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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1996 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.)
640 Memorial Drive, Cambridge, Massachusetts 02139-4851
(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
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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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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229,405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of February 28, 1997, 5,710,610 shares of the Registrant's Common Stock were
outstanding and the aggregated market value of such Common Stock held by non-
affiliates of the Registrant was approximately $97,000,000.
__________________
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's proxy statement for the Annual Meeting of
Stockholders to be held on May 21, 1997 are incorporated by reference into
Part III hereof.
Exhibit index is located on pages 36 through 39 of this Report.
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PART I
ITEM 1. Business
General
Lifeline Systems, Inc. (the "Company"), provides personal response
services associated with the monitoring of those products it designs,
manufactures, and markets. Through its central monitoring facilities, the
Company provides 24-hour monitoring to its subscribers, primarily elderly
individuals with medical or age-related conditions as well as physically
challenged individuals. These subscribers communicate with the Company
primarily through a communicator which connects to the telephone line in
the subscriber's home and is activated by a personal help button, worn or
carried by the individual subscriber. The Company believes it is a major
provider of such services.
Business Developments
In July, 1996, the Company acquired all the outstanding stock of
CareTel, Inc., ("CareTel") of Toronto, Ontario, Canada, through its
subsidiary, Lifeline Systems (Canada), Inc. CareTel provides personal
response services under the trade name ProtectAlert(TM), and operates a
response center in Toronto. The acquisition of CareTel resulted in
approximately 3,000 additional monitored subscribers.
In the third quarter of 1996, the Company launched the CarePartner
Telephone, which replaced the Company's CommuniCatorPlus(TM) product.
This new version of the Company's full-function speaker telephone
incorporates digital speech technology, called VoiceAssist(TM), which
provides special features for those with visual or hearing limitations,
clarifies alarm messages, and instructs users in a friendly, reassuring
manner.
In November, 1996, the Company announced an organizational change,
which resulted in the realignment of the responsibilities of three of its
officers. The officers and their new positions are: Thomas E. Loper, Vice
President, Customer Care; Donald G. Strange, Vice President, Sales and
Marketing; and Paul V. Vizzini, Vice President, Development.
During the year, research and development efforts concentrated on the
development of a new personal help button. The Classic Pendant(TM) was
introduced in January, 1997 and is designed to appeal to female
subscribers who want the peace of mind that the Lifeline service offers.
Industry Segments
The Company operates in one industry segment. Its operations consist
of providing personal response services associated with the monitoring of
those products it designs, manufactures, and markets. Foreign revenues,
from Canada, comprised less than 10% of the Company's total revenues in
1996, and the Company has no significant tangible assets in foreign
countries.
The Lifeline Service
The Company's principal offering, called LIFELINE/(R)/, consists of a
monitoring service combined with equipment manufactured by the Company.
The Company's monitoring service is a personal response
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service which provides 24-hour monitoring and personalized support to
elderly individuals with medical or age-related conditions and to
physically challenged individuals throughout the United States and
Canada. Through use of the LIFELINE service, individuals in need of help
are able to signal monitoring personnel in one of the Company's response
centers. These trained monitors identify the nature and extent of the
subscriber's particular need and manage the situation according to the
subscriber's predetermined response sequence of friends, neighbors,
and/or emergency personnel. The Company also offers a supportive home
monitoring service called CommuniCall/(R)/. This service, distinct from
the LIFELINE personal response service, emphasizes social support for
elderly individuals who live alone. Since its acquisition of CareTel,
Inc., in July, 1996 the Company also provides personal response services
in Canada under the trade name ProtectAlert(TM). These services are
substantially the same as those provided under the LIFELINE brand.
The equipment used for the LIFELINE, CommuniCall and ProtectAlert
services includes a personal help button, worn or carried by the
individual subscriber, and a communicator, which connects to the
telephone line in the subscriber's home. When pressed, the personal help
button sends a radio signal to the communicator; the communicator
automatically dials a response center where monitoring personnel answer
the call and dispatch the designated responders, typically a friend or
relative of the subscriber and/or emergency service.
The Company's primary monitoring center in Cambridge, Massachusetts is
supported by its proprietary CORMIS(TM) system, a computer-based system
utilizing integrated monitoring software and telecommunication services.
The system receives incoming signals from subscribers' communicators,
matches and retrieves the appropriate subscriber data records from a
central database, and routes both the call and the data record to
monitoring personnel in the Lifeline Response Center.
In the past, the Company offered its customers, typically healthcare
providers which established their own Lifeline programs, two alternatives
for providing the LIFELINE monitoring service: they could perform their
own monitoring locally using equipment and software manufactured by the
Company or they could utilize the Lifeline Response Center. Although the
Company continues to service equipment for customers who perform their
own monitoring, the Company no longer markets the equipment necessary for
new providers to monitor their own subscribers. New providers outsource
their monitoring activities to a Lifeline monitoring center to service
their subscribers.
Lifeline also provides its local programs with a comprehensive set of
monitoring and business support services which reduce the program
management responsibilities and administrative burden associated with a
local monitoring center. In addition, the Company also provides
monitoring coverage directly to subscribers in Canada and to subscribers
in the United States who do not have access to a local Lifeline program.
The Company offers several versions of its communicators. All models
currently available provide two-way voice communication over a speaker
between the subscriber and the response center as well as other features.
The product line offers customers flexibility in terms of price and
functionality.
In the third quarter of 1996, the Company launched the CarePartner
Telephone(TM), which replaced the Company's CommuniCatorPlus(TM) product.
This new version of the Company's full-function speaker telephone
incorporates digital speech technology, called VoiceAssist(TM), which
provides special features for those with visual or hearing limitations,
clarifies alarm messages, and instructs users in a friendly, reassuring
manner. The new communicator offers additional features as compared to
the earlier model it replaced. All of the Company's current models also
offer the RSVP(TM) feature, which allows the subscriber to answer routine
telephone calls by pushing the personal help button. The Classic
Pendant(TM) Lifeline's newest
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personal help button, was introduced in January, 1997 and is designed to
appeal to female subscribers who want the peace of mind that the Lifeline
service offers.
Customers
The Company primarily markets its services and products to hospitals,
institutions, and other service providers in a variety of health-care
related fields. Hospitals, however, have historically been the Company's
primary market. The Company believes that hospitals offer Lifeline's
services and products to capture revenues from the sale of the service,
improve healthcare for the communities they serve, enhance community
relations, market other hospital services to the subscriber base, and/or
contain healthcare costs by facilitating early discharge from the
hospital and reducing the need for nursing home care.
The Company offers its products and monitoring service directly to
consumers through its ProtectAlert service in Canada and in selected
areas of the United States not serviced by local Lifeline programs.
Sales and Marketing
The Company sells its services and products through a direct sales
organization in the United States and Canada.
In support of the sales effort, these sales professionals assist the
Company's institutional customers in developing a marketing plan for the
Lifeline program, monitoring progress against that plan, and providing
training to the customer's staff on the management of their local
Lifeline program. Programs' marketing plans typically address the
introduction of Lifeline's services to key decision makers and service
providers within the customer's organization; the planning and delivery
of presentations to community responders such as police, fire, and
medical emergency professionals; and the development of local referral
networks of elder care and other service organizations. Lifeline
personnel also provide continuing operational support, ongoing
consultation, and program evaluations.
The Company also markets its ProtectAlert services directly to
consumers in Canada through independent representatives.
Source of Raw Materials
The Company manufactures all of its products, relying on outside
vendors for components and enclosures. Any difficulties in obtaining
these parts will have a direct effect on the Company's ability to meet
shipment targets. Although the Company does generally have two or more
suppliers for its proprietary components, it has no assurance that it
will not encounter component shortages in the future, which may adversely
affect the results of operations.
Patents, Licenses and Trademarks
The Company considers its proprietary know-how with respect to the
development, manufacture, and marketing of its personal response services
to be a valuable asset. Due to rapid technological changes that
characterize the industry, the Company believes that continuing
development of new services and products; the improvement of existing
services and products; and patent and license protection are important in
maintaining a competitive advantage.
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Although the Company owns numerous patents and patent applications in
the United States, Canada, and other countries, the Company does not
believe that its business as a whole is or will be materially dependent
upon the protection afforded by its patents.
The Company's LIFELINE trademark and servicemark are registered at the
United States Patent and Trademark Office and in most states and some
foreign countries. The Company also has a number of other trademarks.
Research and Development
Research and development continues to be an important strategic
element for the Company and is geared toward enhancing and augmenting the
Company's products and services. Research and development expenses were
$1,771,000, $1,701,000, and $1,682,000, for the years ended December 31,
1996, 1995, and 1994, respectively.
Backlog/Seasonality
Because of the nature of the Company's products, it endeavors to
minimize the time which elapses from the receipt of a purchase order to
the date of delivery of the products. Accordingly, the Company's backlog
as of the end of any period represents only a portion of the Company's
expected sales for the succeeding period and is not significant in
understanding the Company's business. The Company does not believe that
the industry in which it operates is seasonal.
Government Regulation
The Company's products are registered with the Federal Communication
Commission ("FCC") and comply with FCC regulations pertaining to radio
frequency devices (Part 15) connected to the telephone system (Part 68).
The Company has also received registrations of equipment from Canadian
agencies. As new models are developed, they are submitted to appropriate
agencies as required.
The Company has registered its communicator products with the United
States Food and Drug Administration.
None of the Company's business is subject to negotiation of profits or
termination of contract by the government, nor is it impacted by any
existing environmental laws.
Competition
The Company believes that it is a major provider of personal response
services and products. Other companies offer services and products
competitive with those offered by the Company, including many burglar
alarm companies which offer emergency response as a part of security
services. These companies offer personal response services on a regional
or national basis through both healthcare providers and directly to the
subscribers themselves.
Although price is a competitive factor, the Company believes that its
customers' main considerations in choosing a personal response service
are service and product performance and reliability; customer support and
service; and reputation and experience in the industry. The Company
believes it competes favorably with respect to these factors.
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Employees
As of February 28, 1997 the Company employed approximately 425 full-
time and permanent part-time employees. None of the Company's employees
is represented by a collective bargaining unit, and the Company believes
its relations with its employees are good.
ITEM 2. Properties
The Company leases a portion of a facility in Cambridge, Massachusetts
which serves as its corporate headquarters and also houses its
manufacturing and U.S.-based monitoring operations. The lease includes two
five-year options to renew at the end of the initial ten-year lease term.
The Company leases facilities in other locations to support its field and
Canadian operations. The Company believes that these facilities are
adequate for its current needs.
ITEM 3. Legal Proceedings
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The following table sets forth certain information regarding the
executive officers of the Company as of December 31, 1996:
<TABLE>
<CAPTION>
Name Position Age
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<S> <C> <C>
L. Dennis Shapiro Chairman of the Board 63
Ronald Feinstein President, Chief Executive Officer
and Director 50
Dennis M. Hurley Vice President, Finance,
Chief Financial Officer,
Treasurer 50
Heather E. Edelman Vice President, Human Resources 49
John D. Gugliotta Vice President, Operations 49
Thomas E. Loper Vice President, Customer Care 47
Richard M. Reich Vice President, Technology and Advanced
Services 49
Donald G. Strange Vice President, Sales and Marketing 50
Paul V. Vizzini Vice President, Development 49
Norman B. Asher Clerk 70
</TABLE>
L. Dennis Shapiro, Chairman of the Board, has served the Company in
this capacity since 1978, and at various times, has served as President and
Chief Financial Officer.
Ronald Feinstein became an employee of the Company in September, 1992
and became Executive Vice President and Chief Operating Officer in October,
1992. He was appointed President and Chief Executive
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Officer in January, 1993. Mr. Feinstein has served as a director of the
Company since 1985. From January, 1991 until September, 1992, he was
President and Chief Executive Officer of International Business Interiors.
Dennis M. Hurley joined the Company in March, 1995 as Vice President,
Finance; Chief Financial Officer; and Treasurer. From November, 1994 to
February, 1995, Mr. Hurley was Corporate Controller for C.P. Clare Corp.
which is an electronics manufacturer. From 1977 to 1994, Mr. Hurley held
various senior financial management positions with Avery Dennison, most
recently as Group Controller for the Office Products Group.
Heather E. Edelman joined the Company in June, 1993 as Vice President,
Human Resources. From 1989 through 1992, Ms. Edelman was Manager, Human
Resources Programs for ROLM, which manufactures, markets and services
telecommunications products and services.
John D. Gugliotta has been Vice President, Operations since June,
1990. Mr. Gugliotta had served as Vice President, Manufacturing since he
joined the Company in August, 1987.
Thomas E. Loper serves as Vice President, Customer Care. He joined the
Company in September, 1995 as Vice President, Subscriber Services. From
1993 until 1995, Mr. Loper served as Area Vice President for Herman Miller,
manufacturer of office furniture. Prior to that, he was President of
Business Interiors, a division of International Business Interiors, from
1991 until 1993.
Richard M. Reich has been Vice President, Technology and Advanced
Services since August, 1994. From June, 1990 to August, 1994, Mr. Reich
had served as Vice President, Product Planning and Development. Since
joining the Company in April, 1986 he had held the position of Vice
President, Engineering.
Donald G. Strange is the Vice President, Sales and Marketing. He
joined the Company in February, 1993 as Vice President, Sales. From
September, 1992 to January, 1993, Mr. Strange was Senior Vice President and
General Manager of American Distribution System, which manages the
distribution of prescription drugs and controlled substances. From 1969 to
1992, he was employed by Hoffman-La Roche, Inc., where he held various
management positions in sales and marketing, most recently as National
Director of Sales for its Roche Home Healthcare Services division.
Paul V. Vizzini serves as Vice President, Development. He joined the
Company in June, 1993 as Vice President, Marketing. From 1968 to 1993, he
was employed by Avery Dennison, where he held various senior marketing and
operations management positions, most recently as Vice President/General
Manager of the Customer Operations Division.
Norman B. Asher has been the Clerk of the Company since July, 1978 and
since 1965 has been a partner of the law firm of Hale and Dorr, which has
been general counsel to the Company since 1976.
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PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Quarterly Market Information and Related Matters
The Company's common stock is traded on the Nasdaq Stock Market under the symbol
"LIFE." On February 28, 1997, the Company had 488 shareholders of record.
The table below reflects the high and low sales prices for 1996 and 1995.
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
1996 First Quarter $ 12.75 $ 10.50
Second Quarter 14.63 11.88
Third Quarter 19.25 11.50
Fourth Quarter 20.50 15.00
1995 First Quarter $ 7.13 $ 5.38
Second Quarter 8.13 5.25
Third Quarter 13.25 7.63
Fourth Quarter 14.13 10.88
</TABLE>
During the periods presented, the Company has not paid or declared any cash
dividends on its common stock. While the payment of dividends is within the
discretion of the Company's Board of Directors, the Company presently expects to
retain all of its earnings for use in financing the future growth of the
Company.
As part of the July, 1996 acquisition of CareTel, Inc., the Company issued 6,000
shares of Lifeline Common Stock to the principal shareholder of CareTel, Inc. in
exchange for 2,100 common shares of CareTel Inc.
In September, 1995 the Company issued 8,939 shares of its common stock to the
Vice President, Customer Care in exchange for a collateralized promissory note
in the amount of $100,000. The note, which bears interest at a rate of 6.3% per
annum, payable annually in arrears, is due September, 2002.
The Company from time to time issues shares to its employees as part of its
bonus program. In 1996, a total of 1,500 shares were issued under this program.
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ITEM 6. Selected Financial Data
Selected Financial Data
<TABLE>
<CAPTION>
(In thousands, except per share data) 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Total revenues $ 50,223 $ 43,379 $ 36,141 $ 30,059 $ 28,496
Income (loss) before taxes 7,078 5,505 3,413 1,870 (4,460)
Net income (loss) 4,176 3,148 1,980 1,085 (2,944)
Net income (loss) per share $ 0.67 $ 0.51 $ 0.34 $ 0.19 $ (0.54)
Weighted average common and
common equivalent shares
outstanding 6,197 6,115 5,776 5,680 5,429
FINANCIAL POSITION (1)
Working capital $ 14,003 $ 15,253 $ 14,971 $ 10,469 $ 8,970
Total assets 37,909 31,961 28,883 28,327 25,935
Long-term debt 25 32 85 395 458
Stockholders' equity 27,620 24,289 21,208 19,421 18,462
</TABLE>
(1) There were no cash dividends paid or declared during any of the periods
presented.
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ITEM 7. 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
1996 Compared with 1995
Total revenues for the year ended December 31, 1996 were $50.2 million, an
increase of 16% compared with the $43.4 million recorded in 1995.
Service revenues represented $24.2 million of the Company's total revenues for
the year ended December 31, 1996, compared to $18.6 million for the prior year.
This 30% increase in service revenues was driven primarily by a 30% increase in
subscribers, to approximately 156,000 at December 31, 1996, from nearly 120,000
at the end of the prior year. Service revenues comprised 48% of the Company's
total revenues in 1996 compared to 43% in 1995 which is consistent with the
Company's continued transition to a service-oriented business, with its focus on
developing its base of subscribers and generating recurring service revenues.
The increase in subscribers was driven by conversions of locally-monitored
programs to centralized monitoring by the Company, growth of the Company's
existing programs, and by the Company's acquisition of CareTel, Inc. in July,
1996 which contributed nearly 3,000 subscribers. The Company's ability to
sustain the current level of service revenue growth depends on its ability to
expand the market for its personal response services and convert additional
locally-monitored programs to monitoring service provided directly by Lifeline.
The Company believes that the high quality of its services will be a factor in
meeting this challenge.
Net product revenues totaled $24.9 million during 1996, representing a 6%
increase over product revenues in 1995 of $23.4 million. The 1996 results
benefited from an entire year of sales of the CarePartner(TM) line, the first
models of which were introduced in September, 1995. The increase in volume
attributed to this line was partially offset by a decline in the average selling
price. The average selling price decreased because of product and service price
offerings in support of the Company's strategy to grow recurring service revenue
while maintaining product sales. The Company introduced the CarePartner
Telephone(TM) during the third quarter of 1996, which replaced the Company's
CommuniCatorPlus(TM). This new version of the Company's full-function speaker
telephone incorporates digital speech technology, called VoiceAssist(TM), which
provides special features for those with visual or hearing limitations,
clarifies alarm messages, and instructs users in a friendly, reassuring manner.
This product did not have a material impact on 1996 product revenues. In
January, 1997, the Company introduced the Classic Pendant(TM), a new personal
help button designed with particular emphasis on its fashion appeal. The
Company's ability to sustain the current level of product sales in the long run
depends upon its ability to expand the market for its personal response
services. The Company believes its new products will be a factor in meeting this
challenge.
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Finance and rental income, representing income earned from the Company's
portfolio of sales-type leases, decreased $.2 million to $1.1 million in 1996
from $1.3 million for the previous year. The decline is attributable to the
overall aging of the lease portfolio existing when the Company transitioned to
an arrangement with a third-party leasing agent, beginning in January, 1994.
Although this arrangement provided cash flow benefits during 1994 and 1995, in
January, 1996 the Company terminated this arrangement and introduced a more
customer-focused, internally managed and funded leasing program which is
expected to increase finance income in future years.
Cost of services, as a percentage of service revenues, increased to 42% for the
year ended December 31, 1996 from 40% for the year ended December 31, 1995. The
increased cost is attributable to the Company's investment in personnel and
systems supporting its growing service infrastructure. As the Company grows its
subscriber base and develops its monitoring capabilities, it expects to continue
to invest in its service infrastructure to enhance its ability to provide caring
service for its subscribers. These investments are expected to be directed
primarily toward systems enhancements and improvements.
For the year ended December 31, 1996, cost of product sales as a percentage of
product sales was 33%, versus 36% in the prior year. This decrease was due
largely to improvements in manufacturing processes and the application of new
technology which reduced product costs.
Selling, general, and administrative expenses as a percentage of revenues
decreased slightly to 47% for the year ended December 31, 1996 from 48% for the
prior year. The dollar increase year-over-year was largely attributable to
expenditures related to enhancements to information systems, salaries, and
related fringe benefits due to the overall increase of the Company's employee
base; market development and promotional strategies aimed at the healthcare
channel and related referral networks; and the additional administrative
expenses associated with the acquisition of CareTel, Inc. in the third quarter
of 1996.
Research and development expenses represented 4% of revenues in 1996 and in
1995. Research and development efforts are focused on ongoing product
improvements, and the Company expects to maintain these expenses, as a
percentage of total revenues, at a relatively consistent level.
The Company's effective tax rate was 41% for 1996, as compared to 43% in 1995.
The reduction in the Company's rate was largely due to the impact of tax-exempt
income from the Company's marketable securities portfolio and utilization of a
subsidiary with favorable tax status.
1995 Compared with 1994
Total revenues for the year ended December 31, 1995 were $43.4 million, versus
$36.1 million in 1994, representing an increase of 20%.
Total service revenues, primarily from monitoring, increased 34% to $18.6
million in 1995 from $13.9 million in 1994. The number of subscribers monitored
by the Lifeline Response Center grew by 35% during the year, to nearly 120,000
by year end, resulting in a 32% increase in monitoring revenues. This rapid
expansion was driven by the Company's continued conversions of locally-monitored
programs to monitoring provided by the Lifeline Response Center, growth in
existing programs, and the acquisition of Tele-Response(TM) and Support
Services, Inc. during the second quarter of 1995.
Net product sales increased 15% to $23.4 million in 1995 from $20.4 million in
1994. The Company introduced a new product line, the CarePartner(TM), during the
third quarter. This new communicator
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incorporated advanced technologies, including digital speech, or
VoiceAssist(TM), which clarifies alarm messages and instructs users in a
friendly, reassuring manner. In addition, 1995 results reflected the impact of
an entire year of sales of the Company's then-premier model, the
CommuniCatorPlus(TM) which was introduced during the second quarter of 1994.
This communicator provided extended range and enhanced voice clarity in addition
to being a full-featured speaker telephone. During 1995, the Company experienced
strong sales of this product which contributed significantly to year-over-year
growth in product revenues. The Company also experienced a significant increase
in accessory sales, driven primarily by the Slimline(TM) personal help button.
Finance and rental income, representing income earned from the Company's
portfolio of sales-type leases, decreased $0.6 million to $1.3 million in 1995
from $1.9 million for the previous year. The decline was attributable to the
overall aging of the existing lease portfolio. In January, 1994 the Company
entered into an arrangement with a third-party leasing agent, offering
competitive rates and programs. This arrangement provided cash flow benefits
during 1994 and 1995. In January, 1996 the Company terminated this arrangement
and introduced a more customer-focused, internally managed and funded leasing
program which is expected to increase finance income in future years.
The Company improved the profitability of its service operations with overall
cost of services at 40% of service revenues in 1995, compared with 41% for 1994.
The most significant component of the improved cost structure was the Company's
realization of a full year of operating expense savings resulting from the
integration of monitoring and administrative functions of its CommuniCall
operation during the second half of 1994. During 1995, the Company focused its
efforts to expand and better serve its subscriber base through investments in a
supporting organization. The Company will continue to invest in its service
business in upcoming periods.
Cost of product sales was 36% of product sales in 1995 compared with 40% in
1994. The improvement is largely attributable to a shift in the Company's
product mix toward lower cost models, including the new CarePartner series and
its focus aimed at manufacturing high quality, lower-cost products. Also,
overall product mix improved as a result of increasing accessory sales, which
yielded higher average selling prices than in the prior year.
Selling, general, and administrative expenses as a percentage of total sales
remained constant at 48%. The increase in expenses was largely due to
expenditures on market development and promotional strategies aimed at the
healthcare channel and related referral networks, as well as the Company's
acquisition of Tele-Response and Support Services, Inc. Other elements of
selling, general, and administrative expense included continued expenses for
improvements in the systems infrastructure for subscriber support and sales and
management bonuses relating to favorable 1995 performance.
Research and development expenses represented 4% of revenues in 1995 versus 5%
in 1994. Research and development efforts were focused on ongoing product
improvements.
The Company's effective tax rate was 43% for 1995 as compared with 42% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1996, cash and cash equivalents decreased $.5
million to $3.0 million at December 31, 1996 from $3.5 million at December 31,
1995. The decrease in cash and cash equivalents resulted from the continued
investment of excess cash in longer-term marketable securities consistent with
the Company's investment strategy for its cash and temporary investments. The
Company's portfolio of cash, cash equivalents, and investments grew by $.5
million in total primarily as a result of positive cash flows from profitable
operations. The Company used $1.2 million, net of cash received on leases, to
fund its internal
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leasing program, which was reintroduced in 1996, while in 1995 and 1994 the
Company generated $2.9 million and $3.7 million, respectively, from payments
received from the Company's existing portfolio of sales-type leases. In
addition, during 1996 the Company invested $5.0 million in equipment purchases
for use in the development and manufacture of its products and services, as well
as for Company-owned equipment provided directly to customers under
comprehensive service agreements and to subscribers not serviced by local
Lifeline programs. These expenditures were significantly higher than the $2.7
million invested in 1995 and $2.0 million in 1994.
In July, 1996 the Company acquired all of the outstanding stock of CareTel, Inc.
of Toronto, Ontario, Canada through its subsidiary, Lifeline Systems (Canada),
Inc. CareTel provides monitoring services, similar to those offered by the
Company, directly to consumers under the brand name ProtectAlert. The purchase
price was approximately $1.1 million in cash, all of which was paid in 1996. The
acquisition was accounted for as a purchase transaction, and, as a result, the
Company recorded goodwill of approximately $1.0 million which is being amortized
over an 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 acquisition and did not have a material impact on 1996 operating results.
In October, 1993 the Company's Board of Directors approved the repurchase of up
to 300,000 shares of the Company's common 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. The Company has
completed the purchase of all of the approved 300,000 shares as of December 31,
1996, including 103,000 shares of treasury stock purchased for $1.3 million in
1996. In January, 1997, the Board of Directors authorized the repurchase of an
additional 100,000 shares of stock for general corporate purposes.
In November, 1995, the Company secured a $4.0 million line of credit effective
in January, 1996. During 1996, the term of the credit facility was extended
until December, 1997. This 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. No amounts were outstanding as of December 31, 1996.
The Company expects that funding requirements for operations and in support of
future growth are expected to be met primarily from operating cash flow and
existing cash and marketable securities. The Company expects these sources will
be sufficient to finance the 1997 requirements of its internally funded lease
financing program, stock repurchases, any potential acquisitions, and other
investments in support of its current business. The Company is currently
considering significant investments in 1997 relating to the development of
advanced call center technologies. The timing and extent of these investments
have not yet been determined by the Company.
In February, 1997, the Financial Accounting Standards Board issued Statement No.
128 ("SFAS 128"), "Earnings per Share," which is effective for fiscal years
ending after December 15, 1997, including interim periods. SFAS 128 requires the
presentation of basic and diluted earnings per share (EPS). Basic EPS, which
replaces primary EPS, excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS under the existing rules. SFAS 128 requires
restatement of all prior-period earnings per share data presented after the
effective date. The Company will adopt SFAS 128 in 1997 and has not yet
determined the impact of adoption.
-13-
<PAGE>
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 Annual Report on Form 10-K and presented elsewhere by management from time
to time.
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 client preferences and new service and product
introductions by the Company's competitors. Lifeline's future success will
depend on its ability to enhance its existing services and products (including
accessories), to introduce new service and product offerings to meet and adapt
to changing customer requirements and emerging technologies on a timely basis
and to offer such products and services at competitive prices. There can be no
assurance that Lifeline will be successful in identifying, developing,
manufacturing or marketing new services and products or enhancing its existing
services and products on a timely basis or that Lifeline will be able to offer
such services and products at competitive prices. Also, there can be no
assurance that services, products or technologies developed by others will not
render Lifeline's services or products noncompetitive or obsolete.
The Company's growth is dependent on its ability to increase the number of
subscribers served by its monitoring centers. In 1995, service revenue was $18.6
million, accounting for approximately 43% of the Company's total revenues. For
the year ended December 31, 1996, service revenue was $24.2 million, comprising
48% of total revenues for the year. 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
results of operations.
The Company may expand its operations through the acquisition of additional
businesses. There can be no assurance that the Company will be able to identify,
acquire or profitably manage additional businesses or successfully integrate any
acquired businesses into the company without substantial expenses, delays or
other operational or financial problems. In addition, acquisitions may involve a
number of special risks, including diversion of management's attention, failure
to retain key acquired personnel, unanticipated events, contingent liabilities
and amortization of acquired intangible assets. There can be no assurance that
the acquired businesses, if any, will achieve anticipated revenues or earnings.
The Company believes that its future success will also depend in large part upon
its ability to attract and retain key personnel, and there can be no assurance
that the Company will be successful in attracting and retaining such personnel.
The Company sells a significant portion of its products to healthcare providers
which establish their own Lifeline programs. These healthcare providers
typically lease, rather than sell, the Lifeline products to subscribers and
accordingly following such time as a product is no longer used by a subscriber,
it is returned to the healthcare provider and becomes available for lease to
another subscriber. As a result of this use and reuse of the Company's products,
sales of such products are dependent on growth in the number of subscribers and
on the ability of the Company to encourage its healthcare provider customers to
replace their existing inventory by continuing to enhance its products with new
features.
The Company's monitoring operations are concentrated principally in its
Cambridge, Massachusetts headquarters facility. Although the Company believes
that it has constructed safeguards to protect against system failures, the
disruption of service at its monitoring facility, whether due to telephone or
electrical failures, earthquakes, fire or other similar events or for any other
reason, could have a material adverse effect on the Company's results of
operations.
-14-
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
Quarterly Results of Operations
<TABLE>
<CAPTION>
(Unaudited) Quarter Ended
(Dollars in thousands, except per share data) Mar 31 Jun 30 Sep 30 Dec 31 Full Year
<S> <C> <C> <C> <C> <C>
1996 Total revenues $ 11,156 $ 13,043 $ 12,755 $ 13,269 $ 50,223
Net income 690 1,065 1,136 1,285 4,176
Net income per common share $ 0.11 $ 0.17 $ 0.18 $ 0.21 $ 0.67
1995 Total revenues $ 9,711 $ 11,080 $ 11,416 $ 11,172 $ 43,379
Net income 527 744 883 994 3,148
Net income per common share $ 0.09 $ 0.12 $ 0.14 $ 0.16 $ 0.51
</TABLE>
Report of Independent Accountants
To the Stockholders and Board of Directors of Lifeline Systems, Inc.:
We have audited the accompanying consolidated financial statements and financial
statement schedule of Lifeline Systems, Inc. listed in Items 14(a)(1) and
14(a)(2) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lifeline Systems,
Inc. as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material aspects, the information to be included
therein.
/s/ Coopers & Lybrand L.L.P.
-----------------------------
Boston, Massachusetts
February 10, 1997
-15-
<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,030 $ 3,490
Short-term investments 7,140 6,726
Accounts receivable trade, net of allowance for doubtful
accounts of $197 in 1996 and $156 in 1995 6,062 5,976
Inventories 1,450 1,394
Net investment in sales-type leases 1,278 1,992
Prepaid expenses and other current assets 1,675 624
Deferred income taxes 1,046 1,093
------------------ ------------------
Total current assets 21,681 21,295
Long-term investments 3,178 2,597
Property and equipment, net 7,127 4,648
Goodwill, net 2,568 2,018
Net investment in sales-type leases 3,160 1,208
Other assets 195 195
------------------ ------------------
Total assets $ 37,909 $ 31,961
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,063 $ 697
Accrued expenses 2,520 1,811
Accrued payroll and payroll taxes 1,743 1,702
Product warranty 639 456
Accrued income taxes 854 319
Deferred revenues 812 936
Current portion of obligations under capital lease 7 91
Other current liabilities 40 30
------------------ ------------------
Total current liabilities 7,678 6,042
Obligations under capital lease 25 32
Deferred income taxes 1,690 1,148
Deferred compensation 896 450
Commitments:
Stockholders' equity:
Common stock, $.02 par value, 10,000,000 shares authorized,
6,217,192 shares issued in 1996 and 6,132,457 shares issued in 1995 124 123
Additional paid-in capital 15,618 15,161
Retained earnings 15,151 10,975
------------------ ------------------
30,893 26,259
Less: treasury stock at cost, 532,348 shares in 1996 and 436,848 shares in 1995 (2,923) (1,620)
Notes receivable - officers (350) (350)
------------------ ------------------
Total stockholders' equity 27,620 24,289
------------------ ------------------
Total liabilities and stockholders' equity $ 37,909 $ 31,961
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-16-
<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995, and 1994
(In thousands except for per share data)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues
Net product sales $ 24,864 $ 23,440 $ 20,394
Services 24,220 18,602 13,860
Finance and rental income 1,139 1,337 1,887
--------------- ---------------- -------------
Total revenues 50,223 43,379 36,141
--------------- ---------------- -------------
Costs and expenses
Cost of sales 8,238 8,500 8,232
Cost of services 10,064 7,454 5,740
Selling, general, and administrative 23,855 20,959 17,421
Research and development 1,771 1,701 1,682
--------------- ---------------- -------------
Total costs and expenses 43,928 38,614 33,075
--------------- ---------------- -------------
Income from operations 6,295 4,765 3,066
--------------- ---------------- -------------
Other income (expense)
Interest income 790 748 368
Interest expense (7) (8) (21)
--------------- ---------------- -------------
Total other income, net 783 740 347
--------------- ---------------- -------------
Income before income taxes 7,078 5,505 3,413
Provision for income taxes 2,902 2,357 1,433
--------------- ---------------- -------------
Net income $ 4,176 $ 3,148 $ 1,980
=============== ================ ============
Net income per common share:
Primary $0.67 $ 0.51 $ 0.34
Fully diluted $0.67 $ 0.51 $ 0.34
Weighted average common and common equivalent shares outstanding:
Primary 6,197 6,115 5,776
Fully diluted 6,265 6,217 5,880
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-17-
<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In
------------------------------------------------------
Shares Amount Capital
-----------------------------------------------------------------
<C> <C> <C>
BALANCE, DECEMBER 31, 1993 5,507,388 $116 $14,192
-----------------------------------------------------------------
Exercise of stock options 97,110 2 222
Issuance of stock under employee stock purchase plan 18,417 70
Income tax benefit from stock options exercised 49
Purchase of treasury stock (128,000)
Net income
-----------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 5,494,915 118 14,533
-----------------------------------------------------------------
Exercise of stock options 177,202 5 423
Issuance of stock under employee stock purchase plan 16,053 88
Purchase of treasury stock (10,000)
Sale of stock to officer 8,939 69
Issuance of treasury stock 8,500 48
Purchase of common stock warrant
Net income
-----------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 5,695,609 123 15,161
-----------------------------------------------------------------
Exercise of stock options 69,650 1 230
Issuance of stock under employee stock purchase plan 15,085 163
Purchase of treasury stock (103,000)
Issuance of treasury stock 7,500 64
Net income
-----------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 5,684,844 $124 $15,618
=================================================================
<CAPTION>
Notes Total
Retained Treasury Receivable Stockholders'
Earnings Stock Officers Equity
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $6,386 ($1,023) ($250) $19,421
---------------------------------------------------------------------
Exercise of stock options 224
Issuance of stock under employee stock purchase plan 70
Income tax benefit from stock options exercised 49
Purchase of treasury stock (536) (536)
Net income 1,980 1,980
---------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 8,366 (1,559) (250) 21,208
---------------------------------------------------------------------
Exercise of stock options 428
Issuance of stock under employee stock purchase plan 88
Purchase of treasury stock (122) (122)
Sale of stock to officer 31 (100) -
Issuance of treasury stock 30 78
Purchase of common stock warrant (539) (539)
Net income 3,148 3,148
---------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 10,975 (1,620) (350) 24,289
---------------------------------------------------------------------
Exercise of stock options 231
Issuance of stock under employee stock purchase plan 163
Purchase of treasury stock (1,337) (1,337)
Issuance of treasury stock 34 98
Net income 4,176 4,176
---------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $15,151 ($2,923) ($350) $27,620
=====================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-18-
<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995, and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,176 $ 3,148 $ 1,980
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,216 2,231 2,021
Provision for bad debts 120 - -
Income tax benefit from stock options exercised - - 49
Deferred income tax provision 589 (869) (1,191)
Deferred compensation 446 384 66
Changes in operating assets and liabilities:
Accounts receivable (182) (961) (1,068)
Inventories (56) 117 (240)
Net investment in sales-type leases (1,238) 2,963 3,672
Prepaid expenses, other current assets and other assets (1,049) (331) 53
Other current liabilities 1,099 509 300
Income taxes payable/receivable 529 319 159
Accrued restructuring charge - (200) (195)
---------------- ------------ ---------------
Net cash provided by operating activities 7,650 7,310 5,606
---------------- ------------ ---------------
Cash flows from investing activities:
Purchases of investments (20,664) (9,323) -
Sales and maturities of investments 19,669 - -
Additions to property and equipment (5,033) (2,709) (2,022)
Payment for business acquisition (1,146) (1,000) (500)
---------------- ------------ ---------------
Net cash used in investing activities (7,174) (13,032) (2,522)
---------------- ------------ ---------------
Cash flows from financing activities:
Principal payments under capital lease obligations (91) (276) (299)
Proceeds from stock options exercised and
employee stock purchase plan 394 516 294
Purchase of common stock warrant - (539) -
Purchase of treasury stock (1,337) (122) (536)
Issuance of treasury stock 98 78 -
---------------- ------------ ---------------
Net cash used in financing activities (936) (343) (541)
---------------- ------------ ---------------
Net increase (decrease) in cash and cash equivalents (460) (6,065) 2,543
---------------- ------------ ---------------
Cash and cash equivalents at beginning of year 3,490 9,555 7,012
---------------- ------------ ---------------
Cash and cash equivalents at end of year $ 3,030 $ 3,490 $ 9,555
================ ============ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-19-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Lifeline Systems,
Inc. and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Cash, Cash Equivalents, and Investments
The Company considers all securities purchased with a maturity of three months
or less at the date of acquisition to be cash equivalents. The Company's
investments are deemed to be available for sale. Short-term investments consist
primarily of obligations of the US Government and its agencies, tax-exempt
securities, commercial paper, and bank time deposits with maturities at date of
acquisition beyond three months and less than one year. Long-term investments
consist primarily of obligations of the US Government and its agencies,
tax-exempt securities, and commercial paper with maturities at date of
acquisition beyond one year and less than three years. Investments are carried
at fair market value, which approximates cost.
The fair market value of securities, which approximates cost, consists of the
following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(Dollars in thousands) Maturity
----------------------------------------------------------
Less than More than
Type of Security one year one year Total
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
US Government and Agency
securities $ 2,917 $ 1,535 $ 500 $ 500 $ 3,417 $ 2,035
Tax-exempt securities 4,223 1,256 2,678 2,097 6,901 3,353
Corporate bonds and securities - 3,935 - - - 3,935
---------------------------------------------------------------------------------------
$ 7,140 $ 6,726 $ 3,178 $ 2,597 $ 10,318 $ 9,323
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 3,030 3,490
- --------------------------------------------------------------------------------------------------------------------------------
$ 13,348 $ 12,813
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-20-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of cost or market, as determined by the
first-in, first-out method.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization are
computed principally by the straight-line method over the useful lives of the
assets, typically three to five years, or, in the case of leasehold
improvements, over the lesser of the useful life or the lease term.
When assets are sold or retired, the related cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is credited or
charged to income. Expenditures for maintenance and repairs are charged to
expense as incurred; betterments are capitalized.
Goodwill
Goodwill is recorded at cost and amortized on a straight-line basis over an
estimated useful life of seven years. Amortization expense was $472,000,
$361,000, and $318,000 in 1996, 1995 and 1994, respectively. Accumulated
amortization amounted to $1,244,000 and $772,000 as of December 31, 1996 and
1995 respectively. The Company evaluates the possible impairment of long-lived
assets, including goodwill, whenever events or circumstances indicate that the
carrying value of the assets may not be recoverable.
Product 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.
Revenue Recognition
Revenues from the sale of personal response products are recognized upon
shipment. Service revenues are associated primarily with providing monitoring
and maintenance of personal response products and are recognized ratably over
the contractual period. Finance income attributable to sales-type lease
contracts is initially recorded as unearned income and subsequently recognized
under the interest method over the term of the leases.
Income Taxes
The Company accounts for income taxes under a liability approach. Under this
approach, deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
temporary differences are expected to reverse.
-21-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Income Per Common Share
Net income per common share is computed based on the weighted average number of
common and dilutive common equivalent shares outstanding during each period.
Common equivalent shares consist of stock options and warrants calculated using
the treasury stock method.
Industry Segments
The Company operates in one industry segment. Its operations consist of
providing personal response services associated with the monitoring of those
products it designs, manufactures, and markets. Foreign revenues, from Canada,
comprise less than 10% of the Company's total revenues, and the Company has no
significant tangible assets in foreign countries.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk include cash, cash equivalents, investments, and trade receivables.
The Company sells its products primarily to hospitals and other healthcare
institutions. The Company performs ongoing credit evaluations of its customers
and, in the case of sales-type leases, the leased equipment serves as collateral
in the transactions. The Company has established guidelines relative to credit
ratings, diversification and maturities that maintain safety and liquidity. The
Company has not experienced any significant losses on these financial
instruments.
Reclassification
Certain prior year balances have been reclassified to conform to the current
year presentation.
B. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Purchased parts and assemblies $ 797 $ 602
Work in progress 392 492
Finished goods 261 300
- -----------------------------------------------------------------------------
$ 1,450 $ 1,394
- -----------------------------------------------------------------------------
</TABLE>
-22-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
C. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Equipment $ 9,786 $ 7,532
Furniture and fixtures 574 332
Equipment leased to others 5,218 2,661
Equipment under capital leases 1,035 1,035
Leasehold improvements 692 663
- -------------------------------------------------------------------------------
17,305 12,223
Less: accumulated depreciation and amortization (10,178) (7,575)
- -------------------------------------------------------------------------------
$ 7,127 $ 4,648
- -------------------------------------------------------------------------------
</TABLE>
Accumulated depreciation and amortization amounted to $2,256,000 and $1,276,000
on equipment leased to others and $1,006,000 and $991,000 on equipment under
capital leases at December 31, 1996 and 1995, respectively.
D. LEASING ARRANGEMENTS
As Lessor
In January, 1996 the Company reintroduced an internally-financed and operated
leasing program and leases its personal response products to customers
principally under sales-type leases.
As sales-type leases, the lease payments to be received over the term of the
leases are recorded as a receivable at the inception of the new lease. Finance
income attributable to the lease contracts is initially recorded as unearned
income and subsequently recognized as income under the interest method over the
term of the leases. The lease contracts are generally for five-year terms, and
the residual value of the leased equipment is considered to be nominal at the
end of the lease period.
-23-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
D. LEASING ARRANGEMENTS (continued)
The components of the net investment in sales-type leases are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Minimum lease payments receivable $ 6,193 $ 3,994
Less: Unearned interest 1,579 577
Allowance for doubtful accounts 176 217
- ----------------------------------------------------------------------------
4,438 3,200
Less: Current portion 1,278 1,992
- ----------------------------------------------------------------------------
Net investment in sales-type leases $ 3,160 $ 1,208
- ----------------------------------------------------------------------------
<CAPTION>
Future minimum lease payments due under non-cancellable sales-type leases at
December 31, 1996 are as follows:
<S> <C>
(Dollars in thousands)
1997 $ 1,932
1998 1,282
1999 884
2000 842
2001 504
Thereafter 749
- ---------------------------------------------------------------------
$ 6,193
- ---------------------------------------------------------------------
</TABLE>
As Lessee
The Company conducts its primary operations in a leased facility under a
ten-year operating lease which commenced in the second quarter of 1994. The
lease includes scheduled base rent increases over the term of the lease. The
total amount of base rent payments is being charged to expense on the
straight-line method over the term of the lease. The Company recorded a deferred
credit to reflect the excess of rent expense over cash payments upon the
commencement of the lease. In addition, the Company pays a monthly allocation of
the building's operating expenses and real estate taxes. The lease contains two
five-year renewal options.
In conjunction with the leased facility, the Company also entered into operating
lease arrangements for certain furniture, computer equipment, and leasehold
improvements totaling approximately $1.5 million. These leases contain renewal
options and expire through 2001.
The Company also has several operating lease arrangements for sales offices and
office equipment that expire through 2000 and leases certain equipment under
capital leases which expire through 2000. Capital lease obligations are
collateralized by the related equipment.
-24-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
D. LEASING ARRANGEMENTS (continued)
Future minimum lease payments under capital and operating leases with initial or
remaining terms of one year or more are:
<TABLE>
<CAPTION>
(Dollars in thousands) Capital Leases Operating Leases
-------------------------------------------------
<S> <C> <C>
1997 $ 13 $ 1,593
1998 13 1,129
1999 12 1,017
2000 6 1,075
2001 - 1,065
Thereafter - 2,368
- ---------------------------------------------------------------------------------------------------------------------------------
Total minimum lease payments 44 $ 8,247
---------------
Less amount representing interest 12
- -----------------------------------------------------------------------------------------------------
Present value of net minimum lease payments 32
Less current portion 7
- -----------------------------------------------------------------------------------------------------
Long-term obligation under capital leases $ 25
- -----------------------------------------------------------------------------------------------------
</TABLE>
Total rent expense under all operating leases was $1,466,000, $1,451,000, and
$1,208,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
E. STOCK OPTIONS AND STOCK PURCHASE PLAN
Stock-Based Compensation Plans
The Company has adopted the disclosure requirements of Statement of Financial
Accounting Standard (SFAS) No. 123 "Accounting for Stock-Based Compensation."
The Company continues to recognize compensation costs using the intrinsic value
based method described in Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees."
-25-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. STOCK OPTIONS AND STOCK PURCHASE PLAN (continued)
In May, 1994 the stockholders approved the 1994 Stock Option Plan (the "1994
Plan"). The 1994 Plan provides that officers and key employees may be granted
either nonqualified or incentive stock options for the purchase of the Company's
common stock at the fair market value on the date of grant. The employee options
granted generally become exercisable at a rate of 20% per year and expire ten
years from the date of grant. Certain options, as originally granted, became
exercisable only to the extent the Company achieved specific financial goals.
During 1995 these options were amended to provide for vesting on the earlier of
the six year anniversary of the date of grant or the original vesting schedule
upon the achievement of the aforementioned financial goals. As a result of this
change, the Company incurred additional compensation expense totaling $1.8
million, which is being amortized based on a vesting schedule which approximates
the expected date of meeting the specific financial goals. Compensation expense
of $446,000, $384,000, and $66,000 was recorded in 1996, 1995, and 1994 and
accumulated deferred compensation was $896,000 and $450,000 at December 31, 1996
and 1995, respectively.
The 1991 Stock Option Plan also remains in effect, providing for similar grants
to officers and employees. Additionally, the 1991 Plan provides for an automatic
annual grant to non-employee directors. The non-employee director options become
exercisable in three equal installments with the first installment exercisable
on the date of grant and the second and third installments becoming exercisable
on the second and third anniversaries of such date.
Prior to the adoption of the 1994 Plan, several other stock option plans were in
effect and options which remain outstanding under those plans are included
below.
In May, 1996 the Company, upon approval by the Board of Directors and
stockholders, increased the total number of shares approved for future grant
under plans currently in effect by 300,000 for the 1994 Stock Option Plan and
25,000 for the 1991 Stock Option Plan. At December 31, 1996 shares available for
future grants under all option plans were 411,199.
Net income and net income per share as reported in these financial statements
and on a pro forma basis for the years ended December 31, 1996 and 1995, as if
the fair value based method described in SFAS No. 123 had been adopted are as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C> <C>
Net income As Reported $4,176 $3,148
Pro Forma $3,990 $3,071
Primary net income per share As Reported $0.67 $0.51
Pro Forma $0.66 $0.54
Fully diluted net income per share As Reported $0.67 $0.51
Pro Forma $0.65 $0.53
</TABLE>
-26-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. STOCK OPTIONS AND STOCK PURCHASE PLAN (continued)
The effect of applying SFAS No. 123 for the purpose of providing pro forma
disclosure may not be indicative of the effects on reported net income and net
income per share for future years. The pro forma disclosures include the effects
of all awards granted after January 1, 1995 and additional awards in future
years are anticipated.
For the purpose of providing pro forma disclosures, the fair values of stock
options granted were estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1996 and 1995,
respectively: a risk-free interest rate of 6.3% and 6.7%; an expected life of 6
years and 6 years; expected volatility of 40% and 50%; and no expected
dividends.
The following table summarizes all stock option plan activity for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------------- --------------------------------
Wgtd. Avg. Wgtd. Avg.
Shares Exer. Price Shares Exer. Price
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Outstanding
at beginning of year 871,673 $5.40 866,226 $4.22
Granted 100,500 12.51 207,450 7.83
Exercised (69,650) 3.31 (177,202) 2.41
Cancelled or lapsed (26,866) 9.95 (24,801) 6.18
--------- ---------
Outstanding at end of year 875,657 6.24 871,673 5.40
========= =========
Options exercisable
at year end 400,726 $5.58 363,880 $5.30
Weighted average fair value
of options granted
during the year $6.19 $4.45
<CAPTION>
1994
------------------------------
Wgtd. Avg.
Shares Exer. Price
------ -----------
<S> <C> <C>
Outstanding
at beginning of year 835,836 $3.94
Granted 139,250 4.86
Exercised (97,110) 2.31
Cancelled or lapsed (11,750) 7.32
---------
Outstanding at end of year 866,226 4.22
=========
Options exercisable
at year end 449,938 $4.36
Weighted average fair value
of options granted
during the year
</TABLE>
-27-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. STOCK OPTIONS AND STOCK PURCHASE PLAN (continued)
The following table summarizes information about stock options outstanding at
December 31, 1996.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- ------------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.00-$4.00 404,037 4.8 $3.05 227,735 $3.02
4.25-6.50 231,270 7.0 5.62 86,791 5.18
7.00-10.00 33,000 5.0 9.10 23,800 9.85
11.13-12.92 151,600 8.8 11.79 22,900 11.78
14.38-18.50 55,750 6.0 15.07 39,500 15.01
--------- ------------
$2.00-$18.50 875,657 6.1 $6.24 400,726 $5.58
========= ============
</TABLE>
In May, 1995 the stockholders approved the Lifeline Employee Stock Purchase Plan
(ESPP) whereby eligible employees may invest up to 10% of their base salary in
shares of the Company's common stock. The purchase price of the shares is 90% of
the fair market value of the stock on either the commencement date or the date
of purchase, whichever is lower. Under the Plan, 200,000 shares of common stock
are available for purchase over ten offering periods through April, 2000, of
which approximately 177,128 shares remain available. Shares purchased under the
ESPP totaled 15,085 in 1996 and 7,787 in 1995. The weighted-average grant-date
fair value of shares purchased under the ESPP was $15.62 in 1996 and $9.39 in
1995.
For the purpose of providing pro forma disclosures, the fair values of shares
purchased were estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for purchases in 1996 and 1995
respectively: a risk free interest rate of 5.41% and 5.37%; an expected life of
6 months in each year; expected volatility of 40% in each year; and no expected
dividends.
-28-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F. INCOME TAXES
The provision (benefit) for income taxes was computed as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------
(Dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes:
Current $1,834 $2,563 $2,155
Deferred 404 (722) (995)
- ---------------------------------------------------------------------------------------------------------
2,238 1,841 1,160
- ---------------------------------------------------------------------------------------------------------
State income taxes:
Current 567 663 469
Deferred 97 (147) (196)
- ---------------------------------------------------------------------------------------------------------
664 516 273
- ---------------------------------------------------------------------------------------------------------
Provision for income taxes $ 2,902 $ 2,357 $ 1,433
==========================================================================================================
</TABLE>
Total deferred tax assets (liabilities) are as follows at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total deferred tax assets $1,913 $1,180
Total deferred tax liabilities (2,557) (1,235)
- ---------------------------------------------------------------------------------------------------------
Net deferred tax liability ($644) ($55)
=========================================================================================================
</TABLE>
Deferred tax assets (liabilities) are comprised of the following significant
items at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current deferred tax assets:
Inventory and warranty reserves $793 $713
Accounts receivable reserves 105 123
Accrued vacation and other reserves 148 257
- ---------------------------------------------------------------------------------------------------------
Net current deferred tax asset 1,046 1,093
- ---------------------------------------------------------------------------------------------------------
Noncurrent deferred tax assets (liabilities):
Sales type leases (2,489) (1,168)
Depreciation 485 87
Foreign net operating losses 126 -
Amortization 188 (67)
- ---------------------------------------------------------------------------------------------------------
Net noncurrent deferred tax liability (1,690) (1,148)
- ---------------------------------------------------------------------------------------------------------
Net deferred tax liability ($644) ($55)
=========================================================================================================
</TABLE>
-29-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F. INCOME TAXES (continued)
The differences between the statutory U.S. federal income tax rate and the
Company's effective tax rate are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate $ 2,406 $ 1,872 $ 1,160
State income tax, net of federal tax effect 472 338 273
Tax exempt income (60) - -
Other, net 84 147 -
- ------------------------------------------------------------------------------------------------
Provision for income taxes $ 2,902 $ 2,357 $ 1,433
- ------------------------------------------------------------------------------------------------
</TABLE>
The Company has foreign operating loss carryforwards totaling $283,000 which
will begin to expire December 31, 1999.
G. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution savings plan covering
substantially all of its employees. The Company's contributions, which are
included in selling, general and administrative expenses, were $184,000,
$152,000 and $152,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
H. SUPPLEMENTAL CASH FLOW INFORMATION
The Company incurred capital lease obligations to obtain certain equipment in
the amounts of $0, $41,000, and $0, in 1996, 1995, and 1994, respectively.
Cash paid for income taxes amounted to $2,679,000, $2,908,000 and $2,941,000
during 1996, 1995, and 1994, respectively. Interest paid was $7,000, $8,000 and
$21,000 during 1996, 1995, and 1994, respectively.
I. REVOLVING CREDIT AGREEMENT
The Company secured a $4.0 million line of credit effective in January, 1996.
During 1996, the term of the credit facility was extended until December, 1997.
This 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. No
amounts were outstanding at December 31, 1996.
-30-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
J. COMMON STOCK
In September, 1995 the Company issued 8,939 shares of its common stock to the
Vice President, Customer Care in exchange for a collateralized promissory note
in the amount of $100,000. The note, which bears interest at a rate of 6.3% per
annum, payable annually in arrears, is due September, 2002. In September, 1992
the Company issued 83,333 shares of its common stock to the Chief Executive
Officer in exchange for a collateralized promissory note in the amount of
$250,000. The note, which bears interest at a rate of 5.98% per annum, payable
annually in arrears, was due September 1, 1999. On February 24, 1997, the
Company's Chief Executive Officer repaid the note in full, in part by exercising
stock options and selling 10,700 shares of Common Stock back to the Company at
their fair market value of $17.00 on such date, the proceeds of which were used
to repay the note.
In connection with the 1993 acquisition of the assets of CarePartners, Inc., the
Company issued a warrant to purchase 100,000 shares of the Company's common
stock at $4.78 per share, expiring in March, 1996. In September, 1995 the
Company paid $539,000 to repurchase the warrant.
In January, 1997, the Board of Directors authorized the repurchase of an
additional 100,000 shares of common stock for general corporate purposes.
K. ACQUISITION
In July, 1996 the Company acquired all of the outstanding stock of CareTel, Inc.
of Toronto, Ontario, Canada through its subsidiary, Lifeline Systems (Canada),
Inc. CareTel provides monitoring services, similar to those offered by the
Company, directly to consumers under the brand name ProtectAlert. The purchase
price was approximately $1.1 million in cash, all of which was paid in 1996. The
acquisition was accounted for as a purchase transaction, and, as a result, the
Company recorded goodwill of approximately $1.0 million which is being amortized
over an 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 acquisition and did not have a material impact on 1996 operating results.
L. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
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 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.
-31-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
M. NEWLY ISSUED ACCOUNTING STANDARDS
In February, 1997, the Financial Accounting Standards Board issued Statement No.
128 ("SFAS 128"), "Earnings per Share," which is effective for fiscal years
ending after December 15, 1997, including interim periods. SFAS 128 requires
the presentation of basic and diluted earnings per share (EPS). Basic EPS,
which replaces primary EPS, excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS under the existing rules. SFAS 128 requires
restatement of all prior-period earnings per share data presented after the
effective date. The Company will adopt SFAS 128 in 1997 and has not yet
determined the impact of adoption.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-32-
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information under the heading "Election of Directors" in the
Company's definitive proxy material for its annual meeting of stockholders to be
held on May 21, 1997, is incorporated herein by reference. Information
concerning officers of the Company appears in Part I of this Annual Report on
Form 10-K.
ITEM 11. Executive Compensation
The information under the heading "Executive Compensation," excluding the
"Compensation Committee Report on Executive Compensation" and the Stock Price
Performance Graph in the Company's definitive proxy material for its annual
meeting of stockholders to be held on May 21, 1997, is incorporated herein by
reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners: The information under
the heading "Beneficial Ownership of Common Stock" in the Company's
definitive proxy material for its annual meeting of stockholders to be
held on May 21, 1997, is incorporated herein by reference.
(b) Security ownership of management: The information under the heading
"Election of Directors" in the Company's definitive proxy material for
its annual meeting of stockholders to be held on May 21, 1997, is
incorporated herein by reference.
(c) Changes in control: None known.
ITEM 13. Certain Relationships and Related Transactions
None.
-33-
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following consolidated financial statements of Lifeline Systems,
Inc. and the report of independent accountants relating thereto, are set forth
in Item 8 of this Annual Report on Form 10-K on the pages indicated.
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Accountants 15
Consolidated Balance Sheets as of December 31, 1996 and 1995 16
Consolidated Statements of Income for the years
ended December 31, 1996, 1995, and 1994 17
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1995, and 1994 18
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995, and 1994 19
Notes to Consolidated Financial Statements 20-32
</TABLE>
(a)(2) Financial Statement Schedule
The following financial statement schedule of Lifeline Systems, Inc. is
filed herewith and included in ITEM 14 (a)(2) on the pages indicated below.
Pages
-----
Schedule II - Valuation and Qualifying Accounts for
the years ended December 31, 1996, 1995 and 1994 40
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended December 31, 1996.
(c) 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 pages
37 through 40 hereof.
-34-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LIFELINE SYSTEMS, INC.
March 25, 1997 By:/s/ Ronald Feinstein
- -------------- --------------------
Date Ronald Feinstein
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ L. Dennis Shapiro Chairman of the Board March 25, 1997
- ------------------------ --------------
L. Dennis Shapiro
/s/ Ronald Feinstein Chief Executive Officer, March 25, 1997
- ------------------------ President and Director (Principal --------------
Ronald Feinstein Executive Officer)
/s/ Dennis M. Hurley Vice President of Finance March 25, 1997
- ------------------------ (Principal Financial and --------------
Dennis M. Hurley Accounting Officer)
/s/ Everett N. Baldwin Director March 25, 1997
- ------------------------ --------------
Everett N. Baldwin
/s/ Joseph E. Kasputys Director March 25, 1997
- ------------------------ --------------
Joseph E. Kasputys
/s/ Carolyn C. Roberts Director March 25, 1997
- ------------------------ --------------
Carolyn C. Roberts
/s/ Steven M. Tritman Director March 25, 1997
- ------------------------ --------------
Steven M. Tritman
/s/ Gordon C. Vineyard Director March 25, 1997
- ------------------------ --------------
Gordon C. Vineyard
</TABLE>
-35-
<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.
<TABLE>
<CAPTION>
Exhibit No. Exhibit SEC Document Reference
- ----------- ------- ----------------------
<S> <C> <C>
Exhibit 3. Articles of Incorporation and By-Laws
3.1 Articles of Organization of Lifeline Systems, 2-84060 Exhibit 3.1
Inc., as amended.
3.2 Articles of Amendment of Lifeline Systems, 1987 10K Exhibit 3.4
Inc.
3.3 Restated By-Laws of Lifeline Systems, 1990 10K Exhibit 3.4
Inc.
Exhibit 4. Instruments Defining the Rights of Security
Holders
4.1 Specimen Stock Certificate. 2-84060 Exhibit 4.1
Exhibit 10. Material Contracts
10.01 Registrant's 1982 Incentive Stock Option 2-84060 Exhibit 10.19
Plan and form of Option Agreement.
10.02 Registrant's 1982-A Incentive Stock Option 2-84060 Exhibit 10.20
Plan and form of Option Agreement.
10.03 Medical Expense Reimbursement Plan. 2-84060 Exhibit 10.21
10.04 Registrant's 1986 Incentive Stock 33-12030 Exhibit 10.26
Option Plan and form of
Option Agreement
10.05 Amendments to Registrant's 1986 1987 10K Exhibit 10.13
Incentive Stock Option Plan.
10.06 Registrant's 1982 Incentive Stock Option 1988 10K Exhibit 10.14
Plan, as amended.
10.07 Registrant's 1982-A Incentive Stock Option 1988 10K Exhibit 10.15
Plan, as amended.
10.08 Amendment to Registrant's 1986 Incentive Proxy Statement filed
Stock Option Plan. April 13, 1989 (0-13617)
10.09 Registrant's 1991 Stock Option Plan. 1990 10K Exhibit 10.37
10.10 Form of Non-statutory Stock Option 1992 10K Exhibit 10.32
Agreement
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
for Registrant's 1991 Stock Option Plan.
10.11 Form of Special Non-statutory Stock 1992 10K Exhibit 10.33
Option Agreement for Registrant's
1991 Stock Option Plan.
10.12 Lease Agreement between the Registrant and 1992 10K Exhibit 10.34
the Massachusetts Institute of
Technology, dated April 3, 1992.
10.13 First Amendment to Lease Agreement dated 1992 10K Exhibit 10.35
April 3, 1992 between the Registrant
and the Massachusetts Institute of
Technology, dated August 25, 1992.
10.14 Amended Employment and Noncompetition 1992 10K Exhibit 10.36
Agreement between Ronald Feinstein
and the Registrant, dated
August 27, 1992.
10.15 Secured Promissory Note between Ronald 1992 10K Exhibit 10.37
Feinstein and the Registrant, dated
September 1, 1992.
10.16 Security and Pledge Agreement between 1992 10K Exhibit 10.38
Ronald Feinstein and the Registrant,
dated September 1, 1992.
10.17 Non-statutory Stock Option Agreement, as 1992 10K Exhibit 10.39
amended, between Ronald Feinstein and
the Registrant, dated August 27, 1992.
10.18 Special Non-statutory Stock Option 1992 10K Exhibit 10.40
Agreement, as amended, between
Ronald Feinstein and the Registrant,
dated August 27, 1992.
10.19 Second Amendment to Lease Agreement dated 10Q for the Quarter
April 3, 1992 between the Registrant ended June 30, 1993
and the Massachusetts Institute of Exhibit 10.42
Technology, dated May 18, 1993.
10.20 Amended and Restated Asset Purchase Agreement 10Q for the Quarter
dated September 9, 1993 between the ended September 30,1993
Registrant and CarePartners, Inc. Exhibit 10.43
10.21 Second Amendment to Lease Agreement 1993 10K Exhibit 10.44
dated August 31, 1989 and Consent to
Assignment of Lease between the
Registrant and Tierrasanta 234
dated September 9, 1993.
10.22 Letter Agreement between Ronald Feinstein 1993 10K Exhibit 10.45
and the Registrant dated March 4, 1994.
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.23 Nonstatutory Stock Option Agreement between 1993 10K Exhibit 10.46
Ronald Feinstein and the Registrant
dated February 11, 1994.
10.24 Third Amendment to Lease Agreement dated 10Q for the Quarter
April 3, 1992 between the Registrant ended March 31, 1993
and the Massachusetts Institute of Exhibit 10.47
Technology
10.25 Registrant's 1994 Stock Option Plan. 1994 10K Exhibit 10.48
10.26 Form of Non-statutory Stock Option 1994 10K Exhibit 10.49
Agreement for Registrant's 1994
Stock Option Plan.
10.27 Form of Special Non-statutory Stock 1994 10K Exhibit 10.50
Option Agreement for Registrant's
1994 Stock Option Plan.
10.28 Master Lease Agreement between Registrant 1994 10K Exhibit 10.51
and Bell Atlantic-TriCon Leasing
Corporation
10.29 Master Lease Agreement between Registrant 1994 10K Exhibit 10.52
and U.S. Leasing Corporation
10.30 Secured Promissory Note between Thomas E.
Loper and the Registrant, dated
September 11, 1995. 1995 10K Exhibit 10.30
10.31 Security and Pledge Agreement between
Thomas E. Loper and the Registrant,
dated September 11, 1995. 1995 10K Exhibit 10.31
10.32 Asset Purchase Agreement dated May 17, 1995
between the Registrant and Martha's
Vineyard Hospital Foundation. 1995 10K Exhibit 10.32
10.33 Form of the Non-statutory Stock Option
Agreement to Registrant's 1991 Stock
Option Plan 1995 10K Exhibit 10.33
10.34 Form of the Non-statutory Stock Option
Agreement to Registrant's 1994 Stock
Option Plan 1995 10K Exhibit 10.34
10.35 1995 Employee Stock Purchase Plan 1995 10K Exhibit 10.35
10.36 Revolving Credit Agreement between the
First National Bank of Boston
and the Registrant, dated
November 30, 1995 1995 10K Exhibit 10.36
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.37 Amended Employment Agreement between
Ronald Feinstein and the Registrant, 10Q for the quarter ended
dated June 14, 1996 June 30, 1996, Exhibit
10.60
10.38 Employment Agreement between Len Wechsler
and Lifeline Systems (Canada), Inc. 10Q for the quarter ended
dated July 3, 1996 September 30, 1996,
Exhibit 10.60
10.39 Stock purchase agreement between
Lifeline Systems (Canada), Inc. and
Len Wechsler dated July 3, 1996 10Q for the quarter ended
September 30,1996
Exhibit 10.61
10.40 Stock purchase agreement between
Lifeline Systems (Canada), Inc., and
CareTel, Inc. and the stockholders
of CareTel, ,Inc., dated 10Q for the quarter ended
July 3, 1996 September 30, 1996,
Exhibit 10.62
Filed herewith:
10.41 Amendment to Registrant's 1991
Stock Option Plan
10.42 Amendment to Registrant's 1994
Stock Option Plan
10.43 First Amendment to Revolving
Credit Agreement between
the First National Bank of Boston
and the Registrant dated
November 29, 1996
Exhibit 11. Earnings per Share
Filed herewith:
11.1 Statement re computation of per share earnings
Exhibit 21. Subsidiaries.
Filed herewith:
21.1 Subsidiaries of Lifeline Systems, Inc.
Exhibit 23. Consents of Experts and Counsel.
Filed herewith:
23.1 Consent of Coopers and Lybrand L.L.P.
</TABLE>
-39-
<PAGE>
LIFELINE SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1995, and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions Balance at
Balance at Charged to End of
Beginning Costs & ------
Description of Year Expenses Deductions(1) Year
- ----------- ---------- ---------- ------------- ----
<S> <C> <C> <C> <C>
1996
- ----
Allowance for doubtful
receivables:
Trade accounts receivable $156 $120 $ 79 $197
Lease receivables 217 0 41 176
---- ---- ---- ----
Total $373 $120 $120 $373
1995
- ----
Allowance for doubtful
receivables:
Trade accounts receivable $221 $ 65 $156
Lease receivables 304 87 217
---- ---- ----
Total $525 $152 $373
1994
- ----
Allowance for doubtful
receivables:
Trade accounts receivable $246 $ 25 $221
Lease receivables 322 18 304
---- ---- ----
Total $568 $ 43 $525
</TABLE>
(1) Uncollectible accounts and adjustments.
-40-
<PAGE>
Exhibit 10.41
AMENDMENT NO. 1 TO THE 1991 STOCK OPTION PLAN
OF LIFELINE SYSTEMS, INC.
Section 4 of the 1991 Stock Option Plan (the "Plan") of Lifeline Systems,
Inc. (the "Company") is hereby amended, subject to stockholder approval, to
increase from 150,000 to 175,000 the number of shares of Common Stock authorized
for issuance to non-employee directors of the Company under the Plan.
Adopted by the Board of
Directors on January 31, 1996
<PAGE>
Exhibit 10.42
AMENDMENT NO. 1 TO THE 1994 STOCK OPTION PLAN
OF LIFELINE SYSTEMS, INC.
The third sentence of Section 3 of the 1994 Stock Option Plan (the "Plan")
of Lifeline Systems, Inc., which states "The maximum number of shares with
respect to which options may be granted to any employee during the term of the
Plan shall not exceed 75,000 shares of common stock," is hereby amended and
restated in its entirety, subject to stockholder approval, to provide as
follows:
"Subject to adjustment as provided in Section 14 below, the maximum
number of shares with respect to which options may be granted to any
employee under the Plan shall not exceed 50,000 shares of common stock
during any calendar year."
Section 4 of the Plan is hereby amended, subject to stockholder approval,
to increase from 300,000 to 600,000 the number of shares of Common Stock
authorized for issuance and sale under the Plan.
Adopted by the Board of
Directors on January 31, 1996
<PAGE>
Exhibit 10.43
LIFELINE SYSTEMS, INC.
FIRST AMENDMENT
TO REVOLVING CREDIT AGREEMENT
This First Amendment (this "Amendment") dated as of November 29, 1996
---------
amends the Revolving Credit Agreement dated as of November 30, 1995 (the "Credit
Agreement"), between LIFELINE SYSTEMS, INC. (The "Company") and THE FIRST
NATIONAL BANK OF BOSTON (the "Bank"). Capitalized terms used herein but not
otherwise defined shall have the meanings assigned to them in the Credit
Agreement.
WHEREAS, the Company and Bank have executed the Credit Agreement providing
for a committee revolving credit facility for borrowings by the Company in
amounts up to $4,000,000; and
WHEREAS, the Bank and the Company wish to amend the Credit Agreement to
extend the maturity of the revolving credit facility, reduce the interest rate
applicable to certain Loans and modify certain of the financial covenants, on
the terms and conditions set forth below;
NOW, THEREFORE, the Bank and the Company agree as follows:
Section 1. Amendments to the Credit Agreement.
--------- ----------------------------------
(a) The definition of "Termination Date" set forth in Section 1.1 of the
----------------
Credit Agreement is hereby amended by deleting the date "November 29, 1996" set
forth therein and substituting therefor the date "December 31, 1997".
(b) Section 2.7(b) of the Credit Agreement is hereby amended by deleting
the percentage "2-1/4 percent (2-1/4%)" set forth therein and substituting
therefor the percentage "one and three quarters percent (1-3/4%)".
(c) Section 5.8 of the Credit Agreement is hereby amended by deleting said
section in its entirety and substituting therefor the following:
"5.8. EBITDA. The Company shall maintain for each quarterly period
------
commencing with the fiscal quarter ended December 31, 1996 consolidated earnings
from continuing operations before interest expense (including imputed interest
on capitalized lease obligations) and income taxes for such period, excluding
any nonrecurring or extraordinary items, plus consolidated depreciation and
amortization expenses for such period, of not less than $1,200,000.
<PAGE>
(d) Section 5.1(c) of the Credit Agreement is hereby amended by deleting
the words "and of the borrowing base".
(e) Exhibit G to the Credit Agreement is hereby amended by deleting said
---------
Exhibit in its entirety and substituting therefor a new Exhibit G in the form
---------
attached hereto.
Section 2. Representations and Warranties. To induce the Bank to enter
------------------------------
into this Amendment, the Company represents and warrants as follows:
(a) The execution and delivery of the Amendment and the performance of the
Credit Agreement as amended hereby and the transactions contemplated hereby are
within the corporate power and authority of the Company and have been authorized
by all necessary corporate proceedings, and do not and will not (a) require any
consent or approval of the stockholders of the Company, (b) contravene any
provision of the charter documents or by-laws of the Company or any law, rule or
regulation applicable to the Company, (c) contravene any provision of, or
constitute an event of default or event that but for the requirement that time
elapse or notice be given, or both, would constitute an event of default under,
any other agreement, instrument, order or undertaking binding on the Company, or
(d) results in or require the imposition of any Encumbrance on any of the
properties, assets or rights of the Company.
(b) This Amendment, the Credit Agreement as amended hereby and the Note and
all of their respective terms and provisions are the valid and binding
obligations of the Company, enforceable in accordance with their respective
terms except as limited by bankruptcy, insolvency, reorganization, moratorium or
other laws affecting the enforcement of creditors' rights generally, and except
as the remedy of specific performance or of injunctive relief is subject to the
discretion of the court before which any proceeding therefor may be brought.
(c) The execution and delivery of this Amendment and the performance by the
Company of the Credit Agreement as amended hereby and the Note and the
transactions contemplated herein and therein do not require any approval or
consent of, or filing or registrations with, any governmental or other agency or
authority, or any other party.
(d) Since the date of the most recent financial statements delivered to the
Bank pursuant to Section 5.1(b) of the Credit Agreement, there have been no
changes in the assets, liabilities, financial condition, business or prospects
of the Company or any of its Subsidiaries that have had, in the aggregate, a
materially adverse effect.
Section 3. Conditions to Effectiveness. The effectiveness of the
--------- ---------------------------
Amendment is condition on the following:
(a) the Company and Bank shall each have executed and delivered a
counterpart of this Amendment;
(b) the representations and warranties contained in Section 2 of this
Amendment and Section IV of the Credit Agreement shall be true and correct in
all material respects as of the date
<PAGE>
hereof as though made on and as of the date hereof, except for representations
which speak as to a specific date and charges not in violation of the Credit
Agreement: and
(c) no Default under the Credit Agreement shall have occurred and is
continuing.
Section 4. Miscellaneous.
--------- -------------
(a) On and after the date hereof, each reference in the Credit Agreement to
"this Agreement" or words of like import shall mean and be deemed to be a
reference to the Credit Agreement as amended hereby.
(b) Except as amended and modified hereby, the Credit Agreement is in all
respects ratified and confirmed as of the date hereof, and the terms, covenants
and agreements therein shall remain in full force and effect.
(c) This Amendment and the modifications to the Credit Agreement set forth
herein shall be deemed to be a document executed under seal and shall be
governed by and construed in accordance with the laws of The Commonwealth of
Massachusetts.
(d) This Amendment may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed as of the date and year first above written.
LIFELINE SYSTEMS, INC.
By:/S/Dennis M. Hurley
-------------------
Title: Vice President and Chief Financial Officer
THE FIRST NATIONAL BANK OF BOSTON
By:/S/Elizabeth C. Everett
-----------------------
Title: Director
<PAGE>
EXHIBIT G
---------
LIFELINE SYSTEMS, INC.
REPORT OF CHIEF FINANCIAL OFFICER
LIFELINE SYSTEMS, INC. (the "Company") HEREBY CERTIFIES that:
This Report is furnished pursuant to Section 5.1(c) of the Revolving Credit
Agreement dated as of November 30, 1995, as amended (the "Credit Agreement") by
and between the Company and THE FIRST NATIONAL BANK OF BOSTON. Unless otherwise
defined herein, the terms used in this Report have the meanings given to them in
the Credit Agreement.
As required by Section 5.1(a) and (b) of the Credit Agreement, consolidated
financial statements of the Company and its Subsidiaries for the [year/quarter]
ended ______, 19__ (the "Financial Statements") prepared in accordance with
--------------------
generally accepted accounting principles consistently applied accompany this
Report. The Financial Statements present fairly the consolidated financial
position of the Company and its Subsidiaries as at the date thereof and the
consolidated results of operations of the Company and its Subsidiaries for the
period covered thereby (subject only to normal recurring year-end adjustments).
The figures set forth in Schedule A for determining compliance by the
Company with the financial covenants contained in the Credit Agreement are true
and complete as of the date hereof.
The activities of the Company and its Subsidiaries during the period
covered by the Financial Statements have been reviewed by the Chief Financial
Officer or by employees or agents under his immediate supervision. Based on
such review, to the best knowledge and belief of the Chief Financial Officer,
and as of the date of this Report, no Default has occurred.*
WITNESS my hand day of , 19 .
------ -------- ---
LIFELINE SYSTEMS, INC.
By:
-----------------------------
Title:
* If a Default has occurred, this paragraph is to be modified with an
appropriate statement to the nature thereof, the period of existence
thereof and what action the Company has taken, is taking, or proposes to
take with respect thereto.
<PAGE>
SCHEDULE A
to
EXHIBIT G
---------
FINANCIAL COVENANTS
Consolidated Total Liabilities to Consolidated Tangible Net Worth (Section 5.7)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C><C>
REQUIRED: .75 : 1.00
---- ----
ACTUAL:
(i) Consolidated Total Liabilities $
(excluding deferred taxes) ------------
(ii) Consolidated assets of the $
Company and its Subsidiaries ------------
(iii) Less: excluded items /1/ (if any) $
------------
(iv) Less: Consolidated Total Liabilities $
of the Company and its Subsidiaries ------------
(v) Consolidated Tangible Net Worth $
------------
(vi) Line (i) divided by line (v) .75 : 1.00
---- ----
</TABLE>
- ------------------------
1 Excluded items are: (a) goodwill of $ , (b) book value, net of any
----
reserves, of intangible assets, including unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and
research and development expenses, of $ (c) reserves not deducted from
------
assets of $ and (e) value of minority interest in Subsidiaries
---------
of $ .
-----------
<PAGE>
<TABLE>
<CAPTION>
EBITDA (Section 5.8)
- -------------------
<S> <C>
REQUIRED: $1,200,000.00
-------------
ACTUAL:
(I) Consolidated earnings from operations
before interest expense and taxes $___________
(ii) Less: extraordinary income $___________
(iii) Plus: depreciation/amortization $___________
(iv) Total EBITDA $___________
</TABLE>
WITNESS my hand this day of , 19 .
-------- ------------ --
LIFELINE SYSTEMS, INC.
By:
--------------------
Title:
<PAGE>
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(In thousands except per share figures)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary
- -------
Weighted average shares outstanding 5,746 5,636 5,598
Net effect of dilutive common stock equivalents
based on the treasury method 515 472 253
Effect of treasury shares purchased (69) - (75)
Effect of treasury shares issued 5 7 -
--------------- --------------- ---------------
Total 6,197 6,115 5,776
Net income $4,176 $3,148 $1,980
=============== =============== ===============
Net income per common share
$0.67 $0.51 $0.34
=============== =============== ===============
Fully diluted
- -------------
Weighted average shares outstanding 5,746 5,636 5,598
Net effect of dilutive common stock equivalents
based on the treasury method 583 574 357
Effect of treasury shares purchased (69) - (75)
Effect of treasury shares issued 5 7 -
--------------- --------------- ---------------
Total 6,265 6,217 5,880
Net income $4,176 $3,148 $1,980
=============== =============== ===============
Net income per common share $0.67 $0.51 $0.34
=============== =============== ===============
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF LIFELINE SYSTEMS, INC.
Lifeline Systems Securities Corporation
640 Memorial Drive
Cambridge, MA 02139-4851
Incorporated in the Commonwealth of Massachusetts
Lifeline Systems Canada, Inc.
640 Memorial Drive
Cambridge, MA 02139-4851
Incorporated in the Province of Ontario, Canada
Lifeline Systems Export, Inc.
The Financial Services Centre
Bishops Court Hill
St. Michael, Barbados
Incorporated in the Country of Barbados
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Lifeline Systems, Inc.
We consent to the incorporation by reference in the registration statements
of Lifeline Systems, Inc. on Form S-8 (File Nos. 33-40684, 33-58632, 33-
79294, 33-59499, 333-03949, 333-03953, and 333-03951) of our report dated
February 10, 1997, on our audits of the consolidated financial statements
and financial statement schedule of Lifeline Systems, Inc. as of December
31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, which report is included in this Annual Report on Form
10-K.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,030
<SECURITIES> 7,140
<RECEIVABLES> 6,259
<ALLOWANCES> 197
<INVENTORY> 1,450
<CURRENT-ASSETS> 21,681
<PP&E> 17,305
<DEPRECIATION> 10,178
<TOTAL-ASSETS> 37,909
<CURRENT-LIABILITIES> 7,678
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 30,769
<TOTAL-LIABILITY-AND-EQUITY> 37,909
<SALES> 24,864
<TOTAL-REVENUES> 50,223
<CGS> 8,238
<TOTAL-COSTS> 18,302
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 7,078
<INCOME-TAX> 2,902
<INCOME-CONTINUING> 4,176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,176
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
