$379,000 of costs associated with the write down of certain manufacturing fixed
assets. During the second quarter of 1999, certain events occurred which
resulted in changes to the Company's original estimates for the cost of its
corporate headquarters' relocation. As a result, the restructuring charge
includes approximately $520,000 of costs not reflected in the Company's December
1997 restructuring charge associated with closing the Company's operations
located in Cambridge, Massachusetts.
On September 2, 1999, the Company and Protection One mutually agreed to
terminate their proposed merger agreement. In September 1999, the Company
recorded a pre-tax charge of $423,000 for unreimbursed costs incurred in
connection with the proposed merger. These costs included such items as
investment banker, legal and independent accountant fees.
-8-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At June 30, 2000, accrued restructuring and non-recurring charges of
approximately $492,000 represented nearly $358,000 of total remaining severance
costs and $134,000 of unpaid, unreimbursed costs which are associated with the
termination of the merger agreement with Protection One.
The following is a roll-forward of accrued restructuring and non-recurring
charges for the three months ended June 30, 2000:
December 31, Amounts June 30,
1999 Utilized 2000
-----------------------------------------------
Reduction of workforce $ 522 ($164) $ 358
and other cash flows
Unreimbursed merger 134 - 134
costs
-----------------------------------------------
Total $ 656 ($164) $ 492
===============================================
7. 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 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, 2000 the Company had $1.8 million outstanding under
this line.
-9-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INTANGIBLES
During the first half of 2000, the Company paid approximately $3.0 million to
local community hospitals and distributors of its personal response products and
services in connection with the purchase by the Company of the rights to service
and/or manage the personal response systems program being operated by these
entities. The majority of the purchase price related to these service agreements
consists of intangible assets. 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 intangible assets over the life of
the agreements, which is typically five years.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC released Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements. SAB 101 clarifies the SEC's views related
to revenue recognition and disclosure. SAB 101A was subsequently issued in
March 2000, deferring the requirement to adopt the revised guidance until the
period ended June 30, 2000. In June 2000 the SEC issued SAB 101B which further
defers the effective date for calendar year companies to the fourth quarter
2000. The Company is in the process of assessing the impact of this SAB and does
not anticipate this having a material effect on the consolidated financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN
44"),"Accounting for Certain Transactions involving Stock Compensation." FIN 44
clarifies the application of APB Opinion No. 25 regarding (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a stock option plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The Company continues to assess the
impact that FIN 44 will have on its financial position or results of operations.
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.
-10-
<PAGE>
RESULTS OF OPERATIONS
Total revenues for the quarter ended June 30, 2000 increased nearly 13% to $19.9
million as compared to total revenues of $17.6 million for the quarter ended
June 30, 1999. For the six months ended June 30, 2000, total revenues were
$38.5 million, or 14% greater than total revenues of $33.8 million for the same
period in 1999.
Service revenues grew 19% for the three and six months ended June 30, 2000 to
$13.7 million and $26.8 million, respectively, from $11.5 million and $22.5
million, respectively, for the same periods in 1999. Service revenues represent
nearly 70% of the Company's year to date total revenues as compared to 66% of
total revenues for the first six months of 1999. The Company continues to
experience growth in its service segment. However, it believes that this growth
was impacted by the service issues it faced in the third and fourth quarters of
1999 arising from the reduction to practice of its CareSystem monitoring
platform. The Company was monitoring over 292,000 subscribers as of June 30,
2000, 16% more than the 251,000 subscribers monitored at June 30, 1999. The
Company's ability to sustain the current level of service revenue growth depends
on its ability to complete the reduction to practice of the CareSystem platform
without significant issues, expand the market for its personal response
services, convert community hospital programs to service 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
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 2000 were slightly better than
the second quarter of 1999 at $5.8 million from $5.7 million. For the six
months ended June 30, 2000, net product revenues were $11.0 million, an increase
of nearly 5% from $10.5 million for the same period in 1999. This increase in
product revenues was mainly a result of an improvement in the Company's service
performance, after a challenging second half of 1999, where the Company
experienced lower equipment sales. Although the Company expected declining
product sales in 1999, it believes that challenges with its service during 1999
led to even lower than anticipated product sales and customers were reluctant to
purchase equipment until the CareSystem platform implementation was completed.
The Company continues to make significant improvements in service recovery in
connection with the challenges it faced with the 1999 implementation of the
CareSystem monitoring platform. However, it 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 revenue earned from the Company's
portfolio of sales-type leases, decreased nearly 10% in the second quarter of
2000 to $352,000, from $389,000 for the second quarter of 1999. For the six
months ended June 30, 2000, finance and rental income declined approximately 11%
to $713,000 from $797,000 for the same period in 1999. While the Company's
leasing portfolio continues to grow for its internally managed and funded
leasing program, it is experiencing slower growth as a result of the Company's
focus on its service business segment. The Company expects finance income to
decline in future periods as it is directly related to its product business.
Total recurring revenues, consisting of service revenues and finance and rental
income, increased 18% for the three and six months ended June 30, 2000, to $14.0
million and $27.5 million, respectively, as compared to $11.9 million and $23.3
million, respectively, for the same periods in
-11-
<PAGE>
1999. These increases reflect the continued expansion of the Company's service
business segment with its focus on increasing the Company's recurring revenue
base.
Cost of services, as a percentage of service revenues, was 65% and 66% for the
three and six months ended June 30, 2000 as compared to 59% for the same periods
in 1999. Cost of services remains high due to a variety of reasons. The
Company continues to maintain higher than normal staffing in its response center
as it continues to reduce the CareSystem call center platform to practice. The
Company also incurred a labor rate increase during the first half of 2000 for
its employees in its Customer Care organization in order to remain competitive
in the tight labor market. The first full year of depreciation of its
CareSystem call center platform is also impacting cost of services for the
quarter and six months ended June 30, 2000. The Company incurred six months of
customer service costs associated with TelCare Systems, Inc. which was purchased
by the Company in August 1999. Additionally, the amortization of intangible
acquisition costs, which began in 1999, is significantly higher for the first
six months of 2000 than the same period in 1999 as it includes amortization for
all purchases during 1999 and the first half of 2000.
Cost of sales was 27% and 29% of net product sales for the three and six months
ended June 30, 2000, respectively, as compared to 26% for the three and six
months ended June 30, 1999. Cost of sales for the quarter and six months ended
June 30, 2000 was higher than the same periods a year ago as there were
efficiencies created in the first half of 1999 by higher than expected
production in anticipation of the Company outsourcing its manufacturing function
to Ademco. The Company believes that the decision to outsource to Ademco will
result in technological innovation and future cost savings opportunities.
Selling, general and administrative ("SG&A") expenses, as a percentage of total
revenues, were 36% for the second quarter of 2000 as compared to 35% during the
second quarter of 1999. For the six months ended June 30, 2000 SG&A expenses
were 35% of total revenues as compared to 37% for the six months ended June 30,
1999. Actual second quarter SG&A expenses were $7.2 million, an increase of
nearly $1.0 million as compared to the same period in 1999. For the six months
ended June 30, 2000, SG&A expenses increased $1.2 million to $13.7 million from
$12.5 for the six months ended June 30, 1999. The SG&A increase was due
primarily to expenditures for a total company quality initiative which was
introduced in 2000, and to increased costs associated with recruiting and
consulting in a very competitive employment market for information technology
professionals. The Company expects to experience an increase in SG&A expenses as
it introduces new sales, marketing and business initiatives that had been
delayed during the first six months of 2000 as the implementation issues
surrounding the CareSystem platform were stabilized during the first half of
2000.
Research and development expenses remained consistent at 2% of total revenues
for the three and six months ended June 30, 2000 and 1999. 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 2000.
In June 1999, the Company recorded a pre-tax restructuring charge of
approximately $2.2 million as a result of the outsourcing of the Company's
equipment manufacturing operations to Ademco and a change to the Company's
original estimates for the cost of its corporate headquarters' relocation.
-12-
<PAGE>
On September 2, 1999, the Company and Protection One mutually agreed to
terminate their proposed merger and therefore the Company recorded a pre-tax
charge of $423,000 for unreimbursed costs incurred in connection with the
proposed merger.
In February 1999, the Company negotiated a buyout of its old corporate
headquarters facility lease. Pursuant to the arrangement, payments were made to
the Company during 1999 dependent on space becoming available in the old
facility. The Company received a payment of approximately $0.5 million during
the first quarter of 1999, net of applicable negotiation fees, and recorded this
payment as other income.
The Company's effective tax rate was 41% for the six months ended June 30, 2000
compared to 38.7% for the six months ended June 30, 1999. The Company's
effective tax rate increased, as it no longer has tax exempt investments at June
30, 2000 as it had at June 30, 1999. Because of this, the Company is no longer
utilizing a subsidiary with a favorable tax status. Also since the Company has
outsourced its manufacturing operations to Ademco, it no longer has certain tax
benefits associated with manufacturing.
In December 1999, the SEC released Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements. SAB 101 clarifies the SEC's views related
to revenue recognition and disclosure. SAB 101A was subsequently issued in
March 2000, deferring the requirement to adopt the revised guidance until the
period ended June 30, 2000. In June 2000 the SEC issued SAB 101B which further
defers the effective date for calendar year companies to the fourth quarter
2000. The Company is in the process of assessing the impact of this SAB and does
not anticipate this having a material effect on the consolidated financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN
44"),"Accounting for Certain Transactions involving Stock Compensation." FIN 44
clarifies the application of APB Opinion No. 25 regarding (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a stock option plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The Company continues to assess the
impact that FIN 44 will have on its financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2000, the Company's portfolio of cash and
cash equivalents increased by more than $1.7 million to $3.1 million at June 30,
2000 from $1.4 million at December 31, 1999. The increase was mainly
attributable to profitable operations of $6.3 million. The Company also
borrowed $1.0 million under its line of credit. During the first six months of
1999, the Company generated a higher than normal increase in inventory in
anticipation of the outsourcing of its manufacturing function. As a result, the
Company spent approximately $1.2 million, net of sales of inventory, for
additional raw material purchases at that time. The oversupply of inventory at
the end of 1999 resulted in lower expenditures needed for inventory purchases in
the first half of 2000. Payments of approximately $1.5 million for its
outstanding debt obligations and $3.0 million to local community hospitals and
distributors of its personal response products and services in connection with
new service agreements offset
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these increases. The Company also incurred expenditures of $1.1 million for
Company-owned equipment provided directly to customers under comprehensive
service agreements and to subscribers not serviced by local Lifeline programs.
In April 2000, the Company loaned $250,000 to its Chief Executive Officer,
pursuant to a collateralized promissory note. The note, which bears interest at
a rate of 6.94%, payable annually in arrears, is due April 5, 2005 and is
collateralized by a pledge of 25,641 shares of common stock of the Company.
The Company is party to Master Lease Agreements for up to $2.7 million for
furniture, computers, security systems and other related equipment purchased in
connection with the Company's move to its new corporate facility and for other
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 June 30, 2000 the Company had made purchases
for the full value under these agreements. The Company is currently negotiating
to obtain a new Master Lease Agreement.
The Company is party to a fifteen-year lease for an 84,000 square foot facility
in Framingham, Massachusetts for its corporate headquarters. Annual base rental
payments under the lease approximate $814,000. At the Company's option the
lease contains two five-year renewal options.
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, 2000 the Company had $1.8 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 cash equivalents and amounts available 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 new response center platform, expenditures needed
for its corporate headquarters, the requirements of its internally funded lease
financing program, any 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.
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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 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.
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 represents 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
will depend on Ademco to provide it with prototypes and otherwise assist in the
product development process. There can be no assurance that the Company will
not experience delays in receiving such assistance.
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.
While the Company has generally experienced an increase in equipment revenue
during the first six months of 2000 over the same period of the prior year,
equipment revenue had been declining 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 equipment revenue both on a quarterly and annual
basis.
The Company may expand its operations through the acquisition of additional
businesses. 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
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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.
In addition, the reduction in the Company's cash and cash equivalent balances
may adversely affect the Company's ability to pay for acquisitions.
The Company's equipment 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'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, 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.
IMPACT OF THE YEAR 2000 ISSUE
During 1999 the Company completed a formal six-phase Year 2000 program to
determine the extent of its own Year 2000 exposures. The Awareness Phase was
ongoing and involved continuous communication, both internally and externally
with customers and vendors. The Assessment Phase identified the Company's
products, services and equipment that contain micro-controllers, as well as all
information technology hardware and software to identify two-digit year
exposures. The Planning Phase was the Company's decision-making phase, and it
prioritized the schedule of resolutions to be implemented. In the Resolution
Phase, the Company modified, replaced or retired systems where necessary. The
Testing Phase tested the Company's readiness to roll out its results. Finally
the Rollout Phase implemented the entire process into production.
As of June 30, 2000 the Company has not experienced any disruptions related to
year 2000 issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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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 June 30, 2000.
(b) Exhibits - The Exhibits which are filed with this Report or which are
incorporated herein by reference are set forth in the Exhibit Index which
appears on page 19 hereof.
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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 11, 2000 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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EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed herewith
or have heretofore been filed with the Securities and Exchange Commission under
the Securities Act of 1933 or the Securities and Exchange Act of 1934 and are
referred to and incorporated herein by reference to such filings.
EXHIBIT NO. EXHIBIT SEC DOCUMENT REFERENCE
----------- ------- ----------------------
10.71 Amended Employment Agreement
Agreement between Len Wechsler and
Lifeline Systems, Canada, dated July 2000
10.72 Registrant's 2000 Stock Incentive Plan
10.73 Registrant's 2000 Employee Stock Option
Plan
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