-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RP+3CGAwc6GSCwYYuPO+UXg8P0ZC0cN/kx1QIK1IEvyPFKkrDKy/HMNOYV0mpnIa e6e1a5Cl9RcVy4rUrQ6ADQ== 0000927016-99-001829.txt : 19990507 0000927016-99-001829.hdr.sgml : 19990507 ACCESSION NUMBER: 0000927016-99-001829 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFELINE SYSTEMS INC CENTRAL INDEX KEY: 0000720195 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 042537528 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13617 FILM NUMBER: 99612138 BUSINESS ADDRESS: STREET 1: 640 MEMORIAL DRIVE CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6176791000 MAIL ADDRESS: STREET 1: 640 MEMORIAL DRIVE STREET 2: 640 MEMORIAL DRIVE CITY: CAMBRIDGE STATE: MA ZIP: 02139-4851 10-Q 1 FORM 10-Q 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) ------------------ 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, 1999: 5,862,198 LIFELINE SYSTEMS, INC. INDEX
PAGE 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
-2- LIFELINE SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
March 31, December 31, 1999 1998 ---- ---- 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 ------- ------- 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 ------- ------- 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 ------- ------- 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 ------- ------- 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) ------- ------- Total stockholders' equity 38,076 36,291 ------- ------- Total liabilities and stockholders' equity $ 52,765 $ 52,504 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
-3- LIFELINE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands except for per share data)
Three months ended March 31, ----------------------- 1999 1998 ---- ---- Revenues Services $ 10,997 $ 9,010 Net product sales 4,821 5,604 Finance and rental income 408 338 -------- ------- Total revenues 16,226 14,952 -------- ------- 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 -------- ------- Total costs and expenses 14,385 13,127 -------- ------- Income from operations 1,841 1,825 -------- ------- Other income (expense) Interest income 97 108 Interest expense (7) (12) Other income 503 - -------- ------- Total other income, net 593 96 -------- ------- Income before income taxes 2,434 1,921 Provision for income taxes 973 776 -------- ------- Net income 1,461 1,145 -------- ------- Other comprehensive income, net of tax Foreign currency translation adjustments 37 18 -------- ------- Comprehensive Income $ 1,498 $ 1,163 ======== ======= Net income per weighted average share: Basic $ 0.25 $ 0.20 ======== ======= Diluted $ 0.23 $ 0.18 ======== ======= Weighted average shares: Basic 5,849 5,795 ======== ======= Diluted 6,380 6,296 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. -4- LIFELINE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three months ended March 31, ----------------------- 1999 1998 ---- ---- 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) ------- ------- Net cash provided by operating activities 3 4,098 ------- ------- 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) ------- ------- Net cash used in investing activities (989) (1,960) ------- ------- Cash flows from financing activities: Principal payments under capital lease obligations (3) (3) Proceeds from issuance of common stock 263 173 ------- ------- Net cash provided by financing activities 260 170 ------- ------- 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 ------- ------- Cash and cash equivalents at end of period $ 2,012 $ 4,272 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. -5- 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):
March 31, December 31, 1999 1998 ---- ---- Inventories: Purchased parts and assemblies $ 548 $ 556 Work-in-process 616 324 Finished goods 1,440 616 -------- -------- $ 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 -------- -------- 39,867 37,071 Less: accumulated depreciation and amortization (16,847) (16,295) -------- -------- $ 23,020 $ 20,776 ======== ========
-6- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. The calculation of per share earnings is as follows:
(In thousands except per share data) Three months ended March 31, ------------------- 1999 1998 ---- ---- 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 ------ ------ Total weighted average shares 6,380 6,296 Net income per share, diluted $ 0.23 $ 0.18 ====== ======
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: -7- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. SEGMENT INFORMATION (continued)
March 31, March 31, 1999 1998 ---- ---- Net Sales: United States $15,076 $13,967 Canada 1,150 985 ------- ------- $16,226 $14,952 ======= ======= Net Income: United States $ 1,360 $ 1,070 Canada 101 75 ------- ------- $ 1,461 $ 1,145 ======= ======= Total Assets: United States $49,236 $42,672 Canada 3,529 1,651 ------- ------- $52,765 $44,323 ======= =======
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. -8- 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 -9- 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 -10- 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. -11- 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, -12- 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, -13- 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 -14- 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 -15- 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 -16- 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. -17- 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 -18- EXHIBIT INDEX The following designated exhibits are, as indicated below, either filed herewith or have heretofore been filed with the Securities and Exchange Commission under the Securities Act of 1933 or the Securities and Exchange Act of 1934 and are referred to and incorporated herein by reference to such filings.
Exhibit No. Exhibit SEC Document Reference - ----------- ------- ---------------------- Exhibit 10. MATERIAL CONTRACTS 10.60 Master Lease Agreement between the Registrant and Andover Capital Group dated March 11, 1999
EX-10.60 2 MASTER LEASE AGREEMENT 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 Page 1 of 11 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 Page 2 of 11 $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 (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 Page 4 of 11 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 Page 5 of 11 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 (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 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 (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 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 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 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 2,012 4,282 7,098 260 2,604 22,266 39,867 16,847 52,765 9,352 0 0 0 129 37,947 52,765 4,821 16,226 1,300 7,480 6,905 0 7 2,434 973 1,461 0 0 0 1,461 .25 .23
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