<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999 Commission File Number 0-13617
LIFELINE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2537528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Lawrence Street
Framingham, Massachusetts 01702-8156
(Address of principal executive offices) (Zip Code)
(508) 988-1000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock $0.02 par value
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares outstanding of this issuer's class of common stock as of
October 31, 1999: 5,939,889
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LIFELINE SYSTEMS, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 3
Consolidated Statements of Income and Comprehensive Income -
Three and nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows - Nine
months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-10
ITEM 2.
Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-18
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
ITEM 5.
Other Information 19
ITEM 6.
Exhibits and Reports on Form 8-K 19
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LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,691 $ 2,702
Short-term investments -- 6,696
Accounts receivable, net 8,303 7,459
Inventories 2,293 1,496
Net investment in sales-type leases 2,100 1,713
Prepaid expenses and other current assets 1,358 1,974
Deferred income taxes 1,947 2,238
-------- --------
Total current assets 18,692 24,278
Property and equipment, net 26,608 20,776
Net investment in sales-type leases 5,789 5,892
Goodwill and other intangible assets, net 4,260 1,134
Other assets 34 424
-------- --------
Total assets $ 55,383 $ 52,504
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,500 $ 1,690
Accrued expenses 2,166 2,857
Accrued payroll and payroll taxes 1,408 2,695
Accrued income taxes 78 1,300
Deferred revenues 736 685
Current portion of capital lease obligation 461 10
Current portion of long term debt 180 --
Product warranty and other current liabilities 838 817
Accrued restructuring and other non-recurring charges 1,461 863
-------- --------
Total current liabilities 8,828 10,917
Deferred income taxes 4,048 3,548
Deferred compensation 595 1,578
Long term portion of capital lease obligation 1,788 11
Long term debt, net of current portion 720 --
Other non-current liabilities -- 159
-------- --------
Total liabilities 15,979 16,213
Commitments and contingencies
Stockholders' equity:
Common stock, $0.02 par value, 20,000,000 shares authorized,
6,560,145 shares issued at September 30, 1999 and
6,425,414 shares at December 31, 1998 131 129
Additional paid-in capital 18,556 16,945
Retained earnings 25,663 23,435
Less: treasury stock at cost, 621,089 shares at September 30, 1999
and 592,548 shares at December 31, 1998 (4,556) (4,028)
Notes receivable - officers (400) (100)
Accumulated other comprehensive income (loss)/
cumulative translation adjustment 10 (90)
-------- --------
Total stockholders' equity 39,404 36,291
-------- --------
Total liabilities and stockholders' equity $ 55,383 $ 52,504
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Services $ 12,006 $ 9,990 $ 34,483 $ 28,490
Net product sales 5,760 5,949 16,287 17,746
Finance and rental income 362 347 1,159 1,019
-------- -------- -------- --------
Total revenues 18,128 16,286 51,929 47,255
-------- -------- -------- --------
Costs and expenses
Cost of services 7,747 5,549 20,439 16,160
Cost of sales 1,802 1,599 4,589 4,818
Selling, general, and administrative 7,415 6,400 20,445 18,653
Research and development 346 291 1,131 1,066
Restructuring and other non-recurring charges 423 -- 2,623 --
-------- -------- -------- --------
Total costs and expenses 17,733 13,839 49,227 40,697
-------- -------- -------- --------
Income from operations 395 2,447 2,702 6,558
Other income (expense)
Interest income 28 156 191 424
Interest expense (41) (12) (79) (39)
Other income/(loss) 356 (76) 852 (87)
-------- -------- -------- --------
Total other income, net 343 68 964 298
-------- -------- -------- --------
Income before income taxes 738 2,515 3,666 6,856
Provision for income taxes 306 1,009 1,438 2,754
-------- -------- -------- --------
Net income 432 1,506 2,228 4,102
Other comprehensive income, net of tax
Foreign currency translation adjustments (30) 17 61 5
-------- -------- -------- --------
Comprehensive income $ 402 $ 1,523 $ 2,289 $ 4,107
======== ======== ======== ========
Net income per weighted average share:
Basic $ 0.07 $ 0.26 $ 0.38 $ 0.71
======== ======== ======== ========
Diluted $ 0.07 $ 0.24 $ 0.35 $ 0.66
======== ======== ======== ========
Weighted average shares:
Basic 5,913 5,826 5,875 5,811
======== ======== ======== ========
Diluted 6,277 6,242 6,324 6,258
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,228 $ 4,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Write down of fixed assets 855 --
Depreciation and amortization 4,148 3,103
Treasury stock issued for employee compensation 14 --
Deferred compensation -- 356
Deferred income taxes 791 986
Changes in operating assets and liabilities:
Accounts receivable (773) 953
Inventories (797) 25
Net investment in sales-type leases (284) (1,323)
Prepaid expenses, other current assets and other assets 1,007 (21)
Accounts payable, accrued expenses and other liabilities (997) 549
Accrued payroll and payroll taxes (1,300) 48
Income taxes payable (1,216) 574
Accrued restructuring and other non-recurring charges 598 (599)
------- -------
Net cash provided by operating activities 4,274 8,753
------- -------
Cash flows from investing activities:
Purchases of investments (3,145) (8,826)
Sales and maturities of investments 9,841 6,692
Additions to property and equipment (7,859) (5,527)
Business purchases and other (3,660) --
------- -------
Net cash used in investing activities (4,823) (7,661)
------- -------
Cash flows from financing activities:
Principal payments under capital lease obligations (193) (9)
Proceeds from issuance of common stock 323 488
Proceeds from issuance of long term debt 900 --
Purchase of treasury stock (535) --
------- -------
Net cash provided by financing activities 495 479
------- -------
Effect of foreign exchange on cash 43 36
------- -------
Net increase (decrease) in cash and cash equivalents (11) 1,607
Cash and cash equivalents at beginning of period 2,702 2,019
------- -------
Cash and cash equivalents at end of period $ 2,691 $ 3,626
======= =======
Non-cash activity:
Issuance of note receivable for exercise of stock option $ 300 $ --
Deferred compensation 983 --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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LIFELINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The information furnished has been prepared from the accounts without
audit. In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments necessary, consisting only of
those of a normal recurring nature, to present fairly its consolidated
financial position as of September 30, 1999 and the consolidated results of
its operations and cash flows for the nine months ended September 30, 1999
and 1998.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, these statements should be read in
conjunction with the consolidated financial statements and the related
notes included in the Company's Annual Report on Form 10-K, as filed with
the Securities and Exchange Commission on March 16, 1999 for the year ended
December 31, 1998.
The results of operations for the nine-month period ended September 30,
1999 are not necessarily indicative of the results expected for the full
year.
2. Details of certain balance sheet captions are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Inventories:
Purchased parts and assemblies $ 471 $ 556
Work-in-process 33 324
Finished goods 1,789 616
-------- --------
$ 2,293 $ 1,496
======== ========
Property and equipment:
Equipment $ 22,550 $ 11,136
Furniture and fixtures 721 684
Equipment leased to others 12,553 9,834
Equipment under capital leases 3,047 1,035
Leasehold improvements 4,433 3,439
Capital in progress 627 10,943
-------- --------
43,931 37,071
Less: accumulated depreciation and amortization (17,323) (16,295)
-------- --------
$ 26,608 $ 20,776
======== ========
</TABLE>
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. The calculation of per share earnings is as follows:
(In thousands except per share figures)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic:
- -----
Net income $ 432 $1,506 $2,228 $4,102
Weighted average common shares outstanding 5,913 5,826 5,875 5,811
Net income per share, basic $ 0.07 $ 0.26 $ 0.38 $ 0.71
====== ====== ====== ======
Diluted:
- -------
Net income for calculating diluted earnings per share $ 432 $1,506 $2,228 $4,102
Weighted average common shares outstanding 5,913 5,826 5,875 5,811
Common stock equivalents 364 416 449 447
------ ------ ------ ------
Total weighted average shares 6,277 6,242 6,324 6,258
Net income per share, diluted $ 0.07 $ 0.24 $ 0.35 $ 0.66
====== ====== ====== ======
</TABLE>
4. OTHER INCOME
In February 1999, the Company negotiated a buyout of its old corporate
headquarters facility lease. Pursuant to the arrangement, payments were made to
the Company during 1999 dependent on space becoming available in the old
facility. The Company received a payment of approximately $0.5 million during
the first quarter of 1999, net of applicable negotiation fees, and recorded this
payment as other income. During the third quarter of 1999, the Company received
a final payment of approximately $0.3 million, net of applicable negotiation
fees and also recorded this payment as other income.
5. SEGMENT INFORMATION
The Company is active in one business segment: designing, marketing, monitoring
and supporting its personal response units. The Company maintains sales,
marketing and monitoring operations in both the United States and Canada.
Geographic Segment Data
Net revenues to external customers are based on the location of the customer.
Geographic information as of September 30, 1999 and 1998 is presented as
follows:
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
Dollars in thousands
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales:
United States $16,741 $15,263 $48,025 $44,264
Canada 1,387 1,023 3,904 2,991
------- ------- ------- -------
$18,128 $16,286 $51,929 $47,255
======= ======= ======= =======
Net Income:
United States $ 288 $ 1,477 $ 1,870 $ 3,973
Canada 144 29 358 129
------- ------- ------- -------
$ 432 $ 1,506 $ 2,228 $ 4,102
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Total Assets: September 30, September 30,
1999 1998
------- -------
<S> <C> <C>
United States $50,625 $46,755
Canada 4,758 2,259
======= =======
$55,383 $49,014
======= =======
</TABLE>
6. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
In December 1997, the Company approved a restructuring plan to improve operating
efficiencies and reduce costs, and recorded a pre-tax restructuring charge of
$4.3 million. This charge was established to provide for a business
reorganization which included relocation of the Company's corporate
headquarters, work force reduction and write down of impaired assets in
accordance with SFAS 121.
In June 1999, the Company recorded a pre-tax restructuring charge of
approximately $2.2 million. Nearly $1.7 million was recorded as a result of the
outsourcing of the Company's equipment manufacturing operations to Ademco, an
international manufacturer of electronics equipment and a division of Pittway
Corporation. This charge included approximately $1.3 million of costs related to
the reduction in the Company's manufacturing workforce, and nearly $379,000 of
costs associated with the write down of certain manufacturing fixed assets.
During the second quarter of 1999, certain events occurred which resulted in
changes to the Company's original estimates for the cost of its corporate
headquarters' relocation. As a result, the restructuring charge includes
approximately $520,000 of costs not reflected in the Company's December 1997
restructuring charge (described above) associated with closing the Company's
operations located in Cambridge, Massachusetts.
- 8 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. RESTRUCTURING AND OTHER NON-RECURRING CHARGES (continued)
On September 2, 1999, the Company and Protection One mutually agreed to
terminate their merger agreement. In September 1999, the Company recorded a
pre-tax charge of $423,000 for unreimbursed costs incurred in connection with
the proposed merger. These costs included such items as investment banker, legal
and independent accountant fees.
At September 30, 1999, accrued restructuring and other non-recurring charges of
nearly $1.5 million represented approximately $991,000 of total remaining
severance costs, $62,000 of fixed assets to be written off upon final transfer
of the Company's manufacturing operations to Ademco and $408,000 of unreimbursed
costs which are associated with the termination of the merger agreement with
Protection One.
The following is a summary of accrued restructuring and other non-recurring
charges for the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
December 31, Amounts Amounts September 30,
Dollars in thousands 1998 Recorded Utilized 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-cash write down
of fixed assets $ 536 $ 379 $ (853) $ 62
Reduction of workforce
and other cash flows 327 1,301 (637) 991
Corporate relocation -- 520 (520) --
Unreimbursed merger costs -- 423 (15) 408
------- ------- ------- -------
Total $ 863 $ 2,623 $(2,025) $ 1,461
======= ======= ======= =======
</TABLE>
7. INTANGIBLES
In August 1999 the Company completed the stock acquisition of TelCARE
Systems, Inc. of Denver, Colorado. TelCARE provides personal response
services. The purchase price was approximately $943,000 which was financed
by borrowing $0.9 million on a pre-existing line of credit. The acquisition
was accounted for as a purchase transaction and, as a result, the Company
recorded goodwill of approximately $913,000 to be amortized over an
estimated life of five years. The results of the acquired business are
included in the Company's consolidated financial statements from the date
of acquisition and are not expected to have a material impact on 1999
operating results.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. INTANGIBLES (continued)
During the first nine months of 1999, the Company paid approximately $2.7
million to 54 local community hospitals for conversion to services provided
by the Company. Intangible assets related to these service agreements
consist of the cost of purchasing the rights to service and/or manage the
personal response systems (PRS) program located in various stand-alone
facilities. These agreements allow the Company to monitor and provide other
related services to existing and future subscribers over the term of the
agreements. The Company amortizes the acquisitions costs over the life of
the agreements, which is five years.
8. COMMON STOCK
In August 1999, the Company loaned $300,000 to its Chief Executive Officer,
pursuant to a secured promissory note, for the exercise of a stock option
which was to expire. The note, which bears interest at a rate of 6.77% per
annum, payable annually in arrears, is due August 23, 2004 and is secured
by a pledge of 16,552 shares of common stock of the Company. The Chief
Executive Officer has the right to put the shares back to the Company at a
price equal to 90% of their then current fair market value at any time
during the 180-day period ending on the first anniversary of the date of
exercise of the option.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This and other reports, proxy statements, and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, with respect to, among other
things, the Company's future revenues, operating income, or earnings per share.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. There are a number of factors of which the Company is aware that may
cause the Company's actual results to vary materially from those forecast or
projected in any such forward-looking statement. These factors include, without
limitation, those set forth below under the caption "Certain Factors That May
Affect Future Results." The Company's failure to successfully address any of
these factors could have a material adverse effect on the Company's future
results of operations.
RESULTS OF OPERATIONS
Total revenues for the quarter ended September 30, 1999 were $18.1 million, an
increase of approximately 11% as compared to total revenues of $16.3 million for
the quarter ended September 30, 1998. For the nine months ended September 30,
1999, total revenues were $51.9 million, or nearly 10% greater than total
revenues of $47.3 million for the same period in 1998.
Service revenues grew 20% and 21% for the three and nine months ended September
30, 1999 to $12.0 million and $34.5 million, respectively from $10.0 million and
$28.5 million, respectively for the same periods in 1998. Service revenues
represent over 66% of the Company's quarter and year to date total revenues as
compared to 61% and 60% of total revenues for the three and nine months
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<PAGE>
of 1998, respectively. The Company's expected growth in its service business
segment has continued because of its strategy of packaging products and services
into a single service offering, which results in higher per-subscriber service
revenue. The Company was monitoring over 267,000 subscribers as of September 30,
1999, 20% more than the 223,000 subscribers monitored at September 30, 1998. 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, convert
community hospital programs to service provided by the Company and increase its
focus on referral development and innovative partner relationships in new
channels of distribution. The Company believes that the high quality of its
services and its commitment to providing caring and rapid response to the
at-risk elderly and the physically challenged will be factors in enabling the
Company to meet this challenge.
Net product revenues for the third quarter of 1999 decreased 3% to $5.8 million
from $5.9 million for the third quarter of 1998. For the nine months ended
September 30, 1999, net product revenues were $16.3 million, a decrease of
approximately 8% from $17.7 million for the same period in 1998. Product sales
have declined as a result of the Company's strategy of combining service and
hardware offerings to support its service business segment. As a result, the
Company expects continued declining product sales in future periods as it
continues packaging products and services into a single service offering.
Finance and rental income, representing revenue earned from the Company's
portfolio of sales-type leases, increased 4% in the third quarter of 1999 to
$362,000, from $347,000 for the third quarter of 1998. For the nine months ended
September 30, 1999, finance and rental income rose nearly 14% to $1.2 million
from $1.0 million for the same period in 1998. The growth of the Company's
leasing portfolio for its internally managed and funded leasing program
continues to result in increased finance and rental income. The Company believes
that the retention of new leases in its own portfolio will result in an increase
in finance income for the remainder of 1999.
Total recurring revenues, consisting of service revenues and finance income, was
$12.4 million for the quarter ended September 30, 1999, an increase of nearly
20% as compared to $10.3 million for the quarter ended September 30, 1998. For
the nine months ended September 30, 1999 total recurring revenues increased
approximately 21% to $35.6 million from $29.5 million for the nine months ended
September 30, 1998. These increases reflect the continued expansion of the
Company's service business segment with its focus on increasing the Company's
recurring revenue base.
Cost of services, as a percentage of service revenues, was nearly 65% for the
third quarter of 1999 as compared to 56% for the third quarter of 1998. For the
nine months ended September 30, 1999 cost of services, as a percentage of
service revenues, was 59% as compared to 57% for the same period in 1998. The
Company completed the transition to its new CareSystem call center platform in
the third quarter of 1999. The conversion of its subscribers to this new
platform took longer than originally planned and resulted in higher costs from
extra staffing needed in the Company's response centers and maintaining
duplicate facilities. Cost of services also included continued investments in
personnel and additional costs of employee retention and recruiting initiatives.
These initiatives are principally associated with the delay in the
implementation of the CareSystem platform and relocation of the Company's
monitoring facility as part of the Company's first quarter 1999 move to new
corporate headquarters in Framingham, Massachusetts. The Company also continued
to incur high costs in the third quarter of 1999 associated with systems
enhancements and support to maintain
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<PAGE>
its former service infrastructure while it finalized the implementation of its
CareSystem call center platform. The depreciation of the capital expenditures
for the CareSystem call center platform has also impacted current results of
operations.
Cost of sales was 31% of net product sales for the three months ended September
30, 1999 as compared to 27% during the same period in 1998. For the nine months
ended September 30, 1999 cost of sales was approximately 28% of net product
sales as compared to 27% for the nine months ended September 30, 1998. The
Company completed the transition of its manufacturing operations to Ademco
during the third quarter of 1999. While the Company continues to strive to
maintain its cost of sales at a consistent percentage of net product sales,
there were additional costs incurred during the third quarter associated with
the outsourcing of the manufacturing function. These additional costs, including
higher temporary help, were offset, in part, by a reduction in material costs
and the efficiencies created during the first half of 1999 by higher than
expected production in anticipation of the outsourcing to Ademco. The Company
believes that the decision to outsource to Ademco will result in technological
innovation and future cost savings opportunities.
Selling, general and administrative expenses were nearly 41% of total revenues
for the third quarter of 1999 as compared to 39% during the third quarter of
1998. For the nine months ended September 30, 1999 and 1998 selling, general and
administrative expenses were 39% of total revenues. While the Company has been
able to successfully control many of its costs included within selling, general
and administrative expenses, the Company did incur some higher costs for the
first nine months of 1999. Specifically, the Company has incurred higher costs
for its increased recruiting initiatives and for its 1999 customer conference
which it did not have in 1998. Also, there were nine months of administrative
costs associated with AlertCall, Inc. of Amherst, New York which was purchased
by the Company in November 1998 as well as moving costs incurred in connection
with the Company's relocation to its new corporate headquarters. These higher
costs were offset, in part, by lower expenditures in the areas of market and
product development and promotional strategies aimed at the healthcare channel.
The Company also has experienced savings in operating costs resulting from the
Company's relocation to new corporate headquarters in February 1999. The first
nine months of 1998 were also impacted by compensation expense that was incurred
for certain stock options that became exercisable during the first nine months
of 1998. As a result, no compensation expense was recorded in 1999.
Research and development expenses remained consistent at 2% of total revenues
for the three and nine months ended September 30, 1999 and 1998. Research and
development efforts are focused on ongoing product improvements and
developments. The Company expects to maintain these expenses at a consistent
percentage of total revenues for the remainder of 1999.
In December 1997, the Company approved a restructuring plan to improve operating
efficiencies and reduce costs, and recorded a pre-tax restructuring charge of
$4.3 million. This charge was established to provide for a business
reorganization which included relocation of the Company's corporate
headquarters, work force reduction and write down of impaired assets in
accordance with SFAS 121.
In June 1999, the Company recorded a pre-tax restructuring charge of
approximately $2.2 million. Nearly $1.7 million was recorded as a result of the
outsourcing of the Company's equipment manufacturing operations to Ademco. This
charge included approximately $1.3 million of costs related to the reduction in
the Company's manufacturing workforce and nearly $379,000 of costs associated
with the write down of certain manufacturing fixed assets. During the second
quarter of
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<PAGE>
1999, certain events occurred which resulted in changes to the Company's
original estimates for the cost of its corporate headquarters' relocation. As a
result, the Company recorded approximately $520,000 of costs not reflected in
the Company's December 1997 restructuring charge associated with closing the
Company's operations located in Cambridge, Massachusetts.
On September 2, 1999, the Company and Protection One mutually agreed to
terminate their proposed merger. In September 1999, the Company recorded a
pre-tax charge of $423,000 for unreimbursed costs incurred in connection with
the proposed merger. These costs included such items as investment banker, legal
and independent accountant fees.
At September 30, 1999, accrued restructuring and other non-recurring charges of
nearly $1.5 million represented approximately $1.0 million of total remaining
severance costs, $62,000 of fixed assets to be written off upon final transfer
of the Company's manufacturing operations to Ademco and $408,000 of unreimbursed
costs which are associated with the termination of the merger agreement with
Protection One.
In February 1999, the Company negotiated a buyout of its old corporate
headquarters facility lease. Pursuant to the arrangement, payments were made to
the Company during 1999 dependent on space becoming available in the old
facility. The Company received a payment of approximately $0.5 million during
the first quarter of 1999, net of applicable negotiation fees, and recorded this
payment as other income. During the third quarter of 1999, the Company received
a final payment of approximately $0.3 million, net of applicable negotiation
fees and also recorded this payment as other income.
The Company's effective tax rate was 39.2% for the nine months ended September
30, 1999 compared to 40.2% for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999, the Company's portfolio of
cash, cash equivalents and investments decreased $6.7 million to $2.7 million at
September 30, 1999 from $9.4 million at December 31, 1998. The decrease was
mainly attributable to continued purchases of property and equipment of $7.9
million during 1999. Expenditures of nearly $1.9 million were associated with
the continued development of the Company's new CareSystem response center
platform at its primary monitoring facility and approximately $2.5 million was
for Company-owned equipment provided directly to customers under comprehensive
service agreements and to subscribers not serviced by local Lifeline programs.
The Company also spent an additional $2.3 million for its new corporate facility
including purchases of a heating, ventilation and air conditioning system, a
computer room and network infrastructure, a telephone and voicemail system,
furniture and leasehold improvements. During the first nine months of 1999, the
Company paid approximately $2.7 million to local community hospitals for
conversions to services provided by the Company and paid approximately $943,000
for the acquisition of TelCare Systems, Inc. of Denver Colorado. The payments of
sales and management bonuses and tax payments of nearly $1.6 million also
contributed to the decrease. Profitable operations of $8.0 million helped to
offset the effects of the expenditures for the first nine months of 1999 as well
as a $1.0 million reimbursement from Protection One for merger related costs and
a $0.9 million borrowing under the Company's line of credit.
- 13 -
<PAGE>
The Company completed the transition of its United States monitored subscribers
to its new CareSystem platform in September 1999. The Company has invested
nearly $12.6 million in the CareSystem platform through September 30, 1999 and
anticipates it will spend approximately an additional $0.6 million during 1999.
The Company is party to Master Lease Agreements for up to $2.7 million for
furniture, computers, security systems and other related equipment purchased in
connection with the Company's move to its new corporate facility and for other
purchases. For financial reporting purposes, these leases were recorded as
capital leases and accordingly assets were recorded and are being depreciated
over their estimated useful life. As of September 30, 1999 the Company had made
purchases of approximately $2.4 million under these agreements.
The Company is party to a ten-year lease for an 84,000 square foot facility in
Framingham, Massachusetts for its corporate headquarters. Annual base rental
payments under the lease approximate $772,000. The lease contains two five-year
options to renew at the end of the initial lease term. The Company incurred
expenditures of nearly $7.0 million through September 30, 1999 for capital
improvements associated with its new corporate facility, as described above,
including purchases for the development of a computer center for its new
monitoring platform, its corporate infrastructure and additional capacity to
handle future subscriber growth. Purchases of furniture and fixtures and
leasehold improvements were also included in the aforementioned total capital
expenditures amount. The Company incorporated approximately $2.2 million of its
purchases in the Master Lease Agreements noted above. The Company expects to
spend an additional $0.5 million in 1999 for similar items of which some will be
incorporated as part of the Master Lease Agreements noted above.
In October 1998, the Company entered into a five-year lease to rent an
additional 16,000 square feet of a facility located in Framingham, Massachusetts
to maintain its inventory. Annual base rental payments will be approximately
$79,000. The lease contains two five-year renewal options. The Company is
currently engaged in discussions with the landlord about occupancy of this
facility.
In June 1999, the Company entered into an amended and restated $10.0 million
line of credit which was originally obtained in April 1998. The agreement
contains several covenants, including the Company maintaining certain levels of
financial performance and capital structure. These financial covenants include a
requirement for a current ratio of at least 1.5 to 1.0 and a leverage ratio of
no more than 1.25 to 1.0 through the quarter ending March 31, 2000 and 1.0 to
1.0 thereafter. In addition, there are certain negative covenants that include
limitations on the Company's capital and other expenditures, restrictions on the
Company's capacity to obtain additional debt financing, restrictions on the
disposition of the Company's assets, and restrictions on its investment
portfolio. The Company was not in compliance with certain covenants during the
third quarter of 1999. The Company obtained a waiver from its bank for these
covenants. This line of credit matures on June 30, 2004, and as of September 30,
1999 the Company had borrowed $0.9 million under this line.
The Company expects that funding requirements for operations and in support of
future growth are expected to be met primarily from operating cash flow,
existing cash and marketable securities and its $10.0 million line of credit.
The Company expects these sources will be sufficient to finance the cash needs
of the Company through the next twelve months including the continued investment
in its new response center platform, the remaining expenditures needed for its
move to new corporate headquarters, the requirements of its internally funded
lease financing program, any potential acquisitions and other investments in
support of its current business.
- 14 -
<PAGE>
TERMINATION OF PENDING ACQUISITION
As previously announced on September 2, 1999 Protection One, Inc. and the
Company entered into a mutual agreement to terminate their proposed merger
originally announced in October 1998. The companies also announced the agreement
to terminate the related stock option granted to Protection One by the Company
in connection with the proposed merger. The total costs related to the proposed
merger were approximately $1.4 million of which Protection One reimbursed the
Company $1.0 million. The Company recorded a pre-tax non-recurring charge of
$423,000 in the third quarter of 1999 for the unreimbursed costs. At September
30, 1999 approximately $408,000 of this charge remained in accrued restructuring
and other non-recurring charges.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
On September 2, 1999 the Company terminated its Merger Agreement with Protection
One, Inc. and a subsidiary of Protection One, Inc. (the "Merger Sub"), pursuant
to which, subject to the terms and conditions of the Merger Agreement, the
Company would have become a wholly-owned subsidiary of a newly formed holding
company for Protection One. There can be no assurance that the Company's results
of operations and financial condition will not be adversely affected by the
diversion of management time and resources relating to the proposed merger, or
by other factors.
During the third quarter of 1999, the Company completed the outsourcing of the
manufacturing of its personal response equipment to Ademco, a division of
Pittway Corporation. This decision represents a change in the Company's
manufacturing strategy, as it will no longer support a manufacturing site at its
corporate location. There can be no assurance that the Company will realize the
intended cost savings it anticipates, or that it will not experience delays in
obtaining products from Ademco as a result of process difficulties, component
shortages or for other reasons. Any such delay could have a material adverse
effect on the Company's business, financial condition, or results of operations.
The Company's results are partially dependent on its ability to develop services
and products that keep pace with continuing technological changes, evolving
industry standards, changing subscriber preferences and new service and product
introductions by the Company's competitors. Lifeline's future success will
depend on its ability to enhance its existing services and products (including
accessories), to introduce new service and product offerings to meet and adapt
to changing customer requirements and emerging technologies on a timely basis
and to offer such products and services at competitive prices. There can be no
assurance that Lifeline will be successful in identifying, developing,
manufacturing or marketing new services and products or enhancing its existing
services and products on a timely basis or that Lifeline will be able to offer
such services and products at 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 completed the transition of its United States subscribers to its new
CareSystem call center platform and may experience risks and uncertainties
associated with this new information technology. These include the risks that
the Company does not realize the intended benefits from the new system and the
risks that the costs incurred by the Company during the phase-in of
- 15 -
<PAGE>
CareSystem will be greater than expected, or that customer uncertainty during
the phase-in period will adversely affect the Company's revenues.
The Company's growth is dependent on its ability to increase the number of
subscribers served by its monitoring centers. The Company's ability to continue
to increase service revenue is a key factor in its long-term growth, and there
can be no assurance that the Company will be able to do so. The Company's
failure to increase service revenue could have a material adverse effect on the
Company's business, financial condition, or results of operations.
The Company's equipment revenue has been declining over the last several
quarters as a result of its strategy of combining service and hardware offerings
to support the transition to a service oriented business. As the Company
continues growing its service business segment to increase its recurring
revenue, there can be no assurance that service revenue will increase at a rate
sufficient to offset the expected decrease in higher margin equipment revenue
both on a quarterly and annual basis.
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.
In addition, the reduction in the Company's cash and cash equivalent balances
may adversely affect the Company's ability to pay for acquisitions.
The Company's equipment sales are ordinarily made to healthcare providers that
establish their own Lifeline programs. These healthcare providers typically
rent, rather than sell, the Lifeline products to subscribers and accordingly
following such time as a product is no longer used by a subscriber, it is
returned to the healthcare provider and becomes available for rent to another
subscriber. As a result of this use and reuse of the Company's products, sales
of such products are dependent on growth in the number of subscribers and on the
ability of the Company to encourage its healthcare provider customers to replace
their existing inventory by continuing to enhance its products with new
features.
The Company's monitoring operations are concentrated principally in its
corporate headquarters facility. Although the Company believes that it has
constructed safeguards to protect against system failures, the disruption of
service at its corporate monitoring facility, whether due to telephone or
electrical failures, earthquakes, fire, the continued transition of its
monitoring operations to its new corporate headquarters, or other similar events
or for any other reason, could have a material adverse effect on the Company's
business, financial condition, or results of operations.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. This could result in
computer programs that have date-sensitive software recognizing a date using
"00" as the year 1900 rather than the year 2000. Such errors could cause a
system failure or miscalculations causing disruptions of operations, including,
among other
- 16 -
<PAGE>
things, an inability to respond to subscriber calls, send invoices, or engage in
similar normal business activities.
The Company has implemented a formal six-phase Year 2000 program to determine
the extent of its own Year 2000 exposures. The Awareness Phase is ongoing and
involves continuous communication, both internally and externally with customers
and vendors. The Assessment Phase identifies the Company's products, services
and equipment that contain micro-controllers, as well as all information
technology hardware and software to identify two-digit year exposures. The
Planning Phase is the Company's decision-making phase, and it prioritizes the
schedule of resolutions to be implemented. In the Resolution Phase, the Company
will modify, replace or retire systems where necessary. The Testing Phase tests
the Company's readiness to roll out its results. Finally the Rollout Phase
implements the entire process into production.
The Company has utilized internal resources to test all currently marketed
products for Year 2000 issues. This product-testing phase has revealed only
minor product behaviors in date keeping relating to the year 2000 that do not,
in the Company's judgment, cause significant operational impact. The Company has
provided its customers with written information on how to correct such Year 2000
conditions.
The Company has outsourced the manufacturing of its personal response equipment
to Ademco, a division of Pittway Corporation. This decision represents a change
in the Company's manufacturing strategy, as it will no longer support a
manufacturing site at its corporate location, although repair and distribution
of the Company's hardware are expected to continue from its corporate
headquarters. Based on oral representations from Ademco, the Company believes
that Ademco's ability to perform its manufacturing responsibilities will not be
affected by the Year 2000 problem. As part of its own Year 2000 program, the
Company completed all year 2000 program phases for its manufacturing equipment
and systems it has used to manufacture its personal response equipment. The
Company believes that its own remaining mission critical manufacturing equipment
and systems it uses to support its repair and distribution functions are Year
2000 ready.
The Company completed the transition of its United States monitored subscribers
to its new CareSystem platform in the third quarter of 1999. The Company has
designed its new CareSystem call center platform to be in compliance with the
Year 2000. The Company's system integration provider conducted and completed
CareSystem unit, integration, and system testing which included Year 2000
testing. The Company's Information Technology department's CareSystem Acceptance
Test Plan included the change to the year 2000 as well as time changes in the
year 2000. Based on the testing it has performed, the Company believes that this
call center platform is Year 2000 ready.
The Company has completed the Rollout Phase of its Year 2000 program for its
remaining information technology systems, which include its networks, desktops,
data servers and applications. Of all of the Company's material systems,
software replacements and upgrades in the ordinary course of business (without
acceleration for Year 2000 issues) have enhanced the Company's Year 2000
readiness without material incremental costs. The Company believes that all of
its mission critical systems are Year 2000 ready. As the Company completes the
Rollout Phase of its existing desktop computers it believes that all of its
existing desktop computers are Year 2000 ready.
The Company has moved to new corporate headquarters effective February 1999. As
part of this process, the Company has determined that all embedded systems
contained in its new building, such as its elevators, heating, air conditioning
and security systems, are Year 2000 compliant.
- 17 -
<PAGE>
The Company continues to assess whether third parties with whom it has
significant relationships are Year 2000 compliant. The Company sent formal
communications to third parties to determine the extent to which the Company is
vulnerable in the event those third parties fail to resolve their own Year 2000
issues. Responses to these letters are still being received, but of those
received to date, approximately 90% of the Company's certified vendors have
confirmed their Year 2000 readiness in writing and most other third parties have
informed the Company, either verbally or in writing, that they believe they are
or will be Year 2000 ready. The Company defines certified vendors as those that
have satisfied certain key criteria established by the Company. However, there
can be no assurance that the systems of these companies on which the Company's
systems rely will not experience problems associated with the Year 2000 and, if
so, that such problems would not have a material adverse effect on the Company's
business, financial condition, or results of operations. Vendors that the
Company determines are not Year 2000 compliant, or those that have not provided
adequate information, are being assessed and if needed replacements will be
sought.
The Company believes that its most reasonably likely worse case Year 2000
scenario is significant interruptions in the supply of necessary services and
products caused by third party suppliers that do not resolve their own Year 2000
issues. These disruptions could have a material adverse effect on the Company's
monitoring operations, and accordingly, its business, financial condition or
results of operations. The Company's major provider of telephone service is
AT&T. Based on information received directly from AT&T and from its website, the
Company believes that AT&T has an established Year 2000 compliance plan relating
to its products, services, desktop, infrastructure and vendor supplied products.
This information indicated that AT&T has achieved 100% assessment, repair,
certification and deployment of systems and network elements that directly
impact its customers and therefore believes that it is Year 2000 ready. The
Company has selected Ademco as the primary manufacturer for Lifeline personal
response units. Although the Company believes that Ademco's ability to perform
its manufacturing responsibilities will not be affected by the Year 2000
problem, there can be no assurance that Ademco will not incur delays in
manufacturing products for the Company as a result of its inability to resolve
its own Year 2000 issues. The Company is in the process of defining arrangements
with Ademco. The Company is also in the process of developing contingency plans
to prepare for the inability of its remaining key third-party suppliers to
resolve their own Year 2000 issues. There can be no assurance that these
contingency plans will be adequate to meet the Company's needs.
Through September 30, 1999, the Company has spent over $105,000 related to Year
2000 issues, consisting principally of personnel costs incurred in the scope of
normal operations and consulting costs. The total cost of the Year 2000 project
is estimated to be approximately $200,000.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
- 18 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On September 2, 1999, the Company and Protection One, Inc. announced the mutual
agreement to terminate their proposed merger which was announced in October
1998. The companies also announced that they agreed to terminate the related
stock option granted to Protection One by the Company in connection with the
proposed merger.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K - A Form 8-K was filed on September 10, 1999.
- 19 -
<PAGE>
LIFELINE SYSTEMS, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 9, 1999 LIFELINE SYSTEMS, INC.
- ---------------- ------------------------------------
Date Registrant
/s/ Ronald Feinstein
------------------------------------
Ronald Feinstein
Chief Executive Officer
/s/ Dennis M. Hurley
------------------------------------
Dennis M. Hurley
Vice President of Finance and
Administration, Principal Financial
and Accounting Officer
- 20 -
<PAGE>
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed herewith
or have heretofore been filed with the Securities and Exchange Commission under
the Securities Act of 1933 or the Securities and Exchange Act of 1934 and are
referred to and incorporated herein by reference to such filings.
SEC Document
Exhibit No. Exhibit Reference
- ----------- ------- ---------
Exhibit 10 Material Contracts
10.61 Loan Document Modification Agreement between State
Street Bank and Trust Company and the Registrant
dated June 30, 1999
10.62 Amended and Restated Note between State Street Bank
and Trust Company and the Registrant dated June 30,
1999
10.63 Secured Promissory Note between Ronald Feinstein and
the Registrant, dated August 23, 1999
10.64 Security and Pledge Agreement between Ronald
Feinstein and the Registrant, dated August 23, 1999
-21-
<PAGE>
LOAN DOCUMENT MODIFICATION AGREEMENT EXHIBIT 10.61
(No. 1; dated as of June 30, 1999)
LOAN DOCUMENT MODIFICATION AGREEMENT, dated as of June 30, 1999, by and
between LIFELINE SYSTEMS, INC., a Massachusetts corporation with its principal
place of business and chief executive office at 111 Lawrence Street, Framingham,
Massachusetts 01702 (the "Borrower") and STATE STREET BANK AND TRUST COMPANY, a
--------
Massachusetts trust company with its head office at 225 Franklin Street, Boston,
Massachusetts 02110 (the "Bank").
----
1. Reference to Existing Loan Documents.
------------------------------------
Reference is hereby made to that Revolving Credit Agreement, dated as
of April 22, 1998, between the Borrower and the Bank (with the attached
schedules and exhibits, the "Credit Agreement") and the Loan Documents referred
----------------
to therein, including without limitation that certain Revolving Credit Note of
the Borrower, dated April 22, 1998 in the principal amount of $5,000,000 (the
"Revolving Credit Note") and that certain Convertible Revolving Loan Note of the
---------------------
Borrower, dated April 22, 1998 in the principal amount of $5,000,000 (the
"Convertible Note" and together with the Revolving Credit Note, the "Notes").
---------------- -----
Unless otherwise defined herein, capitalized terms used in this Agreement shall
have the same respective meanings as set forth in the Credit Agreement.
2. Effective Date.
--------------
This Agreement shall become effective as of June 30, 1999 (the "Effective
---------
Date"), provided that the Bank shall have received the following on or before
- ----
September 30, 1999:
a. two copies of this Agreement, duly executed by the Borrower; and
b. an amended and restated promissory note in the principal amount of
$10,000,000 in the form enclosed herewith (the "Amended Note"), duly executed by
------------
the Borrower.
By the signature of its authorized officer below, the Borrower is hereby
representing that, except as modified in Schedule A attached hereto, the
----------
representations of the Borrower set forth in the Loan Documents (including those
contained in the Credit Agreement, as amended by this Agreement) are true and
correct as of the Effective Date as if made on and as of such date. Finally, the
Borrower agrees that, as of the Effective Date, it has no defenses against its
obligations to pay any amounts under the Credit Agreement and the Loan
Documents.
<PAGE>
-2-
3. Description of Change in Terms.
------------------------------
As of the Effective Date, the Credit Agreement is modified in the following
respects:
a. The definitions of "Convertible Revolving Credit Availability
Expiration Date," "Convertible Revolving Credit Commitment," "Convertible
Revolving Credit Loan," "Convertible Revolving Credit Maturity Date" and
"Convertible Revolving Credit Note" and all references to such terms in the
Credit Agreement and the other Loan Documents are hereby deleted in their
entirety.
b. The definition of "Interest Period" is hereby amended by deleting
the phrase "ninety (90), one hundred twenty (120) or three hundred sixty (360)
days" and replacing it with the phrase "thirty (30), sixty (60), ninety (90),
one hundred twenty (120) or one hundred eighty (180) days."
c. The definition of "Revolving Credit Maturity Date" is hereby amended
by deleting the date "June 30, 1999" and replacing it with the date "June 30,
2002."
d. Section 1.1 is hereby amended by inserting the following
definitions, in alphabetical order:
"'Acquisition Loan' shall mean a Revolving Credit Loan utilized to
----------------
finance a Permitted Financeable Acquisition.
'Certificate of Permitted Acquisition' shall mean the notice,
------------------------------------
substantially in the form of Exhibit D hereto, to be given by the Borrower
---------
to the Bank to request an Acquisition Loan, in accordance with Section 3.
'EBITDA' shall mean, as of the applicable period, earnings before
------
interest, taxes, depreciation and amortization, calculated in accordance
with GAAP.
'Permitted Financeable Acquisition' shall mean an acquisition which:
---------------------------------
(a) is a Permitted Acquisition; and
(b) satisfies each of the following requirements:
(i) The total consideration paid must represent a comparable
multiple to other recent industry transactions, as demonstrated by
the Borrower's furnishing evidence satisfactory to the Bank.
(ii) The target company must have positive pro forma adjusted
EBITDA for at least the previous twelve months of operations as
demonstrated by the Borrower's furnishing evidence satisfactory to
the Bank.
<PAGE>
-3-
(iii) After giving effect to each such acquisition, the
Borrower's Leverage Ratio shall not exceed (a) for any acquisition
occurring on or prior to March 31, 2000, 1.25 to 1.00, and (b) for
any acquisition occurring on or after April 1, 2000, 1.00 to 1.00,
in each case as demonstrated by the Borrower's furnishing pro forma
financial statements satisfactory to the Bank."
e. Section 2.1 is hereby amended by deleting the phrase "Five Million
Dollars ($5,000,000)" from the seventh line and replacing it with the phrase
"Ten Million Dollars ($10,000,000)."
f. Sections 2.2 and 2.6(b) are hereby deleted in their entirety and
each replaced with the word "Reserved."
g. Section 2.5 is hereby recaptioned "Maturity and Repayment" and the
second sentence of such Section 2.5 is hereby restated in its entirety as
follows:
"All Acquisition Loans made in any fiscal quarter shall be aggregated and
the principal amount of such aggregated Acquisition Loans will be repayable
in equal installments based upon a sixty (60) month amortization schedule
with the first installment to be made on the first day of the next
succeeding fiscal quarter, provided, however, nothing in this sentence
shall diminish the Borrower's obligation under the first sentence of this
Section 2.5 or under Section 4.6."
h. Section 3(a) is hereby amended by adding the following new sentences
at the end of such section:
"If the Borrower wishes to use a Revolving Credit Loan as an Acquisition
Loan (that is, to finance a Permitted Financeable Acquisition), the
Borrower shall so state the principal amount to be so utilized in its
telephonic notice, and shall give the Bank, in addition to the written
Notice of Borrowing or Conversion required by this Section 3.1(a), a
written Certificate of Permitted Acquisition. Such Certificate shall (i)
specify the effective date and amount of the Acquisition Loan and (ii)
describe the Permitted Financeable Acquisition which is to be financed."
i. Section 4.1(b) is hereby deleted in its entirety and replaced with
the following:
"(b) Notwithstanding the foregoing,
(i) if an Event of Default pursuant to Section 10.1(a) hereof shall
occur, or
(ii) if an Event of Default pursuant to any provision of Section
10.1 hereof (other than Section 10.1(a)) shall occur, beginning thirty
(30) days after notice from the Bank,
<PAGE>
-4-
then the unpaid balance of Loans shall bear interest at a rate per annum
equal to the Post-Default Rate until such Event of Default is cured or
waived, and any other amount payable hereunder which is not paid in full
when due shall bear interest, at a rate per annum equal to the Post-
Default Rate, until the sooner to occur of (x) the date upon which all
Obligations to the Bank have been paid in full and the Commitments have
been terminated, or (y) the date upon which such Event of Default is
cured or waived."
j. Section 4.3 is hereby amended by deleting the phrase "$500,000 or a
larger multiple of $100,000" appearing in the fourth line of such section and
substituting in place thereof the following: "$100,000 or a larger multiple of
$100,000."
k. Section 7.1 is hereby amended by restating the first sentence
thereof in its entirety as follows:
"The proceeds of the Revolving Credit Loans shall be used solely for
working capital purposes and to finance Permitted Financeable Acquisitions,
provided, however, the Bank will not make advances for Permitted
Financeable Acquisitions in an aggregate principal amount in excess of
$5,000,000, unless the Bank in it sole discretion so agrees in writing."
l. Section 8.2 is hereby amended by deleting the last paragraph
thereof.
m. Section 9.3 is hereby deleted in its entirety and replaced with the
following:
"Leverage Ratio. The Borrower will not permit its Leverage Ratio to be
--------------
less than (i) 1.25 to 1.00 as of the end of any fiscal quarter, commencing
with the quarter ending June 30, 1999, through the quarter ending March 31,
2000 and (ii) 1.00 to 1.00 as of the end of any fiscal quarter, commencing
with the quarter ending June 30, 2000 and for each quarter ending
thereafter."
n. The Revolving Credit Note attached as Exhibit A-1 to the Credit
Agreement is hereby restated in its entirety in the form of Exhibit A hereto.
o. The Compliance Certificate attached as Exhibit C to the Credit
Agreement is hereby restated in its entirety in the form of Exhibit C hereto.
p. The Certificate of Permitted Financeable Acquisition attached hereto
as Exhibit D is hereby inserted as Exhibit D to the Credit Agreement.
<PAGE>
-5-
4. Restatement of Revolving Credit Note; Cancellation of Convertible Note.
----------------------------------------------------------------------
As of the Effective Date, (a) the Revolving Credit Note shall be amended
and restated in its entirety by the Amended Note and all references in the
Credit Agreement and the other Loan Documents shall mean and be a reference to
the Amended Note; and (b) the Convertible Note shall be cancelled and returned
to the Borrower so marked.
5. Consistent Changes.
------------------
As of the Effective Date, the Loan Documents shall be amended wherever
necessary to reflect the changes described above.
6. Continuing Validity.
-------------------
Upon the effectiveness hereof, each reference in each Loan Document to
the "Revolving Credit Agreement," the "Credit Agreement," "thereunder,"
"thereof," "therein" or words of like import referring to the Credit Agreement
shall mean and be a reference to the Credit Agreement, as amended hereby.
Except as specifically set forth above, the Credit Agreement shall remain in
full force and effect and is hereby ratified and confirmed. Except as provided
in the foregoing sentence and paragraph 4 above, each of the other Loan
Documents is in full force and effect and is hereby ratified and confirmed. The
amendments set forth above (i) do not constitute a waiver or modification of any
term, condition or covenant of the Credit Agreement or any Loan Document, other
than as expressly set forth herein, and (ii) shall not prejudice any rights
which the Bank may now or hereafter have under or in connection with the Credit
Agreement, as modified hereby, or any Loan Document and shall not obligate the
Bank to assent to any further modifications.
7. Miscellaneous.
-------------
a. This Agreement may be signed in one or more counterparts each of
which taken together shall constitute one and the same document.
b. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
c. THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN
ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY
REASON OF THIS LOAN DOCUMENT MODIFICATION AGREEMENT.
d. THE BORROWER AND THE BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS
TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION OF WHATEVER NATURE BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN.
<PAGE>
-6-
EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A
MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS
AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
e. The Borrower agrees to promptly pay on demand all costs and expenses of
the Bank in connection with the preparation, reproduction, execution and
delivery of this letter amendment and the other instruments and documents to be
delivered hereunder, including the reasonable fees and out-of-pocket expenses of
Sullivan & Worcester LLP, special counsel for the Bank with respect thereto.
IN WITNESS WHEREOF, the Bank and the Borrower have caused this Agreement to
be signed under seal by their respective duly authorized officers as of the date
set forth above.
Sincerely,
LIFELINE SYSTEMS, INC.
By /s/ Dennis M. Hurley
-----------------------------
Name: Dennis M. Hurley
Title: Vice President Finance, CFO
STATE STREET BANK AND TRUST COMPANY
By /s/ Scott Mitchell
-------------------------------
Name: Scott Mitchell
Title: Assistant Vice President
<PAGE>
Schedule A
----------
Modifications to Representations and Warranties
-----------------------------------------------
None.
<PAGE>
Exhibit A
---------
AMENDED AND RESTATED NOTE
$10,000,000 June 30, 1999
(Originally dated April 22, 1998)
For value received, the undersigned, LIFELINE SYSTEMS, INC., a
Massachusetts corporation (the "Borrower"), promises to pay to STATE STREET BANK
--------
AND TRUST COMPANY, 225 Franklin Street, Boston, Massachusetts 02110 (the
"Bank"), or to its order, the lesser of Ten Million Dollars ($10,000,000) or the
----
outstanding principal amount of Revolving Credit Loans (as defined in the Credit
Agreement referred to below) advanced by the Bank to the Borrower pursuant to
the Credit Agreement, on the Revolving Credit Maturity Date (as defined in the
Credit Agreement), together with interest on the principal amount hereof from
time to time outstanding at the rates and at the times provided in the Credit
Agreement.
Computations of interest shall be made by the Bank on the basis of a year
of 360 days for the actual number of days occurring in the period for which such
interest is payable.
This promissory note amends and restates the terms and conditions of the
obligations of the Borrower under the promissory note dated April 22, 1998 (the
"Original Note") by the Borrower to the Bank. This promissory note is referred
-------------
to in the credit agreement dated as of April 22, 1998, as amended by a loan
document modification agreement dated as of June 30, 1999, by the Bank and
accepted by the Borrower together with all related schedules, as the same may be
amended, modified or supplemented from time to time (the "Credit Agreement"),
----------------
and is subject to optional and mandatory prepayment as provided therein, and is
entitled to the benefits thereof and of the other Loan Documents referred to
therein.
Each reference in each Loan Document (as defined in the Credit Agreement)
to "the Note," "thereof," "therein," "thereunder" or words of like import
referring to the Original Note, shall mean and be a reference to the Original
Note, as amended and restated hereby.
Upon the occurrence of any Event of Default under, and as defined in, the
Credit Agreement, at the option of the Bank, the principal amount then
outstanding of and the accrued interest on the advances under this note and all
other amounts payable under this note shall become immediately due and payable,
without notice (including, without limitation, notice of intent to accelerate),
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
The Bank shall keep a record of the amount and the date of the making of
each advance pursuant to the Credit Agreement and each payment of principal with
respect thereto by maintaining a computerized record of such information and
printouts of such computerized record, which computerized record, and the
printouts thereof, shall constitute prima facie evidence of the accuracy of the
----- -----
information so endorsed.
<PAGE>
The undersigned agrees to pay all reasonable costs and expenses of the Bank
(including, without limitation, the reasonable fees and expenses of attorneys)
in connection with the enforcement of this note and the other Loan Documents and
the preservation of their respective rights hereunder and thereunder.
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Borrower and every endorser or guarantor of this note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any one or more extensions or postponements of the
time of payment or any other indulgences, to any substitutions, exchanges or
releases of collateral for this note, and to the additions or releases of any
other parties or persons primarily or secondarily liable.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE
TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR ITSELF
AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION
IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR PROCEEDING OF ANY
KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT
(AS DEFINED IN THE CREDIT AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY,
IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING MAY BE
BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY
SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN
SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND
EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO,
WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN
SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO
THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM
ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN
INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND AGREES THAT
PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE
MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF
THE MASSACHUSETTS RULES OF CIVIL
<PAGE>
A-3
PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF PROCEDURE.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE
COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL.
LIFELINE SYSTEMS, INC.
By: /s/ Dennis M. Hurley
-----------------------------------
Name: Dennis M. Hurley
Title: Vice President Finance, CFO
<PAGE>
Exhibit C
---------
COMPLIANCE CERTIFICATE
TO: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
The undersigned Responsible Officer of Lifeline Systems, Inc., a
Massachusetts corporation (the "Borrower") hereby certifies with respect to the
--------
Credit Agreement, dated as of April 22, 1998, between State Street Bank and
Trust Company (the "Bank") and the Borrower, as amended through the date hereof
----
(the "Credit Agreement"), that (a) the Borrower has been in complete compliance
----------------
for the period from __/__/____ to __/__/____ (the "Applicable Initial Financial
----------------------------
Statements Date") with the covenants of the Borrower contained therein, as
- ---------------
demonstrated below, and (b) no Default or Event of Default has occurred and is
continuing as of the date hereof, except, in either case, as noted below. All
capitalized terms used herein and not otherwise defined shall have the meanings
prescribed therefor in the Credit Agreement.
<TABLE>
<CAPTION>
Actual as of
Covenant Required ________ ___, ____
- -------- --------
<S> <C> <C>
Financial Statements Quarterly within 46 days
FYE within 91 days
All documents filed with the SEC Within 5 days after filing
Net Income (quarterly) $ 1,000,000 $___________________
Current Ratio (quarterly) 1.50 : 1.00 _________ : ________
Leverage Ratio Quarter ending: Ratio: _________ : ________
6/30/99 thru 3/31/2000 1.25 : 1.00 ($__________________ to
6/30/2000 and thereafter 1.00 : 1.00 $___________________ )
</TABLE>
Comments Regarding Exceptions:
Attached hereto are financial statements as of and for the fiscal [quarter]
[year] ended on the applicable initial financial statements date, which have
been certified by the [undersigned] [Accountants] as required by the Credit
Agreement.
[_] The Leverage Ratio has changed so as to warrant an adjustment in the
Applicable Margin from ___% to ___%. (check if applicable)
Submitted by:
_________________________ Date: _______________________
Name:
Title:
<PAGE>
Exhibit D
---------
FORM OF CERTIFICATE OF PERMITTED
FINANCEABLE ACQUISITION
______________, ____
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Attention: Scott C. Mitchell
Re: Revolving Credit Agreement between Lifeline
Systems, Inc. and State Street Bank and Trust Company
-----------------------------------------------------
Ladies and Gentlemen:
The undersigned requests, pursuant to Section 3(a) of the Revolving Credit
Agreement dated as of April 22, 1998 between Lifeline Systems, Inc. (the
"Borrower") and State Street Bank and Trust Company (the "Bank"), as amended
(the "Credit Agreement"), that the Bank make an Acquisition Loan to the Borrower
in the aggregate amount of $_____________ on ______________, ____ and hereby
represents and warrants that the requested Acquisition Loan will be used for the
Permitted Financeable Acquisition described in Schedule 1 hereto (including, but
----------
not limited to, the name and location of company to be acquired).
The Borrower hereby certifies that the Permitted Financeable Acquisition
satisfies the following: (a) if the acquisition involves a merger or
consolidation, the Borrower is the surviving party; (b) at the time of the
acquisition, no Default or Event of Default has occurred and is continuing; (c)
as a result of the acquisition, no Default or Event of Default or violation of
any covenant under the Credit Agreement will arise or is reasonably anticipated
to arise, which the Borrower will confirm by providing to the Bank pro forma
financial statements giving effect to the acquisition at least ten (10) days
before the closing of the acquisition; (d) the target of the acquisition is
engaged in a line of business similar to the current businesses of the Borrower
and its Subsidiaries; (e) the total consideration to be paid represents a
comparable multiple to other recent industry transactions, and such
determination has been confirmed by the Bank; (f) the target company has
positive pro forma adjusted EBITDA for at least the previous twelve months of
operations, as demonstrated by evidence satisfactory to the Bank; and (g) after
giving effect to the acquisition, the Borrower's Leverage Ratio does not exceed
(i) for any acquisition occurring on or prior to March 31, 2000, 1.25 to 1.00,
and (ii) for any acquisition occurring on or after April 1, 2000, 1.00 to 1.00,
in each case as demonstrated by evidence satisfactory to the Bank. Capitalized
terms used herein and not otherwise defined shall have the respective meanings
set forth in the Credit Agreement.
LIFELINE SYSTEMS, INC.
By: _______________________________
Name:
Title:
<PAGE>
AMENDED AND RESTATED NOTE EXHIBIT 10.62
$10,000,000 June 30, 1999
(Originally dated April 22, 1998)
For value received, the undersigned, LIFELINE SYSTEMS, INC., a
Massachusetts corporation (the "Borrower"), promises to pay to STATE STREET BANK
--------
AND TRUST COMPANY, 225 Franklin Street, Boston, Massachusetts 02110 (the
"Bank"), or to its order, the lesser of Ten Million Dollars ($10,000,000) or the
----
outstanding principal amount of Revolving Credit Loans (as defined in the Credit
Agreement referred to below) advanced by the Bank to the Borrower pursuant to
the Credit Agreement, on the Revolving Credit Maturity Date (as defined in the
Credit Agreement), together with interest on the principal amount hereof from
time to time outstanding at the rates and at the times provided in the Credit
Agreement.
Computations of interest shall be made by the Bank on the basis of a year
of 360 days for the actual number of days occurring in the period for which such
interest is payable.
This promissory note amends and restates the terms and conditions of the
obligations of the Borrower under the promissory note dated April 22, 1998 (the
"Original Note") by the Borrower to the Bank. This promissory note is referred
-------------
to in the credit agreement dated as of April 22, 1998, as amended by a loan
document modification agreement dated as of June 30, 1999, by the Bank and
accepted by the Borrower together with all related schedules, as the same may be
amended, modified or supplemented from time to time (the "Credit Agreement"),
----------------
and is subject to optional and mandatory prepayment as provided therein, and is
entitled to the benefits thereof and of the other Loan Documents referred to
therein.
Each reference in each Loan Document (as defined in the Credit Agreement)
to "the Note," "thereof," "therein," "thereunder" or words of like import
referring to the Original Note, shall mean and be a reference to the Original
Note, as amended and restated hereby.
Upon the occurrence of any Event of Default under, and as defined in, the
Credit Agreement, at the option of the Bank, the principal amount then
outstanding of and the accrued interest on the advances under this note and all
other amounts payable under this note shall become immediately due and payable,
without notice (including, without limitation, notice of intent to accelerate),
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
The Bank shall keep a record of the amount and the date of the making of
each advance pursuant to the Credit Agreement and each payment of principal with
respect thereto by maintaining a computerized record of such information and
printouts of such computerized record, which computerized record, and the
printouts thereof, shall constitute prima facie evidence of the accuracy of the
----- -----
information so endorsed.
The undersigned agrees to pay all reasonable costs and expenses of the Bank
(including, without limitation, the reasonable fees and expenses of attorneys)
in connection with the
<PAGE>
-2-
enforcement of this note and the other Loan Documents and the preservation of
their respective rights hereunder and thereunder.
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Borrower and every endorser or guarantor of this note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any one or more extensions or postponements of the
time of payment or any other indulgences, to any substitutions, exchanges or
releases of collateral for this note, and to the additions or releases of any
other parties or persons primarily or secondarily liable.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE
TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR ITSELF
AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION
IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR PROCEEDING OF ANY
KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT
(AS DEFINED IN THE CREDIT AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY,
IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING MAY BE
BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY
SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN
SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND
EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO,
WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN
SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO
THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM
ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN
INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND AGREES THAT
PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE
MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF
THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF
CIVIL PROCEDURE.
<PAGE>
-3-
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE
COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL.
LIFELINE SYSTEMS, INC.
By:/s/ Dennis M. Hurley
----------------------------------
Name: Dennis M. Hurley
Title: Vice President Finance, CFO
<PAGE>
EXHIBIT 10.63 Dated: August 23, 1999
SECURED PROMISSORY NOTE
-----------------------
FOR VALUE RECEIVED, the undersigned hereby promises to pay to Lifeline
Systems, Inc., a Massachusetts corporation with its principal offices in
Framingham, Massachusetts ("Lifeline"), or order, the principal sum of Three
Hundred Thousand ($300,000) Dollars in or within five (5) years from the date
hereof. The outstanding principal balance hereunder shall, commencing August 24,
1999, bear interest at the rate of 6.77% per annum, payable annually in arrears.
This Note may be paid prior to maturity in whole or in part at the discretion of
the Maker; provided that all principal and accrued interest hereunder shall be
due and payable in full within ninety (90) days of the Maker's termination of
employment with Lifeline for any reason. The obligation to pay the interest and
principal on account of this Note is secured by a pledge of 16,552 shares of
Common Stock of Lifeline, pursuant to a Security and Pledge Agreement of even
date hereof which Security and Pledge Agreement sets forth the rights and
obligations of the parties in the event of default as defined in said Pledge
Agreement.
Payment of principal and interest hereunder shall be made in lawful money
of the United States at the offices of Lifeline, 111 Lawrence Street,
Framingham, Massachusetts.
Maker of this Note hereby waives notice, presentation, and demand and shall
be liable for all reasonable expenses of collection in the event of default
including counsel fees of the Payee.
IN WITNESS WHEREOF, the undersigned has executed the within Note under seal
as of the date first above-mentioned.
/s/ Sheryl Sigrist /s/ Ronald Feinstein
- ---------------------------- ------------------------------------
Witness Ronald Feinstein
<PAGE>
SECURITY AND PLEDGE AGREEMENT
-----------------------------
EXHIBIT 10.64
This is a Pledge Agreement made as of the 23/rd /day of August, 1999
between RONALD FEINSTEIN, an individual residing at One Robin Road, Weston,
Massachusetts ("Pledgor") and LIFELINE SYSTEMS, INC., a Massachusetts
corporation with its principal office at 111 Lawrence Street, Framingham,
Massachusetts ("Pledgee").
1. Pledge of Collateral. Pledgor hereby grants Pledgee a security
--------------------
interest in the shares of Lifeline Systems, Inc. Common Stock ("Shares")
identified in Exhibit A, annexed hereto, which Pledgor has delivered to Pledgee,
as well as such other instruments, documents, stock certificates, money and
goods as may come into Pledgee's possession from time to time, whether through
delivery by Pledgor or otherwise (the "Collateral").
2. Obligations Secured. The security interest in the Collateral granted
-------------------
hereby secures payment and performance of all debts, loans and liabilities of
Pledgor to Pledgee arising out of a promissory note from Pledgor to Pledgee of
even date herewith in the principal amount of Three Hundred Thousand ($300,000)
Dollars (the "Note"), together with all interests, fees, charges and expenses
with respect to such debt, loan or liability (the "Obligations").
3. Pledgee's Rights and Duties with Respect to the Collateral. Pledgee's
----------------------------------------------------------
only duty with respect to the Collateral shall be to exercise reasonable care to
secure the safe custody thereof. Pledgee shall have the right but not the
obligation to (a) demand, sue for, receive and collect all money or money
damages payable on account of any Collateral, (b) protect, preserve or assert
any other rights of Pledgor or take any other action with respect to the
Collateral, (c) pay any taxes, liens, assessments, insurance premiums or other
charges pertaining to Collateral. Any expenses incurred by Pledgee under the
preceding sentence shall be paid by Pledgor upon demand, become part of the
Obligations secured by the Collateral and bear interest at the rate provided in
the Note until paid. Pledgee shall be relieved of all responsibility for the
Collateral upon surrendering it to Pledgor.
4. Pledgor's Warranties and Indemnity. Pledgor represents, warrants and
----------------------------------
covenants (a) that he is and will be the lawful owner of the Collateral, (b)
that the Collateral is and will remain free and clear of all liens, encumbrances
and security interests other than the security interest granted by Pledgor
hereunder, and (c) that Pledgor has the sole right and lawful authority to
pledge the Collateral and otherwise to comply with the provisions hereof. In the
event that any adverse claim is asserted in respect of the Collateral or any
portion thereof, except such as may result from an act of Pledgee not authorized
hereunder, Pledgor promises and agrees to indemnify Pledgee and hold Pledgee
harmless from and against any losses, liabilities, damages,
-1-
<PAGE>
expenses, costs and reasonable counsel fees incurred by Pledgee in exercising
any right, power or remedy of Pledgee hereunder or defending, protecting or
enforcing the security interests created hereunder. Any such loss, liability or
expense so incurred shall be paid by Pledgor upon demand, become part of the
Obligations secured by the Collateral and bear interest at the rate provided in
the Note until paid.
5. Voting of Collateral. While Pledgor is not in default hereunder,
--------------------
Pledgor may vote shares pledged as Collateral.
6. Dividends and Other Distributions. While Pledgor is not in default
---------------------------------
hereunder, Pledgor may receive cash dividends and other cash distributions
payable with respect to Collateral. Pledgor shall cause all non-cash dividends
and distributions with respect to Collateral to be distributed directly to
Pledgee, to be held by Pledgee as additional Collateral, and if any such
distribution is made to Pledgor he shall receive such distribution in trust for
Pledgee and shall immediately transfer it to Pledgee.
7. Pledgor's Default. Pledgor shall be in default hereunder upon the
-----------------
occurrence of any of the following events:
(a) If Pledgor is not paying his debts as they become due, becomes
insolvent, files or has filed against him a petition under any chapter of the
United States Bankruptcy Code, 11 U.S.C. (S) 101 et seq. (or any similar
-- ---
petition under any insolvency law of any jurisdiction), proposes any
liquidation, composition or financial reorganization with his creditors, makes
an assignment or trust mortgage for the benefit of creditors, or if a receiver,
trustee, custodian or similar agent is appointed or takes possession with
respect to any property or business of Pledgor;
(b) If Pledgor dies;
(c) If any lien, encumbrance or adverse claim of any nature whatsoever is
asserted with respect to any Collateral;
(d) If any warranty of Pledgor hereunder is or shall become false;
(e) If Pledgor fails to fulfill any obligation hereunder;
(f) If Pledgor fails to pay or perform any of the Obligations when such
payment of performance is due.
8. Pledgee's Rights Upon Default. Upon the occurrence of any default as
-----------------------------
defined in the preceding section, Pledgee may, if Pledgee so elects in its sole
option, subject at times to compliance with the securities law and regulations
of the United States:
-2-
<PAGE>
(a) at any time and from time to time sell, assign and deliver the whole or
any part of the Collateral at a sale through a broker in a public market where
securities of the type constituting such Collateral are usually traded, without
any advertisement, presentment, demand for performance, protest, nature of
protest, notice of dishonor or any other notice;
(b) at any time and from time to time sell, assign and deliver all or any
part of the Collateral, or any interest therein, at any other public or private
sale, for cash, on credit or for other property, for immediate or future
delivery without any assumption of credit risk, and for such price or prices and
on such terms as Pledgee in its absolute discretion may determine, provided that
--------
(i) at least ten days' notice of the time and place of any such sale shall be
given to Pledgor, and (ii) in the case of any private sale, such notice shall
also contain the terms of the proposed sale and Pledgee shall sell the
Collateral proposed to be sold to any purchaser procured by Pledgor who is
ready, willing and able to purchase, and who prior to the time of such sale
tenders the purchase price of, such Collateral on terms more favorable to
Pledgee than the terms contained in such notice;
(c) exercise the right to vote, the right to receive cash dividends and
other distributions, and all other rights with respect to the Collateral as
though Pledgee were the absolute owner thereof, whether or not such rights were
retained by Pledgor as against Pledgee before default; and
(d) exercise all other rights available to a secured party under the
Uniform Commercial Code and other applicable law.
9. Application of Sale Proceeds. In the event of a sale of Collateral,
----------------------------
the proceeds shall first be applied to the payment of the expenses of the sale,
including brokers' commissions, counsel fees, any taxes or other charges imposed
by law upon the Collateral or the transfer thereof and all other charges paid or
incurred by Pledgee pertaining to the sale; and, second, to satisfy outstanding
Obligations, in the order in which Pledgee elects in its sole discretion; and,
third, the surplus (if any) shall be paid to Pledgor.
10. Notices. All notices made or required to be made hereunder shall be
-------
sent by United States first class or certified or registered mail, with postage
prepaid, or delivered by hand to Pledgee or to Pledgor at the addresses first
above written. Notice by mail shall be deemed to have been made on the date
when the notice is deposited in the mail.
11. Heirs, Successors, Etc.. This Pledge Agreement and all of its terms
-----------------------
and provisions shall benefit and bind the heirs, successors, assigns,
transferees, executors and administrators of each of the parties hereto. If
this Pledge Agreement is executed by more than one Pledgor, then (a)
"Obligations" shall include the Obligations of either
-3-
<PAGE>
or both of the Pledgors, (b) Pledgors shall be in default if any of the events
described in Section 7 above takes place with respect to either Pledgor, (c) any
notice required of Pledgee shall be given to both Pledgors and (d) all Pledgors'
covenants, warranties and representations hereunder shall be joint and several.
12. Pledgee's Forbearance. Any forbearance, failure or delay by Pledgee in
---------------------
exercising any right, power or remedy hereunder shall not be deemed a waiver of
such right, power or remedy. Any single or partial exercise of any right, power
or remedy of Pledgee shall continue in full force and effect until such right,
power or remedy is specifically waived in writing by Pledgee.
EXECUTED under seal at Framingham, Massachusetts, as of the date first
above written.
/s/ Ronald Feinstein
----------------------
Ronald Feinstein
-4-
<PAGE>
Exhibit A to Security and Pledge Agreement
------------------------------------------
16,552 Shares of Lifeline Systems, Inc. Common Stock
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,691
<SECURITIES> 0
<RECEIVABLES> 8,585
<ALLOWANCES> 282
<INVENTORY> 2,293
<CURRENT-ASSETS> 18,692
<PP&E> 43,931
<DEPRECIATION> 17,323
<TOTAL-ASSETS> 55,383
<CURRENT-LIABILITIES> 8,828
<BONDS> 0
0
0
<COMMON> 131
<OTHER-SE> 39,273
<TOTAL-LIABILITY-AND-EQUITY> 55,383
<SALES> 16,287
<TOTAL-REVENUES> 51,929
<CGS> 4,589
<TOTAL-COSTS> 25,028
<OTHER-EXPENSES> 21,576
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 3,666
<INCOME-TAX> 1,438
<INCOME-CONTINUING> 3,666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,228
<EPS-BASIC> 0.38
<EPS-DILUTED> 0.35
</TABLE>
