<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 September 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
October 31, 2000: 5,997,282
<PAGE>
LIFELINE SYSTEMS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2000
and December 31, 1999 3
Consolidated Statements of Income and Comprehensive Income -
Three and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - Nine
months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-11
ITEM 2.
Management's Discussion and Analysis of Results of
Operations and Financial Condition 11-18
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
ITEM 4.
Submission of Matters to a Vote of Security Holders 19
ITEM 6.
Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,014 $ 1,415
Accounts receivable, net 8,802 9,247
Inventories 1,225 2,605
Net investment in sales-type leases 2,882 2,310
Prepaid expenses and other current assets 1,228 832
Prepaid income taxes 704 1,013
Deferred income taxes 2,575 1,788
------------- -------------
Total current assets 20,430 19,210
Property and equipment, net 25,595 26,852
Net investment in sales-type leases 5,428 5,747
Goodwill and other intangible assets, net 10,189 5,551
Other assets 163 25
------------- -------------
Total assets $ 61,805 $ 57,385
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,326 $ 1,801
Accrued expenses 2,385 2,224
Accrued payroll and payroll taxes 1,607 2,133
Accrued income taxes 438 140
Deferred revenues 651 846
Current portion of capital lease obligation 531 478
Current portion of long term debt 723 405
Product warranty and other current liabilities 938 458
Accrued restructuring and other non-recurring charges 1,893 656
------------- -------------
Total current liabilities 10,492 9,141
Deferred income taxes 5,097 4,592
Deferred compensation 315 559
Other non-current liabilities 311 -
Long term portion of capital lease obligation 1,518 1,779
Long term debt, net of current portion 1,271 1,575
Accrued restructuring and other non-recurring charges, long term 1,237 -
------------- -------------
Total liabilities 20,241 17,646
Commitments and contingencies
Stockholders' equity:
Common stock, $.02 par value, 20,000,000 shares authorized, 6,618,371
shares issued at September 30, 2000 and 6,563,657 shares
issued at December 31, 1999 132 131
Additional paid-in capital 19,115 18,626
Retained earnings 27,649 25,941
Less: Treasury stock at cost, 621,089 shares at September 30, 2000
and December 31, 1999 (4,556) (4,556)
Notes receivable - officers (650) (400)
Accumulated other comprehensive loss/cumulative translation adjustment (126) (3)
------------- -------------
Total stockholders' equity 41,564 39,739
------------- -------------
Total liabilities and stockholders' equity $ 61,805 $ 57,385
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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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 Nine months ended
September 30, September 30,
-------------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Services $ 14,388 $ 12,006 $ 41,174 $ 34,483
Net product sales 6,240 5,760 17,274 16,287
Finance and rental income 389 362 1,102 1,159
--------- --------- ---------- ----------
Total revenues 21,017 18,128 59,550 51,929
--------- --------- ---------- ----------
Costs and expenses
Cost of services 9,413 7,964 27,112 21,174
Cost of sales 1,807 1,802 4,976 4,589
Selling, general, and administrative 7,206 7,198 20,863 19,710
Research and development 394 346 1,174 1,131
Restructuring charge and
other non-recurring charges 2,700 423 2,685 2,623
--------- --------- ---------- ----------
Total costs and expenses 21,520 17,733 56,810 49,227
--------- --------- ---------- ----------
Income (loss) from operations (503) 395 2,740 2,702
--------- --------- ---------- ----------
Other income (expense)
Interest income 186 28 410 191
Interest expense (77) (41) (255) (79)
Other income - 356 - 852
--------- --------- ---------- ----------
Total other income, net 109 343 155 964
--------- --------- ---------- ----------
Income (loss) before income taxes (394) 738 2,895 3,666
Provision (benefit) for income taxes (162) 306 1,187 1,438
--------- --------- ---------- ----------
Net income (loss) (232) 432 1,708 2,228
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments (35) (30) (73) 61
--------- --------- ---------- ----------
Comprehensive income (loss) $ (267) $ 402 $ 1,635 $ 2,289
========= ========= ========== ==========
Net income (loss) per weighted average share:
Basic $ (0.04) $ 0.07 $ 0.29 $ 0.38
========= ========= ========== ==========
Diluted $ (0.04) $ 0.07 $ 0.28 $ 0.35
========= ========= ========== ==========
Weighted average shares:
Basic 5,995 5,913 5,976 5,875
========= ========= ========== ==========
Diluted 5,995 6,277 6,210 6,324
========= ========= ========== ==========
</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>
Nine months ended
September 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,708 $ 2,228
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 314 855
Depreciation and amortization 5,554 4,148
Treasury stock issued for employee compensation - 14
Deferred income taxes (282) 791
Deferred compensation (29) -
Changes in operating assets and liabilities:
Accounts receivable 418 (773)
Inventories 1,380 (797)
Net investment in sales-type leases (253) (284)
Prepaid expenses and other assets (225) 1,007
Accrued payroll and payroll taxes (511) (1,300)
Accounts payable, accrued expenses and other liabilities 304 (997)
Income taxes payable 303 (1,216)
Accrued restructuring charge (226) 598
--------- ----------
Net cash provided by operating activities 11,155 4,274
--------- ----------
Cash flows from investing activities:
Purchases of investments - (3,145)
Sales and maturities of investments - 9,841
Additions to property and equipment (3,017) (7,859)
Business purchases and other (6,118) (3,660)
--------- ----------
Net cash used in investing activities (9,135) (4,823)
--------- ----------
Cash flows from financing activities:
Principal payments under long term obligations (2,803) (193)
Proceeds from issuance of debt 2,444 900
Issuance of note to officer (250) -
Purchase of treasury stock - (535)
Proceeds from issuance of common stock 275 323
--------- ----------
Net cash (used in) provided by financing activities (334) 495
--------- ----------
Effect of foreign exchange on cash (87) 43
--------- ----------
Net increase (decrease) in cash and cash equivalents 1,599 (11)
Cash and cash equivalents at beginning of period 1,415 2,702
--------- ----------
Cash and cash equivalents at end of period $ 3,014 $ 2,691
========= ==========
Non-cash activity:
Capital leases $ 165 $ -
Acquisition related obligation 660 -
Issuance of note receivable for exercise of stock option - 300
Deferred compensation 215 983
</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 September 30, 2000, the consolidated results of its operations
for the three and nine months ended September 30, 2000 and 1999 and cash
flows for the nine months ended September 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 nine-month period ended September 30, 2000
are not necessarily indicative of the results expected for the full year.
2. Details of property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- --------------
<S> <C> <C>
Property and equipment:
Equipment $ 22,230 $ 21,442
Furniture and fixtures 702 597
Equipment leased to others 14,792 12,935
Equipment under capital leases 3,335 3,170
Leasehold improvements 4,935 4,885
Capital in progress 597 786
--------- -----------
46,591 43,815
Less: accumulated depreciation and amortization (20,996) (16,963)
--------- -----------
$ 25,595 $ 26,852
========= ===========
</TABLE>
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. The calculation of per share earnings is as follows:
<TABLE>
<CAPTION>
(In thousands except per share figures)
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
-----
Net income (loss) ($232) $ 432 $1,708 $2,228
Weighted average common shares outstanding 5,995 5,913 5,976 5,875
Net income (loss) per share, basic ($0.04) $ 0.07 $ 0.29 $ 0.38
===== ======= ====== ======
Diluted:
-------
Net income (loss) for calculating diluted earnings
per share ($232) $ 432 $1,708 $2,228
Weighted average common shares outstanding 5,995 5,913 5,976 5,875
Common stock equivalents - 364 234 449
----- ------- ------ ------
Total weighted average shares 5,995 6,277 6,210 6,324
Net income (loss) per share, diluted ($0.04) $ 0.07 $ 0.28 $ 0.35
======= ======= ====== ======
</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. During the third quarter of 1999, the Company received
a final payment of approximately $0.3 million, net of applicable negotiation
fees and also 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 operations in
both the United States and Canada.
Geographic Segment Data
Net revenues 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, 2000 and 1999 and the financial position as of September 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 Nine months ended
Dollars in September 30, September 30,
thousands ------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales:
United States $19,459 $16,741 $54,967 $48,025
Canada 1,558 1,387 4,583 3,904
----------------------------------------------------------
$21,017 $18,128 $59,550 $51,929
==========================================================
Net Income (Loss):
United States $ (386) $ 288 $ 1,289 $ 1,870
Canada 154 144 419 358
----------------------------------------------------------
$ (232) $ 432 $ 1,708 $ 2,228
==========================================================
<CAPTION>
September 30, December 31,
2000 1999
-----------------------------
<S> <C> <C>
Total Assets:
United States $56,955 $53,970
Canada 4,850 3,415
-----------------------------
$61,805 $57,385
=============================
</TABLE>
6. 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 a battery-
related issue with 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 support for the cost of installer visits to subscriber homes
to replace the buttons.
On September 2, 1999, the Company and Protection One mutually agreed to
terminate their 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.
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
-8-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. RESTRUCTURING AND NON RECURRING CHARGES (continued)
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 included 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.
At September 30, 2000, accrued restructuring and non-recurring charges of
approximately $3.1 million represented nearly $296,000 of total remaining
severance costs, $134,000 of unpaid, unreimbursed costs related to the
termination of the merger agreement with Protection One, and $2.7 million of
costs associated with the anticipated cost of addressing erroneous low-battery
signals in personal help buttons.
The following is a roll-forward of accrued restructuring and non-recurring
charges for the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, Amounts Amounts September 30,
1999 Recorded Utilized 2000
---------------------------------------------------------
<S> <C> <C> <C> <C>
Reduction of workforce $522 ($226) $ 296
and other cash flows
Unreimbursed merger 134 - 134
costs
Erroneous low battery - $2,700 2,700
signals
---------------------------------------------------------
Total $656 $2,700 ($226) $3,130
=========================================================
</TABLE>
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. The Company was
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. LONG TERM DEBT (continued)
not in compliance with a certain covenant during the third quarter of 2000
because it recorded the $2.7 million non-recurring charge. The Company obtained
a waiver from its bank for this covenant.
This line of credit matures on June 30, 2002, and as of September 30, 2000 the
Company had $2.0 million outstanding under this line.
8. INTANGIBLES
In September 2000, Lifeline Systems, Canada, a wholly owned subsidiary of the
Company, completed the acquisition of the Argus Emergency Medical division of
Microtec Enterprises Inc. of Quebec, Canada. Argus provides personal response
services similar to the services provided by the Company. The purchase price
was approximately $1.5 million of which $1.1 million was paid at the closing
with the remainder to be paid during 2001 and 2002. This acquisition was
accounted for as a purchase transaction, and the resulting goodwill will be
amortized over an estimated life of 10 years.
During the first nine months of 2000, the Company paid approximately $4.6
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 does not expect that the adoption of SAB 101 will have a
material impact on its financial position or results of operations.
In September 2000, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." This consensus requires that all shipping and handling amounts billed to
a customer in a sale transaction should represent revenues earned for the goods
provided and therefore be classified as revenue. Adoption of the consensus
reached on EITF Issue 00-10 is required no later than the required
implementation date for SAB 101. The Company is in the process of assessing the
impact of the consensus reached on EITF Issue 00-10 and does not anticipate this
having a material effect on its overall financial position or results of
operations.
-10-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. RECENT ACCOUNTING PRONOUNCEMENTS (continued)
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 was effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a
material impact on the Company's 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.
RESULTS OF OPERATIONS
Total revenues for the quarter ended September 30, 2000 increased approximately
16% to $21.0 million as compared to total revenues of $18.1 million for the
quarter ended September 30, 1999. For the nine months ended September 30, 2000,
total revenues were $59.6 million or nearly 15% greater than total revenues of
$51.9 million for the first nine months of 1999.
Service revenues were $14.4 million for the quarter ended September 30, 2000, an
increase of 20% over the $12.0 million recorded for the quarter ended September
30, 1999. For the nine months ended September 30, 2000 service revenues grew
19% to $41.2 million from $34.5 million for the same period in 1999. Service
revenues represent 69% of the Company's year to date total revenues as compared
to 66% of total revenues for the first nine months of 1999. The Company
continues to experience growth in its service segment, but it believes that this
growth has been 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 continues to make significant improvements in
service recovery in connection with those challenges. As of September 30, 2000,
it was monitoring over 305,000 subscribers, 14% more than the 267,000
subscribers monitored at September 30, 1999. The Company's ability to sustain
the current level of service revenue growth depends on its ability to maintain
the CareSystem platform without significant issues, expand the
-11-
<PAGE>
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 third quarter of 2000 were $6.2 million, an
improvement of 8% over $5.8 million for third quarter of 1999. For the nine
months ended September 30, 2000, net product revenues were $17.3 million, an
increase of 6% from $16.3 million for the same period in 1999. This increase
during 2000 has been a result of an improved average selling price of the
Company's communicators during the three and nine months ended September 30,
2000. Also, an improvement in the Company's service performance, after a
challenging second half of 1999 where the Company experienced lower equipment
sales than it had expected, has resulted in increased net product revenues for
2000. Although the Company believed it would have declining product sales in
1999, it believes that challenges with its service during 1999 led to even lower
than anticipated product sales during that period, as customers were reluctant
to purchase equipment until the CareSystem platform implementation was
completed. The Company still expects declining product sales in future periods
as it continues packaging products and services into a single service offering.
Finance and rental income, representing revenue earned from the Company's
portfolio of sales-type leases, increased over 7% in the third quarter of 2000
to $389,000, from $362,000 for the third quarter of 1999. For the nine months
ended September 30, 2000, finance and rental income declined approximately 5% to
$1.1 million from $1.2 million for the first nine months of 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
sales.
Total recurring revenues, consisting of service revenues and finance and rental
income, increased 19% for the three and nine months ended September 30, 2000, to
$14.8 million and $42.3 million, respectively, as compared to $12.4 million and
$35.6 million, respectively, for the same periods in 1999. As the Company
continues to focus on its service business, it expects its recurring revenues to
continue to increase in future periods.
Cost of services, as a percentage of service revenues, was 65% for the three
months ended September 30, 2000 as compared to 66% for the same period in 1999.
For the nine-month period ended September 30, 2000, cost of services was 66% of
service revenues as compared to 61% for the first nine months of 1999. Cost of
services remains high due to a variety of reasons. The Company incurred a labor
rate increase during 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 nine months ended September 30, 2000 in addition to
related information technology consulting expenses, as the Company is
experiencing a very competitive employment market for information technology
professionals. For the nine-month period ended September 30, 2000, the Company
also incurred nine 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 nine months of 2000 than the same period in
1999 as it includes amortization for all purchases during 1999 and the first
nine months of 2000.
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<PAGE>
Cost of sales was 29% of net product sales for the three and nine months ended
September 30, 2000, as compared to 31% and 28% for the three and nine months
ended September 30, 1999, respectively. The Company completed the transition of
its manufacturing operations to Ademco during the third quarter of 1999. At that
time, the Company incurred additional temporary costs that resulted in an
increase in cost of sales for the third quarter of 1999. 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 34% for the third quarter of 2000 as compared to 40% for the
third quarter of 1999. For the nine months ended September 30, 2000 SG&A
expenses were 35% of total revenues as compared to 38% for the nine months ended
September 30, 1999. Actual current third quarter SG&A expenses were consistent
with the third quarter of 1999 at $7.2 million. For the nine months ended
September 30, 2000, SG&A expenses increased nearly $1.2 million to $20.9 million
from $19.7 for the nine months ended September 30, 1999. The Company's improved
2000 revenue performance and its ability to control its SG&A expenses has
resulted in improved SG&A percentages for the first three and nine months of
2000. The year to date SG&A dollar increase was due primarily to expenditures
for a total company quality initiative which was introduced in 2000, increased
costs associated with recruiting and consulting in a very competitive employment
market for information technology professionals and increased sales and
management bonuses relating to the improved 2000 performance. The Company may
experience an increase in SG&A expenses as it is starting to introduce new
sales, marketing and business initiatives that had been delayed during the first
half of 2000 because of the implementation issues surrounding the CareSystem
platform.
Research and development expenses remained consistent at 2% of total revenues
for the three and nine months ended September 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 September 2000, the Company recorded a pre-tax non-recurring charge of
approximately $2.7 million for costs it expects to incur to address a battery-
related issue with 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 support for the cost of installer visits to subscriber homes
to replace the buttons.
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 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.
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. During the third quarter of 1999, the Company received
a final payment of
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approximately $0.3 million, net of applicable negotiation fees and also recorded
this payment as other income.
The Company's effective tax rate was 41% for the nine months ended September 30,
2000 compared to 39% for the nine months ended September 30, 1999. The Company's
effective tax rate has increased since the Company has outsourced its
manufacturing operations to Ademco and it no longer has certain tax benefits
associated with manufacturing. Also, because the Company does not have tax-
exempt investments, it no longer utilizes a subsidiary with a favorable tax
status which it had used during the first nine months of 1999.
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 does not expect that the adoption of SAB 101 will have a material impact
on its financial position or results of operations.
In September 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." This consensus requires that all shipping and handling amounts billed to
a customer in a sale transaction should represent revenues earned for the goods
provided and therefore be classified as revenue. Adoption of the consensus
reached on EITF Issue 00-10 is required no later than the required
implementation date for SAB 101. The Company is in the process of assessing the
impact of the consensus reached on EITF Issue 00-10 and does not anticipate this
having a material effect on its overall financial position or results of
operations.
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 was effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a
material impact on the Company's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, the Company's portfolio of cash
and cash equivalents increased $1.6 million to $3.0 million at September 30,
2000 from $1.4 million at December 31, 1999. The increase was mainly
attributable to profitable operations of $10.0 million. Also, during 1999, the
Company generated a higher than normal increase in inventory in anticipation of
the outsourcing of its manufacturing function. As a result, the oversupply of
inventory at the end of 1999 resulted in lower expenditures needed for inventory
purchases during 2000. The Company also borrowed $2.4 million under its line of
credit, which was offset by payments of approximately $2.8 million related to
outstanding debt obligations, $4.6 million to local community hospitals and
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distributors of its personal response products and services in connection with
new service agreements and the payment of $1.1 million for the purchase of the
Argus Emergency Medical division of Microtec Enterprises Inc. of Quebec, Canada.
The Company also incurred expenditures of $1.9 million for Company-owned
equipment provided directly to customers under comprehensive service agreements
and to subscribers not serviced by local Lifeline programs.
In September 2000, Lifeline Systems, Canada, a wholly owned subsidiary of the
Company, completed the acquisition of the Argus Emergency Medical division of
Microtec Enterprises Inc. of Quebec, Canada. Argus provides personal response
services similar to the services provided by the Company. The purchase price was
approximately $1.5 million of which $1.1 million was paid at the closing with
the remainder to be paid during 2001 and 2002. This acquisition was accounted
for as a purchase transaction, and the resulting goodwill will be amortized over
an estimated life of 10 years.
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 $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, 2000 the Company had made purchases of
approximately $2.7 million under these agreements.
The Company is party to a fifteen-year lease, expiring in 2013, 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. The Company was not in compliance with
a certain covenant during the third quarter of 2000 because it recorded the $2.7
million non-recurring charge. The Company obtained a waiver from its bank for
this covenant. This line of credit matures on June 30, 2002, and as of September
30, 2000 the Company had $2.0 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 cash equivalents and amounts available under its $10.0 million
line of credit. The Company expects these sources will be
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sufficient to finance the cash needs of the Company through the next twelve
months. This includes the continued investment in its 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.
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.
The Company is currently experiencing a battery-related issue with some of its
personal help buttons worn by subscribers. Certain personal help buttons are
erroneously transmitting low battery signals. While the buttons that exhibit
this erroneous low battery condition still contain sufficient power to activate
the communicator when the button is pressed and do not place the Company's
subscribers at risk, the Company believes it is prudent to replace those buttons
exhibiting this condition. The Company has recorded a non-recurring charge of
approximately $2.7 million, or $0.25 on a per share basis, for the third quarter
ended September 30, 2000 for costs it expects to incur to address this issue,
including anticipated material and mailing costs for exchanging buttons,
providing hospital programs with higher inventory levels for the planned swap,
and support for the cost of installer visits to subscriber homes to replace the
button. The Company cannot be certain that the charge it recorded to address
this issue will be sufficient to cover all of its associated expenses, or that
its reputation, business, financial condition or results of operations will not
be otherwise affected.
During the third quarter of 1999, the Company completed the outsourcing of the
manufacturing of its personal response equipment to the Ademco Group, a division
of Honeywell International, Inc. This decision represented a change in the
Company's manufacturing strategy, as it no longer supports a manufacturing site
at its corporate location. There can be no assurance that the Company will
realize the intended cost savings it anticipates, or that it will not experience
delays in obtaining products from Ademco as a result of process difficulties,
component shortages or for other reasons. Any such delay could have a material
adverse effect on the Company's business, financial condition, or results of
operations.
The Company's results are partially dependent on its ability to develop services
and products that keep pace with continuing technological changes, evolving
industry standards, changing subscriber preferences and new service and product
introductions by the Company's competitors. Lifeline's future success will
depend on its ability to enhance its existing services and products (including
accessories), to introduce new service and product offerings to meet and adapt
to changing customer requirements and emerging technologies on a timely basis
and to offer such products and services at competitive prices. There can be no
assurance that Lifeline will be successful in identifying, developing,
manufacturing or marketing new services and products or enhancing its existing
services and products on a timely basis or that Lifeline will be able to offer
such services and products at
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<PAGE>
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 product revenue
during the first nine months of 2000 over the same period of the prior year,
product 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 product revenue both on a quarterly and annual basis. Moreover,
the Company's product sales are ordinarily made to healthcare providers that
establish their own Lifeline programs. These healthcare providers typically
rent, rather than sell, the Lifeline products to subscribers and accordingly
following such time as a product is no longer used by a subscriber, it is
returned to the healthcare provider and becomes available for rent to another
subscriber. As a result of this use and reuse of the Company's products, sales
of such products are dependent on growth in the number of subscribers and on the
ability of the Company to encourage its healthcare provider customers to replace
their existing inventory by continuing to enhance its products with new
features.
The Company may expand its operations through the acquisition of additional
businesses. 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.
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.
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IMPACT OF THE YEAR 2000 ISSUE
As of September 30, 2000 the Company has not experienced any disruptions related
to year 2000 issues.
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 September
30, 2000. 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 consists of 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 basis 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 sensitivity analysis as of September 30, 2000 to
assess the potential effect of a 100 basis point increase or decrease in
interest rates and concluded that near-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 sensitivity analysis as of
September 30, 2000 to assess the potential effect of a 10% increase or decrease
in Canadian foreign exchange rates and concluded that near-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, operations or local
prices for our services/products.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting in Lieu of Annual Meeting of Stockholders of the Company was
held on July 19, 2000. The stockholders of the Company elected members of the
Board of Directors, approved the Company's 2000 Stock Incentive Plan and 2000
Employee Stock Purchase Plan, ratified the selection of PricewaterhouseCoopers
LLP as the Company's auditors for 2000 and voted on a stockholder proposal.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON STOCK
--------------------------------
BROKER
FOR AGAINST ABSTAINED NON- VOTES
--- ------- --------- ----------
<S> <C> <C> <C> <C>
Ronald Feinstein 5,153,316 - 600,925 -
Joseph E. Kasputys, Ph.d. 5,288,086 - 466,155 -
Approval of the Company's 2000
Stock Incentive Plan 2,645,413 1,971,156 251,148 886,524
Approval of the Company's 2000
Employee Stock Purchase Plan 4,033,380 584,153 250,184 886,524
Selection of
PricewaterhouseCoopers LLP 5,739,926 11,903 2,412 -
Stockholder proposal 570,354 4,231,444 65,919 886,524
</TABLE>
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, 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.
November 8, 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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