<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 March 31, 1996 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)
__________________
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 April
30, 1996: 5,677,001
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LIFELINE SYSTEMS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets-March 31, 1996
and December 31, 1995 3
Consolidated Statements of Income - Three months
ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows - Three months
ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
ITEM 2.
Management's Discussion and Analysis of Results of
Operations and Financial Condition 7-9
PART II. OTHER INFORMATION 10
</TABLE>
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LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,708 $ 3,490
Short-term investments 4,731 6,726
Accounts receivable, net 5,782 5,976
Inventories 1,418 1,394
Net investment in sales-type leases 1,884 1,992
Other current assets 581 624
Deferred income taxes 1,093 1,093
--------- ---------
Total current assets 19,197 21,295
Long-term investments 4,984 2,597
Property and equipment, net 4,982 4,648
Goodwill, net 1,918 2,018
Net investment in sales-type leases 1,178 1,208
Other assets 196 195
--------- ---------
Total assets $ 32,455 $ 31,961
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,795 $ 2,508
Accrued payroll and payroll taxes 513 1,702
Accrued income taxes 642 319
Deferred revenues 783 936
Current portion of obligations under capital lease 68 91
Product warranty 500 456
Other current liabilities 30 30
--------- ---------
Total current liabilities 6,331 6,042
Obligations under capital lease 31 32
Deferred income taxes 1,148 1,148
Deferred compensation 549 450
Commitments:
Stockholders' equity:
Common stock, $.02 par value, 10,000,000 shares authorized,
6,172,349 and 6,132,457 shares issued at March 31, 1996
and December 31, 1995, respectively 123 123
Additional paid-in capital 15,281 15,161
Retained earnings 11,665 10,975
--------- ---------
27,069 26,259
Less: treasury stock at cost, 495,348 shares at March 31, 1996
and 436,848 shares at December 31, 1995 (2,323) (1,620)
Notes receivable - officers (350) (350)
--------- ---------
Total stockholders' equity 24,396 24,289
--------- ---------
Total liabilities and stockholders' equity $ 32,455 $ 31,961
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 690 $ 527
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 720 493
Deferred income taxes - (358)
Deferred compensation 99 -
Changes in operating assets and liabilities:
Accounts receivable 194 200
Inventories (24) 204
Net investment in sales-type leases 138 856
Other current assets and other assets 42 (123)
Accounts payable and accrued expenses 1,287 189
Accrued payroll and payroll taxes (1,189) (620)
Deferred revenues, product warranty, and other
current liabilities (109) 19
Accrued income taxes 323 713
Accrued restructuring charge - (200)
--------- --------
Net cash provided by operating activities 2,171 1,900
--------- --------
Cash flows from investing activities:
Purchases of investments (4,597) -
Sales and maturities of investments 4,205 -
Additions to property and equipment (954) (790)
--------- --------
Net cash (used in) investing activities (1,346) (790)
--------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations (24) (88)
Proceeds from issuance of common stock 108 312
Purchase of treasury stock (709) -
Issuance of treasury stock 18 -
--------- --------
Net cash provided by (used in) financing activities (607) 224
--------- --------
Net increase in cash and cash equivalents 218 1,334
Cash and cash equivalents at beginning of period 3,490 9,555
--------- --------
Cash and cash equivalents at end of period $ 3,708 $ 10,889
========= ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except for per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995
<S> <C> <C>
Revenues
Net product sales $ 5,467 $ 5,334
Services 5,419 3,991
Finance and rental income 270 386
--------- ---------
Total revenues 11,156 9,711
--------- ---------
Costs and expenses
Cost of sales 1,936 2,105
Cost of services 2,448 1,610
Selling, general, and administrative 5,280 4,834
Research and development 483 411
--------- ---------
Total costs and expenses 10,147 8,960
--------- ---------
Income from operations 1,009 751
--------- ---------
Other income (expense)
Interest income 168 161
Interest expense (2) (2)
--------- ---------
Total other income, net 166 159
--------- ---------
Income before income taxes 1,175 910
Provision for income taxes 485 383
--------- ---------
Net income $ 690 $ 527
========= =========
Net income per common share:
Primary $ 0.11 $ 0.09
--------- ---------
Fully diluted $ 0.11 $ 0.09
--------- ---------
Weighted average common and
common equivalent shares outstanding:
Primary 6,166 5,941
--------- ---------
Fully diluted 6,184 5,941
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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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 March 31, 1996 and the consolidated results of its operations
and cash flows for the three months ended March 31, 1996 and 1995.
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, 1995.
The results of operations for the three month period ended March 31, 1996
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>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Inventories:
Purchased parts and subassemblies $ 639 $ 602
Work-in-process 603 492
Finished goods 176 300
--------- ------------
$1,418 $1,394
========= ============
Property and equipment:
Equipment $8,175 $7,532
Furniture and fixtures 412 332
Equipment leased to others 3,039 2,661
Equipment under capital leases 1,035 1,035
Leasehold improvements 515 663
--------- ------------
13,176 12,223
Less accumulated depreciation and amortization (8,194) (7,575)
--------- ------------
$4,982 $4,648
========= ============
</TABLE>
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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 with respect to, among other
things, the Company's future revenues, operating income, or earnings per share.
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. A discussion of these risk factors is
included herein under the caption "Significant Risk Factors" which contains
certain, but not necessarily all, of the factors which the management of the
Company presently believes could cause the Company's actual operating results to
be materially different from that forecast or projected in any forward-looking
statement.
RESULTS OF OPERATIONS
Total revenues for the quarter ended March 31, 1996 were $11.2 million, an
increase of 15% compared with the total revenues of $9.7 million for the quarter
ended March 31, 1995.
Service revenues grew 36% to $5.4 million for the first quarter of 1996 from
$4.0 million for the first quarter of 1995. Services comprised nearly 49% of
the Company's revenues during the first quarter, as compared to 41% during the
same period in 1995. The Company's continued growth in service revenue is due
to continued expansion in the number of the Company's monitored subscribers, to
over 128,000 by quarter-end as compared to 100,000 for the first quarter of
1995. The Company's ability to sustain the current level of service revenue
growth in the long run depends on its ability to expand the market for its
personal response services and convert additional locally monitored programs to
service provided by Lifeline Central. The Company believes that the high
quality of its services will be a factor in meeting this challenge.
Product sales were comparable with prior year results, increasing 2% to $5.5
million for the three months ended March 31, 1996 from $5.3 million for the same
period in 1995. While unit shipments rose 9% versus the prior year, revenues
did not increase proportionately due to first quarter shipments of previously
committed quantity discount orders. Current quarter hardware revenues include
the Company's newest product line, the CarePartner, which represented 70% of
total units shipped during the quarter. The Company's ability to sustain the
current level of product sales in the long run depends on its ability to expand
the market for its personal response services. The Company believes the
CarePartner and other new products will be a factor in meeting this challenge.
Finance and rental income, representing revenue earned from the Company's
portfolio of sales-type leases, decreased $116,000, to $270,000 for the first
quarter of 1996 from $386,000 for the same period last year. In January, 1996
the Company introduced an internally managed and funded leasing program to
replace its arrangement with a third-party leasing agent. This arrangement had
been in place since January, 1994, prior to which the Company had offered its
own leasing program. Finance income from leases generated by the Company prior
to 1994 declined during the quarter ended March 31,
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1996 as compared to the similar period last year. The effect of this decline was
offset in part by finance income earned on leases generated by the Company
during the first quarter of 1996 under the more recent internal leasing program.
Cost of sales was 35% of product sales for the three months ended March 31,
1996, compared with 39% for the same period a year ago. The improvement is
largely attributable to manufacturing process improvements which reduced product
costs.
Cost of services increased as a percentage of service revenues, to 45% for the
first quarter of 1996 from 40% for the first quarter of 1995. The increase was
largely due to expenditures related to investments in personnel and systems
supporting the Company's service infrastructure.
Selling, general, and administrative expenses continue to decline as a
percentage of total revenues. Such expenses represented 47% of total revenues
during the first quarter of 1996, as compared to 50% during the same period in
1995. Actual first quarter selling, general, and administrative expenditures
totaled $5.3 million during 1996, an increase of $0.5 million over expenses of
$4.8 million for the same period in 1995. The increase was largely attributable
to maintenance of and improvements in support systems and higher spending
associated with sales and marketing strategies.
Research and development expenses remained constant as a percentage of total
revenues at 4% for both the quarters ended March 31, 1996 and 1995. Research
and development efforts are focused on ongoing product improvements and
developments. The Company expects to maintain these expenses at approximately a
consistent percentage of total revenues.
The Company's effective tax rate was 41% for the three months ended March 31,
1996, versus 42% for the comparable period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1996, cash and cash equivalents
increased $0.2 million to $3.7 million at March 31, 1996 from $3.5 million at
December 31, 1995. The net increase in cash resulted from positive cash flows
from profitable operations, as well as payments received from the Company's
portfolio of sales-type leases. The Company also experienced a significant
increase in its accounts payable and accrued expenses, primarily as a result of
the timing of expenditures related to market development and referral programs
as well as to raw material purchases to support increases in inventories. These
cash flows were in part offset by additional investments in property and
equipment and the purchase of 60,000 shares of the Company's common stock.
During 1995, the Company adopted a revised investment strategy for its cash and
temporary investments. The implementation of the revised policy continued
during the first quarter of 1996, as the Company lengthened the maturity
structure of its portfolio. The Company continued to increase its investment
portfolio during the first quarter of 1996, with net purchases of $0.4 million
in marketable securities.
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<PAGE>
In November, 1995 the Company secured a $4.0 million line of credit effective in
January, 1996. The credit agreement contains a number of covenants, including
requirements that the Company maintain certain levels of financial performance
and capital structure, limitations on the Company's capital and other
expenditures, and restrictions on the Company's capacity to secure additional
debt financing. There have been no borrowings under this line of credit.
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
employee stock option plans and stock purchase plans. Of the 300,000 shares
approved, the Company has purchased 257,000 shares through March 31, 1996,
including 60,000 shares of treasury stock purchased for $0.7 million during the
first quarter of 1996.
Given the Company's current cash, marketable securities, and revenue levels,
funding requirements for operations and in support of future growth are expected
to be met primarily from existing cash and investment 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 funding its internally-managed lease financing program,
additional stock purchases, and any potential acquisitions through 1996.
SIGNIFICANT RISK FACTORS
The ability of the Company to attain the financial or other results that may be
forecast or projected from time to time is subject to a number of risk factors,
including the ability of the Company to introduce new services and products and
enhancements at competitive prices and on a timely basis, the ability of the
Company to market its services directly to subscribers, the ability of the
Company to provide technologically advanced services and products in comparison
to those offered by competitors, the ability of the Company to make appropriate
acquisitions and to integrate the acquired companies successfully, and the risk
factors listed from time to time in the Company's other reports to the
Securities and Exchange Commission. The Company may fail to meet any such
forecast or projected results for reasons other than those set forth above.
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<PAGE>
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 March 31, 1996.
(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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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.
May 10, 1996 LIFELINE SYSTEMS, INC.
- ---------------------------- ----------------------
Date Registrant
/s/ Ronald Feinstein
--------------------
Ronald Feinstein
Chief Executive Officer
/s/ Dennis M. Hurley
--------------------
Dennis M. 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.
Exhibit No. Exhibit SEC Document Reference
- ----------- ------- ----------------------
Exhibit 11. COMPUTATION RE EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995
---- ----
<S> <C> <C>
Primary:
- --------
Weighted average shares outstanding 5,713 5,581
Net effect of dilutive common stock
equivalents based on the treasury method 472 359
Effect of treasury shares purchased (20) -
Effect of treasury shares issued 1 1
------- -------
Total 6,166 5,941
======= =======
Net income $ 690 $ 527
------- -------
Net income per common share $ 0.11 $ 0.09
------- -------
Fully diluted:
- --------------
Weighted average shares outstanding 5,713 5,581
Net effect of dilutive common stock
equivalents based on the treasury method 490 359
Effect of treasury shares purchased (20) -
Effect of treasury shares issued 1 1
------- -------
Total 6,184 5,941
======= =======
Net income $ 690 $ 527
------- -------
Net income per common share $ 0.11 $ 0.09
------- -------
</TABLE>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,708
<SECURITIES> 9,715
<RECEIVABLES> 5,782
<ALLOWANCES> 136
<INVENTORY> 1,418
<CURRENT-ASSETS> 19,197
<PP&E> 13,176
<DEPRECIATION> 8,194
<TOTAL-ASSETS> 32,455
<CURRENT-LIABILITIES> 6,331
<BONDS> 0
0
0
<COMMON> 123
<OTHER-SE> 24,273
<TOTAL-LIABILITY-AND-EQUITY> 32,455
<SALES> 5,467
<TOTAL-REVENUES> 11,156
<CGS> 1,936
<TOTAL-COSTS> 4,384
<OTHER-EXPENSES> 5,763
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 1,175
<INCOME-TAX> 485
<INCOME-CONTINUING> 690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 690
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
