<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1995 Commission File Number 0-13617
LIFELINE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS O4-2537528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
640 Memorial Drive
Cambridge, Massachusetts 02139
(Address of principal executive offices) (Zip Code)
(617) 679-1000
(Registrant's telephone number, including area code)
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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
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(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
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Number of shares outstanding of this issuer's class of common stock as of
September 30, 1995: 5,667,905
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LIFELINE SYSTEMS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets-September 30, 1995
and December 31, 1994 3
Consolidated Statements of Income - Three and
nine months ended September 30, 1995 and 1994 4
Consolidated Statements of Cash Flows
-Nine months ended September 30, 1995 and 1994 5
Notes to Consolidated Financial Statements 6-7
ITEM 2.
Management's Discussion and Analysis of Results of
Operations and Financial Condition 7-9
PART II. OTHER INFORMATION 9
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LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $12,908 $ 9,555
Accounts receivable, trade, net 5,515 4,943
Inventories 1,596 1,511
Net investment in sales-type leases 2,281 3,222
Other current assets 305 280
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Total current assets 22,605 19,511
Property and equipment, net 4,803 3,450
Goodwill, net 2,117 1,748
Net investment in sales-type leases 1,524 2,941
Other assets 185 203
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Total assets $31,234 $27,853
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,802 $ 2,665
Accrued payroll and payroll taxes 1,006 1,136
Deferred revenues 863 954
Current portion of obligations under capital
leases 132 273
Product warranty 452 369
Other current liabilities 38 39
Accrued restructuring charges -- 200
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Total current liabilities 7,293 5,636
Obligations under capital leases 311 85
Deferred income taxes 327 924
Stockholders' equity:
Common stock $.02 par value, 10,000,000 shares
authorized 6,094,753 and 5,939,202
issued at September 30, 1995 and December
31, 1994 122 118
Additional paid-in capital 15,048 14,533
Retained earnings 9,981 8,366
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25,151 23,017
Less: treasury stock at cost, 426,848 shares
at September 30, 1995 and 444,287 at
December 31, 1994 (1,498) (1,559)
Note receivable - officers (350) (250)
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Total stockholders' equity 23,303 21,208
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Total liabilities and stockholders' equity $31,234 $27,853
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1995 1994 1995 1994
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues
Net product sales $ 6,056 $5,510 $17,705 $14,865
Services 5,033 3,617 13,459 10,194
Finance and rental income 327 446 1,043 1,449
------- ------ ------- -------
Total revenues 11,416 9,573 32,207 26,508
------- ------ ------- -------
Costs and expenses
Cost of sales 2,094 2,240 6,638 6,008
Cost of services 1,993 1,511 5,273 4,392
Selling, general and administrative 5,534 4,474 15,805 12,890
Research and development 424 448 1,293 1,259
------- ------ ------- -------
Total costs and expenses 10,045 8,673 29,009 24,549
------- ------ ------- -------
Income from operations 1,371 900 3,198 1,959
------- ------ ------- -------
Other income (expense)
Interest income 165 113 535 235
Interest expense (13) (5) (17) (18)
------- ------ ------- -------
Total other income, net 152 108 518 217
------- ------ ------- -------
Income before taxes 1,523 1,008 3,716 2,176
Provision for income taxes 640 424 1,561 914
------- ------ ------- -------
Net income $ 883 $ 584 $ 2,155 $ 1,262
======= ====== ======= =======
Net income per common share:
Primary $.14 $.10 $.35 $.22
======= ====== ======= =======
Fully Diluted $.14 $.10 $.35 $.22
======= ====== ======= =======
Weighted average common and
common equivalent shares outstanding:
Primary 6,216 5,728 6,078 5,764
===== ===== ===== =====
Fully Diluted 6,273 5,761 6,229 5,779
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
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1995 1994
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,155 $ 1,262
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,579 1,512
Changes in operating assets and liabilities:
Accounts receivable (500) (1,036)
Inventories (85) (71)
Net investment in sales-type leases 2,358 2,632
Income taxes receivable -- 579
Other current assets and other assets (2) (151)
Accounts payable and accrued expenses 2,111 (40)
Accrued payroll and payroll taxes (130) (292)
Deferred revenues and other current
liabilities (9) (46)
Deferred income taxes (597) (1,033)
Accrued restructuring charges (200) (156)
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Net cash provided by operating activities 6,680 3,160
Cash flows from investing activities:
Additions to property and equipment (2,002) (1,393)
Payment for business acquisition (1,000) (300)
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Net cash used in investing activities (3,002) (1,693)
Cash flows from financing activities:
Principal payments under capital lease obligations (266) (227)
Proceeds from common stock options exercised 480 238
Purchase of treasury stock -- (575)
Repurchase of common stock warrant (539) --
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Net cash used in financing activities (325) (564)
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Net increase in cash and cash equivalents 3,353 903
Cash and cash equivalents at beginning of period 9,555 7,012
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Cash and cash equivalents at end of period $12,908 $ 7,915
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
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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, 1995 and the consolidated results of its
operations and cash flows for the three and nine months ended September 30,
1995 and 1994.
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 audited financial statements for the year ended
December 31, 1994.
The results of operations for the nine month period ended September 30, 1995
are not necessarily indicative of the results expected for the full year.
2. Details of certain balance sheet captions are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
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<S> <C> <C>
Inventories:
Purchased parts and subassemblies $ 708 $ 771
Work-in process 590 361
Finished goods 298 379
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$ 1,596 $ 1,511
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Property and equipment:
Equipment $ 7,354 $ 6,712
Furniture and fixtures 299 171
Equipment leased to others 2,326 1,276
Equipment under capital lease 1,345 1,244
Leasehold improvements 656 612
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$11,980 $10,015
Less accumulated depreciation and
amortization (7,177) (6,565)
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$ 4,803 $ 3,450
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</TABLE>
3. In May, 1995, the Company completed the acquisition of Tele-Response &
Support Services, Inc. of Raynham, Massachusetts, an affiliate of Martha's
Vineyard Hospital Foundation of Oak Bluffs, Massachusetts. Tele-Response was
a distributor of Lifeline's response monitoring services. The purchase price
was approximately $1,000,000 of which $900,000 was paid at the closing, and
the remainder paid during the third quarter of 1995. The acquisition was
accounted for as a purchase transaction, and, as a result, the Company
recorded goodwill of approximately $631,000 which is being amortized over the
estimated life of seven years.
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The results of the acquired business have been included in the Company's
consolidated financial statements from the date of the acquisition. The
Company does not expect the acquisition to have a material impact on its 1995
operating results.
4. In connection with the September, 1993 acquisition of Carepartners, Inc., the
Company issued a warrant to purchase 100,000 shares of the Company's common
stock at $4.78 per share. In September 1995, an agreement was entered into
whereby the Company, in exchange for payment of $539,000, received the right,
title and interest in and to the warrant, including the ability to exercise
all the shares issued as part of the warrant. The price paid for the warrant
approximated the fair market value and therefore the purchase was recorded as
a reduction of retained earnings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Total revenues for the quarter ended September 30, 1995 were $11,416,000, 19%
higher than total revenues of $9,573,000 earned for the quarter ended September
30, 1994. For the nine months ended September 30, 1995, total revenues
increased 21% to $32,207,000 compared with $26,508,000 for the same period in
1994.
Service revenues for the third quarter of 1995 increased by 39% to $5,033,000,
compared with $3,617,000 for the third quarter of 1994. For the nine months
ended September 30, 1995, service revenues were $13,459,000, 32% higher than the
$10,194,000 recorded for the nine months ended September 30, 1994. With the
May, 1995 acquisition of Tele-Response and Support Services, Inc. and overall
growth in the number of monitored subscribers, the Company continues to
transition to a service-oriented recurring revenue business. This transition
also includes the conversion of subscribers from existing self-monitored health
care provider programs to Lifeline Central(TM).
Product sales increased 10% for the quarter ended September 30, 1995 to
$6,056,000 from $5,510,000 for the comparable period in 1994. For the nine
months ended September 30, 1995, product sales were $17,705,000, an increase of
19% from the $14,865,000 reported for the nine months ended September 30, 1994.
These increases were attributable to health care providers increasing the volume
of the Communicator Plus(TM) product purchased as they continue to upgrade their
existing inventory of older products, plus higher accessory sales relating to
the wide acceptance of the Slimline(TM) button introduced in the third quarter
of 1994. Also, the introduction of the new CarePartner(TM) product in the third
quarter of 1995 contributed to the positive results. This enhanced communicator
model is designed to incorporate the latest technology. The product utilizes
digitized speech technology, called VoiceAssist(TM), which clarifies alarm
messages and instructs users in a friendly reassuring manner. While product
sales during 1995 continue to be strong, the Company's ability to sustain the
current level of product sales growth in the long run depends upon its ability
to expand the market for its personal response services. The Company believes
that its new products will be a supporting factor in meeting this challenge.
Finance and rental income, representing income earned from the Company's
portfolio of sales-type leases, decreased by 27% to $327,000 for the three
months ended September 30, 1995 from $446,000 for the same period in 1994. For
the nine months ended September 30, 1995, finance and rental income decreased by
$406,000 to $1,043,000 compared with $1,449,000 for the nine months ended
September 30, 1994. The decline is due to the overall aging of the lease
portfolio in addition to a 1994 arrangement to direct new lease activity to a
third party leasing agent.
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Cost of sales was 35% of product sales for the third quarter of 1995, a
significant improvement from 41% for the third quarter of 1994. For the nine
months ended September 30, 1995, cost of sales represented 37% of product sales
compared with 40% for the nine months ended September 30, 1994. The improvement
is a result of higher costs in 1994 associated with the introduction of the
Communicator Plus(TM) product, coupled with a higher selling price in 1995 for
the Slimline(TM) button. Also, continued production efficiencies, resulting from
an increased volume of shipments in 1995, have had a favorable impact, but may
not repeat at the same level.
Cost of services, as a percentage of service revenue, improved to 40% for the
third quarter of 1995 from 42% for the third quarter of 1994. For the nine
months ended September 30, 1995, cost of services decreased to 39% of service
revenues compared with 43% for the comparable period in 1994. The improvement
is attributable to continued operating efficiencies achieved with the higher
subscriber volume. Also, in 1994, the higher operating expenses associated with
the Communicall business were significantly reduced during 1995 by integrating
its monitoring center and management and administrative functions at the
Company's headquarters.
Selling, general and administrative expenses were 48% of total revenues for the
three months ended September 30, 1995 as compared to 47% for the same period in
1994. For the nine months ended September 30, 1995 and 1994, selling, general
and administrative expenses were 49% of total revenues. As the Company
continues to expand its service offerings, which are designed to optimize the
strengths of our local Lifeline programs, expenditures related to employee
training programs, customer satisfaction, and sales and marketing strategies
remain high. Management and administrative expenses associated with projects
undertaken to strengthen the business also occurred. For the remainder of the
year, selling, general and administrative expenses are expected to remain stable
or improve slightly as a percentage of total revenues.
For both the three and nine month periods ended September 30, 1995, research and
development expenses were 4% of revenues compared with 5% for the same periods
in 1994. Research and development efforts are focused on ongoing product
improvements and technological enhancements. The Company intends to maintain
1995 research and development expenses, as a percentage of total revenues, at
approximately the same level as in the first nine months of the year.
The Company's effective tax rate was 42% for the three and nine month periods
ended September 30, 1995 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1995, the Company's cash and cash
equivalents increased $3,300,000 to $12,900,000 at September 30, 1995 from
$9,600,000 at December 31, 1994. The increase in cash was provided by
profitable operations and $2,400,000 received from the Company's existing lease
portfolio, combined with the timing of the payment of accounts payable and
accrued expenses. Offsetting these favorable changes was $2,000,000 utilized to
purchase property and equipment for use in the operations of the business and in
the development and manufacture of products and services. Additionally, in
September, 1995, the Company paid $539,000 under an agreement to receive the
right, title and interest in and to the warrant to purchase 100,000 shares of
the Company's common stock, which was issued in connection with the acquisition
of Carepartners, Inc. in September, 1993.
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<PAGE>
In May, 1995, the Company completed the acquisition of Tele-Response & Support
Services, Inc. of Raynham, Massachusetts. Tele-Response was a distributor of
Lifeline's response monitoring services. The purchase price was approximately
$1,000,000 of which $900,000 was paid at the closing, and the remainder paid in
the third quarter of 1995. The acquisition was accounted for as a purchase
transaction, and, as a result, the Company recorded goodwill of approximately
$631,000 which is being amortized over the estimated life of seven years. The
results of the acquired business have been included in the Company's
consolidated financial statements from the date of the acquisition. The Company
does not expect the acquisition to have a material impact on its 1995 operating
results.
In October, 1993, the Company's Board of Directors approved the repurchase of up
to 300,000 shares of the Company's stock from time to time in the open market
for general corporate purposes, including shares for use in connection with the
employee stock option plans and stock purchase plans. Of the 300,000 shares
approved, the Company has purchased 187,000 shares, excluding warrants, through
September 30, 1995. No shares were purchased during the first nine months of
1995.
Given the Company's current cash, cash equivalents and revenue levels, funding
requirements for operations and in support of future growth are expected to be
met primarily from existing cash balances and funds generated from operations.
The Company currently believes that cash provided from these sources will be
sufficient to meet its operating and investing requirements, including any
potential acquisitions.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K-No reports on Form 8-K were filed for the three
months ended September 30, 1995.
(b) Exhibits - The Exhibit which is filed with this Report or which is
incorporated herein by reference is set forth in the Exhibit Index which
appears on page 12 hereof.
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<PAGE>
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, 1995 LIFELINE SYSTEMS, INC.
- --------------------- ----------------------
Date Registrant
/s/ Ronald Feinstein
-----------------------------
Ronald Feinstein
Chief Executive Officer
/s/ Dennis Hurley
-----------------------------
Dennis Hurley
Vice President of Finance and
Administration
Principal Financial and
Accounting Officer
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<PAGE>
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.
SEC Document Reference
----------------------
Exhibit No. Exhibit
- ----------- -------
Exhibit 11. COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
1995 1994 1995 1994
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Primary
- -------
Weighted average shares outstanding 5,653 5,537 5,597 5,586
Net effect of dilutive stock options & warrants
based on the treasury method 558 211 477 234
Effect of treasury shares purchased -- (20) -- (56)
Effect of treasury shares issued 5 -- 4 --
------ ------ ------ ------
Total 6,216 5,728 6,078 5,764
====== ====== ====== ======
Net income $ 883 $ 584 $2,155 $1,262
====== ====== ====== ======
Net income per common share $ .14 $ .10 $ .35 $ .22
====== ====== ====== ======
Fully diluted
- -------------
Weighted average shares outstanding 5,653 5,537 5,597 5,586
Net effect of dilutive stock options & warrants
based on the treasury method 615 244 628 249
Effect of treasury shares purchased -- (20) -- (56)
Effect of treasury shares issued 5 -- 4 --
------ ------ ------ ------
Total 6,273 5,761 6,229 5,779
====== ====== ====== ======
Net income $ 883 $ 584 $2,155 $1,262
====== ====== ====== ======
Net income per common share $ .14 $ .10 $ .35 $ .22
====== ====== ====== ======
</TABLE>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 12,908
<SECURITIES> 0
<RECEIVABLES> 5,698
<ALLOWANCES> 183
<INVENTORY> 1,596
<CURRENT-ASSETS> 22,605
<PP&E> 11,980
<DEPRECIATION> 7,177
<TOTAL-ASSETS> 31,234
<CURRENT-LIABILITIES> 7,293
<BONDS> 0
<COMMON> 122
0
0
<OTHER-SE> 23,181
<TOTAL-LIABILITY-AND-EQUITY> 31,234
<SALES> 17,705
<TOTAL-REVENUES> 32,207
<CGS> 6,638
<TOTAL-COSTS> 11,911
<OTHER-EXPENSES> 17,098
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 3,716
<INCOME-TAX> 1,561
<INCOME-CONTINUING> 2,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,155
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
