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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, 2002 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 ___
---
Indicate by check mark whether the registrant is an accelerated filer Yes x
---
No_____
Number of shares outstanding of the issuer's class of common stock as of October
31, 2002: 6,460,451
LIFELINE SYSTEMS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2002
and December 31, 2001 3
Consolidated Statements of Income and Comprehensive Income -
Three and nine months ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows - Nine months
ended September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6-12
ITEM 2.
Management's Discussion and Analysis of Results of
Operations and Financial Condition 13-19
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk 19
ITEM 4.
Controls and Procedures 20
PART II. OTHER INFORMATION
ITEM 6.
Exhibits and Reports on Form 8-K 21
SIGNATURES 22
-2-
LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
2002 2001
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 7,511 $ 5,742
Accounts receivable, net 10,535 12,118
Inventories 6,245 4,129
Net investment in sales-type leases 2,322 2,874
Prepaid expenses and other current assets 2,217 1,947
Deferred income taxes 1,478 1,436
---------------- ----------------
Total current assets 30,308 28,246
Property and equipment, net 30,749 30,712
Goodwill 8,790 7,226
Other intangible assets, net 5,365 6,414
Net investment in sales-type leases 4,277 4,337
Other assets 88 67
---------------- ----------------
Total assets $ 79,577 $ 77,002
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,869 $ 1,972
Accrued expenses 4,152 2,197
Accrued payroll and payroll taxes 3,421 4,282
Accrued income taxes 2,164 730
Deferred revenues 1,035 1,026
Current portion of capital lease obligation 104 1,080
Current portion of long term debt - 1,105
Product warranty and other current liabilities 245 329
Accrued restructuring and other non-recurring charges, current 163 506
---------------- ----------------
Total current liabilities 13,153 13,227
Deferred income taxes 6,191 5,799
Other non-current liabilities 75 150
Long term portion of capital lease obligation 25 1,657
Long term debt, net of current portion - 3,343
Accrued restructuring and other non-recurring charges, long term 261 617
---------------- ----------------
Total liabilities 19,705 24,793
Commitments and contingencies
Stockholders' equity:
Common stock, $0.02 par value, 20,000,000 shares authorized, 7,081,400
shares issued at September 30, 2002 and 6,934,461 shares issued
at December 31, 2001 142 139
Additional paid-in capital 23,616 22,000
Retained earnings 40,943 35,446
Less: Treasury stock at cost, 621,089 shares at September 30, 2002
and December 31, 2001 (4,556) (4,556)
Notes receivable - officer - (550)
Accumulated other comprehensive loss/cumulative translation adjustment (273) (270)
---------------- ----------------
Total stockholders' equity 59,872 52,209
---------------- ----------------
Total liabilities and stockholders' equity $ 79,577 $ 77,002
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands except for per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues
Services $ 19,841 $ 17,577 $ 57,479 $ 50,328
Net product sales 6,167 7,669 19,200 19,888
Finance and rental income 338 337 987 1,029
---------- ---------- ---------- ---------
Total revenues 26,346 25,583 77,666 71,245
---------- ---------- ---------- ---------
Costs and expenses
Cost of services 11,115 10,778 32,727 30,840
Cost of sales 1,746 2,601 5,978 6,594
Selling, general, and administrative 9,548 8,740 28,463 25,294
Research and development 387 410 1,298 1,185
---------- ---------- ---------- ---------
Total costs and expenses 22,796 22,529 68,466 63,913
---------- ---------- ---------- ---------
Income from operations 3,550 3,054 9,200 7,332
---------- ---------- ---------- ---------
Other income (expense)
Interest income 23 39 73 135
Interest expense (1) (142) (142) (304)
Other income (loss) - (44) 32 (34)
---------- ---------- ---------- ---------
Total other income (expense), net 22 (147) (37) (203)
---------- ---------- ---------- ---------
Income before income taxes 3,572 2,907 9,163 7,129
Provision for income taxes 1,429 929 3,666 2,665
---------- ---------- ---------- ---------
Net income 2,143 1,978 5,497 4,464
Other comprehensive loss, net of tax
Foreign currency translation adjustments (115) (98) (2) (115)
---------- ---------- ---------- ---------
Comprehensive income $ 2,028 $ 1,880 $ 5,495 $ 4,349
========== ========== ========== =========
Net income per weighted average share:
Basic $ 0.33 $ 0.32 $ 0.86 $ 0.73
========== ========== ========== =========
Diluted $ 0.32 $ 0.30 $ 0.82 $ 0.69
========== ========== ========== =========
Weighted average shares:
Basic 6,458 6,174 6,407 6,122
========== ========== ========== =========
Diluted 6,728 6,536 6,730 6,440
========== ========== ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months ended
September 30,
----------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 5,497 $ 4,464
Adjustments to reconcile net income to net cash provided
by operating activities:
Write off of fixed assets - 13
Depreciation and amortization 7,484 6,686
Deferred income taxes 350 1,121
Deferred compensation - 36
Changes in operating assets and liabilities:
Accounts receivable 1,517 (5,154)
Inventories (2,116) (1,803)
Net investment in sales-type leases 612 422
Prepaid expenses, other current assets and other assets (290) (2,030)
Accrued payroll and payroll taxes (862) 321
Accounts payable, accrued expenses and other liabilities 3,135 661
Accrued restructuring charge (699) (830)
---------- ---------
Net cash provided by operating activities 14,628 3,907
---------- ---------
Cash flows from investing activities:
Additions to property and equipment (5,821) (6,932)
Business purchases and other (2,133) (4,998)
---------- ---------
Net cash used in investing activities (7,954) (11,930)
---------- ---------
Cash flows from financing activities:
Principal payments under long term obligations (7,056) (917)
Proceeds from issuance of long term debt - 3,578
Net proceeds under short-term borrowings - 3,335
Repayment of notes by officer 550 -
Proceeds from issuance of common stock 1,614 1,498
---------- ---------
Net cash provided by (used in) financing activities (4,892) 7,494
---------- ---------
Effect of foreign exchange on cash (13) (33)
---------- ---------
Net increase (decrease) in cash and cash equivalents 1,769 (562)
Cash and cash equivalents at beginning of period 5,742 4,417
---------- ---------
Cash and cash equivalents at end of period $ 7,511 $ 3,855
========== =========
Non-cash activity:
Capital leases $ - $ 1,518
Acquisition related obligation - 133
Deferred compensation (5) 286
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
LIFELINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The information furnished has been prepared from the accounts without
audit. In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments necessary, consisting only of
those of a normal recurring nature, to present fairly its consolidated
financial position as of September 30, 2002 and the consolidated statements
of income and cash flows for the three and nine months ended September 30,
2002 and 2001.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, these statements should be read in
conjunction with the consolidated financial statements and the related
notes included in the Company's Annual Report on Form 10-K, as filed with
the Securities and Exchange Commission on March 29, 2002, for the year
ended December 31, 2001.
The results of operations for the nine-month period ended September 30,
2002 are not necessarily indicative of the results expected for the full
year.
2. Details of certain balance sheet captions are as follows (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Inventories:
Purchased parts and assemblies $ 1,857 $ 759
Work-in-process 160 42
Finished goods 4,228 3,328
------------- ------------
$ 6,245 $ 4,129
============= ============
Property and equipment:
Equipment $ 30,672 $ 26,285
Furniture and fixtures 2,984 873
Equipment provided to customers 19,687 16,707
Equipment under capital leases 1,190 5,050
Leasehold improvements 5,929 5,314
Capital in progress 661 925
------------- ------------
61,123 55,154
Less: accumulated depreciation and amortization (30,374) (24,442)
------------- ------------
Total property and equipment, net $ 30,749 $ 30,712
============= ============
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. STOCKHOLDERS' EQUITY
The calculation of per share earnings is as follows:
(In thousands except per share figures)
Three months ended Nine months ended
Sepetmber 30, September 30,
----------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic:
- ------
Net income $ 2,143 $ 1,978 $ 5,497 $ 4,464
Weighted average common shares outstanding 6,458 6,174 6,407 6,122
Net income per share, basic $ 0.33 $ 0.32 $ 0.86 $ 0.73
============ =========== =========== ===========
Diluted:
- --------
Net income for calculating diluted earnings per share $ 2,143 $ 1,978 $ 5,497 $ 4,464
Weighted average common shares outstanding 6,458 6,174 6,407 6,122
Common stock equivalents 270 362 323 318
------------ ----------- ----------- -----------
Total weighted average shares 6,728 6,536 6,730 6,440
Net income per share, diluted $ 0.32 $ 0.30 $ 0.82 $ 0.69
============ =========== =========== ===========
For the three and nine months ended September 30, 2002, options to purchase
145,010 shares and 51,550 shares, respectively, at an average exercise price per
share of $24.73 and $26.05, respectively, have not been included in the
computation of diluted net income per share as their effect would have been
anti-dilutive. For the three and nine months ended September 30, 2001, options
to purchase 108,340 shares and 218,290 shares, respectively, at an average
exercise price per share of $23.85 and $21.08, respectively, were not included
in the computation of diluted net income per share as their effect would have
been anti-dilutive.
4. SEGMENT INFORMATION
The Company is active in one business segment: designing, marketing, monitoring
and supporting its personal response units. The Company maintains sales,
marketing and monitoring operations in both the United States and Canada.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. SEGMENT INFORMATION (continued)
Geographic Segment Data
Net revenues from customers are based on the location of the customer.
Geographic information related to the results of operations for the periods
ended September 30, 2002 and 2001 and the financial position as of September 30,
2002 and December 31, 2001 is presented as follows:
(In thousands)
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales:
United States $24,213 $23,747 $71,481 $65,794
Canada 2,133 1,836 6,185 5,451
--------------------------------------------------------------
$26,346 $25,583 $77,666 $71,245
==============================================================
Net Income:
United States $ 1,969 $ 1,805 $ 4,939 $ 3,979
Canada 174 173 558 485
--------------------------------------------------------------
$ 2,143 $ 1,978 $ 5,497 $ 4,464
==============================================================
September 30, December 31,
2002 2001
------------------------------
Total Assets:
United States $73,369 $ 69,495
Canada 6,208 7,507
------------------------------
$79,577 $ 77,002
==============================
5. RESTRUCTURING AND NON RECURRING CHARGES
In September 2000, the Company recorded a pre-tax non-recurring charge of
approximately $2.7 million for costs it expected to incur to address erroneous
low-battery signals in some of its personal help buttons. Included in the
non-recurring charge were anticipated material and mailing costs for exchanging
buttons, providing hospital programs with higher inventory levels for the
planned swap, and the cost of installer visits to subscriber homes to replace
the buttons.
At September 30, 2002, accrued restructuring and other non-recurring charges of
approximately $424,000 represented the remaining unutilized costs associated
with the anticipated cost of addressing erroneous low-battery signals in
personal help buttons.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. RESTRUCTURING AND NON RECURRING CHARGES (continued)
The following is a roll-forward of accrued restructuring and non-recurring
charges for the nine months ended September 30, 2002:
(In thousands)
Balance at December 31, 2001 $ 1,123
Less: Amounts utilized (699)
---------
Balance at September 30, 2002 $ 424
=========
The Company expects to utilize the remaining accrued restructuring balance
during 2003 and believes that this balance should be sufficient to cover the
remaining expenditures associated with this issue.
6. LONG TERM DEBT
In August 2002, the Company entered into a $15.0 million Revolving Credit
Agreement. The agreement has two components, the first of which is the ability
to obtain a Revolving Credit Loan with an interest rate based on the London
Interbank Offered Rate (LIBOR). The second component is the ability to obtain a
Revolving Credit Loan with an interest rate based on the lender's prime interest
rate. The Company has the option to elect to convert any outstanding Revolving
Credit Loan to a Revolving Credit Loan of the other type. The agreement contains
several covenants, including the Company maintaining certain levels of financial
performance. These financial covenants include a requirement for a current ratio
of at least 1.5 to 1.0 and an operating cash flow to total debt service ratio of
no less than 1.75 to 1.0. In addition, there are certain negative covenants that
include restrictions on the disposition of the Company's assets, restrictions on
the Company's capacity to obtain additional debt financing, and restrictions on
its investment portfolio. This Revolving Credit Agreement matures in August 2005
and as of September 30, 2002 the Company did not have any debt outstanding under
this line.
7. GOODWILL AND INTANGIBLE ASSETS
During the first nine months of 2002, the Company recorded approximately
$446,000 of intangible assets related to provider agreements entered into with
community hospitals ("customer") for conversion to services provided by the
Company. The intangible assets related to these agreements consist of the cost
of purchasing the rights to service and/or manage the personal response systems
program located in various stand-alone facilities. These agreements allow the
Company to provide monitoring and/or business support services to existing and
future subscribers of the customer in accordance with the terms of the
agreements. The Company amortizes the acquisition costs over the initial life of
the agreements, which is typically five years.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. GOODWILL AND INTANGIBLE ASSETS (continued)
During 2002, the Company paid in cash approximately $1.6 million for
acquisitions of distributors of the Company's personal response products and
services. The results of the acquired businesses have been included in the
Company's consolidated financial statements from the dates of acquisition with
no material effect on the Company's results of operations for the three and nine
months ended September 30, 2002. As a result of the purchase accounting
associated with these acquisitions, the Company recorded goodwill of
approximately $1.6 million.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which was effective January 1, 2002. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also required the Company to
complete a transitional goodwill impairment test within six months from the date
of adoption. The Company adopted SFAS 142 in January 2002, and accordingly
ceased amortizing goodwill with a net carrying value totaling approximately $7.2
million as of the date of adoption. The Company did not record approximately
$679,000 of goodwill amortization expense for the first nine months of 2002. The
Company believes that the adoption of SFAS 142 will result in an additional 1%
improvement to service margins in calendar year 2002 compared to 2001 as a
result of the exclusion of approximately $926,000 of goodwill amortization
expense.
The Company performed a transitional impairment test as required by SFAS 142 and
determined that there were no goodwill or intangible asset impairment losses
that should be recognized. The Company also determined that no reclassifications
between goodwill and intangible assets were required. Information pertaining to
intangible assets and goodwill and the effects of adopting SFAS 142 are
presented below.
Intangible Assets
At September 30, 2002 and December 31, 2001, acquired intangible assets were
related to provider agreements entered into with customers for conversion to
services provided by the Company:
(Dollars in thousands)
September 30, December 31,
2002 2001
---- ----
Gross carrying amount $11,068 $10,566
Less: accumulated amortization (5,703) (4,152)
---------------------------
Net book value $ 5,365 $ 6,414
===========================
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. GOODWILL AND INTANGIBLE ASSETS (continued)
All of the Company's acquired intangible assets, other than goodwill, are
subject to amortization. Amortization expense for acquired intangible assets for
the nine months ended September 30, 2002 and 2001 was approximately $1,553,000
and $1,547,000 respectively.
Based on the Company's intangible assets currently owned, estimated amortization
expense for the current fiscal year and the succeeding four years is as follows:
Fiscal Year Ended
December 31, Amount
----------- ------
2002 $2,083
2003 2,055
2004 1,687
2005 764
2006 241
Goodwill
The following information reflects pro forma adjustments to exclude goodwill
amortization expense and related tax effects:
For the three months ended For the nine months ended
(Dollars in thousands, except per share data) September 30, September 30,
------------------------------- ------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income:
Reported net income $2,143 $1,978 $5,497 $4,464
Add back: goodwill amortization, net of taxes
-- 142 -- 308
---------------- -------------- -------------- ---------------
Adjusted net income $2,143 $2,120 $5,497 $4,772
================ ============== ============== ===============
Basic earnings per share:
Weighted average common shares outstanding 6,458 6,174 6,407 6,122
Reported net income $ 0.33 $ 0.32 $ 0.86 $ 0.73
Add back: goodwill amortization, net of taxes -- 0.02 -- 0.05
---------------- -------------- -------------- ---------------
Adjusted net income $ 0.33 $ 0.34 $ 0.86 $ 0.78
================ ============== ============== ===============
Diluted earnings per share:
Total weighted average shares 6,728 6,536 6,730 6,440
Reported net income $ 0.32 $ 0.30 $ 0.82 $ 0.69
Add back: goodwill amortization, net of taxes -- 0.02 -- 0.05
---------------- -------------- -------------- ---------------
Adjusted net income $ 0.32 $ 0.32 $ 0.82 $ 0.74
================ ============== ============== ===============
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. NEWLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
Be Disposed Of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business." SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company adopted SFAS 144 in January 2002 and it did not have a significant
effect on its financial statements.
9. CONTINGENT LIABILITIES AND COMMITMENTS
The Company has recently been audited by Revenue Canada asserting deficiencies
in goods and services tax and sales tax for the Company's 1993 to 1999 tax
years. On March 26, 2002, the Company received a proposed tax assessment (which
includes penalties and interest) of CAN$1,050,000 (approximately US$662,000
based on current exchange rates at September 30, 2002). In October 2002, the
Company received a reduced assessment of CAN$523,000 (approximately US$330,000
based on current exchange rates at September 30, 2002). Part of this assessment
is recoverable from customers; therefore net of recoveries the Company believes
that the total reduced assessment amounts to US$300,000. The Company is
considering filing an objection to the re-assessment that may result in a
further reduction. However, there is no assurance that the Company will be
successful in its objection. The Company does not believe that the payment of
any such deficiency will have a material adverse effect on its financial
position or results of operations or cash flows.
10. STOCKHOLDERS' EQUITY
In August 1999, the Company loaned $300,000 to its Chief Executive Officer,
pursuant to a secured promissory note, for the exercise of a stock option which
was to expire. The note, which bore interest at a rate of 6.77% per annum,
payable annually in arrears, was due August 23, 2004 and was secured by a pledge
of 16,552 shares of common stock of the Company. In April 2000, the Company
loaned $250,000 to its Chief Executive Officer, pursuant to a collateralized
promissory note. The note, which bore interest at a rate of 6.94%, payable
annually in arrears, was due April 5, 2005 and was collateralized by 25,641
shares of common stock of the Company. On July 15, 2002, the Company's Chief
Executive Officer repaid both notes in full.
-12-
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, 2002 increased approximately
3% to $26.3 million as compared to total revenues of $25.6 million for the
quarter ended September 30, 2001. For the nine months ended September 30, 2002,
total revenues were $77.7 million, 9% greater than total revenues of $71.2
million for the same period in 2001.
Service revenues increased by 13% and were $19.8 million for the three months
ended September 30, 2002 as compared to $17.6 million for the same period in
2001. For the nine months ended September 30, 2002, services revenues rose by
14% to $57.5 million from $50.3 million for the first nine months of 2001. In
accordance with the Company's service business strategy, service revenues
continue to grow as a percentage of the Company's total revenue and represent
74% of the Company's year to date total revenues as compared to 71% of total
revenues for the nine months ended September 30, 2001. Overall, the Company
achieved a 7% increase in its monitored subscriber base to 362,000 subscribers
as of September 30, 2002 from 340,000 as of September 30, 2001. The Company's
ability to sustain the current level of service revenue growth depends on its
ability to continue to make improvements in service delivery, expand the market
for its personal response services, convert community hospital programs to
services provided by the Company and increase its focus on referral development.
The Company believes that the high quality of its services and its commitment to
providing caring and rapid response to the at-risk elderly will be factors in
meeting this goal.
Net product revenues for the third quarter of 2002 decreased by 20% to $6.2
million as compared to the third quarter of 2001 at $7.7 million. For the nine
months ended September 30, 2002, net product revenues were $19.2 million, a
decrease of approximately 3% from $19.9 million for the same period in 2001. The
majority of the decrease in the quarter was the result of strong sales in the
third quarter of 2001 of the Company's site-monitoring platform for those
customers who perform their own monitoring at their local facilities, which
represented approximately $1.3 million of total product sales during that period
as compared to approximately $163,000 for the third quarter of 2002. The Company
has been anticipating a decline in sales of its site-monitoring platform. With a
finite number of customers for this product, the Company believes that equipment
sales for the year ended December 31, 2002 will be lower than 2001. The Company
also continues to believe that equipment sales may remain flat or decline in
periods subsequent to 2002 as it has experienced little or no growth in
-13-
sales of its home communicators since it began providing subscribers with the
Lifeline service under its Business Management Services ("BMS") program, which
includes monitoring and the use of Company-owned home communicators for a single
fee. During 2002, the Company launched its new Senior Living initiative, under
which it will seek to develop alliances with senior living facilities to provide
them with a cost-effective and distinctive emergency call system to appeal to
residents and their families. As a result of this initiative, the Company
believes that sales of residence response systems to these facilities may
mitigate some of the expected decline in product revenue in periods subsequent
to 2002.
For the three months ended September 30, 2002, finance and rental income,
representing revenue earned from the Company's portfolio of sales-type leases,
remained consistent with the third quarter of 2001. For the nine months ended
September 30, 2002, however, finance and rental income decreased approximately
4% to $987,000 from $1.0 million for the same period in 2001. With the Company's
focus on its service offerings it expects finance income to decline in future
periods because such income is directly related to product sales.
Total recurring revenues, consisting of service revenues and finance and rental
income, increased 13% for the three months ended September 30, 2002 to $20.2
million from $17.9 million for the same period in 2001. For the nine months
ended September 30, 2002, total recurring revenues increased 14% to $58.5
million from $51.4 million for the nine months ended September 30, 2001.
Recurring revenues represented 77% and 75% of total revenue for the three and
nine months ended September 30, 2002, respectively, as compared to 70% and 72%
for the respective three and nine month periods in 2001. With the Company's
continued focus on its service offerings, and its anticipated decline in product
revenue, it expects its recurring revenues to continue to increase as a
percentage of total revenues in future periods.
Cost of services, as a percentage of service revenues, improved to 56% and 57%,
respectively for the three and nine months ended September 30, 2002 as compared
to 61% for the three and nine months ended September 30, 2001. Even though on a
dollar basis, cost of services increased by approximately $1.9 million for the
nine months ended September 30, 2002 as compared to the first nine months of
2001 due to the growth in the number of subscribers serviced under the Company's
BMS program, the percentage improvement is directly in line with the Company's
goal of making its service offerings more profitable with productivity
improvements, leveraging the capabilities of its investment in the CareSystem
monitoring platform and effective pricing.
The Company adopted SFAS 142 in January 2002, which requires, among other
things, the discontinuance of goodwill amortization. As a result, the Company
did not record approximately $243,000 and $679,000 of goodwill amortization
expense for the three and nine-month periods ended September 30, 2002. The
Company believes that the adoption of SFAS 142 will result in an additional 1%
improvement to service margins in calendar year 2002 as compared to 2001 as a
result of the exclusion of nearly $926,000 of goodwill amortization expense.
Cost of sales, as a percentage of net product sales, was 28% for the three
months ended September 30, 2002 as compared to 34% for the three months ended
September 30, 2001. For the nine months ended September 30, 2002, cost of sales,
as a percentage of net product sales, improved to 31% as compared to 33% for the
same period in 2001. The considerable improvement during the quarter is a direct
result of the significant amount of sales of the Company's site-monitored
platform in the third quarter of 2001 which has a cost that is higher as a
percentage of revenue than the cost of the
-14-
Company's home communicators. Also, the efficiencies created in the third
quarter of 2002 associated with the Company producing its own product offset the
increased manufacturing costs that it had experienced during the first half of
2002 as it has been transitioning from outsourcing its manufacturing to in house
assembly and production. The Company expected these higher costs to be
non-recurring and therefore anticipates cost of sales for 2002 as a percentage
of net product sales to be better than or relatively consistent with results
achieved in 2001.
Selling, general and administrative ("SG&A") expenses as a percentage of total
revenues were 36% for the third quarter of 2002 as compared to 34% for the third
quarter of 2001. For the nine months ended September 30, 2002, SG&A expenses
were 37% of total revenues as compared to 36% for the same period in 2001. On a
dollar basis, SG&A expenditures increased $3.2 million to $28.5 million for the
nine months ended September 30, 2002 from $25.3 million for the same period in
2001. The Company is incurring costs associated with its new senior living
initiative launched in the beginning of 2002. It has also been experiencing
start-up costs associated with new marketing and business initiatives coupled
with information technology costs associated with these initiatives. The Company
believes that SG&A expenses will increase as a percentage of revenue for
calendar year 2002 as it continues with these business initiatives.
Research and development expenses were nearly 2% of total revenues for the three
and nine months ended September 30, 2002 and 2001. Research and development
efforts are focused on ongoing product improvements and developments. The
Company expects to maintain these expenses, as a percentage of total revenues,
at a relatively consistent level for the remainder of 2002.
The Company's effective tax rate was 40% for the three and nine months ended
September 30, 2002 as compared to 32% and 37%, respectively, for the same
periods in 2001. The lower effective tax rates in 2001 were due to the benefit
of recording a previously disclosed tax credit earned under a Tax Increment
Finance ("TIF") agreement with the town of Framingham, Massachusetts. The
Company believes it will continue to receive additional ongoing tax credits
under the TIF agreement during the remaining years of its corporate headquarters
lease, which should allow it to maintain an effective tax rate of approximately
40%.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2002, the Company's portfolio of cash
and cash equivalents increased approximately $1.8 million to $7.5 million at
September 30, 2002 from $5.7 million at December 31, 2001. The majority of the
increase is a direct result of profitable operations of $13.3 million coupled
with a net decrease in its accounts receivable portfolio of $1.5 million,
proceeds from stock option exercises of $1.6 million and an increase in its
accounts payable and accrued expenses of $3.1 million, primarily as a result of
the timing of expenditures related to its business and marketing initiatives.
During 2002, the Company took advantage of its overall improvement in cash flow
to pay off approximately $7.0 million in debt and outstanding capital lease
obligations, which offset some of the increase. The Company also purchased
property and equipment of $5.8 million and paid in cash approximately $1.6
million for acquisitions of distributors of the Company's personal response
products and services. The Company also experienced a net inventory increase of
approximately $2.1 million as it fulfilled its obligation to purchase certain
amounts of inventory in accordance with the termination provisions of its
contract with an outside electronics product manufacturer as well as for support
of its manufacturing site at its
-15-
corporate location to minimize the risk of supply interruption as it completes
the transition from outsourced manufacturing to internal manufacturing.
As noted above, as of June 30, 2002, the Company paid off substantially all of
its capital lease obligations associated with existing Master Lease Agreements.
The Company is currently in the process of finalizing a new Master Lease
Agreement for potential future capital purchases, but expects to have sufficient
operating cash flow in the near term for its budgeted capital purchases without
the proceeds of a new leasing facility.
In August 2002, the Company entered into a $15.0 million Revolving Credit
Agreement. The agreement has two components, the first of which is the ability
to obtain a Revolving Credit Loan with an interest rate based on the London
Interbank Offered Rate (LIBOR). The second component is the ability to obtain a
Revolving Credit Loan with an interest rate based on the lender's prime interest
rate. The Company has the option to elect to convert any outstanding Revolving
Credit Loan to a Revolving Credit Loan of the other type. The agreement contains
several covenants, including the Company maintaining certain levels of financial
performance. These financial covenants include a requirement for a current ratio
of at least 1.5 to 1.0 and an operating cash flow to total debt service ratio of
no less than 1.75 to 1.0. In addition, there are certain negative covenants that
include restrictions on the disposition of the Company's assets, restrictions on
the Company's capacity to obtain additional debt financing, and restrictions on
its investment portfolio. This Revolving Credit Agreement matures in August 2005
and as of September 30, 2002 the Company did not have any debt outstanding under
this line.
The following summarizes the Company's existing contractual obligations at
September 30, 2002 and the effect such obligations are expected to have on its
liquidity and cash flows in future periods:
(Dollars in thousands)
2002 2003 2004 2005 2006 Thereafter (1)
---- ---- ---- ---- ---- --------------
Contractual
Obligations (2):
Capital leases $ 157 $ 100 $ 6 - - -
Operating leases 1,287 1,390 1,522 $1,462 $1,367 $9,166
-----------------------------------------------------------------------------------------
Total Obligations $1,444 $1,490 $1,528 $1,462 $1,367 $9,166
=========================================================================================
(1) The majority of this amount represents contractual obligations on the
Company's corporate facility lease through the year 2013 and its
second U.S. call center through 2012.
(2) The table does not include the new line of credit, for up to $15
million, with respect to which no amounts were outstanding at
September 30, 2002.
The Company expects that funding requirements for operations and in support of
future growth are expected to be met primarily from operating cash flow,
existing cash and marketable securities and the availability from time to time
under its new line of credit. The Company expects these sources will be
sufficient to finance the cash needs of the Company through the next twelve
months. This includes the continued investment in its response center platform,
the requirements of its internally funded lease financing program, any future
potential acquisitions and other investments in support of
-16-
its current business. The Company may from time to time consider potential
strategic acquisitions that may not be able to be financed through these
sources. In such an event, the Company may consider appropriate alternative
financing vehicles.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of financial condition and results of operations are
based upon the Company's consolidated financial statements. The preparation of
these consolidated financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. The Company
has identified the following accounting policies as critical to understanding
the preparation of its consolidated financial statements and results of
operations.
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. It
estimates the allowance based upon historical collection experience, analysis of
accounts receivable by aging categories and customer credit quality. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Impairment of long-lived assets, goodwill and other intangibles
The Company assesses the impairment of goodwill and other intangibles on an
annual basis or, along with long-lived assets, whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. It uses
an estimate of the future undiscounted net cash flows of the related asset or
asset grouping over the remaining life in measuring whether assets are
recoverable. Based on the Company's expectation of future undiscounted net cash
flows, an impairment loss would be recorded by writing down the assets to their
estimated realizable values. Any resulting impairment loss could have a material
adverse effect on the Company's results of operations.
Inventories
The Company values its inventories at the lower of cost or market, as determined
by the first-in, first-out method. It regularly reviews inventory quantities on
hand and records a provision for excess or obsolete inventory based upon its
estimated forecast of product demand. If actual future demand is less than the
projections made by management, then additional provisions may be required.
Warranty
The Company's products are generally under warranty against defects in material
and workmanship. The Company provides an accrual for estimated warranty costs at
the time of sale of the related products based upon historical return rates and
repair costs at the time of the sale. A significant increase in product return
rates could have a material adverse effect on the Company's results of
operations.
NEWLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which was effective January 1, 2002. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
-17-
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires the Company to
complete a transitional goodwill impairment test within six months from the date
of adoption. The Company adopted SFAS 142 in January 2002, and as a result did
not record approximately $679,000 of goodwill amortization expense for the first
nine months of 2002. The Company believes that the adoption of SFAS 142 will
result in an additional 1% improvement to service margins in calendar year 2002
as compared to 2001 as a result of the exclusion of nearly $926,000 of goodwill
amortization expense. The Company performed a transitional impairment test as
required by SFAS 142 and determined that there were no goodwill or intangible
asset impairment losses that should be recognized. The Company also determined
that no reclassifications between goodwill and intangible assets were required.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
Be Disposed Of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business." SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company adopted SFAS 144 in January 2002 and it did not have a significant
impact on its financial statements.
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 recorded a non-recurring charge of approximately $2.7 million in the
third quarter of 2000 for costs it expected to incur to address a previously
disclosed battery-related issue, including anticipated material and mailing
costs for exchanging buttons, providing hospital programs with higher inventory
levels for the planned swap, and support for the cost of installer visits to
subscriber homes to replace the button. The Company cannot be certain that the
charge it recorded to address this issue will be sufficient to cover all of its
associated expenses. In addition, the Company has changed its battery vendor.
The Company cannot be certain that it will not experience disruption related to
such change.
In 2002 the Company has transitioned to once again supporting a manufacturing
site at its corporate location to assemble its personal response equipment. In
connection with this, the Company ended its outsourcing arrangement with an
outside electronics product manufacturer. The Company has not supported a
manufacturing site for the past two years and as a result there can be no
assurance that the transition from outsourced manufacturing to internal
manufacturing for its personal response equipment will not have a material
adverse effect on its results of operations or that the Company will not
experience difficulties in successfully transitioning the assembly process of
its personal response equipment to its corporate location. There also can be no
assurance that the decision to assemble its equipment will result in the
anticipated cost containment or that the Company will maintain cost of sales at
a relatively consistent percentage of product sales in 2002. This 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
-18-
preferences and new service and product introductions by the Company's
competitors. There can be no assurance that services, products or technologies
developed by others will not render Lifeline's services or products
noncompetitive or obsolete.
The Company's revenue growth is partially dependent on its ability to increase
the number of subscribers served by its monitoring centers by an amount which
exceeds the number of subscribers lost. The Company's ability to continue to
increase service revenue is a key factor in its long-term growth, and there can
be no assurance that the Company will be able to do so. The Company's failure to
increase service revenue could have a material adverse effect on the Company's
business, financial condition, or results of operations.
The Company's monitoring operations are concentrated principally in its
corporate headquarters facility. Although the Company believes that it has
constructed safeguards to protect against system failures, the disruption of
service at its monitoring facility, whether due to telephone or electrical
failures, earthquakes, fire, weather or other similar events or for any other
reason, could have a material adverse effect on the Company's business,
financial condition, or results of operations. In order to mitigate any
potential negative effect of a disruption of service, the Company recently
signed a lease for a second U.S. call center. The Company expects to occupy the
new facility in 2003. There can be no assurance, however, that the Company will
meet the intended date of occupation, that costs incurred in connection with the
start-up of the new facility will not have a material adverse effect on the
Company's business, financial condition or results of operations, or that the
second call center, which is located within one mile of the Company's
headquarters, will not be affected by the same disruption that affects the
corporate headquarters facility.
The Company believes that its future success will depend in large part upon its
ability to attract and retain key personnel. Although the Company believes it is
making progress in retaining and recruiting well-trained, highly capable people,
there can be no assurance that the Company will continue to be successful in
attracting and retaining such personnel.
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.
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, 2002. As described in the following paragraphs, the Company believes that it
currently has no material exposure to interest
-19-
rate and foreign currency exchange rate risks in its instruments entered into
for other than trading purposes.
Interest rates
The Company's balance sheet periodically includes an outstanding balance
associated with a revolving credit facility that is subject to interest rate
risk. The Company has the ability to obtain a Revolving Credit Loan with an
interest rate based on the London Interbank Offered Rate (LIBOR) or a Revolving
Credit Loan with an interest rate based on the lender's prime interest rate. 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. As
of September 30, 2002, the Company did not have any outstanding balances
associated with its credit facility and therefore its consolidated financial
position, results of operations or cash flows would not be affected by near-term
changes in interest rates.
Foreign currency exchange rates
The Company's earnings are affected by fluctuations in the value of the U.S.
Dollar as compared to the Canadian Dollar, as a result of the sale of its
products and services in Canada and translation adjustments associated with the
conversion of the Company's Canadian subsidiary into the reporting currency
(U.S. Dollar). As such, the Company's exposure to changes in Canadian exchange
rates could impact the Company's consolidated financial position, results of
operations or cash flows. The Company performed a sensitivity analysis as of
September 30, 2002 to assess the potential effect of a 10% increase or decrease
in Canadian foreign exchange rates and concluded that short-term changes in
Canadian exchange rates should not materially affect the Company's consolidated
financial position, results of operations or cash flows. The Company's
sensitivity analysis of the effects of changes in foreign currency exchange
rates in such magnitude did not factor in a potential change in sales levels or
local prices for its services/products.
ITEM 4. CONTROLS AND PROCEDURES
1. Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this Quarterly Report on Form 10-Q,
the Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner.
2. Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
-20-
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K - The Company filed a report on Form 8-K on July
12, 2002 reporting under Item 5 thereof, an amendment to the Company's
Rights Agreement and an agreement with a stockholder, and on August
21, 2002 reporting under Item 5 thereof, the appointment of a new
rights agent under its Rights Agreement.
(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 25 hereof
-21-
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 13, 2002 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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CERTIFICATIONS
I, Ronald Feinstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lifeline Systems,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: November 13, 2002 /s/ Ronald Feinstein
--------------------
Ronald Feinstein
Chief Executive Officer
-23-
CERTIFICATIONS
I, Dennis M. Hurley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lifeline Systems,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
d. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: November 13, 2002 /s/ Dennis M. Hurley
--------------------
Dennis M. Hurley
Senior Vice President of Finance and
Administration, Principal Financial
and Accounting Officer
-24-
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
- ----------- ------- ----------------------
10.1 Revolving Credit Agreement between
Registrant and Citizens Bank of
Massachusetts Dated August 28, 2002
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