<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000 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)
__________________
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock $0.02 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-----
Number of shares outstanding of this issuer's class of common stock as of April
30, 2000: 5,955,900
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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, 2000
and December 31, 1999 3
Consolidated Statements of Income and Comprehensive Income -
Three months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows - Three months
ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-10
ITEM 2.
Management's Discussion and Analysis of Results of
Operations and Financial Condition 11-16
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
ITEM 6.
Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,013 $1,415
Accounts receivable, net 8,044 9,247
Inventories 1,762 2,605
Net investment in sales-type leases 2,475 2,310
Prepaid expenses and other current assets 1,163 832
Prepaid income taxes 1,012 1,013
Deferred income taxes 1,709 1,788
-------- --------
Total current assets 19,178 19,210
Property and equipment, net 26,134 26,852
Net investment in sales-type leases 5,686 5,747
Goodwill and other intangible assets, net 5,949 5,551
Other assets 28 25
-------- --------
Total assets $56,975 $57,385
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 679 $1,801
Accrued expenses 2,306 2,224
Accrued payroll and payroll taxes 799 2,133
Accrued income taxes 140 140
Deferred revenues 740 846
Current portion of capital lease obligation 510 478
Current portion of long term debt 1,405 405
Product warranty and other current liabilities 350 458
Accrued restructuring and other non-recurring charges 573 656
-------- --------
Total current liabilities 7,502 9,141
Deferred income taxes 5,012 4,592
Deferred compensation 429 559
Long term portion of capital lease obligation 1,757 1,779
Long term debt, net of current portion 1,474 1,575
-------- --------
Total liabilities 16,174 17,646
Commitments and contingencies
Stockholders' equity:
Common stock, $.02 par value, 20,000,000 shares authorized,
6,576,989 shares issued at March 31, 2000 and 6,563,657
shares at December 31, 1999 131 131
Additional paid-in capital 18,779 18,626
Retained earnings 26,864 25,941
Less: Treasury stock at cost, 621,089 shares at March 31, 2000
and December 31, 1999 (4,556) (4,556)
Notes receivable - officers (400) (400)
Accumulated other comprehensive loss/cumulative translation adjustment (17) (3)
-------- --------
Total stockholders' equity 40,801 39,739
-------- --------
Total liabilities and stockholders' equity $56,975 $57,385
======== ========
</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
March 31,
----------------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues
Services $ 13,097 $ 10,997
Net product sales 5,221 4,821
Finance and rental income 361 408
-------------- -------------
Total revenues 18,679 16,226
-------------- -------------
Costs and expenses
Cost of services 8,752 6,180
Cost of sales 1,591 1,300
Selling, general, and administrative 6,461 6,499
Research and development 334 406
-------------- -------------
Total costs and expenses 17,138 14,385
-------------- -------------
Income from operations 1,541 1,841
-------------- -------------
Other income (expense)
Interest income 102 97
Interest expense (84) (7)
Other income 5 503
-------------- -------------
Total other income, net 23 593
-------------- -------------
Income before income taxes 1,564 2,434
Provision for income taxes 641 973
-------------- -------------
Net income 923 1,461
Other comprehensive income, net of tax
Foreign currency translation adjustments (8) 37
-------------- -------------
Comprehensive Income $ 915 $ 1,498
============== =============
Net income per weighted average share:
Basic $ 0.16 $ 0.25
============== =============
Diluted $ 0.15 $ 0.23
============== =============
Weighted average shares:
Basic 5,952 5,849
============== =============
Diluted 6,160 6,380
============== =============
</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)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
2000 1999
----- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 923 $ 1,461
Adjustments to reconcile net income to net cash provided
by operating activities:
Write off of fixed assets 38 -
Depreciation and amortization 1,789 1,221
Deferred income taxes 499 186
Deferred compensation (130) -
Changes in operating assets and liabilities:
Accounts receivable 1,203 637
Inventories 843 (1,108)
Net investment in sales-type leases (104) (186)
Prepaid expenses, other current assets and other assets (333) (571)
Accrued payroll and payroll taxes (1,334) (1,473)
Accounts payable, accrued expenses and other liabilities (1,254) 199
Income taxes payable - (363)
Accrued restructuring charge (83) -
---------- --------
Net cash provided by operating activities 2,057 3
---------- --------
Cash flows from investing activities:
Purchases of investments - (1,440)
Sales and maturities of investments - 3,854
Additions to property and equipment (589) (3,403)
Business purchases and other (789) -
---------- --------
Net cash used in investing activities (1,378) (989)
---------- --------
Cash flows from financing activities:
Principal payments under long term obligations (220) (3)
Proceeds from issuance of long term debt 1,000 -
Proceeds from issuance of common stock 153 263
---------- --------
Net cash provided by financing activities 933 260
---------- --------
Effect of foreign exchange on cash (14) 36
---------- --------
Net increase (decrease) in cash and cash equivalents 1,598 (690)
Cash and cash equivalents at beginning of period 1,415 2,702
---------- --------
Cash and cash equivalents at end of period $ 3,013 $ 2,012
========== ========
Non-cash activity:
Capital leases $129
</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, 2000 and the consolidated results of its operations
and cash flows for the three months ended March 31, 2000 and 1999.
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 and Form 10-K/A-1, as
filed with the Securities and Exchange Commission on March 30, 2000 and April
28, 2000, respectively, for the year ended December 31, 1999.
The results of operations for the three-month period ended March 31, 2000 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,
2000 1999
--------- ------------
<S> <C> <C>
Inventories:
Purchased parts and assemblies $ 75 $ 100
Work-in-process - 10
Finished goods 1,687 2,495
--------- ------------
$ 1,762 $ 2,605
========= ============
Property and equipment:
Equipment $ 21,579 $ 21,442
Furniture and fixtures 693 597
Equipment leased to others 13,374 12,935
Equipment under capital leases 3,299 3,170
Leasehold improvements 4,894 4,885
Capital in progress 653 786
--------- ------------
44,492 43,815
Less: accumulated depreciation and amortization (18,358) (16,963)
--------- ------------
$ 26,134 $ 26,852
========= ============
</TABLE>
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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
March 31,
----------------------------------
2000 1999
------ ------
<S> <C> <C>
Basic:
- ------
Net income $ 923 $1,461
Weighted average common shares outstanding 5,952 5,849
Net income per share, basic $ 0.16 $ 0.25
========== ==========
Diluted:
- --------
Net income for calculating diluted earnings per share $ 923 $1,461
Weighted average common shares outstanding 5,952 5,849
Common stock equivalents 208 531
---------- ----------
Total weighted average shares 6,160 6,380
Net income per share, diluted $ 0.15 $ 0.23
========== ==========
</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.
5. SEGMENT INFORMATION
The Company is active in one business segment: designing, marketing, monitoring
and supporting its personal response units. The Company maintains sales and
marketing operations in both the United States and Canada.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SEGMENT INFORMATION (continued)
Geographic Segment Data
Net sales to external customers are based on the location of the customer.
Geographic information as of March 31, 2000 and 1999 is presented as follows:
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
-----------------------
<S> <C> <C>
Net Sales:
United States $17,193 $15,076
Canada 1,486 1,150
-----------------------
$18,679 $16,226
=======================
Net Income:
United States $ 797 $ 1,360
Canada 126 101
-----------------------
$ 923 $ 1,461
=======================
Total Assets:
United States $53,339 $49,236
Canada 3,636 3,529
-----------------------
$56,975 $52,765
=======================
</TABLE>
6. RESTRUCTURING AND NON RECURRING CHARGES
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 electronic equipment and a division of Honeywell
International, Inc. 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 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 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.
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<PAGE>
At March 31, 2000, accrued restructuring and non-recurring charges of nearly
$573,000 represented approximately $439,000 of total remaining severance costs
and $134,000 of unpaid, unreimbursed costs which are associated with the
termination of the merger agreement with Protection One.
The following is a roll-forward of accrued restructuring and non-recurring
charges for the three months ended March 31, 2000:
<TABLE>
<CAPTION>
December 31, Amounts March 31,
1999 Utilized 2000
-----------------------------------------------
<S> <C> <C> <C>
Reduction of workforce
and other cash flows $522 ($83) $439
Unreimbursed merger costs 134 - 134
-----------------------------------------------
Total $656 ($83) $573
===============================================
</TABLE>
7. LONG TERM DEBT
In June 1999, the Company entered into an amended $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 financial covenants
during the first quarter of 2000. The Company obtained a waiver from its bank
for these covenants for the quarter ended March 31, 2000. The line of credit
matures on June 30, 2002, and as of March 31, 2000 the Company had $2.9 million
outstanding under this line.
8. INTANGIBLES
During the first three months of 2000, the Company paid approximately $0.8
million to 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 program previously operated by the local community hospitals. 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
typically five years.
-9-
<PAGE>
9. RECENT ACCOUNTING PRONOUCEMENTS
In December 1999, the SEC released Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements. SAB 101 clarifies the SEC's views related
to revenue recognition and disclosure. SAB 101A was subsequently issued in
March 2000, deferring the requirement to adopt the revised guidance until the
period ended June 30, 2000. The Company is in the process of assessing the
impact of this SAB and does not anticipate this having a material effect on the
consolidated financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation." FIN 44
clarifies the application of APB Opinion No. 25 regarding (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a stock option plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions cover specific events that occur after either December
15, 1998, or January 12, 2000. The Company believes that the adoption of FIN 44
will not have a material effect on the financial position or results of
operations of the Company.
10. SUBSEQUENT EVENT
In April 2000, the Company loaned an additional $250,000 to its Chief Executive
Officer, pursuant to a collateralized promissory note. The note, which bears
interest at a rate of 6.94%, payable annually in arrears, is due April 5, 2005
and is collateralized by a pledge of 25,641 shares of common stock of the
Company.
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<PAGE>
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, 2000 increased nearly 15% to
$18.7 million as compared to total revenues of $16.2 million for the quarter
ended March 31, 1999.
Service revenues, at $13.1 million for the first quarter of 2000, represented
over 70% of the Company's first quarter total revenues. This increase, up from
$11.0 million or 68% of total revenues in the first quarter of 1999, is a result
of the Company's strategy of packaging products and services into a single
service offering, which results in higher per-subscriber service revenue. The
Company continues to increase its monitored subscriber base and was monitoring
approximately 285,000 subscribers as of March 31, 2000, 18% more than the
241,000 subscribers monitored at the end of the first quarter of 1999. 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 services 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 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 2000 increased 8% to $5.2 million
from $4.8 million for the same period in 1999. This increase in product
revenues was mainly a result of an improvement in the Company's service
performance, after a challenging second half of 1999, where the Company
experienced lower equipment sales. Although the Company expected declining
product sales in 1999, it believes that challenges with its service during 1999
lead to even lower than anticipated product sales. The Company continues to
make significant improvements in service recovery in connection with the
challenges it faced with the 1999 implementation of the CareSystem monitoring
platform. However, it still expects 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, decreased 12% in the first quarter of 2000 to
$361,000, from $408,000 for the first quarter of 1999. While the Company's
leasing portfolio continues to grow for its internally managed and funded
leasing program, it is experiencing slower growth as a result of the Company's
focus on its
-11-
<PAGE>
service business segment. The Company expects finance income to decline in
future periods as it is directly related to its product business.
Total recurring revenues, consisting of service revenues and finance and rental
income, rose to $13.5 million for the three months ended March 31, 2000 and
represented 72% of total revenue as compared to $11.4 million and 70% of total
revenue for the three months ended March 31, 1999. This percentage of total
revenue 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 67% for the first
quarter of 2000, significantly higher than the first quarter of 1999 at 56%.
Cost of services remains high due to a variety of reasons. The Company
continues to maintain higher than normal staffing in its response center as it
continues to reduce the CareSystem call center platform to practice. The Company
also incurred a labor rate increase during the first quarter of 2000 for its
call center employees in order to remain competitive in the tight labor market.
The first full year of depreciation of its CareSystem call center platform is
also impacting cost of services for the quarter ended March 31, 2000.
Additionally, the amortization of intangible acquisition costs, which began in
1999, is significantly higher in the first quarter of 2000 than the same period
in 1999 as it includes amortization for all purchases during 1999 and the first
quarter of 2000.
Cost of sales was 30% of net product sales for the three months ended March 31,
2000 as compared to 27% for the three months ended March 31, 1999. Cost of
sales for the quarter ended March 31, 2000 was higher than the same period a
year ago as there were efficiencies created in the first quarter of 1999 by
higher than expected production in anticipation of the Company outsourcing its
manufacturing function 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 ("SG&A") improved as a percentage
of total revenues to 35% for the first quarter of 2000 as compared to 40% for
the first quarter of 1999. Actual first quarter SG&A expenditures totaled $6.5
million for both the first quarters of 2000 and 1999. Some of the reasons for
the improvement in these expenses, as a percentage of revenue, were related to
the Company not incurring moving and start-up related expenses in the first
quarter of 2000 as it had in the first quarter of 1999 in connection with its
relocation to new corporate headquarters. Also, sales and marketing initiatives
had been delayed during the start of 2000 as the implementation issues
surrounding the CareSystem platform were stabilized in the first quarter of
2000. The Company expects an increase in SG&A expenses during 2000 as it
introduces new sales, marketing and business initiatives.
Research and development expenses were 2% of total revenues for the quarter
ended March 31, 2000 as compared to 3% of total revenues for the quarter ended
March 31, 1999. 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
2000.
In June 1999, the Company recorded a pre-tax restructuring charge of
approximately $2.2 million as a result of the outsourcing of the Company's
equipment manufacturing operations to Ademco and a change to the Company's
original estimates for the cost of its corporate headquarters' relocation.
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<PAGE>
On September 2, 1999, the Company and Protection One mutually agreed to
terminate their proposed merger and therefore the Company recorded a pre-tax
charge of $423,000 for unreimbursed costs incurred in connection with the
proposed merger.
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.
The Company's effective tax rate was 41.0% for the three months ended March 31,
2000 compared to 40.0% for the three months ended March 31, 1999.
In April 2000, the Company loaned an additional $250,000 to its Chief Executive
Officer, pursuant to a collateralized promissory note. The note, which bears
interest at a rate of 6.94%, payable annually in arrears, is due April 5, 2005
and is collateralized by a pledge of 25,641 shares of common stock of the
Company.
In December 1999, the SEC released Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements. SAB 101 clarifies the SEC's views related
to revenue recognition and disclosure. SAB 101A was subsequently issued in
March 2000, deferring the requirement to adopt the revised guidance until the
period ended June 30, 2000. The Company is in the process of assessing the
impact of this SAB and does not anticipate this having a material effect on the
consolidated financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),"Accounting
for Certain Transactions involving Stock Compensation." FIN 44 clarifies the
application of APB Opinion No. 25 regarding (a) the definition of employee for
purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a stock option plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions cover specific events that occur after either December
15, 1998, or January 12, 2000. The Company believes that the adoption of FIN 44
will not have a material effect on the financial position or results of
operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2000, the Company's portfolio of cash
and cash equivalents increased $1.6 million to $3.0 million at March 31, 2000
from $1.4 million at December 31, 1999. The increase was mainly attributable to
profitable operations of $3.1 million coupled with borrowings of $1.0 million
under the Company's line of credit and enhanced collection efforts in the first
quarter of 2000 on its accounts receivable portfolio outstanding at December 31,
1999. Payments of approximately $1.1 for accounts payable obligations at
December 31, 1999 and $0.9 million in management and sales bonuses offset these
increases. The Company also paid nearly $0.8 million to local community
hospitals for conversions to services provided by the Company. This represented
the cost of purchasing the rights to service and/or manage the personal response
systems program previously operated by the local community hospitals. The
Company also incurred
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<PAGE>
expenditures of $0.4 million for Company-owned equipment provided directly to
customers under comprehensive service agreements and to subscribers not serviced
by local Lifeline programs.
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 are recorded as
capital leases and accordingly the associated assets are being depreciated over
their estimated useful life. As of March 31, 2000 the Company had made
purchases for the full value under these agreements. The Company is currently
negotiating to obtain a new Master Lease Agreement.
The Company is party to a fifteen-year lease for an 84,000 square foot facility
in Framingham, Massachusetts for its corporate headquarters. Annual base rental
payments under the lease approximate $814,000. At the Company's option the
lease contains two five-year renewal options.
In June 1999, the Company entered into an amended $10.0 million line of credit
which was originally obtained in April 1998. The agreement has two components,
the first of which is a working capital line of credit, the other, the ability
to convert up to five million dollars into a five year fixed loan. The working
line of credit's interest rate is based on the London Interbank Offered Rate
(LIBOR), while the fixed loan is at the bank's prime interest rate. 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 financial covenants during the first quarter of 2000. The Company
obtained a waiver from its bank for these covenants for the quarter ended March
31, 2000. This line of credit matures on June 30, 2002, and as of March 31,
2000 the Company had $2.9 million outstanding 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. This includes the continued
investment in its new response center platform, expenditures needed for its
corporate headquarters,the requirements of its internally funded lease financing
program, any potential acquisitions and other investments in support of its
current business.
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 completed the transition of its United States subscribers to its new
CareSystem call center platform during 1999 and experienced certain software
design deficiencies which have been resolved in connection with the transition.
The Company may continue to experience problems
-14-
<PAGE>
associated with this new information technology. There can be no assurance that
the Company will realize the intended benefits from the new system.
During the third quarter of 1999, the Company completed the outsourcing of the
manufacturing of its personal response equipment to the Ademco Group, a division
of Honeywell International, Inc. 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
will depend on Ademco to provide it with prototypes and otherwise assist in the
product development process. There can be no assurance that the Company will
not experience delays in receiving such assistance.
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 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.
-15-
<PAGE>
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 monitoring facility, whether due to telephone or electrical
failures, earthquakes, fire, or other similar events or for any other reason,
could have a material adverse effect on the Company's 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.
IMPACT OF THE YEAR 2000 ISSUE
During 1999 the Company completed a formal six-phase Year 2000 program to
determine the extent of its own Year 2000 exposures. The Awareness Phase was
ongoing and involved continuous communication, both internally and externally
with customers and vendors. The Assessment Phase identified 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 was the Company's decision-making phase, and it
prioritized the schedule of resolutions to be implemented. In the Resolution
Phase, the Company modified, replaced or retired systems where necessary. The
Testing Phase tested the Company's readiness to roll out its results. Finally
the Rollout Phase implemented the entire process into production.
As of March 31, 2000 the Company has not experienced any disruptions related to
year 2000 issues.
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, 2000.
(b) Exhibits - The Exhibits which are filed with this Report or which are
incorporated herein by reference are set forth in the Exhibit Index which
appears on page 18 hereof.
-16-
<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 15, 2000 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
-17-
<PAGE>
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed herewith
or have heretofore been filed with the Securities and Exchange Commission under
the Securities Act of 1933 or the Securities and Exchange Act of 1934 and are
referred to and incorporated herein by reference to such filings.
Exhibit No. Exhibit SEC Document Reference
- ----------- ------- ----------------------
10.68 Agreement for Purchase and Sale of
Common Stock between Ronald Feinstein
and the Registrant, dated August 23, 1999
10.69 Secured Promissory Note between Ronald
Feinstein and the Registrant, dated April 5, 2000
10.70 Security and Pledge Agreement between Ronald
Feinstein and the Registrant, dated April 5, 2000
-18-
<PAGE>
EXHIBIT 10.68
-------------
AGREEMENT FOR PURCHASE AND SALE OF COMMON STOCK
-----------------------------------------------
This Agreement effective as of August 23, 1999 is entered into by and
between Lifeline Systems, Inc., a Massachusetts corporation (the "Company") and
Ronald Feinstein (the "Stockholder"), and is pursuant to the vote of the
Compensation Committee as reflected in the minutes of its meeting on August 23,
1999, copy attached
WHEREAS, on August 23, 1999, the Stockholder exercised an option to
purchase 100,000 shares of the common stock, $.02 par value per share, of the
Company (the "Common Stock");
WHEREAS, after withholding 29,541 shares of Common Stock for the payment of
taxes owed, the Stockholder received 70,459 shares (the "Shares") of Common
Stock in connection with such exercise;
WHEREAS, the Company has agreed to purchase the Shares, upon the terms and
conditions set forth more fully below;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Right to Sell Shares
--------------------
(a) The Stockholder shall have the right to sell (the "Put Right") all or
any portion of the Shares (the "Offered Shares") to the Company, and the Company
shall be obligated to purchase the Offered Shares, in accordance with the terms
and conditions of this Agreement. The Put Right shall be exercisable in whole or
in part once per quarter during the exercise period. Notwithstanding anything
contained herein to the contrary, (i) the Stockholder is not obligated to
exercise the Put Right, and may, at any time, sell the Shares to any other
party, and (ii) the Company shall have no obligation to purchase the Offered
Shares following the delivery of a Notice of Exercise (as defined below) if such
purchase would be in violation of applicable laws or regulations.
(b) The Put Right shall be exercisable beginning on April 30, 2001 (it
being understood that this date represents over one year after the date
originally proposed by the Company and the Stockholder) and this Agreement and
the Put Right shall terminate on the earliest of:
(i) the written agreement of both the Company and the
Stockholder;
(ii) October 30, 2002;
(iii) the date on which the Company executes a definitive agreement
with a third party concerning a transaction intended to be
accounted for as a "pooling of interests" in accordance with
United States generally accepted accounting principles (a
"Pooling Transaction"); provided that the Put Right shall not
-------- ----
terminate upon the occurrence of an event described in this
Subsection 1(b)(iii) if the Company's independent auditors
deliver to the Company a written opinion indicating that the
exercise of the Put Right
<PAGE>
would not prevent any such contemplated transaction from
qualifying as a Pooling Transaction. Notwithstanding the
foregoing, (i) the Put Right shall be reinstated in the event
the Pooling Transaction fails to close and the definitive
agreement related thereto is terminated (or if the definitive
agreement is amended to reflect that such transaction is to be
accounted for under the purchase method of accounting); and
(ii) in the event the Pooling Transaction closes and the
stockholders of the Company receive consideration in connection
therewith which is less than $16.3125 per share, the Company
shall, at such closing, pay to the Stockholder, in cash, an
amount equal to the difference between $16.3125 and the fair
market value of the consideration received by stockholders,
unless such payment would prevent the Company from reporting
the Pooling Transaction as a pooling of interests; and
(iv) the termination of the Stockholder's employment with the
Company (I) by the Company for "cause" or (II) by the
Stockholder (other than on account of his death or permanent
disability). For the purposes of this paragraph, (X) "cause"
shall mean (a) a good faith finding by the Company that the
Stockholder has engaged in dishonesty, gross negligence or
misconduct, or (b) the conviction of the Stockholder of, or the
entry of a pleading of guilty or nolo contendere by the
Stockholder to, any crime involving moral turpitude or any
felony; and (Y) "disability" shall mean the inability of the
Stockholder, due to a physical or mental disability, for a
period of 90 days, whether or not consecutive, during any 360-
day period to perform his duties for the Company, with or
without reasonable accommodation as that term is defined under
state or federal law. A determination of disability shall be
made by a physician satisfactory to both the Stockholder and
the Company, provided that if the Stockholder and the Company
-------- ----
do not agree on a physician, the Stockholder and the Company
shall each select a physician and these two together shall
select a third physician, whose determination as to disability
shall be binding on all parties.
2. Purchase Price
--------------
(a) The purchase price per share (the "Purchase Price") of the Offered
Shares shall be Sixteen Dollars and Thirty-One cents ($16.3125).
(b) Except as provided in Section 1(a)(ii) above, the Company shall,
within thirty days of receipt of the Notice of Exercise, deliver to the
Stockholder a check payable to the Stockholder in full payment of the aggregate
Purchase Price for the Offered Shares, upon delivery by the Stockholder of the
certificate or certificates representing the Offered Shares, duly endorsed in
blank to the Company and accompanied by a certification by the Stockholder that
the Offered Shares are free and clear of any liens and that good and marketable
title thereto will pass to the Company upon the repurchase of such Offered
Shares.
2
<PAGE>
3. Notices
-------
(a) If the Stockholder desires to sell any of the Shares to the Company, he
shall, during the period that the Put Right is exercisable, deliver written
notice of his desire to do so (the "Notice of Exercise") to the Company
(attention: Chief Financial Officer) at the Company's principal offices, located
at 111 Lawrence Street, Framingham, MA 01702. The Notice of Exercise shall be
delivered by hand, sent via a reputable national overnight courier service or
mailed by first class certified or registered mail, return receipt requested,
postage prepaid. A copy of the Notice of Exercise shall also be sent by any one
or more of the same means to the Chairman of the Board of Directors of the
Company at the address then on record for such person and to Jeffrey A. Stein,
Esq., Hale and Dorr LLP, 60 State Street, Boston, MA 02109.
(b) The Notice of Exercise must specify the number of Offered Shares.
(c) Any other notice, request, consent or other communication under this
Agreement shall be delivered (i) to the Company as provided in paragraph (a)
above, with a copy to the Chairman of the Board of Directors of the Company at
the address then on record for such person , and (ii) to the Stockholder by
hand, sent via a reputable national overnight courier service or mailed by first
class certified or registered mail, return receipt requested, postage prepaid,
c/o the offices of the Company, or to such other address as to which the
Stockholder has notified the Chairman of the Board of Directors of the Company
at the address then on record for such person.
(d) Notices provided in accordance with this Section 3 shall be deemed
delivered upon personal delivery, one business day after being sent via a
reputable nationwide overnight courier service, or three business days after
deposit in the mail.
3. Nontransferability
------------------
This Agreement, and the rights of the Stockholder hereunder, may not
be assigned or otherwise transferred by the Stockholder to any other person or
entity, either voluntarily or by operation of law, except by will or the laws of
descent and distribution, and except that, during the lifetime of the
Stockholder, the Put Right shall be exercisable only by the Stockholder.
4. Complete Agreement; Amendments
------------------------------
(a) This Agreement constitutes the full and complete agreement of the
parties hereto with respect to the subject matter hereof.
(b) No amendment, modification or termination of any provision of this
Agreement shall be valid unless in writing and signed by the Company and the
Stockholder.
5. Counterparts; Facsimile Signatures
----------------------------------
This Agreement may be executed in counterparts, each of which shall be
deemed to be an original, and all of which shall constitute one and the same
document. This Agreement may be executed by facsimile signatures.
3
<PAGE>
6. Governing Law
-------------
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the Commonwealth of Massachusetts.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the date first written above.
COMPANY:
Lifeline Systems, Inc.
By: /s/ Dennis M. Hurley
-------------------------
Dennis Hurley
Chief Financial Officer
STOCKHOLDER:
/s/ Ronald Feinstein
----------------------------
Ronald Feinstein
5
<PAGE>
EXHIBIT 10.69
Dated: April 5, 2000
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 Two
Hundred and Fifty Thousand ($250,000) Dollars in or within five (5) years from
the date hereof. The outstanding principal balance hereunder shall, commencing
April 5, 2000, bear interest at the rate of 6.94% 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 25,641 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/ Wilfredo Torres /s/ Ronald Feinstein
- --------------------------- ----------------------------
Witness Ronald Feinstein
<PAGE>
EXHIBIT 10.70
SECURITY AND PLEDGE AGREEMENT
-----------------------------
This is a Pledge Agreement made as of the 5/th/day of April, 2000
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 Two Hundred and Fifty Thousand
($250,000) 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
------------------------------------------
25,641 Shares of Lifeline Systems, Inc. Common Stock
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,013
<SECURITIES> 0
<RECEIVABLES> 8,745
<ALLOWANCES> 701
<INVENTORY> 1,762
<CURRENT-ASSETS> 19,178
<PP&E> 44,492
<DEPRECIATION> 18,358
<TOTAL-ASSETS> 56,975
<CURRENT-LIABILITIES> 7,502
<BONDS> 0
0
0
<COMMON> 131
<OTHER-SE> 45,643
<TOTAL-LIABILITY-AND-EQUITY> 56,975
<SALES> 5,221
<TOTAL-REVENUES> 18,679
<CGS> 1,591
<TOTAL-COSTS> 10,343
<OTHER-EXPENSES> 6,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84
<INCOME-PRETAX> 1,564
<INCOME-TAX> 641
<INCOME-CONTINUING> 923
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 923
<EPS-BASIC> $0.16
<EPS-DILUTED> $0.15
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