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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 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
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(Title of Class)
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Number of shares outstanding of this issuer's class of common stock as of
April 30, 1999: 5,862,198
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LIFELINE SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 3
Consolidated Statements of Income and Comprehensive Income
Three months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows - Three months
ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-8
ITEM 2.
Management's Discussion and Analysis of Results of
Operations and Financial Condition 9-17
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
ITEM 6.
Exhibits and Reports on Form 8-K 17
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LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,012 $ 2,702
Short-term investments 4,282 6,696
Accounts receivable, net 6,838 7,459
Inventories 2,604 1,496
Net investment in sales-type leases 1,841 1,713
Prepaid expenses and other current assets 2,533 1,974
Deferred income taxes 2,156 2,238
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Total current assets 22,266 24,278
Property and equipment, net 23,020 20,776
Net investment in sales-type leases 5,950 5,892
Goodwill, net 1,093 1,134
Other assets 436 424
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Total assets $ 52,765 $ 52,504
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,978 $ 1,690
Accrued expenses 2,568 2,857
Accrued payroll and payroll taxes 1,227 2,695
Accrued income taxes 935 1,300
Deferred revenues 870 685
Product warranty and other current liabilities 911 827
Accrued restructuring charge 863 863
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Total current liabilities 9,352 10,917
Deferred income taxes 3,652 3,548
Deferred compensation 1,578 1,578
Other non-current liabilities 107 170
Commitments and contingencies
Stockholders' equity:
Common stock, $.02 par value, 20,000,000 shares authorized,
6,450,014 shares issued at March 31, 1999 and 6,425,414 shares
at December 31, 1998 129 129
Additional paid-in capital 17,208 16,945
Retained earnings 24,896 23,435
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42,233 40,509
Less: Treasury stock at cost, 592,548 shares at March 31, 1999
and December 31, 1998 (4,028) (4,028)
Note receivable - officer (100) (100)
Accumulated other comprehensive loss/cumulative translation adjustment (29) (90)
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Total stockholders' equity 38,076 36,291
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Total liabilities and stockholders' equity $ 52,765 $ 52,504
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
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LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands except for per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1999 1998
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<S> <C> <C>
Revenues
Services $ 10,997 $ 9,010
Net product sales 4,821 5,604
Finance and rental income 408 338
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Total revenues 16,226 14,952
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Costs and expenses
Cost of services 6,180 5,100
Cost of sales 1,300 1,486
Selling, general, and administrative 6,499 6,166
Research and development 406 375
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Total costs and expenses 14,385 13,127
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Income from operations 1,841 1,825
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Other income (expense)
Interest income 97 108
Interest expense (7) (12)
Other income 503 -
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Total other income, net 593 96
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Income before income taxes 2,434 1,921
Provision for income taxes 973 776
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Net income 1,461 1,145
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Other comprehensive income, net of tax
Foreign currency translation adjustments 37 18
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Comprehensive Income $ 1,498 $ 1,163
======== =======
Net income per weighted average share:
Basic $ 0.25 $ 0.20
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Diluted $ 0.23 $ 0.18
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Weighted average shares:
Basic 5,849 5,795
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Diluted 6,380 6,296
======== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
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1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,461 $ 1,145
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,221 979
Deferred compensation - 119
Deferred income taxes 186 294
Changes in operating assets and liabilities:
Accounts receivable 637 1,993
Inventories (1,108) (187)
Net investment in sales-type leases (186) (217)
Prepaid expenses, other current assets and other assets (571) (6)
Accrued payroll and payroll taxes (1,473) (686)
Accounts payable, accrued expenses and other liabilities 199 604
Income taxes payable (363) 231
Accrued restructuring charge - (171)
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Net cash provided by operating activities 3 4,098
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Cash flows from investing activities:
Purchases of investments (1,440) (2,445)
Sales and maturities of investments 3,854 1,859
Additions to property and equipment (3,403) (1,374)
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Net cash used in investing activities (989) (1,960)
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Cash flows from financing activities:
Principal payments under capital lease obligations (3) (3)
Proceeds from issuance of common stock 263 173
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Net cash provided by financing activities 260 170
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Effect of foreign exchange on cash 36 (55)
Net increase (decrease) in cash and cash equivalents (690) 2,253
Cash and cash equivalents at beginning of period 2,702 2,019
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Cash and cash equivalents at end of period $ 2,012 $ 4,272
======= =======
</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 March 31, 1999 and the consolidated results of its operations
and cash flows for the three months ended March 31, 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 three-month period ended March 31, 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>
March 31, December 31,
1999 1998
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<S> <C> <C>
Inventories:
Purchased parts and assemblies $ 548 $ 556
Work-in-process 616 324
Finished goods 1,440 616
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$ 2,604 $ 1,496
======== ========
Property and equipment:
Equipment $ 22,997 $ 11,136
Furniture and fixtures 684 684
Equipment leased to others 10,395 9,834
Equipment under capital leases 621 1,035
Leasehold improvements 4,695 3,439
Capital in progress 475 10,943
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39,867 37,071
Less: accumulated depreciation and amortization (16,847) (16,295)
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$ 23,020 $ 20,776
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</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. The calculation of per share earnings is as follows:
<TABLE>
<CAPTION>
(In thousands except per share data) Three months ended
March 31,
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1999 1998
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<S> <C> <C>
Basic:
- ------
Net income $1,461 $1,145
Weighted average common shares outstanding 5,849 5,795
Net income per share, basic $ 0.25 $ 0.20
====== ======
Diluted:
- --------
Net income for calculating diluted earnings
per share 1,461 1,145
Weighted average common shares outstanding 5,849 5,795
Common stock equivalents 531 501
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Total weighted average shares 6,380 6,296
Net income per share, diluted $ 0.23 $ 0.18
====== ======
</TABLE>
4. SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards
for reporting information regarding operating segments and related disclosures
about products and services, geographic areas and major customers. SFAS 131 need
not be applied to interim periods in the initial year; however, in subsequent
years, interim period information must be presented on a comparative basis.
The Company is active in one business segment: designing, manufacturing,
marketing, monitoring and supporting its personal response units. The Company
maintains sales and marketing operations in both the United States and Canada.
The majority of the Canadian operations were established through an acquisition
in July 1996.
Geographic Segment Data
Net revenues to external customers are based on the location of the customer.
Geographic information as of March 31, 1999 and 1998 is presented as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
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<S> <C> <C>
Net Sales:
United States $15,076 $13,967
Canada 1,150 985
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$16,226 $14,952
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Net Income:
United States $ 1,360 $ 1,070
Canada 101 75
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$ 1,461 $ 1,145
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Total Assets:
United States $49,236 $42,672
Canada 3,529 1,651
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$52,765 $44,323
======= =======
</TABLE>
5. RESTRUCTURING
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.
At March 31, 1999, accrued restructuring charges of $863,000 represents $327,000
of remaining severance costs and $536,000 of fixed assets to be written off upon
final relocation to the Company's new corporate headquarters. During the first
quarter of 1999 the Company continued to execute its restructuring plan. No
amounts were paid during this period. The Company anticipates utilizing a
portion of this reserve during the second quarter of 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This and other reports, proxy statements, and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements 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 March 31, 1999 increased nearly 9% to
$16.2 million as compared to total revenues of $15.0 million for the quarter
ended March 31, 1998.
Service revenues, at $11.0 million for the first quarter of 1999, represented
68% of the Company's first quarter total revenues. This increase, up from
$9.0 million or 60% of total revenues in the first quarter of 1998, is a result
of the Company's successful strategy of packaging products and services into a
single service offering, which results in higher per-subscriber service revenue.
The Company was monitoring approximately 241,000 subscribers as of March 31,
1999, 18% more than the 204,000 subscribers monitored at the end of the first
quarter of 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 meeting this challenge.
Net product revenues for the first quarter of 1999 decreased 14% to $4.8 million
from $5.6 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 the transition to a service oriented business. 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 21% in the first quarter of 1999 to
$408,000, from $338,000 for the first quarter of 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,
rose to $11.4 million for the three months ended March 31, 1999 as compared to
$9.3 million for the three months ended
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March 31, 1998. This 22% increase reflects 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 56% for both the
first quarters of 1999 and 1998. While the Company has been able to maintain
these costs at a relatively consistent level as a percentage of service
revenues, cost of services remains high due to continued investments in
personnel and additional costs of employee retention and recruiting initiatives.
These initiatives are principally associated with the relocation of the
Company's monitoring facility as part of the recent move of the Company's
headquarters to Framingham, Massachusetts. The Company also continues to incur
high costs associated with systems enhancements and support to maintain its
current service infrastructure while it implements its CareSystem call center
platform.
Cost of sales was 27% of product sales for the three months ended March 31, 1999
and 1998. The Company continues to strive to maintain its cost of sales at a
consistent percentage of net product sales. The Company was able to accomplish
this during the first quarter of 1999 due to efficiencies created by higher than
expected production in anticipation of the Company's potential outsourcing of
its manufacturing function as well as additional reductions in material costs.
The Company anticipates that the change in its manufacturing strategy will
result in future cost savings opportunities resulting in lower cost of sales as
a percentage of product sales.
Selling, general and administrative expenses improved as a percentage of total
revenues to 40% for the first quarter of 1999 as compared to 41% during the
first quarter of 1998. Actual first quarter selling, general and administrative
expenditures totaled $6.5 million during 1999, an increase of $0.3 million over
expenses of $6.2 million for the same period in 1998. The majority of the
percentage reduction was related to savings in operating costs at the Company's
new corporate headquarters. Also, final amortization of compensation expense
relating to certain stock options was recorded during 1998, and as a result, no
compensation expense was recorded in the first quarter of 1999. These savings
were partly offset by spending associated with the Company's 1999 customer
conference, the inclusion of three months of administrative costs associated
with AlertCall, Inc. of Amherst, New York which was purchased by the Company in
November 1998 and moving costs incurred in connection with the Company's
relocation to its new corporate headquarters.
Research and development expenses remained consistent at 3% of total revenues
for the quarters ended March 31, 1999 and 1998. Research and development
efforts are focused on ongoing product improvements and developments. The
Company expects to maintain these expenses at approximately a consistent
percentage of total revenues 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.
At March 31, 1999, accrued restructuring charges of $863,000 represents $327,000
of remaining severance costs and $536,000 of fixed assets to be written off upon
final relocation to the Company's new corporate headquarters. During the first
quarter of 1999 the Company continued to execute its
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restructuring plan. No amounts were paid during this period. The Company
anticipates utilizing a portion of this reserve during the second quarter of
1999.
In February 1999, the Company negotiated a buyout of its old corporate
headquarters facility lease. Pursuant to the arrangement, a payment of
approximately $0.5 million was received during the first quarter of 1999, net of
applicable negotiation fees. The Company may receive other payments under this
arrangement if certain conditions are met in the future.
The Company's effective tax rate was 40.0% for the three months ended March 31,
1999 compared to 40.4% for the three months ended March 31, 1998.
SUBSEQUENT EVENT
The Company entered into an Agreement and Plan of Merger dated as of October 18,
1998, with Protection One, Inc. and a subsidiary of Protection One, Inc. On
April 1, 1999, Protection One issued a press release announcing that as a result
of discussions with the staff of the Securities and Exchange Commission (SEC),
it would restate its 1997 operating results and its results for the first three
quarters of 1998. These discussions were related to the registration statement
filed by Protection One in connection with the proposed acquisition of the
Company. The Company is currently studying the information contained in that
press release and its effects, in order to ensure that the best interests of the
Company's shareholders are served. The Company continues to monitor the
developments between the SEC and Protection One with respect to the unresolved
accounting questions associated with Protection One's method of amortizing
subscriber accounts. Once all remaining open issues between the SEC and
Protection One have been resolved, the Company will fully examine the merger
arrangement between Protection One and Lifeline more conclusively. The Company
continues to believe that the proposed merger between Protection One and
Lifeline Systems, Inc. makes strategic sense.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999, the Company's portfolio of cash,
cash equivalents and investments decreased $3.1 million to $6.3 million at
March 31, 1999 from $9.4 million at December 31, 1998. The decrease was mainly
attributable to continued purchases of property and equipment of $3.4 million in
the first quarter of 1999. Expenditures of nearly $0.6 million were associated
with the continued development of the Company's new CareSystem response center
platform at its primary monitoring facility and approximately $0.4 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 $2.1 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 quarter of 1999, the
Company also incurred a higher than normal increase of inventory in anticipation
of the Company's potential outsourcing of its manufacturing function. As a
result, the Company spent approximately $1.1 million, net of sales of inventory,
for additional raw material purchases. These increases are reflected in higher
work in process and finished goods inventory levels. Profitable operations of
$2.9 million coupled with sales and maturities of $3.9 million in the Company's
investment portfolio helped to offset the effects of the first quarter's
expenditures.
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During the first quarter of 1999, the Company continued its investment in new
information technology for its response center platform. The Company began to
transition subscribers to its new CareSystem platform in February 1999 and
currently monitors approximately 17% of its subscriber base on the new platform.
The Company has invested nearly $11.3 million in the CareSystem platform through
March 31, 1999 and anticipates it will spend approximately an additional
$0.7 million during 1999 for this flexible, scaleable, and fault tolerant
response center platform at its primary monitoring facility to support its
growing subscriber base.
In March 1999, the Company entered into a Master Lease Agreement for up to $2.5
million for furniture, computers, security systems and other related equipment
purchased in connection with the Company's move to a new corporate facility.
For financial reporting purposes, these leases will be recorded as capital
leases and accordingly assets will be recorded and depreciated over their
estimated useful life. As of March 31, 1999 the Company had not made any
purchases under this agreement.
In November 1997, the Company entered into a ten-year lease for an 84,000 square
foot facility in Framingham, Massachusetts for its corporate headquarters. The
Company began occupying this new facility in February 1999. 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 has spent
approximately $4.5 million through March 31, 1999 for capital expenditures
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, and the Company expects to spend an additional $1.5 million in 1999 for
similar items of which some will be incorporated as part of the Master Lease
Agreement 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. The Company intends to occupy this new facility in
1999. Annual base rental payments will be approximately $79,000. The lease
contains two five-year options to renew at the end of the initial lease term.
In April 1998, the Company obtained a $10.0 million line of credit. 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 1.0 to 1.0. 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. This line of credit matures on
June 30, 2004, and no amounts were outstanding at March 31, 1999.
In July, 1998, the Company's Board of Directors adopted a Shareholder Rights
Plan in which common stock purchase rights were distributed as a dividend at the
rate of one Right for each share of the Company's Common Stock outstanding as of
the close of business on August 3, 1998. This plan was adopted as a means of
deterring possible coercive or unfair takeover tactics and to prevent a
potential acquirer from gaining control of the Company without offering a fair
price to all of the Company's shareholders. In connection with the Merger
Agreement between the Company and Protection One, an amendment to this Rights
Plan was adopted on October 18, 1998, providing, in part, that Protection One
and its Affiliates are not Acquiring Persons, that no Distribution Date,
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Stock Acquisition Date, or Triggering Event shall be deemed to have occurred,
and that no holder of Rights is entitled to exercise such Rights (as all such
terms are defined in the Rights Plan), by virtue of the execution of the Merger
Agreement. Unless the Rights are redeemed or exchanged earlier, they will expire
on July 24, 2008. No rights were exercised at March 31, 1999.
The Company expects that funding requirements for operations and in support of
future growth are expected to be met primarily from operating cash flow,
existing cash and marketable securities and the newly signed Master Lease
Agreement. The Company expects these sources will be sufficient to finance the
cash needs of the Company through 1999 including the continued investment in its
new response center platform, the remaining expenditures needed for its move to
new corporate headquarters, the 1999 requirements of its internally funded lease
financing program, any potential acquisitions and other investments in support
of its current business. Company operations have historically provided a strong,
positive cash flow, and the Company expects that its operations will continue to
provide adequate liquidity to meet the Company's operational needs in the long
term.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
The Company entered into the 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
become a wholly-owned subsidiary of a newly formed holding company for
Protection One. There can be no assurance that the Merger will be consummated.
If the Merger is not consummated, there can be no assurance that the Company's
results of operations and financial condition will not have been adversely
affected by the Merger negotiations or the announcement of the Merger, by the
passage of time following the signing of the Merger Agreement, or by other
factors. If the Merger is consummated, stockholders of the Company will become
stockholders of the holding company, and as such will have the risks associated
with an investment in that company.
In January 1999, the Company selected, subject to the signing of a binding
agreement, Ademco, a division of Pittway Corporation, as the primary
manufacturer for Lifeline equipment. 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 Ademco will not incur
delays in manufacturing products for the Company 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,
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<PAGE>
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 has begun to transition its 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 such implementation
effort may not be completed on schedule, or at all, or within budget, or that
future developments in information technology will render the Company's system
non-competitive; the risks that the Company does not realize the intended
benefits from the new system, once subscribers are fully transitioned; and the
uncertainty associated with the substantial commitment of funds to this new
system, including the risks that the Company will have available significantly
less cash to finance its operations, other capital expenditures and future
growth, including acquisitions. The Company's existing call center platform,
CORMIS, which is being replaced by the new CareSystem platform, may not be Year
2000 compliant. Because the Company monitors approximately 17% of its
subscribers on the CareSystem call center platform as of March 31, 1999 it has
not devoted resources to making CORMIS Year 2000 compliant.
The Company has recently moved to new corporate headquarters. The new facility
is approximately 20 miles from the Company's former headquarters. There can be
no assurance that the move will not have a material adverse effect on the
Company's business, financial condition or results of operations, including as a
result of employee attrition.
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 sales have continued to decline as a result of its
strategy of combining service and hardware offerings to support the transition
to a service oriented business. There can be no assurance that service revenue
will increase at a rate sufficient to offset the expected decrease in equipment
sales.
The Company may expand its operations through the acquisition of additional
businesses. There can be no assurance that the Company will be able to
identify, acquire or profitably manage additional businesses or successfully
integrate any acquired businesses into the Company without substantial expenses,
delays or other operational or financial problems. In addition, acquisitions
may involve a number of special risks, including diversion of management's
attention, failure to retain key acquired personnel, unanticipated events,
contingent liabilities and amortization of acquired intangible assets. There can
be no assurance that the acquired businesses, if any, will achieve anticipated
revenues or earnings.
The Company'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
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<PAGE>
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 move 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.
The Company believes that its future success will depend in large part upon its
ability to attract and retain key personnel, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel. In
particular, the Company believes that its recent move to new corporate
headquarters and its pending acquisition by Protection One may result in
employee resignations and is actively addressing this possibility.
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 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 products that it
currently manufactures for Year 2000 issues. This product-testing phase has
revealed only minor product behaviors in date keeping that do not, in the
Company's judgment, cause operational failure relating to the year 2000. The
Company has provided its customers with written information on how to correct
such Year 2000 conditions.
The Company's information technology systems, which include its networks,
desktops, data servers and applications, are being analyzed and tested for Year
2000 compliance. The Company has designed its new CareSystem call center
platform to be in compliance with the Year 2000. The Company began to
transition subscribers to its new CareSystem platform in February 1999 and
currently monitors approximately 17% of its subscriber base on the new platform.
The Company has performed extensive testing on its CareSystem technology with
successful results. The Company
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believes that it will incur a smooth transition of its remaining subscribers
during 1999 and believes that the implementation of its new platform will be
complete in the third quarter of 1999. However, there can be no assurance that
the implementation effort will be completed on schedule, or at all. The Company
has not allocated any resources for its current CORMIS monitoring platform to
ensure that it is Year 2000 ready. As a result, there can be no assurance that
the Company will not need to incur material costs in order to ensure that the
CareSystem monitoring platform is operational in 1999. The Company believes,
however, that it has the necessary resources to ensure that CareSystem is
implemented in 1999.
The Company has completed the Assessment Phase of its remaining mission critical
information technology systems and is continuing the Planning and Resolution
Phase. 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 incremental
costs. The Company estimates that nearly 80% of its mission critical systems
are Year 2000 ready. The Company is currently completing the Assessment Phase
of its existing desktop computers and believes that approximately 90% are Year
2000 compliant with the remaining 10% either requiring some modification to
ensure Year 2000 compliance or needing to be retired. The Company anticipates
that any remaining Year 2000 modifications will be completed during the third
quarter of 1999.
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.
The Company has categorized its manufacturing equipment and systems as either
mission-critical or non-mission-critical. To date, the Company believes that
its mission-critical manufacturing equipment and systems are Year 2000 ready.
All of the identified non-mission-critical manufacturing equipment and systems
are either not affected by the Year 2000 issue or are deemed to be Year 2000
ready. In January 1999, the Company selected, subject to the signing of a
binding agreement, Ademco as the primary manufacturer for Lifeline personal
response units. 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.
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 80% 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, will be assessed and if needed replaced.
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
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<PAGE>
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, 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 and repair of systems and network elements that directly impact its
customers and is more than 99% complete in its testing of these systems and
network elements. The Company has selected, subject to the signing of a binding
agreement, 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. Lifeline is in the process of defining arrangements with
Ademco. The Company is developing contingency plans to prepare for the inability
of its remaining key third-party suppliers to resolve their own Year 2000
issues.
Through March 31, 1999, the Company has spent nearly $50,000 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, estimated to be approximately $0.2 million, and the date on which the
Company plans to complete the Year 2000 modifications, estimated to be during
1999, are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K - No reports on Form 8-K were filed for the
three months ended March 31, 1999.
(b) Exhibits - The Exhibit which is filed with this Report or which is
incorporated herein by reference is set forth in the Exhibit Index which
appears on page 19 hereof.
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<PAGE>
LIFELINE SYSTEMS, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
May 3, 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
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<PAGE>
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed herewith
or have heretofore been filed with the Securities and Exchange Commission under
the Securities Act of 1933 or the Securities and Exchange Act of 1934 and are
referred to and incorporated herein by reference to such filings.
<TABLE>
<CAPTION>
Exhibit No. Exhibit SEC Document Reference
- ----------- ------- ----------------------
<C> <S>
Exhibit 10. MATERIAL CONTRACTS
10.60 Master Lease Agreement between the
Registrant and Andover Capital Group
dated March 11, 1999
</TABLE>
<PAGE>
Exhibit 10.60
Master Lease Agreement
Master Lease Agreement (hereinafter together with the below referred to
Schedule(s) called the "Lease") has been entered into as of March 11, 1999
between Andover Capital Group, Inc. having its principal place of business at
238 Littleton Road, Westford, Massachusetts 01886 (hereinafter the "Lessor"),
and Lifeline Systems, Inc. (hereafter the "Lessee").
LESSOR AND LESSEE hereby agree as follows:
1. AGREEMENT TO LEASE EQUIPMENT. Subject to the terms set forth below,
Lessor and Lessee agree that on or before the date designated as the acquisition
expiration date in Exhibit A attached hereto, Lessor shall lease to Lessee and
Lessee shall lease from Lessor items of personal property of the types described
in Exhibit A hereto (hereinafter collectively called the "Equipment"), having an
aggregate acquisition cost not to exceed the amount set forth in Exhibit A.
Lessor and Lessee shall evidence the leasing of particular items of Equipment by
executing and delivering to each other a Schedule or Schedules identified to
this Lease which shall be executed by the parties hereto either concurrently
with or subsequent to the execution of this Lease. Any and all such schedules,
including any terms and conditions set forth therein (hereinafter individually a
"Schedule" or collectively the "Schedules"), are incorporated herein by
reference.
2. IMPORTANT UNDERSTANDINGS.
(A) Lessee has selected both (1) the Equipment and (2) the Seller from
whom Lessor is to purchase the Equipment. Lessor warrants good title to Lessee
only against liens, encumbrances and claims arising by, through and under Lessor
and not otherwise. Lessor makes no other warranty expressed or implied as to any
matter whatsoever, including the condition of the Equipment, its
merchantability, its fitness for any particular purpose, or its freedom from the
claims of others by way of infringement or the like, and as to Lessor, Lessee
leases the Equipment "As Is".
(B) If the Equipment is not properly installed, does not operate as
represented or warranted by Seller or is unsatisfactory for any reason, Lessee
shall have any claim on account thereof solely against Seller and shall,
nevertheless, pay Lessor all rent payable under this Lease, without deduction or
set-off of any kind, Lessee hereby waiving any such claims against Lessor.
Lessor assigns to Lessee any of the rights which Lessor may have against Seller
or any other person for breach of warranty or other representation respecting
the Equipment.
(C) Lessee understands and agrees that neither the Seller nor any
salesman or other agent of the Seller is an agent of the Lessor. No salesman or
agent or Seller is authorized to waive or alter any term or condition of this
Lease and no representation as to the Equipment or any other matter by the
Seller, shall in any way affect Lessee's duty to pay the rent and perform its
other obligations as set forth in this Lease.
(D) Lessee hereby acknowledges that it has received a copy of this
Lease.
(E) Lessee has requested Lessor to order the Equipment from Seller upon
the Terms and Conditions of the Purchase Order acknowledged by Lessee. Lessor
shall have no responsibility for Seller's delay or failure to fill or comply
with the purchase order for any reason whatsoever and all of Lessor's
obligations hereunder are subject to Lessee's due acceptance of the Equipment.
Lessee hereby authorizes Lessor to insert in this Lease the serial numbers, and
other identification data, of the Equipment when determined by Lessor.
(F) Finance Lease Status. You agree that if Article 2A - Leases of the
Uniform Commercial Code applies to this Lease, this Lease will be considered a
"finance lease" as that term is defined in Article 2A. By signing this Lease,
you agree that either (a) you have reviewed, approved and received, a copy of
the Supply Contract, or (b) that we have informed you of the identity of the
seller, that you may have rights under the Supply Contract, and that you may
contact the Seller for a description of those rights. To the extent permitted by
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<PAGE>
applicable law, you waive any and all rights and remedies of a Lessee arising
under Article 2A and any similar rights and remedies arising under other laws.
3. TERM. The term of the Lease of each item of Equipment under this Lease
shall commence upon the Delivery Date and shall continue for the Term of Lease,
each as set forth in the Schedule describing such item of Equipment. If the
Schedule provides for an extension of the Lease upon expiration of its term,
then Lessee may extend the Lease of Equipment, or of any item thereof, described
in such Schedule from year to year by written notice to Lessor given at least 30
days prior to the expiration of the last year the Lease has been so extended.
4. RENT AND PAYMENT. The total rent payable for the lease of items of
Equipment described in any Schedule, throughout the term such items are leased
under this Lease, shall be the aggregate amount equal to the sum of all the
monthly rentals (including advance rent) for the entire term of the Lease
specified on each Schedule. Periodic payments of rent payable under this Lease
shall be payable in advance on the terms set forth in the applicable Schedule.
(A) Rent Payment Commencement Date. Solely for convenience in payment
of rent, in all cases where the Delivery Date of any Equipment shall be the
first through the fifteenth day of a month the term of the Lease of such
Equipment shall be deemed to commence and the first payment of rent shall be due
on the first day of such month, and in all cases where the Delivery Date of any
Equipment shall be the sixteenth through the last day of the month the term of
the Lease of such Equipment shall be deemed to commence and the first payment of
rent shall be due on the first day of the next succeeding month (such first day
of the month hereinafter called the "Rent Payment Commencement Date").
(B) First Payment. Lessor acknowledges receipt from Lessee of the first
payment referred to in any Schedule which shall be applied to the rental payable
for the first month after the Rent Payment Commencement Date. Any part of this
payment not so applied by Lessor shall be held as security for performance of
the terms of the Lease. If Lessee is not in default hereunder and under any
other lease or other agreement between the parties hereto, at the end of the
term of this Lease said security shall be refunded to the Lessee upon return of
the leased Equipment as provided in paragraph 13 or, solely at the Lessor's
option, applied toward the payments of rent due or to become due hereunder in
the inverse order of their maturities.
(C) Next and Subsequent Rental Payments. Lessee shall make its next
rental payment hereunder on the first day of the first month following the Rent
Payment Commencement Date and Lessee shall make subsequent rental payments on
the first day of each succeeding month.
(D) Total Rent. The total rent for the Equipment described herein, or
in separate schedules made a part hereof, shall be the aggregate of that shown
herein and in such schedules and shall be payable in the installments designated
herein and in such schedules. Lessee promises and agrees to pay all specified
installments in advance on the date designated for payment herein and in such
Schedules without demand. Said rental shall be payable at the office of Lessor,
or to such other person and/or at such other place as Lessor may from time to
time designate in writing.
(E) Adjustment. The rent payable under this Lease may be based upon
estimates of Equipment cost and other charges to Lessor. In the event that
actual cost shall be less than an estimate or shall exceed an estimate by not
more than 10%, the Lessee authorizes Lessor and Lessor agrees to increase or
decrease, as the case may be, the amount set forth as the total rent payable for
any Equipment leased hereunder and further to adjust proportionately the amounts
of installments of rent remaining to be paid with respect to such Equipment to
the end that the adjusted rent payable shall be paid in full at the end of the
term of lease of such Equipment. Lessor shall give Lessee notice within ten (10)
days from the effective day of such adjustment made by Lessor of the total rent
payable pursuant to this subparagraph (E).
(F) Late Charges. In the event payment is not made when due hereunder
and Lessor has not exercised its rights pursuant to Paragraph 15 hereof, the
Lessee promises to pay (1) a late charge to the Lessor not later than one month
after the due date of such payment in an amount calculated at the rate of five
cents per
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<PAGE>
$1.00 of each such delayed payment, plus (2) interest to the Lessor upon each
such delayed payment calculated at the rate of one and one-half percent (1 1/2%)
per month, or any part thereof, commencing on the due date of the delayed
payment. The late charge and/or the interest payment set forth in this paragraph
shall apply only when permitted by law and, if not permitted by law, the late
charge and/or interest payment shall be calculated at the maximum rate
permissible in the applicable jurisdiction.
(G) Advances by Lessor. If Lessee shall fail to make any payment, other
than rent, or to perform or comply with any of Lessee's agreements set forth
herein, Lessor may make such payment or perform or comply with such agreement,
and the amount of any such payment and the amount of the reasonable expenses
incurred by Lessor in connection with such payment or with such performance or
compliance, together with interest thereon at the rate of one and one-half
percent (1 1/2%) per month, shall be deemed additional rent, payable by Lessee
upon demand.
(H) Nonpayment. In the event of nonpayment by Lessee of any amount
required to be paid under this Paragraph 4, Lessor shall have all rights,
powers, and remedies provided for in this Lease or by law or equity or
otherwise.
5. DELIVERY AND ACCEPTANCE.
(A) Acceptance. Lessor hereby authorizes Lessee to accept on Lessor's
behalf the delivery of any Equipment leased under this Lease.
(B) Inspection by Lessee. Upon delivery of any Equipment under this
Lease, Lessee shall conduct, at its own expense, all inspections and tests of
such Equipment necessary to determine compliance with the applicable purchase
order. As between Lessor and Lessee, the execution and delivery to Lessor of a
Schedule describing such Equipment such constitute Lessee's acknowledgment that
the Equipment is in compliance with such purchase order and that the Lessee is
satisfied that the Equipment is in good condition and suitable for its intended
purpose and has accepted the Equipment and upon receipt of such Schedule, Lessor
shall pay supplier for such Equipment.
(C) Delivery Date and Descriptive Information. Lessee, in executing any
Schedule describing Equipment leased under this Lease, shall enter thereon (i)
the date of delivery of such Equipment as the Delivery Date and (ii) serial
numbers applicable to such Equipment and/or such other descriptive information
as Lessor shall have reasonably requested.
6. LESSEE'S REPRESENTATIONS AND WARRANTIES. The Lessee represents and
warrants that:
(A) If Lessee is a corporation, it is duly organized and existing and
in good standing under the laws of its state of incorporation and is duly
qualified to do business wherever necessary to carry on its present business and
operations.
(B) If Lessee is a corporation, this Lease has been duly authorized by
all necessary corporate action on the part of the Lessee, does not require any
stockholder approval, does not require the approval of or the giving of notice
to any federal, state or other governmental authority and does not contravene
any law binding on the Lessee or contravene the Lessee's articles or certificate
of incorporation or its by-laws.
(C) This Lease constitutes a legal, valid and binding obligation of the
Lessee enforceable in accordance with its terms and does not contravene any
indenture, credit agreement or other agreement to which the Lessee is a party.
(D) No mortgage, security agreement or other lien or encumbrance of any
nature whatsoever, which now covers or affects or may hereafter cover or affect
any property or interest of the Lessee, now attaches or will hereafter attach to
the Equipment hereby leased or in any manner affects or will affect the Lessor's
right, title and interest in the Equipment.
Page 3 of 11
<PAGE>
(E) The Lessee is not materially in default under the provisions of any
agreement to which it is a party.
(F) There are no pending or threatened actions or proceedings before
any court or administrative agency which may materially adversely affect the
Lessee's financial condition or operations (except as may be disclosed in a
letter furnished by the Lessee to the Lessor at the time of execution of this
Lease).
(G) The balance sheet of the Lessee as of the end of the Lessee's most
recent fiscal year and the related earnings statement of the Lessee for the
fiscal year then ended (copies of which have been furnished to the Lessor)
fairly present the Lessee's financial condition as of such date and the results
of its operations for such year, and since such date there has been no material
adverse change in such condition or operations.
7. CONDITION TO LESSEE'S USE AND ACCEPTANCE OF EQUIPMENT. Prior to the
Lessee's acceptance and use of the Equipment, the Lessor shall receive the
following, in form and substance satisfactory to the Lessor and its counsel.
(A) If requested by the Lessor, resolutions of the Board of Directors
of the Lessee certified by the Clerk or Secretary for the Assistant Clerk or
Assistant Secretary of the Lessee, duly authorizing the Lease of the Equipment
hereunder and the execution, delivery and performance of this Lease.
(B) Evidence satisfactory to the Lessor as to due compliance with the
insurance provisions of Paragraph 11 hereof.
(C) If requested by the Lessor, waivers of any interest in or claim
against the Equipment by the landlords and mortgagees of the premises wherein
the Equipment is to be located or certificates by the Lessee that it is the
owner of such premises and/or that such premises are not mortgaged.
(D) If requested by the Lessor, an opinion of counsel for the Lessee
satisfactory to the Lessor as to all or certain of the matters set forth in
Paragraph 6 (A) - (F) hereof and as to such other matters as the Lessor may
reasonably request.
8. USE OF EQUIPMENT.
(A) Title. Equipment leased hereunder shall be the sole and exclusive
property of Lessor, and Lessee shall have no option to purchase or otherwise
acquire title to or ownership of any of the Equipment and shall have no right,
title, or interest in such Equipment except the right as Lessee to use the
Equipment in the ordinary course of Lessee's business in accordance with the
terms and conditions of this Lease.
(B) Identification Plates and Markings. Upon Lessor's request, Lessee
shall affix appropriate labels satisfactory to Lessor to each item of Equipment
indicating that Lessor is the owner thereof and Lessee shall not remove the same
without prior written consent of Lessor.
(C) Operation. Lessee shall cause the Equipment to be operated,
maintained and repaired only (i) in accordance with applicable manufacturer's
manuals and instructions; (ii) by competent, qualified, authorized, and, if
necessary, licensed persons; (iii) in compliance with all of the applicable
laws, ordinances, and regulations relating to operation of the Equipment; and
(iv) in accordance with the terms and conditions of all policies of insurance
pertaining to the Equipment.
(D) Maintenance and Repair. Lessee shall at its own expense cause the
Equipment to be maintained in as good operating condition, repair, order and
appearance as when delivered to Lessee under this Lease, ordinary wear and tear
accepted, and shall provide all maintenance and service and make all repairs
necessary for such purpose. Lessee will at its sole expense keep the Equipment
under cover and protected from the elements, except during normal usage.
(E) Replacement of Parts. If any parts or accessories which form part
of any item of Equipment shall become permanently unfit or unavailable for use,
Lessee shall, at its own expense and within a
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<PAGE>
reasonable time, cause such parts or accessories to be replaced by replacement
parts or accessories which shall be free and clear of any liens, encumbrances,
or rights of others, and which shall have a value and utility at least equal to
the replaced parts or accessories.
(F) Improvements. Lessee may add to any item of Equipment such
additional or replacement parts or accessories as Lessee shall desire, provided
that such addition does not impair the value, utility, function or use of such
Equipment. Any parts or accessories so added by Lessee shall become a component
part thereof and title thereto shall be immediately vested in Lessor and shall
be included under the terms hereof.
(G) Location. The Equipment shall be located at the Equipment location
set forth above or in any Schedule describing such Equipment, and Lessee shall
not change the location of any item of Equipment without the prior written
consent of Lessor.
(H) Inspection. Lessor shall have the right but not the duty, to
inspect at all reasonable times any Equipment leased hereunder and any books and
records of Lessee relating to such Equipment. Lessor shall incur no liability by
reason of not making any such inspection.
(I) Installation. Lessee will not, without prior the written consent of
Lessor and subject to such conditions as lessor may impose for its protection,
affix or install any Equipment leased hereunder to or in any other personal
property or to or in any real property.
9. REPORTS.
(A) Lessee agrees that Lessor shall not be responsible for any loss or
damage to Lessee, its customers or anyone else, caused by the Equipment, by
failure or defect of the Equipment or otherwise. Nevertheless, Lessee will
immediately notify Lessor of each accident arising out of the alleged or
apparent improper manufacturing, functioning or operation of any Equipment, the
time, place and nature of the accident and damage, the names and addresses of
parties involved, persons injured, witnesses and owners of property damaged and
such other information as may be known, and promptly advise Lessor of all
correspondence, papers, notices and documents whatsoever received by Lessee in
connection with any claim or demand involving or relating to improper
manufacturing, functioning or operation of any Equipment or charging Lessor with
liability, and Lessee will investigate and defend all such claims and recover
damages from any third persons liable therefor.
(B) Lessee will notify Lessor by telegram, and confirm by mail on the
same date, of the attachment of any tax or other lien to the Equipment.
(C) Upon request Lessee will deliver to Lessor, in a form satisfactory
to Lessor, duplicate copies of Lessee's most recent balance sheet and earning
statement, including a balance sheet and earnings statement for Lessee's last
fiscal year, certified by either a recognized firm of Certified Public
Accountants or by the chief fiscal officer of Lessee.
(D) Lessee will deliver to Lessor such other information as Lessor may
reasonably request.
10. RISK OF LOSS AND INDEMNIFICATION.
(A) Risk of Loss. Lessee hereby assumes all risks of loss or
destruction, from any cause whatsoever, of any Equipment leased hereunder from
the date such Equipment is shipped by the designated Seller pursuant to a
Purchase Order requested by Lessee hereunder.
(B) Indemnification. Lessee hereby assumes liability for, and agrees to
indemnify and hold harmless Lessor from and against, and to pay lessor upon
demand the amount of, any and all liabilities, claims and demands of whatsoever
nature, together with all costs and expenses, relating to or in any way arising
from this Lease, its enforcement, or the manufacture, purchase, delivery,
acceptance, rejection, ownership, possession, installation, operation, control,
return or other disposition of Equipment leased hereunder, whether or not Lessor
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<PAGE>
is also indemnified against such liabilities, claims, and demands by any
manufacturer or seller of any such Equipment; provided that Lessee shall not
indemnify lessor against taxes upon or measured by the net income of Lessor.
(C) Loss or Damage. In the event of destruction or permanent damage to,
any Equipment, or in the event that such Equipment shall otherwise become lost,
stolen or rendered permanently unfit for use, or in the event that use of any
Equipment by Lessee shall be prevented by the act of any third party or
governmental instrumentality for a period exceeding ninety (90) days, or if any
Equipment shall be attached (other than with respect to a claim against Lessor
but not Lessee) or shall be seriously damaged and the attachment shall not be
removed or the damage repaired within sixty (60) days, then in any such event
Lessee shall notify Lessor of such fact, and within ten (10) days thereafter
Lessee shall pay to Lessor an amount equal to the remaining unpaid rent for the
balance of the term of the lease of such Equipment. Upon such payment, the lease
of such Equipment shall terminate and all right, title and interest to such
Equipment and any insurance thereon shall become the property of the Lessee.
11. INSURANCE. Lessee agrees to keep the Equipment insured in the amounts,
in the forms and with such insurers as Lessor shall approve to protect all
interest of Lessor, at Lessee's expense, against such risks of loss or damage as
Lessor shall designate for not less than the unpaid balance of the lease rentals
due hereunder or the then current cash value of said Equipment, whichever is
higher, and to protect Lessor from public and product liability for bodily
injury and for property damage and such other risks as Lessor may request.
Lessee shall furnish Lessor with copies of all insurance policies required by
this paragraph or certificates with respect thereto or with such other evidence
of Lessee's compliance with this paragraph as may be satisfactory to Lessor. The
policies for said insurance shall provide that such insurance may not be altered
or canceled by the insurer until after thirty (30) days written notice to
Lessor. If Lessee fails to provide such insurance, Lessor may, but shall not be
obligated to, insure said property at the expense of Lessee. All insurance
policies and the proceeds therefrom shall be the sole property of Lessor and
Lessor shall be named as an insured in all such policies. The proceeds of such
insurance, whether resulting from loss or damage or return premium or otherwise,
shall be applied toward the replacement or repair of the said Equipment or the
payment of obligations of Lessee hereunder at the option of Lessor. Lessee
hereby appoints Lessor as Lessee's attorney-in-fact to make claim for, receive
payment of and execute or endorse all documents, checks or drafts for loss or
damage or return premium under any insurance policy insured on said Equipment.
12. TAXES. Lessee shall pay and indemnify Lessor against all fees, taxes,
and other charges of any nature, together with penalties and interest thereon,
arising during the term of any lease of Equipment hereunder, or upon the return
of Equipment to Lessor, and imposed upon Lessor by any government or taxing
authority upon or with respect to such Equipment or upon the purchase,
ownership, delivery, leasing, possession, use, operation, return or other
disposition thereof, or upon the rentals, receipts, or earnings arising
therefrom or upon or with respect to this Lease (other than taxes upon or
measured by the net income of Lessor). In the event that any report or tax
return shall be required to be made with respect to any obligation of Lessee
under or arising out of this Paragraph 12, then Lessee shall make such report or
return in such manner as will disclose ownership of Equipment in Lessor and
furnish to Lessor a copy of such report and return in a manner satisfactory to
Lessor. The obligations of Lessee under this Paragraph 12 shall survive the
termination of this Lease.
13. RETURN OF EQUIPMENT. Upon termination of the Terms of Lease provided in
each Schedule or upon termination for any other cause, Lessee will, at its own
cost and expense, promptly deliver the Equipment described in such Schedule to
Lessor at an address specified by Lessor, in same condition as received,
reasonable wear and tear and normal depreciation accepted. Lessee will pay for
any repairs required to place such Equipment in its original condition. Lessee
shall without unreasonable delay cause such Equipment to be assembled and crated
at its expense as designated and/or supervised by Lessor and delivered to any
carrier designated by Lessor for prepaid shipment to such location as Lessor
shall direct.
14. RIGHTS OF THIRD PARTIES.
Page 6 of 11
<PAGE>
(A) Liens and Encumbrances. Lessee shall not create, incur, assume or
allow to exist any mortgage, pledge, lien, attachment, charge, encumbrance, or
other right of others on or with respect to any Equipment or to any title to
such Equipment or any interest therein, except (i) rights of Lessor and Lessee
under this Lease, (ii) liens or encumbrances resulting from claims against
Lessee not related to ownership of such Equipment, (iii) liens for taxes not yet
due or being contested in good faith by appropriate proceedings, and (iv)
inchoate materialmen's mechanics' or other like liens arising in the ordinary
course of business and not delinquent.
(B) Personal Property. Each item of Equipment shall be and at all times
remain personal property. Without limitation of the generality of the provisions
of Paragraphs 8 (I) and 10, Lessee shall at its own expense take any such
actions as may be necessary to prevent any third party from acquiring any right,
title, or interest in any Equipment by reason of its being affixed to or
otherwise deemed to be real property or by reason of its being affixed to or in
any other personal property. Lessee represents and warrants that it is not now
and during the term of this Lease will not be a party to any lease or mortgage
of real property where any Equipment is to be located which expressly or by
implication restricts the removal of any Equipment at any time by Lessor or
Lessee.
(C) Lessee's Action. If any third party shall acquire, or claim to have
acquired, rights referred to in this Paragraph 14, Lessee shall promptly notify
Lessor of that fact and shall seek diligently to remove the basis for such
claim. If any such claim shall or may interfere with the continued use of
Equipment by Lessee as contemplated by this Lease, Lessee shall remove the basis
for such claim to Lessor's satisfaction within thirty (30) days from the date it
is asserted.
15. DEFAULT.
(A) Events of Default. The following shall constitute Events of Default
under this Lease: (i) default by Lessee in the payment of rent or any other sums
due hereunder for ten (10) days after such rent or other sum is due; (ii)
default by Lessee in the performance of any other liability, obligation, or
covenant of Lessee to Lessor and the continuation of such default for ten (10)
days after written notice to Lessee sent by Lessor by ordinary mail or by any
other means; (iii) default by Lessee in meeting its trade, tax, borrowing, or
other obligations as they become due; (iv) termination or material suspension of
the business of Lessee, or Lessee liquidation, merger, or sale of substantially
all assets; (v) business failure of Lessee or the making by Lessee of an
assignment for the benefit of creditors or the institution of bankruptcy,
reorganization, liquidation or receivership proceedings by or against Lessee
and, if such proceedings shall be instituted against Lessee, its consent thereto
or the pendency thereof for the (10) days; (vi) such a change in Lessee's
affairs as in Lessor's opinion impairs Lessor's security or increases the credit
risk involved in this Lease; or (vii) any representation or warranty made by the
Lessee under this Lease or in any document furnished to the Lessor in connection
herewith or pursuant hereto shall prove to be incorrect at any time in any
material respect.
(B) Lessor's Action. Upon the occurrence of an Event of Default, Lessor
may do one or more of the following, at Lessor's option: (i) accelerate the
balance of payments due hereunder and under any other lease or other agreement
between the parties, thereby requiring prepayment of such lease or leases or
other agreements with all rentals, charges and payments due and payable
forthwith, (ii) terminate this Lease and any schedules or the lease of any
Equipment hereunder upon written notice to Lessee, (iii) take possession of any
or all Equipment wherever located, and for such purpose enter upon any premises
without liability for so doing, (iv) sell the Equipment at public or private
sale or lease any Equipment as Lessor in its sole discretion may decide, without
any duty to account to Lessee with respect to such action or the proceeds
therefrom, or (v) exercise any other remedy available to it at law, or in
equity.
(C) Lessee's Liability After Default. After the occurrence of an Event
of Default, (i) if Lessor shall repossess and sell or lease any Equipment,
Lessee shall be liable for any deficiency between the net proceeds of sale or
lease received and retained by Lessor and the present value of all unpaid Lease
payments for the remainder of the term plus the present value of our anticipated
residual interest in the Equipment, each discounted at a rate per year equal to
the discount rate of the Federal Reserve Bank of Boston on the date the
Page 7 of 11
<PAGE>
payment is demanded, (ii) if Lessor does not repossess and sell or lease any
Equipment, Lessee shall be liable to Lessor for the present value of all unpaid
Lease payments for the remainder of the term plus the present value of our
anticipated residual interest in the Equipment, each discounted at a rate per
year equal to the discount rate of the Federal Reserve Bank of Boston on the
date the payment is demanded, and (iii) in any event Lessee shall be liable to
Lessor for all loss, costs, and expenses incurred by Lessor by reason of the
occurrence of the Event of Default, including without limitation expenses of
repossession and sale or lease and reasonable fees and expenses of Lessor's
attorneys.
(D) Lessor's Remedies Cumulative. Lessor's remedies are cumulative and
Lessor may exercise remedies singly, simultaneously, concurrently or
successively and any such action shall not operate to release the Lessee until
the full amount of the rentals due and to become due and all other sums to be
paid hereunder have been paid in cash.
(E) Liquidated Damages. Any sums payable hereunder shall become due and
payable immediately except as otherwise expressly provided herein, as liquidated
damages and not as a penalty.
16. ASSIGNMENTS.
(A) Lessee. Without the prior written consent of Lessor, Lessee shall
not assign, pledge, mortgage or hypothecate this Lease of any of its rights
under this Lease or sell or sublet any Equipment leased hereunder or any
accessories attached thereto or otherwise permit any Equipment to be used by or
to come into the possession of anyone other than the Lessee.
(B) Lessor. Lessor may at any time, without notice to Lessee, assign to
any other person any or all of its right, title and interest in this Lease or
any Equipment leased hereunder and any such assignee may assign the same. In the
event of such an assignment, the term "Lessor" as used in this Lease shall
include any such assignee, and upon written notice to Lessee of any assignment
by Lessor, Lessee shall make all payments required to be made by Lessee
hereunder to the person and at the address specified in such notice.
17. COVENANT OF FURTHER ASSURANCE. Lessee shall promptly execute and
deliver to Lessor such further documents and take such further action as Lessor
may from time to time reasonably request in order to more effectively effectuate
the intents and purposes of this Lease and to establish and protect the rights
and remedies created in favor of Lessor hereunder, including without limitation
the prompt execution and delivery to Lessor of any Schedule hereunder, and the
filing or recording of this Lease or any schedule or any financing statements or
amendments thereto with respect to this Lease or any Equipment, as may be
permitted by the Uniform Commercial Code or any other applicable law. Lessee
hereby authorizes Lessor and appoints Lessor its attorney in fact to effect any
such filing or recording, including the filing of financing statements or
amendments thereto on Lessee's behalf, and, at Lessor's option, any costs and
expenses with respect thereto shall be payable by Lessee upon demand.
18. NOTICES. Except as otherwise provided herein, all notices hereunder
shall be deemed given and shall be effective when personally delivered or
deposited in the United States mail, postage prepaid and addressed to the
addressee at its address set forth above or at such other address as such party
shall from time to time designate in writing to the other party.
19. SEVERABILITY OF PROVISIONS. Any provisions of this Lease which may be
determined to be unenforceable or invalid shall be ineffective only to the
extent of such unenforceability or invalidity without affecting any other
provisions hereof. To the extent permitted by law, Lessee hereby waives any
provisions of law which render unenforceable or invalid in any respect any
provision hereof.
20. MODIFICATIONS AND WAIVERS.
(A) Modification. Except as may be otherwise expressly permitted in
this Lease, no term or provision hereof may be changed in any way except by an
instrument in writing signed by Lessor and Lessee.
Page 8 of 11
<PAGE>
(B) Waiver. No waiver of any terms of this Lease or of any rights
hereunder shall constitute a waiver of any other terms or rights, and no waiver
upon any occasion shall constitute a waiver of terms or rights as to any
subsequent occasion. No failure or delay of Lessor in its exercise of any rights
hereunder shall constitute a waiver thereof nor shall any such failure or delay
in any way affect the right of the Lessor to enforce the provisions hereof.
21. GENERAL. This Lease constitutes the entire agreement between the
parties hereto and no representation or statement made by any representative of
the Lessor or the Seller not stated herein shall be binding. This Lease shall be
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts. Captions appearing in this Lease are for convenience of reference
only and shall not define or limit any provisions hereof. This Lease shall be
binding upon and inure to the benefit of Lessee and Lessor and their respective
successors and assigns. If there shall be more than one Lessee named in this
Agreement, the liability of each such Lessee shall be joint and several.
22. CONSENT TO JURISDICTION, WAIVER OF JURY TRIAL AND COUNTERCLAIMS. EACH
OF THE LESSORS AND THE LESSEE HEREBY CONSENTS TO THE JURISDICTION OF
MASSACHUSETTS STATE AND FEDERAL COURTS IN CONNECTION WITH ANY DISPUTES UNDER
THIS LEASE, AND HEREBY WAIVES TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH
RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS LEASE, OR THE VALIDITY,
PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF, OR ANY OTHER
CLAIM OR DISPUTE, HOWSOEVER ARISING, BETWEEN THEM; AND LESSEE HEREBY WAIVES THE
RIGHT TO INTERPOSE ANY SETOFF, COUNTERCLAIM OR CROSS-CLAIM IN CONNECTION WITH
ANY SUCH LITIGATION, IRRESPECTIVE OF THE NATURE OF SUCH SETOFF, COUNTERCLAIM OR
CROSS-CLAIM (UNLESS SUCH SETOFF, COUNTERCLAIM OR CROSS-CLAIM COULD NOT, BY
REASON OF ANY APPLICABLE STATE OR FEDERAL PROCEDUARAL LAWS, BE INTERPOSED,
PLEADED OR ALLEGED IN ANY OTHER ACTION).
23. IRREVOCABLE AND NONCANCELLABLE LEASE. This Lease is irrevocable and
noncancellable for the full term as set forth on the Schedule(s) and the
aggregate rentals herein equaling the number of rental payments times the rental
payment amounts shall not abate by reason of termination of Lessee's right or
possession and/or taking of possession by the Lessor or for any other reason and
such obligation shall be absolute and unconditional under all circumstances.
24. NET LEASE. The Lessor and the Lessee hereby acknowledge and agree that
this Lease is a net lease, that the Lessor is the owner of the Equipment and
that the relationship between the Lessor and the Lessee shall always be only
that of Lessor and Lessee. Both parties agree to treat this Lease as a lease for
legal, tax, accounting and all other purposes.
This Master Lease Agreement and related Schedules are deemed to be executed as
an instrument under seal in accordance with the laws of the Commonwealth of
Massachusetts.
THIS IS A NON-CANCELABLE LEASE FOR THE TERM INDICATED.
Date:
________________________________
Page 9 of 11
<PAGE>
Accepted: LESSEE:
Westford, MA Lifeline Systems, Inc.
- ---------------------------- ----------------------------------
(Full Legal Name)
s/ Robert J. Bowdring, Controller
----------------------------------
- ----------------------------
(Authorized Signature and Title)
LESSOR: ATTEST:
Andover Capital Group, Inc. Sealed
- ---------------------------- ----------------------------------
238 Littleton Road (Affix Corporate Seal)
Westford, MA 01886
If Partnership:
By:--------------------------------
(Signature of Authorized Partner)
By: s/ William Carroll
------------------------- ----------------------------------
Authorized Signature (Signature of Witness)
Treasurer
- ----------------------------
Title
THE UNDERSIGNED AFFIRMS THAT HE IS A DULY AUTHORIZED CORPORATE OFFICER, OR
PARTNER OF THE ABOVE NAMED LESSEE.
By: s/ Robert J. Bowdring Controller
---------------------------- ----------------------------------
Title
State of: Masssachusetts )
----------------------
SS.
County of: Middlesex )
---------------------
Below me, Kenneth L. Cook , a Notary Public in and for said County,
-------------------
personally appeared Robert J. Bowdring to me personally known
----------------------------------
to be the identical person who signed and executed the above instrument (for)
(as) the Lessee, and acknowledges that he executed the foregoing instrument as
his free and voluntary act and deed (as and as the free and voluntary act and
deed of said Lessee Corporation or Partnership, being duly authorized to do so)
for the uses and purposes therein set forth.
Affix Notary Seal
s/ Kenneth L. Cook
- --------------------------
Notary Public
My Commission Expires 6/18/2005.
------------
Page 10 of 11
<PAGE>
EXHIBIT A
---------
To Master Lease Agreement dated, March 11, 1999 between
Andover Capital Group, Inc. as Lessor, and
- -------------------------------------------------------
Lifeline Systems, Inc. as Lessee.
- -------------------------------------------------------
Acquisition Expiration Date: June 30, 1999
Description of Equipment: (include Quantity, Name of Manufacturer and Model No.)
A.) Equipment:
- ---------------
Portable Office Partitions and related equipment
B.) Equipment:
- ---------------
Various Computers and related equipment, security systems, and other equipment
Total Aggregate Acquisition Cost $2,500,000.00
-------------
Note:
- -----
A. Equipment = $1,200,000.00
- --
B. Equipment = $1,300,000.00
- --
Page 11 of 11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,012
<SECURITIES> 4,282
<RECEIVABLES> 7,098
<ALLOWANCES> 260
<INVENTORY> 2,604
<CURRENT-ASSETS> 22,266
<PP&E> 39,867
<DEPRECIATION> 16,847
<TOTAL-ASSETS> 52,765
<CURRENT-LIABILITIES> 9,352
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 37,947
<TOTAL-LIABILITY-AND-EQUITY> 52,765
<SALES> 4,821
<TOTAL-REVENUES> 16,226
<CGS> 1,300
<TOTAL-COSTS> 7,480
<OTHER-EXPENSES> 6,905
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 2,434
<INCOME-TAX> 973
<INCOME-CONTINUING> 1,461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,461
<EPS-PRIMARY> .25
<EPS-DILUTED> .23
</TABLE>
