U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
No.4
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF
SMALL BUSINESS ISSUER
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
GUARDIAN INTERNATIONAL, INC.
(Formerly Everest Security Systems Corporation, formerly Everest
Funding Corporation, formerly Burningham Enterprises, Inc.)
-------------------------------------------------------------------------------
(Name of Small Business Issuer in its Charter)
Nevada 58-2201633
-------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
3880 N. 28 Terrace ation Number)
Hollywood, Florida 33020-1118
(Address of Principal Executive Offices)
Telephone: (954) 926-5200
Securities to be Registered Under Section 12(b) of the Act:
None
Securities to be Registered Under Section 12(g) of the Act:
Common Stock, Par Value $.001
(Title of Class)
This is one of ______ pages.
Exhibit Index on Page _____.
1
<PAGE>
GUARDIAN INTERNATIONAL, INC.
Form 10SB
Table of Contents
PART I
Page No.
Item 1. Description of Business...............................................
Item 2. Management's Discussion and Analysis or Plan of Operations............
Item 3. Description of Property...............................................
Item 4. Security Ownership of Certain Beneficial Owners and Management.....
Item 5. Directors, Executive Officers, Promoters and Control Persons..........
Item 6. Executive Compensation................................................
Item 7. Certain Relationships and Related Transactions........................
Item 8. Description of Securities.............................................
PART II
Item 1. Market Price of and Dividends on the registrant's Common Equity
And Other Stockholder Matters................................
Item 2. Legal Proceedings.....................................................
Item 3. Changes in and Disagreements with Accountants.........................
Item 4. Recent Sales of Unregistered Securities...............................
Item 5. Indemnification of Directors and Officers.............................
PART F/S
Item 1. Financial Statements..................................................
PART III
Item 1. Exhibits..............................................................
2
<PAGE>
PART I
Item 1. Business
Introduction
Guardian International, Inc. ("Company") was incorporated under the
laws of the State of Nevada on October 30, 1986 as Burningham Enterprises, Inc.
("Burningham"). The Company's executive offices are located at 3880 North 28
Terrace, Hollywood, Florida 33020-1118 and its telephone number is (954)
926-5200. The Company specializes in the monitoring and installation of security
and fire detection systems. These services are generally provided to subscribers
under renewable three to five (3-5) year contracts, which do not permit
cancellation by subscribers during their term.
Business Development
The Company initiated a public offering on a form S-18 Registration
Statement which was declared effective on March 1987 when it completed its
initial "blank check/blind pool" public offering raising one hundred thousand
dollars ($100,000).
Burningham had no operations and did not acquire any business from
October 1986 until February 1988. On February 25, 1988 Burningham changed its
name to Everest Funding Corporation ("Everest"). In February 1988, Burningham
completed a reverse merger with Everest Mortgage Corporation whereby Everest
Mortgage Corporation ("EMC") became a wholly owned subsidiary of Burningham. EMC
was in the mortgage origination business. In late 1993 EMC ceased operations.
Subsequently EMC was dissolved on July 5, 1995.
Everest was inactive until June 1995 when it changed control. Pursuant
to this change in control new directors were elected to the Board and in July
1995, the Board and a majority of shareholders approved a one for twenty reverse
split. The reverse split became effective on July 24, 1995. On November 27,
1995, Everest changed its name to Everest Security Systems Corporation. The
Company is a home alarm service and installation company.
On October 9, 1995, the Company entered into a Purchase Agreement with
Specialty Device Installers, Inc. ("SDI"). Under the terms of the Purchase
Agreement the Company was to purchase all of the shares of SDI in exchange for
100,000 shares of common stock of the Company. The Purchase Agreement also
called for the Company to enter into an employment contract with Frank Bauer
whereby the Company would pay a salary to him in the amount of fifty-two
thousand dollars ($52,000) per annum plus bonuses based on the performance of
SDI. The bonus structure is yet to be determined by the Board of Directors. In
November 1995, Frank Bauer was elected to the Board of Directors of the Company.
3
<PAGE>
SDI was incorporated under the laws of the State of Florida on August
1991. SDI is a provider of quality installation and systems service to
developers, builders, and operating companies in the cable television and
burglar alarm industry. SDI also offers management programs which allow
developer/builder participation in ongoing security and cable programs, offering
custom tailored programs to fit any development from zero to 100% ownership.
On January 15, 1996, the Company formed Federal Alarm Systems, Inc.
("FASI"), a wholly owned subsidiary organized under the laws of the State of
Florida. FASI was formed to monitor burglar alarm contracts installed by SDI as
well as to monitor and service purchased burglar alarm contracts. FASI is
currently inactive.
On August 15, 1996 the Company signed an Agreement and Plan of Merger
with Guardian International, Inc. a Florida corporation. The merger closed in
escrow. On August 28, 1996 escrow was broken and Guardian International, Inc.
("Guardian") merged with and into the Company. The Company then changed its name
to Guardian International, Inc. The directors of the Company resigned and the
Directors of Guardian filled the vacancies on the Board.
The Company is a leading supplier of security monitoring and high grade
monitored security systems in the Southeast United States. The Company is made
up of three components: Guardian International, a division involved in
monitoring services, Gibraltar Security Alarm Systems, ("Gibraltar") a division
involved in high grade installations and SDI, a wholly owned subsidiary involved
in all aspects of security and fire systems from design to installation to
monitoring and service.
The Company's Services
The Company, through, Guardian International, Gibraltar and SDI, is a
provider of the design, sales and or lease, installation and maintenance of
security and fire systems and the ongoing monitoring and service of these
systems in the State of Florida. The majority of all the systems the Company
services generate Monthly Recurring Revenue ("MRR"). MRR generates approximately
sixty six percent (66%) of the revenue of the Company.
Guardian International accounts for seventy percent (70%) of the
revenues of the Company. Guardian International provides monitoring services
through its state of the art central monitoring facility. This facility is able
to withstand hurricane force winds and can maintain operations indefinitely
without electrical power using its propane generators. The building contains
some of the most advanced security devices available, including CCTV, motion
detecting units, high intensity lighting, access control and sophisticated
anti-terrorist security systems. All the equipment in the facility is the latest
enhancement and none of the equipment is more than four years old.
The entire monitoring facility is redundant, therefore, if there is
ever a failure in a piece of equipment, an exact duplicate is available to back
it up within a fraction of a second. The
4
<PAGE>
monitoring facility is entirely paperless. The phone system is digital (as
opposed to analog); all conversations are recorded and compressed digitally.
Every alarm function is handled through automation, including the dialing of
phones.
Maintenance of the facility's technical functions and equipment is done
internally with the exception of hardware and software. The hardware and
software for the monitoring facility is handled through outside service
contracts at a cost of approximately five thousand dollars ($5,000) per month.
The employees of the Company undergo extensive training and are
continually supervised by an in-house private investigator. Although this
accounts for an initial expense to the Company, there are benefits in the long
run. The Company experiences very little human error in its operations. Many of
the employees of the Company come from other competitors and have been able to
contribute their knowledge and experiences to the Company. In order to take full
advantage of this fact it is the Company's policy to promote suggestions, ideas
and criticisms from employees. It is, therefore, able to benefit from the
mistakes and successes of other alarm companies as they are communicated by the
employees.
The Company also works closely with key authorized dealers and in
contracting bulk service agreements with real estate developers. Key authorized
dealers are agents of the Company. When they become dealers they receive a
number of benefits including, the use of Company supplied marketing material,
equipment discounts and receipt of Company capital for newly created monitoring
contracts.
The Company currently has over two thousand seven hundred (2,700) homes
under contract with Avitar Development (NASDAQ: AVTR) as well as five hundred
(500) homes with Oriole Homes (AMEX: OHC.A) and five hundred (500) homes with
Morrison Homes, Inc., according to South Florida Home Building Trade Journal,
one of the top ten builders in Southern Florida. The bulk service agreements
provide for long-term (on average seven to ten years) ongoing monitoring and
servicing of every home in the residential communities. To attract real estate
developers the Company offers a discount of approximately forty percent (40%) on
bulk service agreements. The Company is also an active member of the Builders'
Association of South Florida, attends trade shows, advertises to builders and
sponsors builder events. This is an area of growth upon which the Company will
continue to focus.
Gibraltar was acquired by the pre-merged Guardian International, Inc.
through an asset acquisition during the first quarter of 1996. Gibraltar
currently accounts for ten percent (10%) of the Company's revenues. Gibraltar
specializes in high grade commercial installation, monitoring and servicing of
security and fire systems. Gibraltar's account base gives the Company the
opportunity to capitalize on the commercial market. The industry's main emphasis
tends to be on the low end residential market. Therefore, this portion of the
market is being overlooked by many of the Company's competitors.
5
<PAGE>
The Company's UL listed central monitoring system gives Gibraltar the
ability to monitor buildings for burglary, fire and environmental problems. If
an alarm, fire or environmental condition is detected, a signal is transmitted
over telephone and or radio transmission to the Company's central monitoring
station. When the conditions require verification and/or dispatch action, human
operators react in the manner in which they were trained.
The system also monitors opening and closing schedules which, with the
optional reporting service, are sent via weekly mail reports. All activities are
displayed with the employees name, the date of the activity and the time the
activity was performed. The reports can be sent to any location around the world
via facsimile or e-mail.
Gibraltar safeguards a number of businesses including financial
institutions, drug companies, airlines, industrial complexes, marinas and yacht
clubs as well as private residences which require state of the art monitoring
systems.
Gibraltar's image is maintained as a stand alone high-end organization.
The Company does not actively reveal its affiliation with Gibraltar in order to
maximize the Gibraltar name which was established in 1977. Gibraltar has its own
President, Director of Sales and service and installation team. However, they
are not officers or directors of the Company.
SDI accounts for twenty percent (20%) of the revenues of the Company.
SDI serves the large well established security alarm companies. These customers,
based on management's experience, generally outsource approximately fifty
percent (50%) of their installation business to subcontractors. As the large
customers have markets throughout the United States, they tend to have their own
core installation segment to handle business in each market. As their business
grows or fluctuates they contract out the balance of the work. For the fiscal
year ended December 31, 1995, ninety percent (90%) of SDI's business came from
contract installation work.
Typically, SDI's customers are involved in ongoing marketing to acquire
new burglar alarm monitoring customers through both an independent dealer
network and direct marketing by their sales people. The new alarm monitoring
contracts that are generated typically need burglar alarm systems installed.
SDI's customers subcontract this work to SDI either on a labor only or turnkey
basis.
Currently SDI has approximately twenty five (25) customers. Two of its
customers for the fiscal year ended December 31, 1995 made up approximately 63%
of SDI's business (ADT Limited - 38%, Alert Center - 25%). For the period ended
March 31, 1996, the following customers made up forty three percent (43%) of
SDI's business: ADT Limited, twenty three percent (23%); Alert Center, twelve
percent (12%); and Avitar Development Corp., eight percent (8%). Ten percent
(10%) of SDI's revenue came from SDI's own monitoring contracts for this same
period ended March 31, 1996.
6
<PAGE>
SDI continues to try and expand its customer base through both
acquiring monitoring contracts and adding additional installation business. As
of April 30, 1996 the major customers were ADT Security Systems which made up
twenty three percent (23%) of SDI's business, Alert Centre, Inc. which made up
twenty five percent of SDI's business, CTS Construction Corp. which made up
eleven percent (11%) of SDI's business, Oriole Homes Corp. making up ten percent
(10%) of SDI's business and eleven percent (11%) of SDI's revenue came from its
own monitoring contracts.
Monthly Recurring Revenues
Over seventy five percent (75%) of all the systems the Company services
generate some sort of Monthly Recurring Revenue ("MRR") such as monthly
monitoring contracts and back up monitoring. The balance of the revenue to the
Company is received from installation and service contracts. The MRR of the
Company accounts for sixty six percent (66%) of revenue. Gibraltar and SDI
provide the balance of the revenue.
Business Strategy
The Company's strategy for growth has been the implementation of an
aggressive and strategic acquisition plan. From 1994 to 1996 the Company
acquired a combination of twelve (12) alarm companies or large portfolios of
customer monitoring contracts from existing alarm companies. The financing for
these acquisitions is derived from a seven million dollar ($7,000,000) credit
facility with Heller Financial, Inc. These acquisitions have enabled the Company
to more than double its annual retail account base each year since its
inception. The program essentially consists of the following stages:
1. Continued Aggressive Strategic Acquisitions: The Company will continue to
grow by acquiring entire alarm companies as well as portfolios of accounts from
existing alarm companies. The strategy has been and will continue to be to
concentrate on specific areas within its current account base. If an acquisition
is possible where the Company does not have a current account base, the Company
may decide to acquire a share of the new market. This occurred recently when
four strategic acquisitions were made within a four month period in the Tampa
Bay area of Florida where the Company had no previous accounts. This acquisition
created a recurring revenue base in excess of one thousand (1,000) subscribers
and laid the foundation for future subscriber growth in the area.
The Company's acquisition strategy is made up of the following steps:
first, potential acquisitions to enhance the Company's operations are
identified; second, the Company enters into an initial negotiation stage with
the target company; third, the Company enters into a contract with that company;
fourth, a due diligence review of the company is undertaken by the Company
whereby the Company conducts in depth reviews of the company, including
selective field equipment inspections, individual review of substantially all of
the subscriber contracts, and an analysis of the rights and obligations under
such contracts; fifth, the Company conducts its
7
<PAGE>
final negotiations based on the comprehensive due diligence; sixth, the acquired
company (or portfolio of accounts) goes into an assimilation stage; and seventh,
monitoring assimilation and customer satisfaction are focused upon and final
performance is executed.
2. Dealer Program: An objective of the Company is to create additional MRR by
generating more Dealer Program agreements with independent alarm companies. To
accomplish this dealers are offered numerous support services including but not
limited to marketing, equipment discounts, technical expertise and competitive
purchase multiples. The Company's aim is to make the dealer successful. The
quality and effectiveness of this program and its participants is constantly
being enhanced.
3. Continued Retail Account Growth: The Company has various retail marketing
programs in place. One such program is a Customer Referral Program whereby new
customers are generated by referrals from the Company's existing and continually
increasing customer account base. These "referral accounts" enable the Company
to increase its revenue at a much lower cost than traditional marketing methods.
Additionally, the Company is evaluating it current retail sales and marketing
programs, and is considering significantly increasing its efforts in these
areas.
4. Bulk Service Communities - Builder Projects: The Company currently has a
total of over three thousand five hundred (3,500) homes under either seven (7)
or ten (10) year master association contracts (including Avatar Development,
Morrison Homes and Oriole Homes). The contracts call for Company installed
alarms to be monitored by the central station with one bill each month to the
master homeowners association. Closings on these developments began in the first
quarter of 1996 and will continue for the next four (4) years. It is anticipated
that upon completion of the two development projects, over fifty thousand
dollars ($50,000) in MRR will be generated.
The Company plans to continue its focus on builder projects. SDI
enables the Company to generate installation revenue as well as the ongoing MRR
from the monitoring contracts. Together the installation business and the
monitoring facility help to give the Company a competitive advantage in this
sector of the market.
5. Increased Efficiency Through Cost Analysis and Increased Automation: During
the first quarter of 1996 the Company completed hardware and software upgrades
to its security monitoring system. These improvements include the addition of
memory on the Data General/Avion machines, enhancements to the Company system in
a more client/server aspect and additional automation improvements that will
increase efficiency while reducing cost. The Company currently operates under
the MAS 5.50.14 version for its automation, service and billing system.
The Company is one of the few companies in the United States to
incorporate integrated MAS fax technology. That gives the Company the ability to
automate numerous aspects of
8
<PAGE>
information that were previously processed manually. In addition, such
technological advancements such as providing alarm indications with Alpha
numeric paging and using security industry specific software such as MASTrak and
MASLink, gives the Company's off site locations the ability to process data
efficiently with little or no human interaction.
The Company has the capacity to monitor over fifty thousand (50,000)
subscribers with little or no upgrade to its existing system. With additional
hardware, software and physical space enhancement, it can monitor over two
hundred thousand (200,000) subscribers.
6. Continued Management of Account Attrition: The Company has developed an
in-house system for identifying and decreasing account attrition. The program
has been dubbed the "No-Tolerance Attrition Policy." This program consists of
the following: (1) the identification of possible lost accounts via a daily
test; (2) false alarm fines, tracking and cause identification; (3) early
account delinquent procedures; (4) quality customer service; (5) the control of
lockout; (6) early identification of new tenants/residences in homes alarmed by
the Company; and (7) aggressive problem solving ability by management. The
No-Tolerance Attrition Policy procedures identify possible account attrition at
various stages and attempt to prevent lost accounts or replace lost accounts by
quick and efficient intervention.
YEAR GROSS NET ATTRITION NO-TOLERANCE
ATTRITION (AFTER SAVES) PROGRAM
RESULTS*
1993 7.2% 6.7% .05%
1994 7.9% 7.2% .07%
1995 10.0% 7.5% 2.6%
1996 (1st Qtr) 8.2% 5.7% 2.5%
* This is the difference resulting from the Company's No-Tolerance Attrition
Program.
Marketing
A large portion of the Company's marketing activities have been through
referrals and a limited amount of advertising. Gibraltar possesses a fleet of
Ford trucks emblazoned with the Gibraltar logo. The Company recognizes the need
for a full blown marketing and sales strategy to maximize its market penetration
as well as to maintain customer service. The Company's approach will be to
continue to rely on customer referrals but its main focus will be on the
implementation of an independent dealer network and a direct sales force aided
by telemarketing.
Competition
9
<PAGE>
Competitive conditions vary within each segment of the security
industry. The largest segment is composed of security system dealers. Most of
these companies can be described as having fewer than twenty employees,
averaging one hundred fifty to eight hundred fifty (150- 850) accounts, are
usually under capitalized, are owner managed and do not have their own central
monitoring station.
According to Security Distributing & Marketing Magazine the one hundred
(100) largest companies in the security industry account for approximately
twenty five percent (25%) of the industry's total revenue. Therefore, the
majority of the industry revenue is generated by smaller alarm service
companies.
The segment of the industry composed of central monitoring services is
characterized by a small number of companies that provide both wholesale and
retail monitoring. The barriers to entry in this segment are high due to the
large investment required to equip and conform the facilities for U.L. approval.
This segment is divided into national and regional firms. The smaller regional
companies have difficulty competing with the larger national firms due to higher
overhead, inability to purchase service and equipment on volume discounts and
often lack the capital to make acquisitions.
The large national companies that provide sales and/or leases,
installations and service of security systems and provide central monitoring
services have a competitive advantage. These companies typically provide only
retail monitoring for security systems installed by them. They normally do not
enter the wholesale market. Companies that provide wholesale monitoring services
typically operate on a regional basis, providing services to regional and local
alarm companies that are unable to supply the monitoring function for the
security systems which they sell.
The following chart represents the size of the nine largest alarm
companies. The information was obtained from Security Distributing & Marketing
Magazine, a security industry magazine published by Cahners Publications.
Company 1994 Revenue All(Accounts 1994 Home Employees
million) Installations
ADT Security $725 850,000 170,000 8,600
Alert Centre $57 152,000 3,400 670
Brink's Home $110 340,000 75,000 1,400
Honeywell $233 190,000 N/A 2,000
National $213 275,000 3,700 2,050
Guardian
10
<PAGE>
Protection One $34 133,000 1,800 531
Rollins $66 121,000 11,000 671
Protective
Wells Fargo $219 124,000 12,000 2,440
Alarm
Westinghouse $115 215,000 60,000 1,800
Security
- ----------------------- ------------------ ----------------- -----------------
Government Regulations
The Company is subject to federal, state, county and municipal laws,
regulations and licensing requirements. The Company is currently under the
regulation of the Florida State Government. SDI has an unlimited electrical
contractor license as required by the State of Florida. It also has all
municipal and city licenses required to work in Dade, Broward, and Palm Beach
Counties. Because the Company operates a central monitoring station, the State
of Florida requires the completion of a certification program and a license to
conduct business. The Company believes that it holds the necessary licenses and
is in substantial compliance with all licensing and regulatory requirements in
each jurisdiction in which it operates to date.
The Company relies on the use of telephone lines and radio frequencies
to transmit signals and relay alarm calls. The cost and type of equipment that
may be employed for telephone lines is regulated by the federal and state
governments. The use and operation of radio frequencies is regulated by the
Federal Communications Commission and the state public utilities commissions.
Trademarks
Guardian International(TM) and Gibraltar Security Alarm Systems(TM) are
the Company's registered trademarks. The Company believes that its trademarks
are important to the marketing of its security alarm services and the
establishment of a strong identity with its customers. No assurance can be given
that the Company will be able to successfully enforce or protect its rights to
its trademarks in the event that any of them is subject to third-party
infringement.
Employees
As of January 13, 1997 the Company employs approximately ninety (90)
people. The majority of the employees work in the Company's headquarters which
consists of the following departments:
11
<PAGE>
Department Number of Employees
Monitoring Center 15
Service and Installation 35
Office/Sales/Management 30
Any increase in the number of employees will be determined by an
increase in the level of business. The Company does not expect any significant
changes in the number of employees, at this time. Management believes that
relations with its employees are satisfactory.
The Company does not conduct any research and development activity.
Also there are no environmental issues concerning the Company.
Item 2. Management's Discussion and Analysis
The following discussion considers the operations of the Company for
the fiscal period ending September 30, 1996 (unaudited) with comparative figures
for the fiscal period ending September 30, 1995 (unaudited). The historical
financial statements are those of the pre-merged Guardian International, Inc.
("Guardian"). The results of operations reflect the operations of Guardian prior
to the merger, and thereafter Guardian's consolidated results of operations with
SDI, a wholly owned subsidiary acquired from predecessor company. The balance
sheet at December 31, 1995 is Guardian's; the consolidated balance sheet at
September 30, 1996 includes the accounts of the surviving entity and its wholly
owned subsidiary. All significant intercompany balances and transactions have
been eliminated. The following discussion should be read in conjunction with the
audited financial statements for the fiscal year ending December 31, 1995 and
the eight month period ending August 31, 1996. These are included as Financial
Statements in Part F/S of this Form 10-SB.
Forward Looking Information
The Private Securities Litigation Reform Act of 1995 (the "Reform Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that would cause actual
results to differ materially from those discussed in the statement. The Company
desires to take advantage of the "safe harbor" provisions of the Reform Act.
Except for the historical information contained herein, the matters discussed in
this Form 10-SB are forward-looking statements which involve risks and
uncertainties. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, it can
give no assurance that its expectations will be achieved. Important factors that
could cause actual results to differ materially from the Company's expectations
are disclosed in conjunction with the forward looking statements or elsewhere
herein.
12
<PAGE>
Overview
The services offered by the Guardian Companies (Guardian International,
Gibraltar, and SDI) include the design, sales/lease, installation and
maintenance of security and fire systems, and the ongoing monitoring and service
of these systems. Over seventy five percent (75%) of all the systems the company
services generate some sort of Monthly Recurring Revenue ("MRR").
A majority of the Company's revenues are derived from recurring
payments for the monitoring and maintenance of security systems. The Company
also generates revenue from billable service charges and revenues from the sale
and installation of security systems, add ons and upgrades. The installation
work is done mostly through SDI. Revenue is provided from monitoring contracts
with initial terms ranging from one to five years. Payment for monitoring
services is typically required in advance, and monitoring revenue is recognized
as the service is provided. Installation, add on and upgrade revenue is
recognized when the required work is completed. All direct installation costs,
which include materials, labor and installation overhead, and selling and
marketing costs are expensed in the period incurred.
The heart of the Company's operation is its state of the art central
monitoring station. The monitoring facility, according to management's research
and knowledge of the security industry, is believed to be one of the most
advanced and well equipped facilities of its kind in the United States. The
Company has recently upgraded the system software which has made the facility
even faster and more efficient. The central monitoring station currently
monitors 24,500 subscribers, and with a minimal capital expenditure can be
expanded to monitor up to 200,000 subscribers. This well designed and efficient
monitoring facility is the foundation for future growth of MRR. With the
efficiency of the central monitoring station, alarm monitoring services generate
a significantly higher gross margin than do the other services provided by the
Company. While sales and installation services contribute to the Company's gross
profits, the total expenses associated with alarm system installations
(including not only the direct costs of providing such services but also the
expenses associated with sales and marketing of alarm systems) also exceed the
revenues generated by such services. The Company's strategy, however, is to
invest in system sales and installation because the Company believes that such
services and products contribute to the generation and retention of alarm
monitoring subscribers.
Plan of Operation
The Company's strategy for growth has been the acquisition of other
security companies and security monitoring contracts combined with internal
growth with aggressive marketing and superior customer service. The security
industry is experiencing dramatic growth and increased consolidation among
smaller, fragmented "mom and pop" type companies. The Company's strategy is to
identify these consolidation opportunities and creating efficient economies of
scale through technical and managerial efficiency. From 1994 to 1996, the
Company made twelve security alarm business account portfolio acquisitions
including All American Security and Gibraltar Alarm Systems. The Company has
successfully incorporated these businesses and molded these accounts into its
13
<PAGE>
operation and created economies of scale and improved margins. Guardian's
strategy of growth has increased the Company's current and future MRR.
The Company can continue to purchase additional accounts through
internally generated cash flow. However, to implement its growth strategy the
Company is currently undertaking expansion of its credit facilities as well as
contemplating equity funding.
During the first quarter of 1996 the Company completed hardware and
software upgrades to its security monitoring system. These improvements included
the addition of increased memory on the Data General/Avion machines,
enhancements to the Company system in a more client/server aspect (as opposed to
text terminals), and additional automation enhancements that will increase
efficiency while reducing cost. Guardian is currently operating under the MAS
5.50.11 version for its automation, service, and billing system.
Results of Operations
Subscriber Attrition. Subscriber attrition has a direct impact on the
Company's results of operations, since it affects both the Company's revenues
and its amortization expense. Attrition can be measured in terms of decreased
MRR resulting from canceled subscriber accounts net of sales of certain services
to existing subscribers, and can also be measured in terms of canceled
subscriber accounts. Guardian has developed an in-house system for identifying
and decreasing account attrition. The Program has been dubbed the "No-Tolerance
Attrition Policy."
Guardian has developed specific procedures for identifying possible account
attrition at various stages and preventing lost accounts or replacing lost
accounts in a fast manner. This program is a critical part of Guardian's
business strategy to increase and maintain MRR.
The No-Tolerance Attrition Policy includes the following:
a) Identification of possible lost accounts via daily test.
b) False alarm fines tracking and cause identification
c) Early, account delinquent procedures
d) Superb customer service
e) Control lockout
f) Early identification of new tenants/residences in Company alarmed homes
The following table sets forth, for the periods indicated, the percentage of net
sales of certain items in the Company's consolidated statements of operations
and other data, and the percentage change in each item from the prior period.
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Percentage of Percentage of Nine Months Percentage of Percentage of Three Months
Total Revenues Total Revenues Ended Sept. Total Revenues Total Revenues Ended Sept. 30,
Nine Months Nine Months 30, 1996 as Three Months Three Months 1996 Compared
Ended Sept. Ended Sept. compared to Ended Sept. Ended Sept. 30, to Three Months
30, 1996 30, 1995 Nine Months 30, 1996 1995 Ended Sept. 30,
Ended Sept. 1995
30, 1995
Revenues:
Monitoring 80.8% 82.7% 187% 73.4% 96.9% 152%
Installation 16.3 15.4 214 22.0 2.8 2488
Other 2.9 0.9 900 4.6 0.3 6035
Total Revenues 100 100 198 100 100 232
Operating
Expenses
Monitoring 11.5 19.6 76 9.9 5.4 84
Installation 7.8 16.2 43 13.6 5.2 758
General and 46.6 58.4 138 48.6 57.0 183
Administrative
Total 65.9 94.2 108 72.1 80.3 199
Operating
Expenses
Operating 34.1 5.8 1634 27.9 19.7 368
Income (*1)
Interest 17.1 10.6 381 16.4 13.2 312
Expense
Amortization 18.7 (24.5) 160 (12.4) (15.1) 21.5
provision for
Taxes
Provision for (2.7) - - (6.8) - -
Income Taxes
Net Loss (9.2%) (24.6%) (11%) (19.2%) (15.1%) (309%)
- ------------------------------------------------------------------------------------------------------------
<FN>
*(1) Before Interest, Amortization and Depreciation and Provision for Income
Taxes
Nine Months Ended September 30, 1996 Compared to
Nine Months Ended September 39, 1995
</FN>
</TABLE>
15
<PAGE>
Revenues for the nine months ended September 30, 1996 increased by $1,556,914,
or 198%, to $2,344,619 from $787,705 for the comparable period in 1995.
Monitoring revenues increased by $1,234,983, or 187%, to $1,894,290 from
$659,307 for the comparable period in 1995, primarily because of a net increase
in the number of subscribers to the Company's alarm services resulting from
acquisitions. Installation revenues increase by $260,657 or 214%, to $382,246
from $121,589 for the comparable period in 1995, mainly because of the
acquisition of SDI.
Operating expenses for the nine months ended September 30, 1996
increased by $804,410, or 108%, to $1,546,056 from $741,646 for the comparable
period in 1995, and decreased as a percentage of revenues from 58.4% to 46.6%.
Monitoring expenses increased by $116,494 or 76%, to $270,552 from $154,058 for
the comparable period in 1995, primarily because of addition of new employees to
handle the additional monitoring acquired through acquisitions. Monitoring
expenses include telephone, labor, rent and depreciation expenses associated
with monitoring of subscriber accounts, as well as billing and collection
expenses. Installation expenses increased by $54,518, or 43%, to $182,185 from
$127,667 in the comparable period in 1995, primarily as a result of the
additional installation revenue generated by the acquisition of SDI. Selling,
general and administrative expenses for the nine months ended September 30, 1996
increased by $633,398, or 138%, to 1,093,319 from $459,921 during the comparable
period in 1995. As a percentage of total revenues, general and administrative
expenses decreased to 46.6% from 58.4%. The increase in general and
administrative expenses resulted from the Company's growth in revenue as well as
the merger of Everest Security Systems Corporation and Guardian International,
Inc. The Company expects that the aggregate amount of general and administrative
expenses will increase in the future as the Company's subscriber base continues
to grow but will decrease as a percentage of total revenue.
Interest expense, including amortization of debt issuance costs, for
the nine months ended September 30, 1996, increased approximately $316,904, or
381% to $400,051 from $83,147 during the comparable 1995 period. The expense
increase primarily as a result of higher outstanding principal balances during
fiscal 1996 created by the increase in customer accounts during the year.
Amortization of customer contracts for the nine months ended September
30, 1996 increased by $354,020, or 417%, to $438,988 from $84,978 for the
comparable 1995 period, as a result of the acquisition of additional subscriber
accounts.
Depreciation and amortization for the nine months ended September 30,
1996 increased by $45,421 or 63.9%, to $116,500 from $71,079 during the
comparable period in 1995, due to the addition of property and equipment during
the 1996 period.
Net loss for the nine months ended September 30, 1996 was $(219,986),
compared to a net loss of $(193,145) in the comparable period in 1995.
Liquidity and Capital Resources
16
<PAGE>
General. The Company has financed its operations and acquisitions from a
combination of borrowing, sales of stock and internally generated funds. The
Company's principal uses of cash are acquisitions of subscriber accounts,
interest and principal payments on long-term debt and capital expenditures.
Future acquisitions of subscriber accounts will likely require additional
financing.
For the nine months ended September 30, 1996, the Company's net cash provided by
operating activities was $194,885, compared to $(21,529) net cash used in
operating activities for the comparable period in 1995.
For the nine months ended September 30, 1996, the Company's net cash provided by
investing activities was $127,186, compared to $(921,335) net cash used in
investing activities during the same period in 1995, primarily as a result of
the funds advanced by Everest Security Systems Corporation in the form of equity
investment.
For the nine months ended September 30, 1996, the Company's net cash provided by
financing activities was $838,795, compared to $1,022,528 in the comparable
period in 1995. Financing activities were primarily associated with the
retirement of long-term debt in fiscal 1996, and repayment of shareholder's
loans.
Heller Financial. Revolving Credit Facility. On November 16, 1994 , the
Company entered into an agreement with Heller Financial, Inc. ("Heller') that
established the Revolving Credit Facility. The Revolving Credit Facility matures
in November 30, 1999, subject to earlier termination. The Company had $4,598,669
million and $1,028,634 million outstanding at September 30, 1996 and September
30, 1995, respectively, under the credit facility.
Availability under the Revolving Credit Facility is a function of a series of
factors including, the amount of unbilled revenue of Guardian's account
portfolio and the multiple of Monthly Recurring Income for which Guardian is
borrowing. At September 30, 1996, and September 30, 1995, the most restrictive
of these availability tests resulted in total remaining availability of
approximately $2,401,331 million and $5,971,366 million, respectively.
Under the Revolving Credit Facility, the applicable interest rate is the prime
interest rate plus 3%. The Company has paid Heller a initial funding fee of
$25,000 for the initial $2,500,000 of borrowing, and continues to pay Heller a
transaction fee of 1% of the amount it is borrowing at the time of funding. As a
result of exchanging the Capital Appreciation rights of Heller for Common Class
B shares, the Company is no longer responsible for any additional Capital
Appreciation Rights .
The Revolving Credit Facility contains customary covenants including, among
others, restrictions on the incurrence of debt, encumbrances on or sates of
assets, mergers and acquisitions, dividends and transactions with affiliates.
Financial covenants include the maintenance of (i) a minimum EBITDA; (ii) a
minimum ratio of EBITDA less capital expenditures to senior interest; (iii) a
minimum ratio of EBITDA less capital expenditures to fixed charges; (iv) a
maximum annual rate
17
<PAGE>
of MRR attrition; and (v) maximum annual capital expenditures. The Revolving
Credit Facility provides that a "change of control" (as defined therein)
constitutes an event of default.
The Revolving Credit Facility contain certain restrictions on transfers of funds
such as loans and advances to the Company from its subsidiaries, but not on cash
dividends to the Company by its subsidiaries. The Company believes that such
restrictions have not had and will not have a significant impact on the
Company's ability to meet its cash obligations.
Capital Expenditures. The Company anticipates making additional capital
expenditures in the remainder of fiscal 1996 of approximately $10,000 to upgrade
its telecommunications capabilities and for routine replacement and upgrading of
other capital items. In addition, the Company anticipates making additional
capital expenditures of approximately $5,000 for facility improvements in the
remainder of fiscal 1996. The Company has no other material commitments for
capital expenditures. the Company does not foresee the need for any significant
investment in new technology in the near future and believes that no new
technology expenditures are currently required in order to sustain market share.
Elements of Income or Loss From Outside Sources
There have been no significant elements of income or loss from sources
outside the Company.
Seasonal Aspects
The Company's business is not materially effected by seasonal changes.
Item 3. Description of Property
The Company leases its corporate headquarters from an affiliate which
is owned by the principal shareholders of the pre-merged Guardian International,
Inc. The property, a six thousand (6,000) square foot building which holds the
Company's monitoring facilities, is located at 3880 N. 28 Terrace, Hollywood,
Florida 33020. The telephone number is (954) 926-5200. The lease will expire on
December 31, 1999 with an option to renew for an additional five years under the
same terms and conditions. The annual rental is approximately fifty one thousand
dollars ($51,000) plus annual increases not to exceed three percent (3%).
SDI leases a two thousand five hundred (2,500) square foot
office/warehouse facility at 823 NW 57th Street, Fort Lauderdale, Florida 33309.
The telephone number is (305) 772-0330. It is a one year lease which expires in
May, 1997. The rent is one thousand five hundred twenty two dollars ($1,522) per
month.
The Company also leases an office at 417 Whooping Loop, Suite 1745,
Altamonte Springs, Florida 32701. The lease is for a one year period which
expires on June 1997. The office is one
18
<PAGE>
thousand seven hundred fifty (1,750) square feet. The rent is seven hundred
fifty dollars ($750) per month.
Ownership of Real Estate
The Company does not own any real estate at this time.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of October 31, 1996, information
with respect to any person known by the Company to own beneficially more than
five percent (5%) of the Company's Common Stock, the shares of the Common Stock
beneficially owned by each officer and director of the Company, and the total of
the Company's Common Stock beneficially owned by the Company's officers and
directors as a group.
Stockholder Shares Beneficially Owned (1) Percent of Class (1)
- ----------- ----------------------------- --------------------
Harold Ginsburg(3) 903,533 14%
Richard Ginsburg(4) 629,245 09.75%
Sheilah Ginsburg(5) 903,533 14%
Rhonda Ginsburg(6) 629,246 09.75%
International Treasury
and Investments, Ltd.(7) 1,000,000 16.49%
Royal Bank of Scotland 400,000 06.19%
All Directors and Officers
as a Group (4 persons) 3,065,557 47.5%
========= =====
- ----------------------
(1) Calculation based on 6,453,804 shares outstanding as of October 31, 1996.
Information derived from the transfer agent, security holders, and/or company
records.
(2) Pursuant to the Plan and Agreement of Merger dated August 15, 1996
between Everest Security Systems Corporation and Guardian International, Inc.
("Merger Agreement"), International Treasury and Investments, Ltd. ("ITI")
pledged one million (1,000,000) shares of common stock of the Company as
security for certain obligation of G.M. Capital Partners, Ltd. in accordance
with a
19
<PAGE>
stock pledge agreement executed in accordance with the Merger Agreement.
G.M. Capital Partners, Ltd. was unable to honor its obligation under the Merger
Agreement and as a result the one million (1,000,000) shares are entitled to be
disbursed to the pre-merger shareholders of Guardian International, Inc. on or
about October 31, 1996. When these shares are distributed security ownership of
certain beneficial owners and management will be as follows:
Richard Ginsburg will own 824,245 shares or 12.77%. Harold Ginsburg
will own 1,183,533 shares or 18.33%. Sheilah Ginsburg will own
1,183,533 shares or 18.33%. Rhonda Ginsburg will own 824,244 shares or
12.77%. As a group the Officers and Directors will own 4,015,555 shares
or 62.21%.
(3) Harold Ginsburg is the Chairman of the Company.
(4) Richard Ginsburg is the Chief Executive Officer, President and a
Director of the Company.
(5) Sheilah Ginsburg is the Secretary/Treasurer and a Director of the
Company.
(6) Rhonda Ginsburg is a Vice President of the Company.
(7) The beneficial owner of International Treasury and Investments, Ltd. is
Warwick Nominees, Ltd. Its North American Business Agent is Mr. J. A.
Michie.
Item 5. Directors, Executive Officers, Promoters and Control Persons
Directors and Officers
Each director shall hold office for a period of one year, at which time
an annual meeting is held in accordance with the Company's Bylaws. The directors
hold office until a successor is elected and qualified.
The directors and officers of the Company are as follows:
Name Age Position
Richard Ginsburg 28 CEO, President, Director
Sheilah Ginsburg 58 Secretary/Treasurer, Director
Rhonda Ginsburg 32 Vice-President
Harold Ginsburg 63 Chairman
Robert K. Norris 39 Chief Financial Officer
20
<PAGE>
Richard Ginsburg
Mr. Ginsburg was a co-founder of the pre-merged Guardian International,
Inc. He received a Bachelor or Science degree in Communications from the
University of Miami. He began his career as a technical assistant for Gibraltar
Security Corporation. He acquired management skills at Guardsman Central
Security Corporation where he was the Central Station Manager. Mr. Ginsburg then
became Operations Manager for the Alert Centre where his responsibilities
included a major regional operations center with over sixty thousand (60,000)
subscribers.
At Guardian International, Inc. Mr. Ginsburg developed and implemented the
Guardian Authorized Dealer Program, the Guardian Acquisition Strategy Program
and the development of Guardian's central station and related operations. Mr.
Ginsburg has a working knowledge of numerous industry automation systems
including PICK, UNIX and off site data base management programs within the alarm
industry. Mr. Richard Ginsburg has not had a Directorship with any other
reporting company.
Harold Ginsburg
Mr. Harold Ginsburg was a co-founder and the President of the
pre-merged Guardian International, Inc. from its inception until August 15,
1996. He has technical training in engineering and is an acknowledged authority
and pioneer in central station monitoring. Mr. Ginsburg has almost four decades
of experience in the security systems industry and has personally developed
high-tech security systems for several Fortune 500 companies. In addition to
being regarded as an international consultant in the alarm service and
monitoring industry, he is responsible for the start-up of several successful
security companies.
Mr. Harold Ginsburg has not had a Directorship with any other reporting
company in over twenty years.
Sheilah Ginsburg
Mrs. Sheilah Ginsburg was a co-founder of the pre-merged Guardian
International, Inc. She is responsible for the day to day accounting and
administrative functions of the Company. Prior to Guardian International, Inc.,
Mrs. Ginsburg was the Vice President/Controller of Guardsman Central Security, a
business similar to Guardian International, Inc. Mrs. Ginsburg has not held a
Directorship position with any other reporting company.
Rhonda Ginsburg
Ms. Rhonda Ginsburg holds a management position with NBC Television (a
subsidiary of
21
<PAGE>
General Electric). Prior to that she was in a sales position at Sunbeam
Television in Miami, Florida.
Ms. Ginsburg has not held a Directorship position with any other
reporting company.
Robert K. Norris
Mr. Robert K. Norris is a Certified Public Accountant in the State of
Florida and received his accounting degree from Florida International
University. Before joining the Company as the Chief Financial Officer in
November 1996, Mr. Norris was Vice President - Finance of International Airline
Support Group, Inc., a publicly held company, from 1994 to 1996. From 1988 to
1993 Mr. Norris was the Controller for Niagara Corporation, a publicly held
company.
Mr. Norris has not held a Directorship position with any other
reporting company.
Item 6. Executive Compensation
The following table shows all the cash compensation paid or to be paid
by the Company or any of its subsidiaries, as well as certain other compensation
paid or accrued, during the fiscal years indicated, to the Chief Executive
Officer for such period in all capacities in which he served. No other Executive
received total annual salary and bonuses in excess of one hundred thousand
dollars ($100,000).
22
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation
<S> <C> <C> <C> <C> <C> <C> <C>
Name and Year Salary Bonus Other (Awards) (Awards) (Payouts) All Other
- -------- ---- ------ ----- ----- -------- -------- --------- ---------
Principal Annual restricted Options/ LTIP Compensa
- --------- ------ ---------- -------- ---- --------
Position Compens stock SARs tion
- -------- ------- ----- ---- ----
ation award
Harold 1996 $60,000 $0 $0 $0 0.00 $0 0.00
Ginsburg
CEO
Richard 1996 $90,000 $0 $0 $0 0 $0 company
Ginsburg car valued
at $599.00
per month
President
Sheilah 1996 $53,000 $0 $0 $0 0.00 $0 0.00
Ginsburg
Secretary/
Treasurer
Rhonda 1996 $0 $0 $0 $0 0.00 $0 0.00
Ginsburg
Vice
President
- -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
Robert K. 1996 $65,000 $0 $0 $0 0.00 $0 0.00
Norris
Chief
Financial
Officer
- -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
The following table sets forth information with respect to the
Executive Officers concerning exercise of options during the last fiscal year
and unexercised options and SARs held as of the end
23
<PAGE>
of the fiscal year:
Option/SAR Grants in Last Fiscal Year
Name Number of Percent of Total Exercise or Expiration
- ---- --------- ---------------- ----------- ----------
Securities Options/SARs Base Price Date
---------- ------------ ---------- ----
Underlying Granted to ($/share)
---------- ---------- ---------
Options/SARs Employees in
------------ ------------
Granted Fiscal Year
------- -----------
Harold Ginsburg 0 0 0 n/a
(CEO)
Richard Ginsburg 0 0 0 n/a
(President, Director)
Sheilah Ginsburg 0 0 0 n/a
(Secretary, Treasurer)
Rhonda Ginsburg 0 0 0 n/a
(Vice President)
- ------------------- ---------- ----------------- ---------- -----------
Robert K. Norris 0 0 0 n/a
(Chief Financial
Officer)
- ------------------ ----------- ----------------- ---------- ----------
The following table sets forth information with respect to the
Executive Officers concerning the exercise of options during the last fiscal
year and unexercised options and SARs held as of the end of the fiscal year:
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/
SAR Values
Name Shares Value Number of Value of
- ---- ------ ----- --------- --------
Acquired on Realized ($) Securities Unexercised in-
----------- ------------ ---------- ---------------
Exercise (#) Underlying the-money
------------ ---------- ---------
Unexercised Options/SARs at
Options/SARs at Fiscal Year-End
Fiscal Year-End ($)
(#) Exercisable/ Exercisable/
Unexercisable Unexercisable
Harold Ginsburg 0.00 0.00 0 0.00
(CEO)
24
<PAGE>
Richard Ginsburg 0.00 0.00 0 0.00
(President)
Sheilah Ginsburg 0.00 0.00 0 0.00
(Secretary, Treasurer)
Rhonda Ginsburg 0.00 0.00 0 0.00
(Vice President)
- ---------------------- --------------- --------------- --------- ------
Robert K. Norris 0.00 0.00 0 0.00
(Chief Financial
Officer)
- ---------------------- --------------- --------------- ---------- ------
The following table sets forth information with respect to the
Executive Officers concerning the grants of options and Stock Appreciation
Rights ("SAR") during the past fiscal year:
<TABLE>
<CAPTION>
Long Term Incentive Plan Table
<S> <C> <C> <C> <C> <C>
Awards in Last Fiscal Year
Name Number of Performance or Threshold Target Maximum
- ---- --------- ----------- -- --------- ------ -------
Shares, Units or Other Period Until ($ or #) ($ or #)
---------------- ------------ ----- -------- --------
Other Rights Maturation Or ($ or #)
----- ------ ---------- -- --------
(#) Payout
--- ------
Harold Ginsburg 0.00 0.00 N/A N/A N/A
(CEO)
- ------------------------------- ------------------ ---------------------- ------------- -------------- ---------
Richard Ginsburg 0.00 0.00 N/A N/A N/A
(President, Director)
Sheilah Ginsburg 0.00 0.00 N/A N/A N/A
(Secretary, Treasurer)
Rhonda Ginsburg 0.00 0.00 N/A N/A N/A
(Vice President)
- ------------------------------- ------------------ ---------------------- ------------- -------------- --------
Robert K. Norris 0.00 0.00 N/A N/A N/A
(Chief Financial Officer)
- ------------------------------- ------------------ ---------------------- ------------- -------------- --------
</TABLE>
Item 7. Certain Relationships and Related Transactions
The Company leases its corporate headquarters from an affiliate which
is owned by the principal shareholders of the pre-merged Guardian International,
Inc. The property, a six thousand (6,000) square foot building which holds the
Company's monitoring facilities, is located at 3880 N.
25
<PAGE>
28 Terrace, Hollywood, Florida 33020. The lease will expire on December 31, 1999
with an option to renew for an additional five years under the same terms and
conditions. The annual rental is approximately fifty one thousand dollars
($51,000) plus annual increases not to exceed three percent (3%).
The forgoing transactions between the Company and the members of
management are, and any future transactions will be, on terms no less favorable
to the Company than those which could be obtained from unaffiliated third
parties. In addition, no future transactions will be entered into between the
Company and members of management or principal shareholders unless such
transactions are approved by a majority of the Directors who are not members of
management or principal shareholders.
Item 8. Description of Securities
Common Stock
The holders of Common Stock (i) have equal ratable rights to dividends
from funds legally available therefor, when and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all of the
assets of the Company available for distribution to holders of Common Stock upon
liquidation, dissolution, or winding up of the affairs of the Company; (iii) do
not have preemptive, subscription, or conversion rights, or redemption or
sinking fund provisions applicable thereto; and (iv) are entitled to one
non-cumulative vote per share, either in person or by proxy, on all matters on
which stockholders may vote at all meetings of stockholders.
The holders of Common Stock of the Company do not have cumulative
voting rights, which means that the holders of more than 50% of such outstanding
shares, voting for the election of directors, can elect all of the Directors of
the Company if they so chose. If such action was to occur, the holders of the
remaining shares would not be able to elect any of the Company's directors.
PART II
Item 1. Market for Common Equity and Related Stockholder Matters
Common Stock
The Company's Common Stock is quoted on the NASDAQ OTC Bulletin Board
under the symbol GIIS.
To the best of the Company's knowledge there are presently six (6)
market-makers. A public trading market having the characteristics of depth,
liquidity and orderliness, depends on the existence of market-makers as well as
the presence of willing buyers and sellers. There can be no guarantee that these
market-makers will continue to make a market. If the market-makers
26
<PAGE>
discontinue making a market for the Company there will be virtually no
liquidity.
The following chart sets forth the range of high and low bid prices for
the Company's Common Stock based on closing transactions during each specified
period as reported by the National Quotation Bureau, Incorporated. The prices
reflect inter-dealer prices without retail mark-up, mark-down, quotation, or
commission. The figures do not necessarily represent actual transactions.
1994 High Low
---- ---- ---
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter $.01 $.01
1995
First Quarter $.011 $.01
Second Quarter $.06 $.05
Third Quarter $2 9/16* $1/2*
Fourth Quarter $3 $2
1996
First Quarter $3 9/16 $3
Second Quarter $4 7/8 $3 1/4
Third Quarter $5 $4 1/8
* Following a 1-for-20 reverse split of the Company's Common
Stock, effective July 24, 1995.
There are approximately two hundred (200) shareholders in the Company
as of December 18, 1996.
The Company is authorized to issue one hundred million (100,000,000)
shares of Common Stock at $0.001 par value per share, of which six million four
hundred fifty three thousand eight hundred four (6,453,804) shares were issued
and outstanding as of December 18, 1996.
Dividends
The Company has not declared any cash dividends since its inception,
and does not anticipate paying such dividends in the foreseeable future. The
Company plans on retaining any future earnings for use in the Company's
business. The payment of any future dividends rests within the discretion of its
Board of Directors in light of the conditions then existing, including
27
<PAGE>
the Company's earnings, capital requirements, and financial condition, as well
as other relevant factors.
Transfer Agent
The transfer agent for the Common Stock of the Company is Interwest
Transfer Company, 1981 E. Murray Holladay Road, Suite 100, Salt Lake City, Utah
84117.
Item 2.
Legal Proceedings
There are no material pending legal proceedings as defined in Item 103
of Regulation S-B.
Item 3. Changes in or Disagreements With Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with accountants on
accounting and financial disclosure.
Item 4. Recent Sales of Unregistered Securities
On June 7, 1995 the Company issued twenty million (20,000,000) shares
for one hundred thousand (100,000) shares of J.A. Industries, Inc. valued at one
hundred thousand dollars ($100,000). The shares were issued in reliance upon the
exemption form registration afforded by Section 4(2) of the Securities Act of
1933, as amended. The shares were issued in a private placement to International
Treasury & Investments Ltd.
Purchaser Date of Purchases Number of Common Aggregate
Shares Consideration
Paid
International Treasury
& Investments Ltd. 6/7/95 20,000,000 (before the $100,000 in
The 1 for 20 roll back) J.A. Industries
stock
On July 5, 1995 the Company issued 3,975,000 shares to three
individuals for par value. Two of the individuals were officers and directors of
the Company. The issuance was exempt from registration in accordance with Rule
701 of the Securities Act of 1933. The shares were issued as compensation for
services rendered or to be rendered.
28
<PAGE>
Purchaser Dates of Purchases Number of Common Aggregate
Shares Consideration
Paid
427968 B.C. Ltd.1 7/5/95 1,325,000 (prior to $1,325
- ----------------- ------ ------------------- ------
1:20 reverse split)
-------------------
Knight Financial
Ltd.2 7/5/95 1,325,000 (prior to the $1,325
- ----- ------ ----------------------- ------
1:20 reverse split)
-------------------
Steven A. Sanders 7/5/95 1,325,000 (prior to the $1,325
- ----------------- ------ ----------------------- ------
1:20 reverse split)
-------------------
In October 1995 the Company issued 500,000 shares at $2.00 per share.
The issuance was exempt from registration pursuant to Rule 504 of Regulation D
promulgated under the Securities Act of 1933. These shares were issued in a
private placement to accredited investors.
Purchaser Dates of Purchases Number of Common Aggregate
Shares Consideration
Paid
427968 B.C. Ltd. 10/13/95 50,000 $100,000
- ---------------- -------- ------ --------
427968 B.C. Ltd. 10/17/95 10,000 $20,000
- ---------------- -------- ------ -------
Royal Bank of Scotland3 10/30/95 100,000 $200,000
- ----------------------- -------- ------- --------
Anne Huber 10/31/95 15,000 $30,000
- ---------- -------- ------ -------
Rodney Adler 12/04/95 100,000 $200,000
- ------------ -------- ------- --------
Tiger Eye Investments
[Cayman] Ltd.4 12/15/95 75,000 $150,000
- --------------- -------- ------ --------
International Treasury &
- --------
1 427968 B.C. Ltd. is controlled by J.A. Michie.
2 Knight Financial Ltd. is controlled by Robert Knight.
3 Royal Bank of Scotland purchased shares for clients of the bank,
identities unknown.
4 Tiger Eye Investments (Cayman) Ltd. is owned by Campbell Nominees,
Ltd.
29
<PAGE>
Investments Ltd.5 12/15/95 75,000 $150,000
- ----------------- -------- ------ --------
Langara Capital
Foundation6 12/15/95 75,000 $150,000
- ------------ -------- ------ --------
In November 1995 the Company issued one hundred thousand (100,000)
shares to Frank Bauer in accordance with the terms of the purchase agreement of
SDI. These shares were issued in reliance upon the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended.
Purchaser Dates of Purchases Number of Common Aggregate
Shares Consideration
Paid
Frank Bauer 11/95 100,000 $1000
- ----------- ----- ------- ----
On March 12, 1996 the Company issued thirty thousand
(30,000) shares to employees and directors of the Company as payment for their
services. The issuance was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.
Purchaser Dates of Purchases Number of Common Aggregate
Shares Consideration
Paid
Frank Bauer 3/12/96 10,000 $100
- ----------- ------- ------ ----
Gary Liscio 3/12/96 5,000 $50
- ----------- ------- ----- ---
Harvey Dolschen 3/12/96 5,000 $50
- --------------- ------- ----- ---
Karl Gelbard 3/12/96 10,000 $100
- ------------ ------- ------ ----
- --------
5 International Treasury & Investments is owned by Warwyck Nominees
Ltd., identity unknown.
6 Langara Capital Foundation is owned by Lichenstein Trust,
administered by J.A. Michie.
30
<PAGE>
On August 14, 1996, the Company issued a total of one million
(1,000,000) shares of common stock to the following institutions. The issuance
was exempt from registration under Regulation S promulgated under the Securities
Act of 1933.
Purchaser Dates of Purchases Number of Common Aggregate
Shares Consideration
Paid
Bank of Austria (Switzerland) 08/14/96 15,000 $52,500
- ----------------------------- -------- ------ -------
Bank Leu 08/14/96 60,000 $210,000
- -------- -------- ------ --------
Coutts & Co. AG Zurich 08/14/96 15,000 $52,500
- ---------------------- -------- ------ -------
Credit Suisse 08/14/96 170,000 $595,000
- ------------- -------- ------- --------
Darier Hentsch Private Bank
& Trust 08/14/96 30,000 $105,000
- ---------- -------- ------ --------
FAI Overseas Investments 08/14/96 200,000 $700,000
- ------------------------ -------- ------- --------
Royal Bank of Scotland 08/14/96 400,000 $1,400,000
- ---------------------- -------- ------- ----------
Swiss Bank Corp. 08/14/96 110,000 $385,000
- ---------------- -------- ------- --------
On October 4, 1996, pursuant to a Plan and Agreement of Merger between
Everest Security Systems Corporation and Guardian International, Inc., three
million two hundred twenty six thousand nine hundred two (3,226,902) shares were
issued to the shareholders of the pre- merged Guardian International, Inc. (the
Florida corporation) in exchange for their shares of the merged corporation.
These shares were issued in reliance upon the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended.
Purchaser Dates of Purchases Number of Common Aggregate
Shares Consideration
Paid
Harold Ginsburg 10/04/96 904,533
Rhonda Ginsburg 10/04/96 629,245
Richard Ginsburg 10/04/96 629,246
Sheilah Ginsburg 10/04/96 904,533
31
<PAGE>
Robert and Nancy Kasky 10/04/96 161,345
Item 5. Indemnification of Directors and Officers
Section 78.751 of the General Corporation Law of the State of Nevada
contains provisions entitling directors and officers of the Company to
indemnification from judgements, fines, amounts paid in settlement, and
reasonable expenses, including attorney's fees, as the result of an action or
proceeding in which they may be involved by reason of being or having been a
director or officer of the Company, provided such officers or directors acted in
good faith. There is no provision in the bylaws or the certificate of
incorporation of the Company for indemnification of officers and directors.
PART F/S
Item 1. Financial Statements
For information regarding this item, reference is made to the "Index of
Financial
Statements."
PART III
Item 1. Exhibits
For information regarding this item reference is made to the "Index of
Exhibits."
INDEX
The following documents are filed as part of this Registration
Statement:
Financial Statements
Page
Description No.
32
<PAGE>
Consolidated Balance Sheets of the Company [unaudited]
at September 30, 1996 and December 31, 1995
Consolidated Statements of Operations [unaudited] for Periods
Ended September 30, 1996 and 1995
Consolidated Statement of Changes in Stockholders Equity
[unaudited] for Nine Months Ended September 30, 1996
Consolidated Statements of Cash Flows [unaudited] for
Nine Months Ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements
33
<PAGE>
GUARDIAN INTERNATIONAL, INC.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994
TOGETHER WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
Guardian International, Inc:
We have audited the accompanying balance sheet of Guardian International, Inc.
(a Florida S corporation) as of December 31, 1994, and the related statements of
operations, changes in shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Guardian International, Inc. as
of December 31, 1994 and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
McKEAN, PAUL, CHRYCY, FLETCHER & CO.
March 14, 1995
Page 1
<PAGE>
GUARDIAN INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
CURRENT ASSETS:
Cash $ 14,011
Accounts receivable-net of $5,000
allowance for doubtful accounts 81,447
Other current assets 23,058 $118,516
--------
PROPERTY & EQUIPMENT:
Station equipment 259,002
Furniture and office equipment 29,854
Leasehold improvements 84,277
---------
373,133
Accumulated depreciation and amortization (122,784) 250,349
---------
OTHER ASSETS:
Customer accounts, net of $36,699 of amortization 513,120
Organization cost, net 58,809
Other 38,764 610,693
--------- --------
$979,558
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 105,584
Acquisition contracts payable 80,510
Unearned revenue 12,862
Current portion of debt 35,791 $234,747
---------
LONG-TERM DEBT:
Equipment installment note payable 87,672
Note payable shareholder 5,867
Note payable to financial institution 194,173 287,712
---------
SHAREHOLDERS' EQUITY:
Common stock, 1000 shares authorized $1 par value,
100 shares issued and outstanding 100
Additional paid-in-capital 1,064,030
Retained deficit (607,031) 457,099
---------- --------
$979,558
The accompanying notes are an integral part of the financial statements.
Page 2
<PAGE>
<PAGE>
GUARDIAN INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
REVENUES:
Monitoring $372,627
Installation 221,852
Other 1,939 $596,418
---------
OPERATING EXPENSES:
Monitoring - primarily salaries 155,872
Installation 200,683
Amortization of customer contracts 36,699
Depreciation and amortization 106,530
General and administrative 447,438 947,222
-------- ---------
Operating loss (350,804)
INTEREST EXPENSE 23,537
Net loss $(374,341)
The accompanying notes are an integral part of the financial statements.
Page 3
<PAGE>
GUARDIAN INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($374,341)
Adjustment to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization of property 88,887
Amortization-customer accounts 36,699
Amortization-organization expense 17,642
Provision for doubtful accounts 5,000
Changes in assets and liabilities:
Accounts receivable (67,550)
Other current assets (23,058)
Accounts payable and accrued expenses 56,219
Acquisition contracts payable 80,510
Unearned revenue 11,662
--------
Net cash used in operating activities (168,330)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (14,784)
Acquisition of customer accounts (540,211)
Other assets (25,447)
----------
Net cash used in investing activities (580,442)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (119,338)
Proceeds from line-of-credit 194,173
Decrease in shareholders' loans (376,082)
Cash contributions and conversion of
shareholders' loans to capital 1,064,030
Net cash provided by financing activities 762,783
---------
Net change in cash 14,011
CASH, BEGINNING OF PERIOD -
CASH, END OF PERIOD $ 14,011
=========
The accompanying notes are an integral part of the financial statements.
Page 5
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
<S> <C> <C> <C> <C>
Additional
Common Paid-in Retained
Stock Capital Deficit Total
Balance, December 31, 1993 $100 $ - $ (232,690) $ (232,590)
Net loss - - (374,341) (374,341)
Capital contributions - 1,064,030 - 1,064,030
----- ---------- -------------- ----------
Balance, December 31, 1994 $100 $1,064,030 $ (607,031) $ 457,099
==== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 4
<PAGE>
GUARDIAN INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
A. Operations
Guardian International, Inc. ("The Company") operates a central
monitoring alarm station which services customer accounts and those accounts
owned by security system dealers.
B. Income Taxes
The Company, with the consent of its stockholders, has elected to be
treated as an S Corporation under the provisions of the Internal Revenue Code.
Under these provisions, the income or loss of the corporation is included in the
income tax returns of the individual stockholders. Accordingly, no income tax
provision or benefit has been reflected in the accompanying financial
statements.
C. Property and Equipment
Property and Equipment are stated at cost. Depreciation is computed
using accelerated methods over the estimated useful lives of the assets.
D. Customer Accounts
Customer Accounts purchased from alarm dealers are reflected at cost.
The purchase price of the contract is amortized on a straight line basis over
the shorter of the term of the contract (usually five years) or life of the
customer account.
E. Revenues
Revenues from monitoring alarm services are recognized when service is
rendered. Amounts paid in advance are deferred and recognized as revenue in the
period service occurs. Revenues from installation of alarm systems are
recognized in the period installed.
2. ACQUISITION OF CUSTOMER ACCOUNTS
During the year ended December 31, 1994, the Company purchased $540,211
of customer accounts from various independent alarm dealers. At December 31,
1994, the Company owed $80,510 in connection with of these acquisitions which is
included in the balance sheet as "Acquisition contracts payable".
Page 6
<PAGE>
3. LINE OF CREDIT
In November 1994, the Company entered into a $7 million credit
agreement with a financial institution for the purpose of borrowing funds to
purchase customer accounts. Borrowings under the agreement bear interest at 4%
above prime plus a funding fee of 1% of any amounts borrowed. The loan is
collateralized by the Company's assets and matures on November 30, 1999. The
principal shareholders of the Company have personally guaranteed $700,000 of the
loan and pledged their stock as collateral. The agreement contains certain
conditions including, but not limited to, restrictions related to indebtedness,
net worth and distribution payments to shareholders.
In connection with the loan agreement, the Company has agreed to pay
the lender a "Capital Appreciation Payment", if a market event occurs (i.e.
merger or consolidation, sale or disposition of the Company or 20% of the number
of outstanding common shares, etc.). The payment is determined based on a
percentage (approximately 25%) of the fair value of the Company's common stock
and after deducting $1 million plus any capital contributions by the principal
shareholders for the purchase of additional shares of common stock.
4. RELATING PARTY TRANSACTIONS
A. Leased Facilities
The Company rents on a month to month basis its monitoring facilities
from an affiliate which is owned by the principal shareholders of the Company.
The informal agreement required lease payments of approximately $50,000 during
1994. Lease payments for the facilities in 1995 are estimated to be $35,000.
B. Consulting Agreement
In May 1994, the Company entered into an agreement with a consultant
to provide advisory services at a fee of $400 per week (subject to increases by
the Board of Directors) through April 15, 1995 at which time agreement is to be
renegotiated. In addition, the Consultant shall be entitled to receive up to 10%
of the amount of common stock then outstanding for securing new customer
accounts (as defined) or in the event the Company has a public offering; sells
its assets or merges with other entity.
Page 7
<PAGE>
GUARDIAN INTERNATIONAL, INC.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH REPORT OF INDEPENDENT AUDITORS
1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
Guardian International, Inc.
We have audited the accompanying balance sheets of Guardian International, Inc.
( a Florida S corporation) as of December 31, 1995 and 1994, and the related
statements of operations, changes in shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Guardian International, Inc. as
of December 31, 1995 and 1994 and the results of its operations and cash flows
for the years then ended in conformity with generally accepted accounting
principles.
McKEAN, PAUL, CHRYCY, FLETCHER & CO.
February 26, 1996
2
<PAGE>
GUARDIAN INTERNATIONAL, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
----- -----
ASSETS
CURRENT ASSETS:
Cash $ 14,263 $ 14,011
Accounts receivable, net of $15,000 and $5,000
allowance for doubtful accounts, respectively 146,285 81,447
Other current assets 7,943 23,058
------------- ---------
Total current assets 168,491 118,516
------------ ---------
PROPERTY & EQUIPMENT:
Station equipment 287,055 259,002
Furniture and office equipment 31,85 29,854
Leasehold improvements 103,217 84,277
------------ ---------
422,131 373,133
Accumulated depreciation and amortization (212,184) (122,784)
------------ ---------
209,947 250,349
------------ ---------
OTHER ASSETS:
Customer accounts, net of $124,482 and $36,699
of amortization, respectively 2,075,671 513,120
Organization cost, net 41,165 58,809
Other 138,492 38,764
------------ -----------
2,255,328 610,693
----------- ----------
Total Assets $2,633,766 $ 979,558
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expense $ 82,583 $ 105,584
Acquisition contracts payable 102,484 80,510
Unearned revenue 60,880 12,862
Current portion of debt 44,947 35,791
------------- -----------
290,894 234,747
------------ ----------
LONG TERM DEBT:
Equipment installment notes payable 61,970 87,672
Notes and loans payable to shareholders 198,887 5,867
Note payable to financial institution 1,895,299 194,173
----------- ----------
2,156,156 287,712
----------- ----------
SHAREHOLDERS' EQUITY:
3
<PAGE>
Common stock, 1,000 shares authorized, $1 par
value, 100 shares issued and outstanding 100 100
Additional paid-in capital 1,064,030 1,064,030
Retained deficit (877,414) (607,031)
------------ ----------
186,716 457,099
------------ ----------
Total Liabilities and Shareholders' Equity $2,633,766 $ 979,558
========== =========
The accompanying notes to financial statements are an integral part of these
statements.
4
<PAGE>
GUARDIAN INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
----------- ----------
REVENUES:
Monitoring $ 953,034 $ 372,627
Installation 131,229 221,852
Other 10,285 1,939
------------- -------------
1,094,548 596,418
----------- -----------
OPERATING EXPENSES:
Monitoring - salaries 215,711 155,872
Installations 141,121 200,683
General and administrative 660,969 447,438
------------
1,017,801 803,993
----------- -----------
Operating income (loss) before
interest expense, amortization 76,747 (207,575)
and depreciation
INTEREST EXPENSE, AMORTIZATION
AND DEPRECIATION:
Interest expense 146,331 23,537
Amortization of customer contracts 87,783 36,699
Depreciation and amortization 113,016 106,530
------------
347,130 166,766
------------ ----------
Net loss $ (270,383) $(374,341)
=========== ==========
5
The accompanying notes to financial statements are an integral part of these
statements.
6
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<S> <C> <C> <C> <C> <C>
Additional
Common Paid-in Retained
Stock Capital Deficit Total
Balance, December 31, 1993 $ 100 $ - $ (232,690) $(232,590)
Net loss - - (374,341) (374,341)
Capital contributions - 1,064,030 - 1,064,030
------------ ----------- ---------------- ---------
Balance, December 31, 1994 100 1,064,030 (607,031) 457,099
Net loss - - (270,383) (270,383)
----------- ----------------- ----------
Balance, December 31, 1995 $ 100 $1,064,030 $(877,414) $ 186,716
========= ========== ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
7
8
<PAGE>
GUARDIAN INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (270,383) $(374,341)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 95,372 88,887
Amortization of customer accounts 87,783 36,699
Amortization of organization expenses 17,644 17,642
Provision for doubtful accounts 23,815 5,000
Changes in assets and liabilities:
Accounts receivable (88,653) (67,550)
Other assets (90,585) (23,058)
Accounts payable and accrued liabilities (23,001) 56,219
Acquisition contracts payable 21,974 80,510
Unearned revenue 48,018 11,662
---------
Net cash used in operating activities (178,016) ( 168,330)
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (34,636) (14,784)
Acquisition of customer accounts (1,650,334) (540,211)
Other assets - (25,447)
------------------------------
Net cash used in investing activities (1,684,970) ( 580,442)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt (356,945) (119,338)
Proceeds from financial institutions 2,001,539 194,173
Increase (decrease) in shareholders' loan 218,644 ( 376,082)
Cash contributions and conversion of share- - 64,030
holders' loans to capital ---------------- ---------
Net cash provided by financing activities 1,863,238 762,783
---------- ----------
Net change in cash 252 14,011
CASH, BEGINNING OF PERIOD 14,011 -
------------
9
<PAGE>
CASH, END OF PERIOD $ 14.263 $ 14,011
============ ==========
NON CASH INVESTING ACTIVITY:
Financed acquisition of property $ 14,362 -
------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 128,281 $ 23,283
-----------
The accompanying notes to financial statements are an integral part of these
statements.
10
<PAGE>
GUARDIAN INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
A. Operations
Guardian International, Inc. ("The Company") operates a
central monitoring alarm station and installs alarm systems for residential and
commercial customers in Florida .
B. Income Taxes
The Company, with the consent of its stockholders, has elected
to be treated as an S Corporation under the provisions of the Internal
Revenue Code. Under these provisions, the income or loss of the corporation
is included in the income tax returns of the individual stockholders.
Accordingly, no income tax provision or benefit has been reflected in the
accompanying financial statements.
C. Property and Equipment
Property and equipment are carried at cost. Depreciation is
computed using accelerated methods over the estimated useful lives of the
assets as follows:
Life
Equipment 5-7 years
Leasehold Improvements 31 1/2 years
D. Customer Accounts
Customer accounts purchased from alarm dealers are reflected
at cost. Effective January 1, 1995, the Company extended the estimated life
of purchased customer accounts and the applicable straight-line
amortization period from 5 to 10 years. The change in the estimated useful
lives was made to more accurately reflect current industry practice. The
effect of the change was to decrease the net loss by approximately $168,000
for the year ended December 31, 1995. It is the Company's policy to
periodically evaluate acquired customer account attrition and, when
necessary, adjust the remaining useful lives.
.
11
<PAGE>
12
<PAGE>
E. Revenues
Revenues from monitoring alarm services are recognized when service is
rendered. Amounts paid in advance are deferred and recognized as revenue in
the period service occurs. Revenues from installation of alarm systems are
recognized in the period installed.
F. Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from
large number of residential and commercial customers.
2. ACQUISITION OF CUSTOMER ACCOUNTS
During the years ended December 31, 1995 and 1994, the Company
purchased $1,650,334 and $540,211 respectively of customer accounts from various
independent alarm dealers which are reflected as customer accounts in the
balance sheet. At December 31, 1995 and 1994, the Company owed $102,484 and
$80,510, respectively in connection with these acquisitions which is included in
the balance sheet as "Acquisition Contracts Payable".
On January 4, 1996 (subsequent to year end) the Company purchased
certain assets consisting primarily of customer accounts and equipment from an
alarm dealer for approximately $1.8 million. The purchase was financed with
borrowings under the existing line of credit with a financial institution (see
Note 3). As of December 31, 1995, the Company had made a $100,000 deposit which
is included in "Other Assets" in the balance sheet.
3. NOTES PAYABLE
(a) Financial Institution
In November 1994, the Company entered into a $7 million line of credit
with a financial institution for the purpose of borrowing funds to acquire
customer alarm accounts. Borrowings ($1,895,299 at December 31, 1995) under the
agreement bear interest at 3% above prime. The loan is collateralized by the
Company's assets and matures on November 30, 1999. The principal shareholders of
the Company have
13
<PAGE>
personally guaranteed $700,000 of the loan and pledged their stock as
collateral. The agreement contains certain conditions including, but not limited
to, restrictions related to indebtedness, net worth and distribution payments to
shareholders. At December 31, 1995, the Company did not comply with certain
conditions of the agreement for which a waiver was obtained from the lender.
In connection with the loan, the Company has agreed to pay the lender a
"Capital Appreciation Payment" if a market event occurs (i.e. merger or
consolidation, sale or disposition of the Company or 20% or more of the number
of its outstanding common shares, etc.). The payment is based on a percentage
(approximately 25%) of the fair value of the Company's common stock after
deducting $1 million plus any capital contributions by the principal
shareholders for the purchase of additional shares of common stock.
(b) Loans Payable to Principal Shareholders
As of December 31, 1995 the principal shareholders have loaned the
Company $194,644. The loans bear interest at 7% and have no fixed maturity date.
The shareholders have indicated that these loans will not be due within a year
and therefore are classified as long-term debt in the balance sheet.
4. RELATED PARTY TRANSACTIONS
Leased Facilities
The Company rents on a month to month basis its monitoring facilities from
an affiliate which is owned by the principal shareholders of the Company. The
informal agreement required lease payments of approximately $32,000 and $50,000
during 1995 and 1994, respectively. Lease payments for the facilities in 1996
are estimated to be $35,000.
14
<PAGE>
GUARDIAN INTERNATIONAL, INC.
FINANCIAL STATEMENTS AS OF AUGUST 31, 1996
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Guardian International, Inc.
We have audited the accompanying consolidated balance sheet of Guardian
International, Inc. as of August 31, 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for the eight
months then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Guardian International, Inc. as
of August 31, 1996 and the results of its operations and cash flows for the
eight months then ended in conformity with generally accepted accounting
principles.
McKEAN, PAUL, CHRYCY, FLETCHER & CO.
November 7, 1996
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1996
ASSETS
CURRENT ASSETS:
Cash $ 3,180,745
Accounts receivable, net of $ 66,347
allowance for doubtful accounts 540,790
Other current assets 136,545
Total current assets 3,858,080
PROPERTY & EQUIPMENT:
Station equipment 514,019
Furniture and office equipment 37,404
Leasehold improvements 105,829
--------------
657,252
Accumulated depreciation and amortization (268,387)
388,865
CUSTOMER ACCOUNTS, net 4,784,693
INTANGIBLE ASSETS, net 1,341,027
OTHER 11,168
Total Assets $10,383,833
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expense $ 608,365
Payable to shareholder 1,750,000
Unearned revenue 163,905
Current portion of debt 43,319
-------------
Total current liabilities 2,565,589
DEFERRED TAX LIABILITY 63,000
LONG TERM DEBT:
Equipment installment notes payable 120,554
Note payable to financial institution 4,530,144
Total long term debt 4,650,698
SHAREHOLDERS' EQUITY:
Common stock, 100,000,000 shares authorized, $.001 par
value, 6,453,804 shares issued and 6,443,726 outstanding 6,454
Additional paid-in capital 4,355,494
Accumulated deficit (1,055,842)
Stock subscription receivables (201,358)
Treasury stock, at cost (202)
------------
Total Liabilities and Shareholders' Equity 3,104,546
$10,383,833
The accompanying notes to financial statements are an integral part of this
statement.
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996
REVENUES:
Monitoring $ 1,670,171
Installation 240,642
Other 54,460
-------------
1,965,273
OPERATING EXPENSES:
Monitoring - primarily salaries 238,098
Installation 87,859
General and administrative 919,571
------------
1,245,528
Income before interest expense,
amortization, depreciation and
provision for taxes 719,745
INTEREST EXPENSE, AMORTIZATION
AND DEPRECIATION:
Interest expense 351,767
Amortization of customer contracts 395,810
Depreciation and amortization 87,596
-------------
835,173
Loss before provision for taxes (115,428)
PROVISION FOR TAXES (63,000)
Net loss $ (178,428)
==========
Pro Forma Data (Unaudited):
Loss before provision for taxes $ (504,457)
Pro forma income tax credit 108,515
-------------
Pro forma net loss $ (395,942)
===========
Pro forma loss per share $ ( 0.06)
-------------
Pro forma weighted average shares outstanding 6,453,804
============
The accompanying notes to financial statements are an integral part of this
statement.
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDER'S EQUITY
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996
Common Stock Common Stock Additional Paid in
Shares Amount Capital
Balance, December 31, 3,226,902 $3,227 $1,060,903
1995
Issuance of stock in 3,226,902 3,227 4,962,429
connection with
Everest acquisition
Distribution to - - (1,667,838)
shareholder
Net loss for period - - -
Balance, August 31, 6,453,804 $6,454 $4,355,494
========= ====== ==========
1996
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDER'S EQUITY
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996
(Continued from above)
Accumulated Stock subscription Treasury Total
Deficit Receivable Stock
Balance, $(877,414) $ - $ - $186,716
December 31,
1995
Issuance of stock - (201,358) (202) 4,764,096
in connection with
Everest
acquisition
Distribution to - - - (1,667,838)
shareholder
Net loss for period (178,428) - - (178,428)
----------
Balance, August
31, 1996 $(1,055,842) $(201,358) $(202) $3,104,546
===========================================================
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (178,428)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 87,596
Amortization of customer accounts 395,810
Provision for doubtful accounts 24,047
Changes in assets and liabilities:
Accounts receivable (221,516)
Other assets (33)
Accounts payable and accrued liabilities 148,192
Deferred taxes 63,000
Unearned revenue 103,025
--------------
Net cash provided by operating activities 421,689
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (150,563)
Acquisition of customer accounts (2,752,832)
Advances from Everest 3,115,619
Cash acquired in acquisition 37,711
---------------
Net cash provided by investing activities 249,935
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (1,372,309)
Proceeds from line of credit 3,979,649
Payment of shareholder loans (112,482)
-------------
Net cash provided by financing activities 2,494,858
------------
Net change in cash 3,166,482
CASH, BEGINNING OF PERIOD 14,263
CASH, END OF PERIOD $ 3,180,745
============
NONCASH INVESTING AND FINANCING ACTIVITY:
Financed acquisition of property $ 58,250
--------------
Payable to shareholder $ 1,667,838
------------
Value of Everest net assets acquired :
Subscriber accounts acquired $ 352,000
Goodwill $ 1,223,000
Other assets $ 332,743
Purchase price and assumed liabilities $ (1,870,032)
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 299,484
------------
The accompanying notes to financial statements are an integral
part of this statement.
<PAGE>
GUARDIAN INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Combination
On August 28, 1996, Everest Security Systems Corporation ("Everest -
the predecessor company") acquired all the outstanding common stock of
Guardian International, Inc. ("Guardian"), a non public company, by
issuing, 3,226,902 shares of Everest. In addition, the merger specified
that $1,750,000 shall be paid to the principal shareholder of Guardian as
consideration for consummating the transaction (including repayment of
shareholder loans of $82,162). The transaction has been accounted for under
the purchase method as a reverse acquisition with Guardian being deemed the
acquirer. The name of the surviving entity was changed from Everest to
Guardian (" the Company").
In addition, the Company will issue 484,035 shares of non-voting class
B common stock to a financial institution as consideration for their
consent to the merger and to amending certain covenants of the loan
agreement.
The historical financial statements prior to August 31, 1996 are those
of Guardian. The consolidated balance sheet at August 31, 1996, includes
the accounts of the surviving entity and its wholly-owned subsidiary. All
significant intercompany balances and transaction have been eliminated.
Unaudited proforma information giving effect to the acquisition as if it
occurred at the beginning of the periods reflected below is as follows:
Unaudited
8 months Ended August 31,
1996 1995
------ ----
Revenues, net $ 2,833,000 $ 1,508,000
========== ==========
Net loss $ (395,942) $ (309,280)
=========== ===========
Loss per share $ (0.06) $ (0,05)
============ =============
Weighted average
number of shares outstanding 6,453,804 6,453,804
========== ==========
<PAGE>
Description of Business
The Company operates a central monitoring alarm station and sells and
installs alarm systems for residential and commercial customers in Florida
.
Cash and Cash Equivalents
All highly liquid investments purchased with a remaining maturity of
three months or less at the date acquired are considered cash equivalents.
Customer Accounts and Intangible Assets
Customer accounts purchased from alarm dealers and intangible assets
are reflected at cost. Substantially all costs associated with purchasing
an alarm account are capitalized and included in the "customer accounts" in
the accompanying balance sheet. Costs related to marketing and installation
of systems for internally generated customer accounts are expensed as
incurred. Customer accounts are amortized on a straight-line basis over a
10 year period. It is the Company's policy to perform monthly evaluations
of acquired customer account attrition and, if necessary, adjust the
remaining useful lives. The Company periodically estimates future cash
flows from customer accounts. Because expected cash flows have exceeded the
unamortized cost of customer accounts the Company has not recorded an
impairment loss.
Intangible assets are recorded at cost and amortized over their
estimated useful lives. The carrying value of intangible assets is
periodically reviewed and impairments are recognized when expected
operating cash flows derived from such intangibles is less than their
carrying value.
Property and Equipment
Property and equipment are stated at cost and depreciated using
accelerated methods over the estimated useful lives.
Revenues
Revenues are recognized when installation of security alarm systems has
been performed and when monitoring services are provided. Customers are
billed for monitoring services on a monthly, quarterly or annual basis in
advance of the period in which such services are provided. Deferred
revenues result from billings in advance of performance of monitoring.
Costs of providing installations, including inventory, are charged to
income in the period when the installation occurs. Losses on contracts for
which future costs are anticipated to exceed revenues are recognized in the
period such losses are identified. Contracts for monitoring services are
generally for an initial non-cancelable term of five years with automatic
renewal on an annual basis thereafter unless terminated by either party. A
substantial number of contracts are on an automatic renewal basis.
Income taxes
Everest, the predecessor company, is a C Corporation subject to income
taxes at the corporate level. Prior to the merger Guardian was an S
Corporation and subject to tax at the shareholder level.
<PAGE>
As a result of the merger on August 28, 1996, Guardian's S Corporation
status was terminated and any future earnings will be subject to income
taxes at the corporate level.
The Company has established deferred tax assets and liabilities for
temporary differences between financial statement and tax basis of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from
large number of customers, including both residential and commercial. The
Company extends credit to its customers in the normal course of business,
performs periodic credit evaluations and maintains allowances for potential
credit losses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. PURCHASED CUSTOMER ACCOUNTS
The following is an analysis of the changes in acquired customer accounts
for the eight months ended August 31, 1996
Balance, December 31, 1995 $2,075,671
Purchase of customer accounts 2,752,832
Customer accounts acquired in merger 352,000
------------
5,180,503
Amortization and write-off of customer
accounts (395,810)
------------
Balance, August 31, 1996 $ 4,784,693
==========
In conjunction with certain purchases of customer accounts, the Company
withholds a portion of the price as a credit to offset qualifying attrition of
the acquired customer accounts and for purchase price settlements of assets
acquired and liabilities assumed. At August 31, 1996, the Company withheld
$68,940 in connection with the acquisition of customer accounts which is
reflected as "accounts payable and accrued expenses" in the balance sheet.
1 INTANGIBLE ASSETS
Intangible assets consist of the following at August 31, 1996:
Amortization
Period Amount
Excess of acquisition cost over
the net assets acquired 10 years $ 1,223,000
Covenant not to compete, organization costs
and other Various 193,455
1,416,455
Less accumulated amortization ( 75,428)
------------
$ 1,341,027
Deferred financing costs will be incurred as a result of issuing to a
financial institution 484,035 shares of nonvoting Class B common stock as
described in Note 1 - "Business Combination". These costs will be charged to
operations as additional interest expense over the life of the related
indebtedness.
4. NOTES PAYABLE TO FINANCIAL INSTITUTION
The Company has a $7 million line of credit with a financial institution
for the purpose of borrowing funds to acquire customer alarm accounts.
Borrowings ($4,530,144 at August 31, 1996) under the agreement bear interest at
3% above prime. The loan is collateralized by the Company's assets and matures
on November 30, 1999. The principal shareholders of the Company have personally
guaranteed $700,000 of the loan and pledged their stock as collateral. The
agreement contains certain conditions including, but not limited to,
restrictions related to indebtedness, net worth and distribution payments to
shareholders other than $1,750,000 which was paid to a shareholder subsequent to
August 31, 1996.
5. RELATED PARTY TRANSACTIONS
Leased Facilities
The Company leases its monitoring facilities from an affiliate which is
owned by the principal shareholders of the Company at an annual rental of
approximately $51,000 (plus annual increases not to exceed 3%) through December
31, 1999 with an option to renew for an additional 5 years under the same terms.
6. INCOME TAXES
The components of deferred tax assets and liabilities at August 31, 1996
are as follows:
Deferred Tax Assets -
Net operating loss carryforwards $48,500
Allowance for doubtful accounts 22,500
Total deferred tax assets 71,000
Deferred Tax Liabilities -
Difference in amortization of customer
contracts 120,200
Other
13,800
--------
Total deferred tax liabilities 134,000
Net deferred tax liability $63,000
<PAGE>
The conversion of Guardian from an S Corporation to C Corporation resulted in
recognition of the net deferred tax liability of $63,000 reflected above.
At August 31, 1996, the Company has net operating loss carryfowards for
federal income tax purposes of approximately $143,000 which expires in 2010.
These net operating loss carryforwards will be subject to significant annual
limitations on utilization in future years as a result of the merger and related
change in ownership control of the company.
8. PRO FORMA DATA (UNAUDITED)
Pro Forma Income Tax Credit -
For informational purposes, the statement of operations includes a pro
forma income tax credit that would have resulted if the Company had been a C
Corporation and able to utilize its operating losses.
Pro Forma Net Loss Per Share -
Pro forma net loss per share is computed by dividing the pro forma net
loss by the pro forma number of shares of common stock outstanding during the
periods.
Pro Forma Shares Outstanding -
Pro forma shares outstanding represent the number of shares of common
stock outstanding after giving retroactive effect to the 3,226,902 shares issued
in connection with the merger. Accordingly, the calculation of the pro forma
number of shares of common stock outstanding would be 6,453,804 and 6,453,804
for the eight months ended August 31, 1996 and 1995, respectively.
9. STOCKHOLDERS' EQUITY
(a) Common Stock
The Company has authorized the issuance of up to 100,000,000 shares of
common stock with a par value of $.001 each. At August 31, 1996 there were
6,453,804 shares of common stock issued and 6,443,726 shares outstanding.
Treasury stock is shown at cost, and as of August 31, 1996, consists of 10,078
shares.
(b) Stock Subscription Notes Receivable
In December 1995, the Company issued 285,000 shares of common stock at $2
per share ($570,000 in the aggregate). The proceeds from the sale of the common
stock were evidenced by an 8% stock subscription note receivable due in January
1996 and collateralized by the common stock. As of August 31, 1996 there remains
an outstanding balance of $201,358 ($179,760 of principal and $21,598 of
interest) under the notes receivables. The $201,358 has been reflected as "stock
subscriptions receivable" and a reduction of stockholder's equity in the
accompanying balance sheet. Management is in the process of attempting to
collect the outstanding amounts or have the applicable common shares returned.
10. STOCK OPTION PLAN
The Company has issued stock options to various key employees to purchase
100,000 and 10,000 shares of common stock at $2 and $3 per share, respectively.
The Company also issued options to
<PAGE>
purchase 74,720 shares at $2 per share to an investment banker. As of August 31,
1996, none of these options have been exercised and all options expire on
December 31, 2000.
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123. "Accounting for Stock Based Compensation", which establishes financial
accounting and reporting standards for stock-based employee compensation plans
and for the issuance of equity instruments to acquire goods and services from
nonemployees. The Company plans to adopt SFAS No. 123 for its stock-based
employee compensation plans in fiscal 1997 through pro forma disclosure only.
<PAGE>
GUARDIAN INTERNATIONAL, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited proforma condensed consolidated financial statements
give effect to the acquisition by Guardian International, Inc. ("Guardian") of
Everest Security Systems Corporation ("Everest"), pursuant to the Acquisition
Agreement between the parties, and are based on the estimates and assumptions
set forth therein. This proforma information has been prepared utilizing the
historical financial statements and notes thereto, which are included. The
proforma financial data does not purport to be indicative of the results which
actually would have been obtained had the purchase been effected on the dates
indicated or of the results which may be obtained in the future.
The proforma financial information is based on the purchase method of accounting
as a reverse acquisition with Guardian being deemed the acquirer. The proforma
entries are described in the accompanying notes to the unaudited proforma
condensed consolidated financial statements. The proforma unaudited condensed
consolidated statements of operations assumes the acquisition took place on the
first day of the period presented.
<PAGE>
GUARDIAN INTERNATIONAL, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996
Unaudited Proforma Condensed Consolidated Financial Statements
The following represents the unaudited proforma condensed consolidated
statements of operations for the eight months ended August 31, 1996, assuming
the transaction was consummated as of January 1, 1996.
Historical Historical
Guardian Everest
International, Security Systems,
Inc.For the Inc.For the
Eight Months Eight Months Proforma Proforma
Ended August Ended August Entries Combined
31, 1996 31, 1996
Revenue $1,965,273 $870,717 (1) $(2,986) $2,833,004
Operating
Expenses 1,245,472 1,147,773 (1) (2,986) 2,390,259
--------- --------- -------- ---------
Income Before
Interest,
Amortization
and Other 719,801 (277,056) 442,745
Interest
Amortization
and Other (2) (17,536)
(3) (29,631)
(4) 55,394
835,173 70,956 (5) 14,491 928,847
------- ------ -------
Net Loss $115,372 $348,012 $486,102
======== ======== ========
Net Loss
Per Share $0.09
Weighted Average
Number of Shares
Outstanding 5,383,693
(1) To eliminate activity which would have been intercompany activity.
(2) To switch Everest amortization of customer contracts to Guardian's
amortization method.
(3) To eliminate amortization of goodwill on Everest's books.
(4) To recognize amortization of goodwill created in transaction.
(5) To recognize amortization of capitalized interest related to issuance of
shares to financial institution.
<PAGE>
GUARDIAN INTERNATIONAL, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
Unaudited Proforma Condensed Consolidated Financial Statements
The following represents the unaudited proforma condensed consolidated
statements of operations for the eight months ended August 31, 1995, assuming
the transaction was consummated as of January 1, 1995.
Historical Historical
Guardian Everest
International, Security Systems,
Inc. For the Inc. For the Proforma Proforma
Eight Months Eight Months Entries Combined
Ended August Ended August
31, 1995 31, 1995
Revenue $694,016 $813,521 $1,507,537
Operating
Expenses 256,568 620,872 877,440
------- ------- -------
Income Before
Interest,
Amortization
and Other 437,448 192,649 630,097
Interest
Amortization
and Other (1) (29,631)
(2) 55,394
(3) 14,491
614,070 403,897 1,058,221
------- ------- ---------
Net Loss $176,622 $211,248 $428,124
======== ======== ========
Net Loss
Per Share $0.11
Weighted Average
Number of Shares
Outstanding 3,844,740
=========
(1) To eliminate amortization of goodwill on Everest's books.
(2) To recognize amortization of goodwill created in transaction.
(3) To recognize amortization of capitalized interest related to issuance
of shares to financial institution.
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
ASSETS
September 30, December 31,
1996 1995
(Unaudited) (Audited)
CURRENT ASSETS:
Cash $ 1,175,129 $ 14,263
Accounts receivable, less allowance
for doubtful accounts of 553,052 146,285
$68,147 and $15,000
Other current assets 146,274 7,943
-------------- --------------
Total current assets 1,874,455 168,491
------------- ------------
PROPERTY & EQUIPMENT:
Station equipment 521,401 287,055
Furniture and office equipment 44,636 31,859
Leasehold improvements 112,429 103,217
-------------- -------------
678,466 422,131
Accumulated depreciation and (278,977) (212,184)
amortization -------------- -------------
399,489 209,947
-------------- --------------
CUSTOMER ACCOUNTS, net 4,835,415 2,075,671
INTANGIBLE ASSETS, net 1,330,338 41,165
OTHER 18,043 138,492
------------- -----------
Total Assets $ 8,457,740 $ 2,633,766
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expense $ 420,093 $ 185,067
Unearned revenue 123,705 60,880
Current portion of debt 45,241 44,947
-------------- --------------
Total current liabilities 589,039 290,894
------------- -------------
DEFERRED INCOME TAX LIABILITY 63,000 -
LONG TERM DEBT:
Equipment installment notes payable 144,044 61,970
Notes and loans payable to shareholders - 198,887
Note payable to financial institution 4,598,669 1,895,299
----------- -----------
Total long term debt 4,742,713 2,156,156
-----------
SHAREHOLDERS' EQUITY:
Common stock, 100,000,000 shares
authorized, $.001 par
34
<PAGE>
value, 6,453,804 shares issued 6,454 3,227
and 6,443,726 outstanding
Additional paid-in capital 4,355,494 1,060,903
Accumulated deficit (1,097,400) (877,414)
Stock subscriptions receivable (201,358) -
Treasury stock, at cost (202) -
------------ -----------
3,062,988 186,716
------------ -----------
Total Liabilities and Shareholders' Equity $ 8,457,740 $ 2,633,766
=========== ==========
See notes to consolidated financial statements.
35
<PAGE>
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
REVENUES:
Monitoring $ 679,304 $269,980 $1,894,290 $ 659,307
Installation 203,391 7,858 382,246 121,589
Other 42,208 687 68,083 6,809
---------- ----------- ----------
924,903 278,525 2,344,619 787,705
--------- -------- ---------- ----------
OPERATING EXPENSES:
Monitoring
- primarily salaries 92,441 50,214 270,552 154,058
Installation 125,362 14,604 182,185 127,667
General and
administrative 449,963 158,808 1,093,319 459,921
--------- ----------
667,766 223,626 1,546,056 741,646
-------- -------- --------- ----------
Operating income
before interest,
amortization and
depreciation and 257,137 54,899 798,563 46,059
provision for income
taxes
INTEREST EXPENSE,
AMORTIZATION
AND DEPRECIATION:
Interest expense 151,631 36,811 400,051 83,147
Amortization of
customer
contracts 184,889 36,555 438,998 84,978
Depreciation and
amortization 35,477 23,693 116,500 71,079
--------- -----------
371,997 97,059 955,549 239,204
-------- --------- -------- -----------
Loss before provision
for income taxes (114,860) (42,160) (156,986) (193,145)
PROVISION FOR INCOME TAXES
upon change in tax status (63.000) - (63,000) -
----------- ----------
Net loss $(177,860) $(42,160) $(219,986) $ (193,145)
========= ======== ========= ==========
Loss per share $ (.03) $ (.01) $ (.03) $ (.03)
=========== ======== =========== ===========
Weighted average
number of common
shares outstanding 6,453,804 6,453,804 6,453,804 6,453,804
========= ========= ========= =========
See notes to consolidated financial statements.
36
<PAGE>
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Common Stock Additional Accumulated
Shares Amount Paid in Capital Deficit
Balance,
December 31, 1995 3,226,902 3,227 1,060,903 $(877,414)
Issuance of stock
in connection with
Everest acquisition 3,226,902 3,227 4,962,429 -
Distribution to
Shareholder - - (1,667,838) -
Net loss for period - - - (219,986)
Balance, September _________ _________ ___________ ____________
30, 1996 6,453,804 $6,454 $4,355,494 $(1,097,400)
--------- ------ ---------- ------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996,
CONTINUED
Stock Treasury
Subscription Stock Total
Receivable
Balance,
December 31, 1995 $ - $- $186,716
Issuance of stock
in connection with
Everest acquisition (201,358) (202) 4,663,491
Distribution to
Shareholder - - (1,667,838)
Net loss for period - - (219,986)
Balance, September _________ _________ ___________
30, 1996 (201,358) $(202) $ 3,062,988
See Notes to consolidated financial statements.
37
<PAGE>
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
CASH FLOW FROM OPERATING ACTIVITIES: 1996 1995
Net loss $(219,986) $(193,145)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 116,500 71,079
Amortization of customer accounts 438,998 84,978
Provision for doubtful accounts 24,047 9,140
Changes in assets and liabilities:
Accounts receivable (233,778) (28,341)
Other Assets (16,637) 17,034
Accounts payable and accrued
liabilities (6,319) (36,630)
Acquisition contracts payable (33,765) (53,058)
Unearned revenue 62,825 107,414
Deferred income tax liability 63,000 ---
------- ---
Net cash provided by (used in)
operating activities 194,885 (21,529)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (179,402) (25,226)
Acquisition of customer accounts (2,846,742) (896,109)
Advances from Everest 3, 115,619 ----
Cash acquired in acquisition 37,711 ----
------------ ----
Net cash provided by (used in)
investing activities 127,186 (921,335)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments of long-term debt (1,274,129) (936,124)
Net proceeds from line of credit 3,979,649 1,958,652
Payment of shareholder loans (198,887) ----
Distribution to shareholder (1,667,838) ----
----------- ----
Net cash provided by
financing activities 838,795 1,022,528
---------------- ---------
Increase in cash 1,160,866 79,664
CASH, BEGINNING OF PERIOD 14,263 14,011
------------ -----------
CASH, END OF PERIOD $1,175,129 93,675
NONCASH INVESTING AND FINANCING ACTIVITY:
Financed acquisition of property $ 58,250 14,362
------------ -----------
Fair value of Everest net assets acquired:
Subscriber accounts acquired $ 352,000 ----
Goodwill $1,223,000 ----
Other assets acquired $ 332,743
Purchase price of assumed
liabilities $(1,870,032) ----
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 345,957 356,776
------------ ----------
See Notes to consolidated financial statements.
38
<PAGE>
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BUSINESS COMBINATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments (consisting of
normal recurring accruals or adjustments only) necessary to present fairly
the financial position at September 30, 1996, and the results of operations
and the cash flows for the periods presented. The results of operations for
the interim periods are not necessarily indicative of the results to be
obtained for the entire year.
Business Combination
On August 28, 1996, Everest Security Systems Corporation ("Everest", or
"the predecessor company") acquired all of the outstanding common stock of
Guardian International, Inc. ("Guardian"), a non-public company, by issuing
3,226,902 shares of Everest. In addition, $1,750,000 was paid to the
principal shareholder of Guardian as consideration for consummating the
transaction (including repayments of shareholder loans of $82,162).
Guardian was merged into Everest, and the name of the surviving entity was
changed from Everest to Guardian (" the Company"). The transaction has been
accounted for under the purchase method as a reverse acquisition with
Guardian being deemed the acquirer.
In connection with the acquisition, the Company will issue 484,035
shares of non-voting class B common stock to a financial institution as
consideration for their consent to the merger and to amend certain
covenants of the loan agreement. These shares will be valued at $217,358.
The historical financial statements are those of Guardian. The results
of operations reflect the operations of Guardian prior to the merger, and
thereafter Guardian's consolidated results of operations with Specialty
Device Installers, Inc. ("SDI"), a wholly-owned subsidiary acquired from
the predecessor company. The balance sheet at December 31, 1995 is
Guardian's; the consolidated balance sheet at September 30, 1996 includes
the accounts of the surviving entity and its wholly-owned subsidiary. All
significant intercompany balances and transactions have been eliminated.
39
<PAGE>
Unaudited proforma information giving effect to the acquisition as if
it had occurred at the beginning of the periods reflected below is as
follows:
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ------ ----
Revenues, net $1,143,000 $ 584,000 $3,212,000 $1,703,000
Net loss before income
tax provision $ (206,000) $ (143,000) $ (518,000) $ (497,000)
Income tax credit, net $ 7,000 $ 27,000 $ 113,000 $ 149,000
Net loss $ (199,000) $ (116,000) $ (405,000) $ (348,000)
Net loss per share $ (.03) $ (.02) $ (.06) $ (.05)
Weighted average number
of shares outstanding 6,453,804 6,453,804 6,453,804 6,453,804
Description of Business
The Company operates a central monitoring alarm station and sells and
installs alarm systems for residential and commercial customers in Florida
.
Cash and Cash Equivalents
All highly liquid investments purchased with a remaining maturity of
three months or less at the date acquired are considered cash equivalents.
Customer Accounts and Intangible Assets
Customer accounts purchased from alarm dealers and intangible assets
are reflected at cost. Substantially all costs associated with purchasing
an alarm account are capitalized and included in the "customer accounts" in
the accompanying balance sheet. Costs related to marketing and installation
of systems for internally generated customer accounts are expensed as
incurred. Customer accounts are amortized on a straight-line basis over a
10 year period. It is the Company's policy to perform monthly evaluations
of acquired customer account attrition and, if necessary, adjust the
remaining useful lives. The Company periodically estimates future cash
flows from customer accounts. Because expected cash flows have exceeded the
unamortized cost of customer accounts the Company has not recorded an
impairment loss.
Intangible assets are recorded at cost and amortized over their
estimated useful lives. The carrying value of intangible assets is
periodically reviewed and impairments are recognized when expected
operating cash flows derived from such intangibles is less than their
carrying value.
40
<PAGE>
Property and Equipment
Property and equipment are stated at cost and are depreciated using
accelerated methods over their estimated useful lives.
Revenues
Revenues are recognized when installation of security alarm systems has
been performed and when monitoring services are provided. Customers are
billed for monitoring services on a monthly, quarterly or annual basis in
advance of the period in which such services are provided. Deferred
revenues result from billings in advance of performance of monitoring.
Costs of providing installations, including inventory, are charged to
income in the period when the installation occurs. Losses on contracts for
which future costs are anticipated to exceed revenues are recognized in the
period such losses are identified. Contracts for monitoring services are
generally for an initial non-cancelable term of five years with automatic
renewal on an annual basis thereafter unless terminated by either party. A
substantial number of contracts are on an automatic renewal basis.
Income taxes
Everest, the predecessor company, is a C Corporation subject to income
taxes at the corporate level. Prior to the merger, Guardian was an S
Corporation and subject to tax at the shareholder level. As a result of the
merger on August 28, 1996, Guardian's S Corporation status was terminated
and any future earnings will be subject to income taxes at the corporate
level.
As result of the change in tax status, the Company has established
deferred tax assets and liabilities for temporary differences between
financial statement and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from
large number of customers, including both residential and commercial. The
Company extends credit to its customers in the normal course of business,
performs periodic credit evaluations and maintains allowances for potential
credit losses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. PURCHASED CUSTOMER ACCOUNTS
The following is an analysis of the changes in acquired customer accounts
for the nine months ended September 30, 1996:
41
<PAGE>
Balance, December 31, 1995 $2,075,671
Purchase of customer accounts 2,846,742
Customer accounts acquired in merger 352,000
5,274,413
Amortization and write-off of customer
accounts (438,998)
Balance, September 30, 1996 $4,835,415
In conjunction with certain purchases of customer accounts, the Company
withholds a portion of the price as a credit to offset qualifying attrition of
the acquired customer accounts and for purchase price settlements of assets
acquired and liabilities assumed. At September 30, 1996, the amounts withheld in
connection with the acquisition of customer accounts aggregated $68,719, and are
included in accounts payable in the accompanying consolidated balance sheet.
3. INTANGIBLE ASSETS
Intangible assets consist of the following at September 30, 1996:
Estimated
Lives Amount
Excess of acquisition cost over
the net assets acquired 10 years $ 1,223,000
Covenant not to compete, organization costs
and other Various 193,455
1,416,455
------------
Less accumulated amortization ( 86,117)
$1,330,338
===========
4. NOTES PAYABLE TO FINANCIAL INSTITUTION
The Company has a $7 million line of credit with a financial institution
for the purpose of borrowing funds to acquire customer alarm accounts.
Borrowings under the agreement ($4,598,669 at September 30, 1996) bear interest
at 3% above prime. The loan is collateralized by the Company's assets and
matures on November 30, 1999. The principal shareholders of the Company have
personally guaranteed $700,000 of the loan and pledged their stock as
collateral. The agreement contains certain conditions including, but not limited
to, restrictions related to indebtedness, net worth and distribution payments to
shareholders other than $1,750,000 which was paid to a shareholder in connection
with the acquisition as described in Note 1.
5. RELATED PARTY TRANSACTIONS
42
<PAGE>
Leased Facilities
The Company leases its monitoring facilities from an affiliate which is
owned by the principal shareholders of the Company at an annual rental of
approximately $51,000 (plus annual increases not to exceed 3%) through December
31, 1999 with an option to renew for an additional 5 years under the same terms.
6. INCOME TAXES
The conversion of Guardian from an S Corporation to C Corporation resulted
in recognition of a net deferred tax liability. The components of deferred tax
assets and liabilities at September 30, 1996 are as follows:
Deferred Tax Assets -
Net operating loss carry forwards $48,500
Allowance for doubtful accounts 22,500
Total deferred tax assets 71,000
Deferred Tax Liabilities -
Difference in amortization of customer
contracts 120,200
Other 13,800
Total deferred tax liabilities 134,000
Net deferred tax liability $63,000
At September 30, 1996, the Company has net operating loss carry forwards
for federal income tax purposes of approximately $143,000 which expire in 2010.
These net operating loss carry forwards will be subject to significant annual
limitations on utilization in future years as a result of the merger and related
change in ownership control of the company.
43
<PAGE>
7. PRO FORMA DATA
Pro Forma Income Tax Provision (Credit) -
Pro forma net losses do not include a pro forma income tax provision or
benefit for periods prior to the acquisition, as the Company has had net losses
since its inception. The income tax provision in the pro forma data represents
the estimated deferred income tax liability had the Company terminated its S
Corporation status at the end of the period presented.
Pro Forma Net Loss Per Share -
Pro forma net loss per share is computed by dividing the pro forma net
loss by the pro forma number of shares of common stock outstanding during the
periods.
Pro Forma Shares Outstanding -
Pro forma shares outstanding represent the number of shares of common
stock outstanding after giving retroactive effect to the 3,226,902 shares issued
in connection with the merger. Accordingly the calculation of the pro forma
weighted average number of shares of common stock outstanding would be 6,453,804
shares for the nine months ended September 30, 1996 and 1995, respectively.
8. STOCKHOLDERS' EQUITY
(a) Common Stock
The Company has authorized the issuance of up to 100,000,000 shares of
common stock with a par value of $.001. At September 30, 1996, there were
6,453,804 shares of common stock issued and outstanding. Treasury stock is shown
at cost, and as of September 30, 1996, consisted of 10,078 shares.
(b) Stock Subscription Notes Receivable
In December 1995, the Company issued 285,000 shares of common stock at $2
per share ($570,000 in the aggregate). The proceeds from the sale of the common
stock were evidenced by an 8% stock subscription note receivable due in January
1996 and collateralized by the common stock. As of September 30, 1996, there
remains an outstanding balance of $201,358 ($179,760 of principal and $21,598 of
interest) under the notes receivable. The $201,358 has been reflected as "stock
subscriptions receivable" and a reduction of stockholder's equity in the
accompanying consolidated balance sheet. Management is in the process of
attempting to collect the outstanding amounts or have the applicable common
shares returned.
44
<PAGE>
9. STOCK OPTION PLAN
The Company has issued stock options to various key employees to purchase
100,000 and 10,000 shares of common stock at $2 and $3 per share, respectively.
The Company also issued options to purchase 74,720 shares at $2 per share to an
investment banker. All options expire on December 31, 2000. As of September 30,
1996, none of these options had been exercised.
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123. "Accounting for Stock Based Compensation", which establishes financial
accounting and reporting standards for stock-based employee compensation plans
and for the issuance of equity instruments to acquire goods and services from
nonemployees. The Company plans to adopt SFAS No. 123 for its stock-based
employee compensation plans in fiscal 1997 through pro forma disclosure only.
45
<PAGE>
EVEREST SECURITY SYSTEMS
CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
For The Year Ended
December 31, 1995
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
Everest Security Systems Corporation and Subsidiary
We have audited the accompanying consolidated balance sheet of Everest Security
Systems Corporation and Subsidiary as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Everest Security
Systems Corporation and Subsidiary as of December 31, 1995, and the results of
their operations, changes in stockholders' equity, and their cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Certified Public Accountants
Phoenix, Arizona
February 23, 1996
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1995
ASSETS
Current Assets:
Cash and cash equivalents (Note 1) $ 8,114
Accounts receivable - trade, net of allowance for
doubtful accounts (Notes 1, 6 and 8) 151,425
Available for sale securities (Notes 1, 3 and 5) 65,600
Prepaid expenses 7,033
Inventory (Notes 1 and 6) 50,742
----------
Total Current Assets 282,914
----------
Property and Equipment, net (Notes 1, 4, 6 and 7) 15,076
----------
Other Assets:
Loan receivable - related entity (Note 5) 20,500
Deferred contract costs, net (Note 1) 47,043
Refundable deposits 2,410
Goodwill, net (Notes 1 and 2) 211,124
----------
281,077
----------
Total Assets $ 579,067
==========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-2-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable
- current (Note 6) $ 61,666
- related parties (Note 5) 33,387
Obligation under capital lease - current portion
(Notes 1 and 7) 1,978
Accounts payable 99,362
Accrued liabilities 36,111
Accrued interest payable (Note 5) 7,311
----------
Total Current Liabilities 239,815
----------
Long-Term Liabilities:
Obligation under capital lease - long-term portion
(Notes 1 and 7) 7,410
----------
Commitments and Contingencies (Notes 5 and 8) -
Stockholders' Equity: (Notes 9 and 10)
Common stock 2,030
Additional paid-in capital 1,976,130
Accumulated deficit (1,053,577)
----------
924,583
Stock subscriptions receivable (570,000)
Cumulative translation adjustment (Note 1) 11,861
Treasury stock (202)
Unrealized loss on available for sale
securities (Notes 1 and 3) (34,400)
----------
Total Stockholders' Equity 331,842
----------
Total Liabilities and Stockholders' Equity $ 579,067
==========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-3-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For The Year Ended December 31, 1995
Revenues $ 273,028
Cost of Revenues 265,365
----------
Gross Profit 7,663
General and Administrative Expenses 211,163
----------
Loss from Operations (203,500)
----------
Interest Expense 1,994
----------
Net Loss $ (205,494)
==========
Net Loss per Share (Note 1) $ (.21)
==========
Weighted Average Shares Outstanding 981,529
==========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-4-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Year Ended December 31, 1995
<TABLE>
<CAPTION>
Unrealized
Loss on
Additional Stock Cumulative Available Total
Common Stock Paid-in Accumulated Subscriptions Translation Treasury for Sale Stockholders'
Shares Amount Capital Deficit Receivable Adjustment Stock Securities Equity
------ ------ ------- ------- ---------- ---------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 326,152 $ 326 $ 847,959 $ (848,083) $ - $ - $ (202) - $ -
Issued for available for
sale securities 1,000,000 1,000 99,000 - - - - - 100,000
Issued for consulting
services 218,750 219 59,656 - - - - - 59,875
Issued for shares of
Specialty Device
Installers, Inc. 100,000 100 199,900 - - - - - 200,000
Issued for cash 100,000 100 199,900 - - - - - 200,000
Issued and unpaid 285,000 285 569,715 - (570,000) - - - -
Aggregate adjustment
from foreign
currency translation - - - - - 11,861 - - 11,861
Net unrealized losses
on available for
sale securities - - - - - - - (34,400) (34,400)
Net loss - - - (205,494) - - - - (205,494)
--------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Balance, end of year 2,029,902 $ 2,030 $1,976,130 $(1,053,577) $ (570,000) $ 11,861 $ (202) $ (34,400)$ 331,842
========= ========== ========== =========== ========== ========== ========== ========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-5-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Year Ended December 31, 1995
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $ 246,278
Cash paid to suppliers and employees (360,459)
Interest paid (1,994)
----------
Net cash used by operating activities (116,175)
----------
Cash flows from investing activities:
Loan receivable - related entity (20,500)
Purchase of property and equipment (1,268)
Purchase of monitoring contracts (46,498)
----------
Net cash used by investing activities (68,266)
----------
Cash flows from financing activities:
Proceeds from notes payable 46,029
Repayment of notes payable (41,340)
Proceeds from notes payable - related parties 78,159
Repayment of notes payable - related parties (106,018)
Repayment of obligation under capital lease (173)
Proceeds from sale of common stock 200,000
----------
Net cash provided by financing activities 176,657
----------
Effect of exchange rate changes 11,861
----------
Net increase in cash and cash equivalents 4,077
Cash and cash equivalents at beginning of year 4,037
----------
Cash and cash equivalents at end of year $ 8,114
==========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-6-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Year Ended December 31, 1995
Reconciliation of Net Loss to Net Cash Used
by Operating Activities:
Net loss $ (205,494)
----------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 13,581
Issuance of stock for services 59,875
Changes in Assets and Liabilities:
Accounts receivable - trade (26,749)
Prepaid expenses (2,210)
Inventory (577)
Refundable deposits 211
Accounts payable 55,498
Accrued liabilities (10,310)
----------
89,319
----------
Net cash used by operating activities $ (116,175)
==========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-7-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Corporation:
Everest Security Systems Corporation is a Corporation organized under
the laws of the State of Nevada. The Company was organized in 1986 as
Burningham Enterprises, Inc. In February, 1988, the Company changed its
name to Everest Funding Corporation and acquired Everest Mortgage
Corporation, Inc. The acquisition was accounted for under the purchase
method of accounting as a reverse acquisition, whereby Everest Mortgage
Corporation, Inc. was deemed to have acquired Everest Funding
Corporation.
During 1992, Everest Mortgage Corporation, Inc. ceased operations.
Everest Funding Corporation was inactive until April, 1995, when the
Company was reinstated in the State of Nevada. On September 30, 1995,
the Company acquired all of the issued and outstanding stock of
Specialty Device Installers, Inc. (Note 2). In October, 1995, the
Company conducted a private offering of their common stock. In October,
1995, the Company's Board of Directors resolved to change the name of
the Corporation to Everest Security Systems Corporation.
The principal purpose of the Corporation is to act as the holding
company of Specialty Device Installers, Inc., a Florida Corporation,
which is primarily engaged in the sale, installation and monitoring of
security device systems to private and commercial customers in southern
Florida.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Specialty Device
Installers, Inc. (SDI, Inc.) from the date of its acquisition, October
1, 1995. Intercompany transactions and balances have been eliminated in
consolidation.
Revenue Recognition:
System Sales:
Revenues from security system installation services and security system
sales are recognized when the services are rendered or product
installations made. Upon installation of the security system, the title
on the equipment is passed to the customer.
-8-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Revenue Recognition: (Continued)
Monitoring Services:
Revenues from contract monitoring services, which are normally
prebilled, are deferred and taken into income on a prorata basis as
earned over the life of the contract. Costs of monitoring contracts
purchased from third-parties are capitalized and amortized over the life
of the contract, and are reviewed periodically for impairment.
Cash and Cash Equivalents:
Cash and cash equivalents include all highly liquid investments
purchased with an initial maturity of three (3) months or less.
Available for Sale Securities:
Available for sale securities are equity securities that the Company
purchased and held for the purpose of selling over an undetermined
period, and are reported at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity.
Accounts Receivable - Trade:
Accounts receivable - trade primarily represent amounts billed but
uncollected on completed installations and monitoring contracts. The
receivables are principally unsecured.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance is provided for based upon a review
of the individual accounts outstanding and the prior history of
uncollectible accounts receivable. At December 31, 1995, an allowance
has been provided for potentially uncollectible accounts receivable in
the amount of $10,000.
Inventory:
Inventory quantities and valuations are determined on an annual basis by
a physical count and pricing of same. Inventory is stated at the lower
of cost, first-in, first-out method, or market.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method over the estimated useful lives of the
assets. The average lives range from five (5) to seven (7) years.
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as
incurred. Betterments or renewals are capitalized when incurred.
Depreciation expense was $628 for the year ended December 31, 1995.
-9-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Property and Equipment: (Continued)
The Company is the lessee of office equipment under a capital lease
agreement expiring November, 1999. The asset is being depreciated over
its estimated productive life. Amortization of the equipment is included
in depreciation expense, as noted above.
Goodwill:
Goodwill represents the excess of the cost of acquiring Specialty Device
Installers, Inc. over the fair value of their net assets at the date of
acquisition, and is being amortized on the straight-line method over
five (5) years. Amortization expense charged to operations for the
period from the date of acquisition, September 30, 1995 through December
31, 1995 was $11,110. The carrying value of goodwill will be
periodically reviewed by the Company and impairments, if any, will be
recognized when expected future operating cash flows derived from
goodwill are less than their carrying value.
Deferred Contract Costs:
Deferred contract costs represent the cost of purchasing long-term
monitoring contracts and are being amortized on the straight-line method
over the life of the contracts. Amortization expense charged to
operations for the period from the date of acquisition, September 30,
1995 through December 31, 1995 was $1,843. The carrying value of
deferred contract costs will be periodically reviewed by the Company and
impairments, if any, will be recognized when expected future operating
cash flows derived from the monitoring contracts are less than the
deferred contract cost.
Translation of Foreign Currencies:
Account balances and transactions denominated in foreign currencies and
the accounts of the Corporation's foreign operations have been
translated into United States funds, as follows:
Assets and liabilities at the rates of exchange
prevailing at the balance sheet date;
Revenue and expenses at average exchange rates for the
period in which the transaction occurred;
Exchange gains and losses arising from foreign currency
transactions are included in the determination of net earnings
for the period;
Exchange gains and losses arising from the translation of
the Corporation's foreign operations are deferred and included
as a separate component of stockholders' equity.
-10-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Income Taxes:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis, and the utilization of the net operating loss carryforward.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Loss Per Share:
The loss per share amount is based on the weighted average number of
shares outstanding of 991,607 at December 31, 1995. A fully diluted loss
per share amount is not presented for 1995 as it is anti-dilutive.
2. Business Combinations:
On October 1, 1995, the Company purchased all of the outstanding shares
of Specialty Device Installers, Inc. for common share consideration. The
acquisition was accounted for by the purchase method. The results of
operations are included in the accounts from the effective date of the
acquisition. Details of the purchase are as follows:
Fair market value of assets acquired:
Working capital $ 86,104
Fixed assets 4,875
Other assets 5,009
Debt (118,222)
Goodwill 222,234
----------
Consideration given $ 200,000
==========
Common shares issued 200,000
==========
-11-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments:
Available for Sale Securities:
As of December 31, 1995, the Company had securities classified as
available for sale as follows:
Aggregate Unrealized
Fair Value Cost Holding Loss
Equity Securities:
J.A. Industries,
Inc., 100,000
shares $ 65,600 $ 100,000 $ 34,400
========== ========== ==========
Stockholders' equity for the year ended December 31, 1995 includes an
unrecognized holding loss on available for sale securities of $34,400.
Realized gains and losses are determined on the specific identification
basis. During the year ended December 31, 1995, there were no sales
proceeds or gross realized gains on securities classified as available
for sale.
Subsequent to the date of these financial statements, J.A. Industries,
Inc.'s common stock was trading at approximately $.42 per share.
Management believes this is a temporary devaluation of J.A. Industries,
Inc.'s market price. Although J.A. Industries, Inc. has no assets as of
March 31, 1996, the Company is in the process of performing a reverse
merger with another company. The investment in J.A. Industries, Inc.'s
common stock is recorded at the fair market value of the stock, based on
the trading price at December 31, 1995.
4. Property and Equipment:
As of December 31, 1995, property and equipment consist of the
following:
Furniture $ 3,000
Equipment 14,244
----------
17,244
Less: accumulated
depreciation (2,168)
----------
$ 15,076
==========
5. Related Party Transactions:
Loan Receivable - Related Entity:
As of December 31, 1995, the loan receivable from a related entity
consists of a loan receivable from J.A. Industries, Inc., in the amount
of $20,500, due on demand with no stated interest.
-12-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Related Party Transactions: (Continued)
Notes Payable - Related Parties:
As of December 31, 1995, notes payable - related parties consist of the
following:
Note payable to J.A. Industries, Inc., due
on demand with no stated interest. $ 15,000
Note payable to Knight Financial, due on
demand with no stated interest. 5,000
Note payable to Frank Bauer, due on
demand with no stated interest. 13,387
----------
$ 33,387
==========
The Company has accrued interest payable of $7,311 at December 31, 1995
related to the above note payable to Frank Bauer, President of Specialty
Device Installers, Inc. The interest was accrued through the date of
acquisition, September 30, 1995, at which time further interest accrual
was suspended in accordance with the terms agreed to between the
parties.
Other Transactions:
The Company has a management agreement with Knight Financial Limited, a
company owned by an officer and stockholder of the Company. The
agreement is effective through May 30, 1996, and provides for
compensation of $24,000 per year plus stock options for 100,000 shares
under an Incentive Stock Option Plan, exercisable at a price of $2 per
share. None of the options have been exercised to date. Included in
accounts payable as of December 31, 1995, is $1,474 of compensation
accrued under the above agreement.
The Company has an employment agreement with the president of the
Company's wholly-owned subsidiary. The agreement was effective through
December 31, 1995, and has been extended for one (1) additional year.
The agreement is for a base salary of $52,000 plus a ten percent (10%)
incentive based on the year end adjusted net profits of the subsidiary.
The net profits of the Company will be adjusted to exclude any incentive
salary paid pursuant to this agreement, any contributions to the pension
or profit sharing plans, any extraordinary gains or losses (including
but not limited to gains or losses on disposition of assets) and any
provisions or refunds for state or federal income taxes.
The Company is holding 100,000 common shares of J.A. Industries, Inc. as
available for sale securities. An officer and stockholder of the Company
is also an officer and stockholder of J.A. Industries, Inc.
-13-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Notes Payable:
<TABLE>
<CAPTION>
<S> <C>
As of December 31, 1995, notes payable consist of the following:
$50,000 revolving line of credit with Barnett Bank, interest at prime
plus 4%, due on demand; collateralized by substantially all of the
Company's assets. $ 47,139
10% note payable to High Tech, monthly
installments of $879, including principal and
interest, due May, 1995; unsecured. 9,204
Loan payable to J.A. (Canada), Inc., non-interest
bearing, due on demand; unsecured. J.A. (Canada), Inc.
is a former subsidiary of J.A. Industries, Inc., a
related entity. 5,323
----------
$ 61,666
==========
</TABLE>
7. Obligation Under Capital Lease:
The Company is the lessee of office equipment with a cost of $9,561
under a capital lease agreement which expires in November, 1999. At
December 31, 1995, future minimum lease payments due under the capital
lease agreement are as follows:
Year Ended
December 31, Amount
1996 $ 3,063
1997 3,063
1998 3,063
1999 2,807
----------
Total minimum lease payments 11,996
Less: amount representing interest (2,608)
----------
Present value of net minimum lease
payments 9,388
Less: current maturities of capital
lease obligations (1,978)
----------
Non-current maturities of capital
lease obligations $ 7,410
==========
The interest rate under the capital lease agreement is based on the
lessor's implicit rate of return at the inception of the lease.
-14-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Commitments and Contingencies:
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of accounts
receivable. The Company's accounts receivable primarily result from its
electronic security installation and monitoring, and reflects a customer
base throughout south Florida. The Company's contracts receivable
consist primarily of three (3) to five (5) year monitoring contracts in
south Florida. The contracts are non-cancellable and secured by the
monitoring equipment. Credit limits, ongoing credit evaluation and
account monitoring procedures are utilized to minimize the risk of loss.
Operating Lease:
The Company is currently leasing office space in Fort Lauderdale,
Florida under a non-cancellable operating lease agreement which expires
May 30, 1996. Payments are approximately $1,600 per month.
9. Stockholders' Equity:
Reverse Stock Split:
On July 24, 1995, the Company declared a 1 for 20 reverse split of the
Company's common stock. The reverse stock split did not affect the par
value of the common stock. The accompanying financial statements give
retroactive effect to the stock split.
Common Stock:
The Company has authorized the issuance of 100,000,000 shares of the
Company's common stock with a par value of $.001 each. At December 31,
1995, there were 2,029,902 shares issued and 2,019,824 shares
outstanding.
Treasury Stock:
Treasury stock is shown at cost, and as of December 31, 1995, consists
of 10,078 shares.
10. Stock Option Plan:
The Company has issued stock options to various key employees and an
outside consulting firm. As of December 31, 1995, the Company has
granted options to purchase 174,720 shares of common stock at $2.00 per
share. On December 31, 2000, the options expire. As of December 31,
1995, none of these options have been exercised.
-15-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock Option Plan: (Continued)
In October, 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock Based Compensation", effective
for years beginning in 1996. As of December 31, 1995, the Company has
not yet adopted this standard.
11. Deferred Income Taxes:
The timing differences that give rise to the deferred tax asset at
December 31, 1995, are presented below:
Net operating loss carryforward $ 48,500
Unrecognized holding loss on
available for sale securities 8,600
Allowance for doubtful accounts 2,500
----------
59,600
Less: valuation allowance (59,600)
----------
Net deferred tax asset $ -
==========
At December 31, 1995, the Company has a net operating loss carryforward
for federal purposes of approximately $194,000, which expires in 2010.
12. Monitoring Contracts:
The Company has contracts to perform monitoring services on various
security alarm installations. As of December 31, 1995, the minimum
annual payments receivable under non-cancellable monitoring contracts,
are as follows:
Year Ended
December 31, Amount
1996 $ 37,856
1997 33,807
1998 32,246
1999 28,794
2000 22,881
----------
$ 155,584
==========
-16-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Statement of Cash Flows:
Non-Cash Investing and Financing Activities:
During the year ended December 31, 1995, the Company recognized
investing and financing activities that affected assets, liabilities and
equity, but did not result in cash receipts or payments. These non-cash
activities consist of the following:
The Company issued 100,000 shares of common stock to acquire all of
the outstanding common stock of Specialty Device Installers, Inc.
The stock was valued at $2 per share.
The Company issued 1,000,000 shares of common stock to acquire
100,000 shares of J.A. Industries, Inc. from an investment company.
The investment was valued at $100,000.
The Company issued 218,750 shares of common stock for consulting
services valued at $58,875.
The Company issued 285,000 shares of common stock for notes
receivable in the amount of $570,000. As of December 31, 1995, the
Company had not been paid for the common stock subscribed.
The Company financed the purchase of office equipment in the amount
of $9,651 under a capital lease agreement.
14. Major Customers:
For the year ended December 31, 1995, two (2) customers make up
approximately 38% and 25% of the Company's sales, respectively.
-17-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
Specialty Device Installers, Inc.
We have audited the accompanying statements of operations, retained earnings
(deficit), and cash flows for the nine months ended September 30, 1995, and the
year ended December 31, 1994 of Specialty Device Installers, Inc. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Specialty
Device Installers, Inc. for the nine months ended September 30, 1995, and the
year ended December 31, 1994, in conformity with generally accepted accounting
principles.
Certified Public Accountants
Phoenix, Arizona
February 23, 1996
-18-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
STATEMENTS OF OPERATIONS
For The Nine Month Period Ended September 30, 1995
and For The Year Ended December 31, 1994
September 30, December 31,
1995 1994
Sales $ 947,254 $1,127,684
Cost of Sales 665,943 776,230
---------- ----------
Gross Profit 281,311 351,454
General and Administrative Expenses 340,715 367,935
---------- ----------
Loss from Operations (59,404) (16,481)
---------- ----------
Other Income (Expenses):
Interest income - 7
Interest expense (7,030) (6,737)
Loss on trading securities (2,494) (736)
Gain on trading securities - 4,911
Loss on sale of assets (9,115) -
---------- ----------
(18,639) (2,555)
---------- ----------
Net Loss $ (78,043) $ (19,036)
========== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
-19-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
STATEMENTS OF RETAINED EARNINGS (DEFICIT)
For The Nine Month Period Ended September 30, 1995 (Unaudited)
and For The Year Ended December 31, 1994
(Unaudited)
September 30, December 31,
1995 1994
Retained earnings, beginning
of period $ 51,852 $ 75,424
Distribution to stockholders (13,620) (4,536)
Net loss (78,043) (19,036)
---------- ----------
Retained earnings (deficit),
end of period $ (39,811) $ 51,852
========== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
-20-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
STATEMENTS OF CASH FLOWS
For The Nine Month Period Ended September 30, 1995
and For The Year Ended December 31, 1994
September 30, December 31,
1995 1994
Increase (Decrease) in Cash and Cash
Equivalents:
Cash flows from operating activities:
Cash received from customers $ 959,296 $1,071,132
Cash paid to suppliers and employees (985,376) (1,130,740)
Interest paid (4,185) (2,272)
Interest received - 7
---------- ----------
Net cash used by operating
activities (30,265) (61,873)
---------- ----------
Cash flows from investing activities:
Sale of property and equipment 3,000 -
Purchase of property and equipment (2,037) (4,952)
Purchase of trading securities - (8,813)
Sale of trading securities - 9,906
Purchase of monitoring contracts (2,388) -
---------- ----------
Net cash used by investing
activities (1,425) (3,859)
---------- ----------
Cash flows from financing activities:
Proceeds from debt 41,653 30,000
Repayment of debt (13,662) (9,198)
Proceeds from note from stockholder 9,222 43,965
Repayment of note from stockholder - (4,396)
Distribution to stockholder (2,535) (4,536)
---------- ----------
Net cash provided by financing
activities 34,678 55,835
---------- ----------
Net increase (decrease) in cash and cash
equivalents 2,988 (9,897)
Cash and cash equivalents at beginning
of period 1,049 10,946
---------- ----------
Cash and cash equivalents at end
of period $ 4,037 $ 1,049
========== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
-21-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
STATEMENTS OF CASH FLOWS (Continued)
For The Nine Month Period Ended September 30, 1995
and For The Year Ended December 31, 1994
September 30, December 31,
1995 1994
Reconciliation of Net Loss to Net Cash
Used by Operating Activities:
Net Loss $ (78,043) $ (19,036)
---------- ----------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,292 3,306
Loss on sale of property and
equipment 9,115 -
Loss on trading securities 2,494 736
Gain on trading securities - (4,911)
Changes in Assets and Liabilities:
Accounts receivable 12,042 (56,552)
Inventory (7,610) (7,802)
Prepaid expenses 498 (1,026)
Refundable deposits - (960)
Accounts payable 7,420 31,189
Accrued liabilities 19,682 (11,282)
Interest payable to stockholder 2,845 4,465
---------- ----------
47,778 (42,837)
---------- ----------
Net cash used by operating activities $ (30,265) $ (61,873)
========== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
-22-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Corporation:
Specialty Device Installers, Inc. (SDI, Inc.), is a Florida
corporation, incorporated on August 20, 1991. SDI, Inc.'s primary
business is the sale, installation and monitoring of security device
systems to private and commercial customers in southern Florida.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Interim Financial Statements:
The interim financial statements for the nine month period ended
Sempember 30, 1995, include all adjustments (consisting of normal
recurring accruals) which the Company considers necessary for a fair
presentation of the results of operations for the interim period.
Operating results for the nine month period ended September 30, 1995
are not necessarily indecative of the results that may be expected for
the entire fiscal year ended December 31, 1995.
Revenue Recognition:
Revenue from services and product sales is recognized in the statements
of operations as services are rendered or product installations made.
Service revenues, which consist of subscriber billings for services not
yet rendered, are deferred and taken into income as earned. Revenue
from the installation of electronic security systems is recognized when
installations are completed.
Cash and Cash Equivalents:
Cash and cash equivalents include all highly liquid investments
purchased with an initial maturity of three (3) months or less.
Trading Securities:
Trading securities are equity securities that the Company purchased
with the intent of selling short-term and are stated at fair value.
-23-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies:
Accounts Receivable:
Accounts receivable primarily represent amounts billed but uncollected
on completed installations, as well as charges for contract monitoring
services. The receivables are principally unsecured.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance is provided for based upon a review
of the individual accounts outstanding and the prior history of
uncollectible accounts receivable. At September 30, 1995, an allowance
has been provided for potentially uncollectible accounts receivable in
the amount of $10,000.
Inventory:
Inventory quantities and valuations are determined on an annual basis by
a physical count and pricing of same. Inventory is stated at the lower
of cost, first-in, first-out method, or market.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method over the estimated useful lives of the
assets. The average lives range from five (5) to seven (7) years.
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as
incurred. Betterments or renewals are capitalized when incurred.
Depreciation expense was $1,292 and $3,306 for the nine month period
ended September 30, 1995 and the year ended December 31, 1994,
respectively.
Income Taxes:
For federal tax reporting purposes, the Company was operating as a
Subchapter S Corporation through September 30, 1995. As such, all
taxable income and available tax credits were passed from the corporate
entity to the individual stockholder. It was the responsibility of the
individual stockholder to report the taxable income or loss and tax
credits, and to pay any resulting income taxes. On a proforma basis,
there would be no tax expense or benefit due to the net operating losses
incurred.
2. Business Combinations:
On October 1, 1995, the stockholder of the Company entered into a Stock
Purchase Agreement under which he agreed to sell one hundred percent
(100%) of the outstanding stock of the Company to Everest Security
Systems Corporation for 100,000 shares of common stock of Everest
Security Systems Corporation.
-24-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Related Party Transactions:
Note Payable to Stockholder:
As of September 30, 1995, note payable to stockholder consists of the
following:
Note payable to an individual, due on demand
with a stated interest rate of 8%. $ 66,568
Less: current portion (66,568)
----------
$ -
==========
The Company has accrued interest payable of $7,311 at December 31, 1995
related to the above note payable. Interest expense on this note payable
was $2,846 and $4,580 for the nine month period ended September 30,
1995, and for the year ended December 31, 1994, respectively.
4. Contingencies:
Major Customers:
For the nine month period ended September 30, 1995, two (2) customers
make up approximately 38% and 25% of the Company's sales.
For the year ended December 31, 1994, three (3) customers made up
approximately 48%, 13% and 10% of the Company's sales.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of accounts
receivable. The Company's accounts receivable primarily result from its
electronic security installation and monitoring, and reflects a customer
base throughout south Florida. The Company's contracts receivable
consist primarily of three to five year monitoring contracts in south
Florida. The contracts are non-cancellable and secured by the monitoring
equipment. Credit limits, ongoing credit evaluation and account
monitoring procedures are utilized to minimize the risk of loss.
5. Stockholders' Equity:
Common Stock:
The Company has authorized the issuance of 1,000 shares of the Company's
common stock with a par value of $1.00 each. At September 30, 1995,
there were 200 shares issued and outstanding.
-25-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Statement of Cash Flows:
Non-Cash Investing and Financing Activities:
During the nine month period ended September 30, 1995, the Company
recognized investing and financing activities that affected assets,
liabilities and equity, but did not result in cash receipts or payments.
These non-cash activities consist of the following:
The Company distributed property to the stockholder with a value of
$11,085.
The Company's insurance carrier paid off an outstanding note
payable in the amount of $7,981, as part of a settlement on a
vehicle destroyed in an accident.
-26-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
UNAUDITED PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited proforma condensed consolidated financial statements
give effect to the acquisition by Everest Security Systems Corporation of
Specialty Device Installers, Inc. pursuant to the Stock Purchase Agreement
between the parties, and are based on the estimates and assumptions set forth
herein and in the notes to such statements. This proforma information has been
prepared utilizing the historical financial statements and notes thereto, which
are incorporated by reference herein. The proforma financial data does not
purport to be indicative of the results which actually would have been obtained
had the purchase been effected on the dates indicated or of the results which
may be obtained in the future.
The proforma financial information is based on the purchase method of accounting
for the acquisition of Specialty Device Installers, Inc. The proforma entries
are described in the accompanying footnotes to the unaudited proforma condensed
consolidated financial statements. The proforma unaudited condensed consolidated
statements of operations assume the acquisition took place on the first day of
the period presented.
Acquisition
On October 1, 1995, Everest Security Systems Corporation purchased all of the
outstanding shares of Specialty Device Installers, Inc. for common share
consideration. The acquisition was accounted for by the purchase method. In the
agreement, 100,000 shares of common stock of Everest Security Systems
Corporation valued at $200,000, was issued for all of the outstanding stock of
SDI, Inc.
-27-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For The Year Ended December 31, 1994
Unaudited Proforma Consolidated Financial Statements:
The following represents unaudited proforma consolidated statements of
operations for the year ended December 31, 1994, assuming the following
transaction was consummated as of January 1, 1994:
- Acquisition of Specialty Device Installers, Inc.
for 100,000 shares of common stock
In addition, the proforma consolidated net income per share gives retroactive
effect to the same events which were given retroactive effect in the
accompanying consolidated financial statements.
<TABLE>
<CAPTION>
Everest
Security
Systems Specialty
Corporation Device Proforma
and Installers, Proforma Consolidated
Subsidiary Inc. Adjustment Amounts
<S> <C> <C> <C> <C>
Revenue $ - $1,127,684 $ - $1,127,684
Cost of Revenue - 776,230 - 776,230
---------- ---------- ----------
Gross Profit - 351,454 - 351,454
General and
Administrative - 367,935 44,447(1) 412,382
---------- ---------- ----------
Loss from
Operations - (16,481) - (60,928)
Other Income
(Expense) - (2,555) - (2,555)
---------- ---------- ----------
Net Loss $ - $ (19,036) - $ (63,483)
========== ========== ==========
Net Loss per
Share N/A $ (.15)
========== ==========
Weighted Average
Number of Shares
Outstanding 316,074 416,074
========== ==========
</TABLE>
(1) To amortize goodwill recorded in connection with the purchase of
Specialty Device Installers, Inc. on a straight-line basis over five
(5) years.
-28-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For The Year Ended December 31, 1995
Unaudited Proforma Consolidated Financial Statements:
The following represents unaudited proforma consolidated statements of
operations for the year ended December 31, 1995, assuming the following
transaction was consummated as of January 1, 1995:
- Acquisition of Specialty Device Installers, Inc.
for 100,000 shares of common stock
In addition, the proforma consolidated net income per share gives retroactive
effect to the same events which were given retroactive effect in the
accompanying consolidated financial statements.
<TABLE>
<CAPTION>
Everest
Security
Systems Specialty
Corporation Device Proforma
and Installers, Proforma Consolidated
Subsidiary Inc. Adjustment Amounts
<S> <C> <C> <C> <C>
Revenue $ 273,028 $ 947,254 $ - $1,220,282
Cost of Revenue 265,365 665,943 - 931,308
---------- ---------- ----------
Gross Profit 7,663 281,311 - 288,974
General and
Administrative 211,163 340,715 33,335(1) 585,213
---------- ---------- ----------
Loss from
Operations (203,500) (59,404) - (296,239)
Other Income
(Expense) (1,994) (18,639) - (20,633)
---------- ---------- ----------
Net Loss $ (205,494) $ (78,043) - $ (316,872)
========== ========== ==========
Net Loss per
Share (.21) $ (.30)
========== ==========
Weighted Average
Number of Shares
Outstanding 981,529 1,056,529
========== ==========
</TABLE>
(1) To amortize goodwill recorded in connection with the purchase of
Specialty Device Installers, Inc. on a straight-line basis over five
(5) years.
-29-
<PAGE>
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION
Consolidated Financial Statements
March 31, 1996 and 1995
(unaudited)
Everest Security Systems Corporation
Consolidated Balance Sheet -- March 31, 1996
(Unaudited)
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31
1996 1995
-------------------------
<S> <C> <C>
CURRENT ASSETS
Accounts receivable net of allowance
for doubtful accounts (Notes 1, 6 and 8) $190,179 $ --
Contracts Receivable (Notes 1 and 8) 1,661 --
Available for Sale Securities (Notes 1, 3 and 5) 65,600 --
Prepaid Expenses 12,417 --
Inventory (Notes 1 and 6) 49,342 --
----------- ---------
TOTAL CURRENT ASSETS $ 319,198 $ --
----------- ---------
Property and Equipment, net (Notes 1, 4, and 6) $ 15,810 $ --
----------- ---------
OTHER ASSETS
Contracts receivable -- Long term (Notes 1 and 8) $ 220,868 $ --
Refundable Deposit 2,410 --
Goodwill, net (Notes 1 and 2) 200,014 --
----------- ---------
TOTAL ASSETS $ 758,300 $ --
----------- ---------
</TABLE>
The Accompanying Notes are an Integral part
of the Consolidated Financial Statements
Page 1
<PAGE>
Everest Security Systems Corporation
Consolidated Balance Sheet -- March 31, 1996
(Unaudited)
- - ------------------------------------------------------------------------------
March 31
1996 1995
-------------------------
CURRENT LIABILITIES
Cash Overdrafts $ 9,994 $ --
Accounts Payable 163,149 --
Taxes Payable Accrued Liabilities 47,763 --
Accrued Liabilities 50,554 --
Monitoring Contract Reserves 4,500 --
Lease Payable 9,455 --
Notes Payable -- Current (Note 6) 56,947 --
----------- ---------
TOTAL CURRENT LIABILITIES $ 342,362 $ --
----------- ---------
LONG TERM LIABILITIES
Obligation Under Capital Lease (Note 1 and 7) $ 6,661 $ --
----------- ---------
STOCKHOLDERS EQUITY (Notes 9 and 10)
Common Stock $ 2,030 $ 326
Additional Paid in Capital 1,976,130 847,959
Accumulated Deficit (1,226,142) (848,083)
----------- ---------
$ 752,018 $ 202
Stock Subscription Receivable $ (320,000) $ --
Cumulative Transition Adjustment (Note 1) 11,861 --
Unrealized loss on available for sale securities (34,400)
Treasury Stock (202) (202)
----------- ---------
409,277 --
----------- ---------
$ 758,300 $ --
----------- ---------
The Accompanying Notes are an Integral part
of the Consolidated Financial Statements
Page 2
<PAGE>
Everest Security Systems Corporation
Consolidated Statement of Operations
For the Three Month Period Ended March 31, 1996
(Unaudited)
- - ------------------------------------------------------------------------------
1996 1995
-------------------------
Sales $ 327,160 $ --
----------- ---------
Cost of Sales 212,473 --
----------- ---------
Gross Profit 114,687 --
----------- ---------
General and Administrative Expenses 285,974 350
----------- ---------
Loss from Operations (171,287) (350)
----------- ---------
Interest Expense (1,278) --
Net Loss $ (172,565) $ (350)
----------- ---------
Net Loss per Share (Note 1) $ (0.09) $ --
----------- ---------
Weighted Average Shares Outstanding 2,029,902 326,152
----------- ---------
The Accompanying Notes are an Integral part
of the Consolidated Financial Statements
Page 3
<PAGE>
Everest Security Systems Corporation
Consolidated Statement of Cash Flows
For the Three Month Period Ended March 31, 1996
(Unaudited)
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31
1996 1995
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalent
Cash Flows from Operating Activities
Cash received from customers $286,745 $ --
Cash paid to suppliers and employees 371,800 (350)
Interest Paid 1,278 --
Net cash used by operating activities $(86,333) $ (350)
Cash Flows from Investing Activities
Purchase of Property and Equipment $ (1,572) $ --
Loans Received - Related Parties 20,500
Purchase of monitoring contracts (169,325) --
Net cash used by investing activities $(150,397) $ --
Cash flows from financing activities
Repayment Loans to Related Parties (33,387)
Proceeds from Notes Payable 7,477
Repayment of Obligation under Capital Lease (5,468)
Repayment of Stock Subscription Receivable $250,000 $ --
Net cash provided by financing activities $218,622 $ --
Changed in non-cash working capital $(18,108) (350)
Cash and cash equivalent at beginning of period 8,114 350
Cash and cash equivalent at end of period $ (9,994) $ --
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
Page 4
<PAGE>
Everest Security Systems Corporation and Subsidiary
Consolidated Statement of Change in Stockholder's Equity
For the Three Month Period Ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
Allowance
Equity for net
Adjustment Unrealized
From (Loss) Gain
Stock Foreign on Available Total
Capital Stock Paid in Accumulated Subscription Currency Treasury for Sale Stockholder's
Shares Amount Capital (Deficit) Receivable Translation Stock Securities Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1994 326,152 $ 326 $ 847,959 $ (848,083) $ -- $ -- $(202) $ -- $ --
------------------------------------------------------------------------------------------------------------
Issued for available
for sale
securities 1,000,000 1,000 99,000 -- -- -- -- -- 100,000
Issued for
consolidating
services 218,750 219 59,656 -- -- -- -- -- 59,875
Issued for shares of
Specialty Device
Installers, Inc. 100,000 100 199,900 -- -- -- -- -- 200,000
Issued For Cash 100,000 100 199,900 -- -- -- -- -- 200,000
Issued and unpaid 285,000 285 569,715 -- (570,000) -- -- -- --
Aggregate adjustment
from foreign
currency transaction -- -- -- -- -- 11,861 -- -- 11,861
Net unrealized losses
on available for sale
securities -- -- -- -- -- -- -- (34,400) (34,400)
Net loss -- -- -- (205,484) -- -- -- (205,494)
--------------------------------------------------------------------------------------------------------------
Balance,
December 1995 2,029,902 $2,030 $1,976,130 $(1,053,577) $(570,000) $11,861 $(202) $(34,400) $ 331,642
--------------------------------------------------------------------------------------------------------------
Repayment of
Stock Subscription
Receivable -- $ -- $ -- $ -- $ 250,000 $ -- $ -- $ -- $ 172,597
Net unrealized gain
on available for
sale securities -- -- -- -- -- -- -- 21,900 21,900
Net Loss -- -- -- (172,565) -- -- -- -- (111,405)
--------------------------------------------------------------------------------------------------------------
Balance,
March 31, 1996 2,029,902 $2,030 $1,976,130 $(1,226,142) $(320,000) $11,861 $(202) $(12,500) $ 414,934
--------------------------------------------------------------------------------------------------------------
</TABLE>
Page 5
<PAGE>
Everest Security Systems Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Nature of Corporation:
Everest Security Systems Corporation is a corporation organized under the
laws of the State of Nevada. The Company was organized in 1986 as Birmingham
Enterprises, Inc. In February, 1988, the Company changed its name to Everest
Funding Corporation and acquired Everest Mortgage Corporation, Inc.
During 1992, Everest Mortgage Corporation, Inc. ceased operations, Everest
Funding Corporation was inactive until April, 1995 when the Company was
reinstated in the State of Nevada. On September 30, 1995, the Company
acquired all of the issued and outstanding stock of Specialty Device
Installers, Inc. In October, 1995, the Company conducted a private offering
of their common stock, as provided under the SEC Regulation D, Rule 504. In
October, 1995, the Company's Board of Directors resolved to change the name
of the Corporation to Everest Security Systems Corporation.
The principal purpose of the Corporation is to act as the holding company of
Specialty Device Installers, Inc., a Florida Corporation, primarily engaged
in the sale, installation and monitoring of security device systems to
private and commercial customers in southern Florida.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Specialty Device Installers,
Inc. (SDI, Inc.) from the date of its acquisition, October 1, 1995.
Intercompany transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents:
Cash equivalents include all highly liquid investments purchased with an
initial maturity of three (3) months or less.
Investments:
Available for Sale Securities:
Available for Sale securities are equity securities that the Company
purchased and held for the purpose of selling over an undetermined period,
and are reported at fair value, with unrealized gains and losses reported as
a separate component of stockholder's equity.
Account Receivable:
Accounts receivable primarily represent amounts billed but uncollected on
completed installations. The receivables are unsecured.
Page 6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Accounts Receivable: (continued)
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance is provided for based upon a review of
the individual accounts outstanding and the prior history of uncollectible
accounts receivable.
Inventory:
Inventory quantities and valuation are determined on an annual basis by a
physical count and pricing of same. Inventory is stated at the lower cost,
first in, first-out method or market.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided for on
the straight-line method over the estimated useful lives of the assets. The
average lives range from five (5) to seven (7) years. Maintenance and
repairs that neither materially add to the value of the property nor
appreciably prolong its life are charged to expense as incurred. Betterments
or renewals are capitalized when incurred.
The Company is the lessee of office equipment under a capital lease
agreement expiring November, 1999. The asset is being depreciated over its
estimated productive life.
Goodwill:
Goodwill represents the excess of the cost of acquiring Specialty Device
Installers, Inc. over the fair market value of their net assets at the date
of acquisition, and is being amortized on the straight-line method over five
(5) years. The carrying value of goodwill will be periodically reviewed by
the Company and impairments, if any will be recognized when expected future
operating cash flows derived from goodwill are less than their carrying
value.
Deferred Contract Costs:
Deferred contract costs represent the cost of purchasing long-term
monitoring contracts and is being amortized on the straight-line method over
the life of the contracts.
Contracts Receivable:
Contracts receivable represents long-term monitoring contracts with
commercial and private customers.
Income Taxes:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Loss per Share:
The loss per share amounts are based on the weighted average number of
shares outstanding of 2,029,902 at March 31, 1996. Fully diluted loss per
share amounts are not presented for the period ended March 31, 1996 as they
are anti-dilutive.
Page 7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Business Combinations:
On October 1, 1995, the Company purchased all of the outstanding shares of
Specialty Device Installers, Inc. for common share consideration. The
acquisition was accounted for by the purchase method. Details of the
purchase are as follows:
Fair market value of assets acquired:
Working Capital $ 86,104
Fixed Assets 4,875
Other Assets 5,009
Debt (118,222)
Goodwill 222,234
---------
Consideration Given $ 200,000
---------
Common Shares Issued 100,000
---------
3. Investments:
Available for Sale Securities:
As of March 31, 1996, the Company had securities classified as available for
sales as follows:
Aggregate Unrealized
Fair Value Cost Gain (Loss)
----------- --------- -------------
Equity Security $ 65,600 $ 100,000 $ (34,400)
----------- --------- -------------
Stockholder's equity for the three month period ended March 31, 1996
and December 31, 1995 includes an unrecognized holding loss on available
for sale securities of $34,400. Realized gains and losses are determined on
the specific identification basis. During the period ended March 31, 1996
there were no sales proceeds or gross realized gains of securities
classified as available for sale.
4. Property and Equipment:
As of March 31, 1996, property and equipment consists of the following:
Furniture $ 2,538
Equipment 13,272
--------
15,810
--------
5. Related Party Transactions:
Loans Receivable from Related Party:
As of December 31, 1995, loan receivable from related party was outstanding
in the amount of $20,500. Loans payable to related parties totalled $33,387.
For the period ended March 31, 1996 all related transactions had been
satisfied by the collection of outstanding amounts and by repayment of loans
payable in full.
Page 8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Related Party Transactions: (Continued)
Other transactions:
The Company has a management agreement with Knight Financial Limited, a
company owned by an officer and stockholder of the Company. The agreement is
effective through May 30, 1996 and provides for compensation of $24,000 per
year.
The Company has an employment agreement with the President of the Company's
wholly owned subsidiary. The agreement is effective through December 31,
1996. The agreement is for a base salary of $52,000 plus ten percent (10%)
incentive based on the year end adjusted net profits of the subsidiary.
The Company is holding 100,000 common shares of J.A. Industries, Inc.
as an available for sale investment. An officer and stockholder of the
Company is also an officer and stockholder of J.A. Industries. Inc.
6. Notes Payable:
As of March 31, 1996, notes payable consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Revolving line of credit for $50,000 with Barnett Bank interest at prime
plus 4%, due on demand;
collateralized by substantially all of the Company's assets $56,947
Installment note of $10,000 with High Tech, with interest at 10%, payable in
monthly principal and interest payments of $879, due May 1995; unsecured $6,661
-------
$63,608
-------
</TABLE>
7. Obligation under Capital Lease:
The Company is the lessee of office equipment with a cost of $9,561 under a
capital lease agreement which expires in November 1999. At December 31,
1995, future minimum lease payments due under the capital lease agreement
are as follows:
Year Ended
December 31 Amount
1996 $ 3,063
1997 3,063
1998 3,063
1999 2,807
-------
Total minimum lease payments $11,996
-------
Less: amount representing interest (2,608)
-------
Present value of net minimum lease
payments 9,388
--------
Page 9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Obligation Under Capital Lease (Continued)
Less: Current maturities of capital (1,978)
lease obligations -------
Non-current maturities of capital
lease obligations $ 7,410
-------
The interest rate under the capital lease agreement is based on the lessor's
implicit rate of return at inception of the lease.
8. Contingencies:
Major Customers:
For the period ended March 31, 1996, two (2) customers make up approximately
38% and 25% of the Company's sales respectively.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to concentration
of credit risk principally consists of accounts receivable and contract
receivable. The Company's accounts receivable primarily
results from its electronic security installation and monitoring, and
reflects a customer base in south Florida. The Company's contracts
receivable consists primarily of three (3) to five (5) year monitoring
contracts in south Florida. The contracts are non-cancellable and secured by
the monitoring equipment. Credit limits, ongoing credit evaluation and and
account monitoring procedures are utilized to minimize the risk of loss.
Operating Lease:
The Company is currently leasing office space in Fort Lauderdale, Florida
under a non-cancellable operating lease agreement which expires May 30,
1996. Payments are approximately $1,600 per month.
9. Stockholder's Equity:
Common Stock:
The Company has authorized the issuance of 100,000,000 shares of the
Company's common stock with a par value of $0.001 each. At March 31, 1996
there were 2,029,902 shares issued and outstanding.
Treasury Stock:
Treasury Stock is shown at cost, as of March 31, 1996 consists of
10,078 shares.
10. Stock Option Plan:
The Company has agreements with various key employees and an outside
consulting firm to provide stock options. As March 31, 1996, the Company has
issued and outstanding options to purchase 174,720 shares at $2.00 per
share. On September 30, 2000, 100,000 options expire. On December 31, 2000,
the remaining 74,720 options expire. As of March 31, 1996, none of the
options have been exercised.
Page 10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Deferred Income Taxes:
The timing differences that give rise to the deferred tax asset at December
31, 1996 are presented below:
Net operating loss carryforward $ 48,500
Unrecognized holding loss on
available for sale securities 8,600
Allowance for doubtful accounts 2,500
--------
59,600
Less: valuation allowance (59,600)
--------
Net deferred tax asset $ -
--------
At December 31, 1995, the Company has net operating loss carryforwards for
federal purposes of approximately $194,000 which expires in 2010.
Page 11
<PAGE>
EVEREST SECURUTY SYSTEMS
CORPORATION AND SUBSIDIARY
FINANCIAL STATEMENTS
(UNAUDITED)
For the Eight Month Period
Ended August 31, 1996
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
August 31, 1996
ASSETS
(Unaudited)
Current Assets:
Cash and cash equivalents (Note 1) $ 37,711
Accounts receivable - trade, net of allowance for
doubtful accounts (Notes 1 and 8) 197,036
Available for sale securities (Notes 1 and 3) 37,500
Pre-paid expenses 21,034
Inventory 51,646
------------------
Total Current Assets 344,927
------------------
Property and Equipment, net (Notes 1, 4 and 7) 21,568
------------------
Other Assets:
Refundable deposits 4,060
Goodwill, net (Note 1) 181,493
Monitoring costs, net of amortization 251,395
Investment (Note 2) 3,020,000
-----------------
3,456,948
-----------------
Total Assets $ 3,823,443
==================
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (Continued)
August 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
Current Liabilities:
Notes payable
-current (Note 6) $ 2,594
-related party (Note 5) 13,387
Obligation under capital lease
-current portion (Notes 1 and 7) 2,649
Accounts payable 110,383
Accrued liabilities 66,459
-----------
Total Current Liabilities 195,472
-----------
Long-Term Liabilites:
Obligation under capital lease
-long-term portion (Notes 1 and 7) 5,987
-----------
Commitments and Contingencies: (Notes 5 and 8) -
Stockholders' Equity: (Notes 9 and 10)
Common stock 3,227
Additional paid-in capital 5,284,407
Accumulated deficit (1,401,590)
----------------
3,886,044
----------------
Stock subscriptions receivable (201,358)
Treasury stock (202)
Unrealized loss on available for sale
securities (Notes 1 and 3) (62,500)
----------------
(264,060)
----------------
Total Stockholders' Equity 3,621,984
----------------
Total Liabilities and Stockholders'
Equity 3,823,443
==========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For the Eight Month Period Ended August 31, 1996
(Unaudited)
Revenues $ 870,717
Cost of Revenues (598,770)
-----------------
Gross Profit 271,947
General and Administrative Expenses (616,278)
------------------
Loss From Operations (344,331)
Other Income (Loss):
Interest expense (12,301)
Interest income 21, 598
Exchange loss (12,979)
----------------
(3,682)
----------------
Net Loss: $ (348,013)
==========
Net Loss per Share (Note 1) $ (.16)
===========
Weighted Average Shares Outstanding 2,147,952
===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Eight Month Period Ended August 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common Stock Additional paid Accumulated Stock
Shares Amount Capital Deficit Subscription
Receivable
Balance at
Dec. 31, 1995 2,029,902 $ 2,030 $1,976,130 $(1,053,578) $ (570,000)
Stock issued for
cash 100,000 100 199,900 - -
Stock issued for
consulting services 22,000 22 2,178 - -
Cash received for
stock subscriptions
receivable - - (120,000) - 390,240
Accrued interest on stock
subscriptions receivable - - - - (21,598)
Stock issued to pay
debt 75,000 75 49,347 - -
Stock issued for
cash 1,000,000 1,000 3,176,852 - -
Aggregate adjustment
from foreign currency
translation - - - - -
Net unrealized losses
on available for
sale securities - - - - -
Net loss for the eight
month period ended
Aug. 31, 1996 - - - (348,012) -
------------ --------- ----------- -------------- ---------
Balance of
Aug. 31, 1996 3,226,902 $ 3,227 $ 5,284,407 $ (1,401,590) $ (201,358)
======== ======= ========= ========== =========
</TABLE>
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Eight Month Period Ended August 31, 1996
(Unaudited)
CONTINUED FROM PREVIOUS PAGE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Cumulative Unrealized loss on Total
Translation Treasury Available for sale Stockholders'
Adjustment Stock Securities Equity
Balance at
Dec. 31, 1995 $ 11,861 $ (202) $ ( 34,400) $ 331,841
Stock issued for
cash - - - 200,000
Stock issued for
consulting services - - - 2,200
Cash received for
stock subscriptions
receivable - - - 270,240
Accrued interest on stock
subscriptions receivable - - - (21,998)
Stock issued to pay debt - - - 49,422
Stock issued for
cash - - - 3,177,852
Aggregate adjustment
from foreign currency
translation (11,861) - - (11,861)
Net unrealized losses
on available for
sale securities - - (28,100) (28,100)
Net loss for the eight
month period ended
Aug. 31, 1996 - - - (348,015)
------------ ----------------- --------------- ---------------
Balance of
Aug. 31, 1996 $ - (202) $ (62,500) $3,621,981
======== ========== ========== =========
</TABLE>
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Eight Month Period Ended August 31, 1996
(Unaudited)
Reconciliation of Net Loss to Net Cash Used
By Operating Activities:
Net loss $ (348,013)
---------------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 67,873
Recognized loss on loan receivable 28,100
Stock issued for consulting services 2,200
Interest accrued on stock subscription receivable (21,598)
Changes in Assets and Liabilities:
Accounts receivable - trade (45,611)
Prepaid expenses (14,001)
Inventory (904)
Refundable deposits (1,650)
Accounts payable 11,021
Accrued liabilities 23,037
-------------
48,467
-------------
Net cash used by operating activities $ (299,546)
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Eight Month Period Ended August 31, 1996
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $ 825,106
Cash paid to suppliers and employees (1,112,351)
Interest paid (12,301)
-------------
Net cash used by operating activities (299,546)
-------------
Cash flows from investing activities:
Loan receivable - related entity (7,600)
Purchase of property and equipment (9,063)
Purchase of monitoring contracts (240,023)
Purchase of investment (3,020,000)
-------------
Net cash used by investing activities (3,276,686)
------------
Cash flows from financing activities:
Proceeds from notes payable 82,172
Repayment of notes payable (91,822)
Proceeds from notes payable - related parties 30,000
Repayment of notes payable - related parties (50,000)
Repayment of obligation under capital lease (752)
Proceeds from sale of common stock 3,377,852
Proceeds from stock subscription receivable 270,240
------------
Net cash provided by financing activities 3,617,690
-----------
Effect of exchange rate changes (11,861)
----------
Net increase in cash and cash equivalents 29,597
Cash and cash equivalents at beginning of year 8,114
----------
Cash and cash equivalents at end of year $ 37,711
=========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies:
Nature of Corporation:
Everest Security Systems Corporation is a corporation organized under
the laws of the State of Nevada. The Company was organized in 1986 as
Burningham Enterprises, Inc. In February, 1988, the Company changed its
name to Everest Funding Corporation and acquired Everest Mortgage
Corporation. The acquisition was accounted for under the purchase
method of accounting as a reverse acquisition, whereby Everest Funding
Corporation.
During 1992, Everest Mortgage Corporation ceased operations. Everest
Funding Corporation was inactive until April, 1995, when the Company
was reinstated in the State of Nevada. On September 30, 1995, the
Company acquired all of the issued and outstanding stock of
Specialty
Device Installers, Inc. In October, 1995, the Company conducted a
private offering of its common stock. In October, 1995, the Company's
Board of Directors resolved to change the name of the Corporation to
Everest Security Systems Corporation. In August, 1996, the Company
acquired Guardian International, Inc. (Note 2).
The principal purpose of the Corporation is to act as the holding
company of Specialty Device Installers, Inc., a Florida corporation,
which is primarily engaged in the sale, installation and monitoring of
security device systems to private and commercial customers in southern
Florida.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Specialty Device
Installers, Inc. (SDI, Inc.). Intercompany transactions and balances
have been eliminated in consolidation.
Revenue Recognition:
System Sales:
Revenues from security system installation services and security system
sales are recognized when the services are rendered or product
installations made. Upon installation of the security system, the
title on the equipment is passed to the customer.
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Summary of Significant Accounting Policies: (Continued)
Revenue Recognition: (Continued)
Monitoring Services:
Revenues from contract monitoring services, which are normally
pre-billed, are deferred and taken into income on a prorate basis as
earned over the life of the contract. Costs of monitoring contracts
purchased from third-parties are capitalized and amortized over the
life of the contract, and are reviewed periodically for impairment.
Cash and Cash Equivalents:
Cash and cash equivalents include all highly liquid investments
purchased with an initial maturity of three (3) months or less.
Available for Sale Securities:
Available for sale securities are equity securities that the Company
purchased and held for the purpose of selling over an undetermined
period, and are reported at fair value, with unrealized gains and
losses reported as a separate component of stockholders' equity.
Accounts Receivable - Trade:
Accounts receivable - trade primarily represents amounts billed but
uncollected on completed installations and monitoring contracts. The
receivable are principally unsecured.
The company follows the allowance method of recognizing uncollectible
amounts receivable. The allowance is provided for based upon a review
of the individual accounts outstanding and the prior history of
uncollectible accounts receivable. At August 31, 1996, an allowance has
been provided for potentially uncollectible accounts receivable in the
amount of $27,300.
Inventory:
Inventory quantities and valuations are determined on an annual basis
by a physical count and pricing of same. Inventory is stated at the
lower of cost, first-in, first-out method, or market.
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Summary of Significant Accounting Policies: (Continued)
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method over the estimated useful lives of the
assets. The average lives range from five (5) to seven (7) years.
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as
incurred. Betterments or renewals are capitalized when incurred.
Depreciation expense was $2,571 for the eight month period ended August
31, 1996.
The Company is the lessee of office equipment under a capital lease
agreement expiring November, 1999. The asset is being depreciated over
its estimated productive life. Amortization of the equipment is
included in depreciation expense, as noted above.
Goodwill:
Goodwill represents the excess of the cost of acquiring Specialty
Device Installers, Inc. over the fair value of their net assets at the
date of acquisition, and is being amortized on the straight-line method
over five (5) years. Amortization expense charged to operations for the
eight month period through August 31, 1996 was $29,631. The carrying
value of goodwill will be periodically reviewed by the Company and
impairments, if any, will be recognized when expected future operating
cash flows derived from goodwill are less than their carrying value.
Deferred Contract Costs:
Deferred contract costs represent the cost of purchasing long-term
monitoring contracts and are being amortized on the straight-line
method over the life of the contracts. Amortization expense charged to
operations for the eight month period ended August 31, 1996 was
$35,671. The carrying value of deferred contract costs will be
periodically reviewed by the Company and impairments, if any, will be
recognized when expected future operating cash flows derived from the
monitoring contracts are less than the deferred contract cost.
Translation of Foreign Currencies:
Account balances and transactions denominated in the foreign currencies
and the accounts of the Corporation's foreign operations have been
translated into United States funds, as follows:
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Summary of Significant Accounting Policies: (Continued)
Translation of Foreign Currencies: (Continued)
Assets and liabilities at the rates of exchange prevailing at
the balance sheet date;
Revenue and expenses at average exchange rates for the
period in which the transaction occurred;
Exchange gains and losses arising from foreign currency
transactions are included in the determination of net earnings
for the period;
Exchange gains and losses arising from the translation of the
Corporation's foreign operations are deferred and included as
a separate component of stockholders' equity.
Income Taxes:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis, and the utilization of the net operating loss
carry forward. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.
Loss Per Share:
The loss per share amount is based on the weighted average number of
shares outstanding of 2,147,952 at August 31, 1996. A fully diluted
loss per share amount is not presented for this period as it is
anti-dilutive.
2. Business Combinations:
On August 15, 1996, the Company signed an Agreement and Plan of Merger
(Merger Agreement) with Guardian International (Guardian). On August
29, 1996, 3,226,904 shares of common stock were issued to Guardian's
common stockholders for 100% of the issued and outstanding stock of
Guardian International. The acquisition was accounted for by the.
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Business Combinations: (Continued)
purchase method of accounting as a reverse acquisition, since the
stockholders of Guardian obtained control of the Company and the Board
of Directors. As such, these financial statements were prepared without
regard to the issuance of the 3,266,902 shares to Guardian
International, as Everest Security Systems Corporation was the target
corporation in the reverse acquisition.
As a condition of the Merger Agreement, Everest Security Systems
Corporation conducted a private placement of 1,000,000 common stock
shares for $3.50 per share. As of August 31, 1996, the investment
account consists principally of $3,500,000 from the private placement,
which was paid directly to Guardian less commissions and other expenses
paid by Guardian on behalf of Everest Security Systems Corporation.
3. Investments:
Available for Sale Securities:
As of August 31, 1996, the Company had securities classified as
available for sale of follows:
Aggregate Unrealized
Fair Value Cost Holding Loss
Equity Securities:
J.A. Industries,
Inc., 100,000 shares $ 37,500 $ 100,000 $ (62,500)
========== ========= ===========
For the eight month period ended August 31, 1996, an unrecognized
holding loss on available for sales securities of $28,100 was recorded
to increase the unrealized holding loss to $62,500. Realized gains and
losses are determined on the specific identification basis. During the
eight month period ended August 31, 1996, there were no sales proceeds
or gross realized gains on securities classified as available for sale.
J.A. Industries, Inc. acquired Electronic Manufacturing Services Group,
Inc. (KMSG) in a reverse acquisition. The new company, EMSG, approved a one for
four (1-4) reverse stock split. As a result, Everest Security Systems
Corporation now owns 25,000 shares of EMSG stock.
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Property and Equipment:
As of August 31, 1996, property and equipment consist of the following:
Furniture $ 3,000
Equipment 19,808
Vehicles 3,500
----------
26,308
Less: accumulated
depreciation (4,740)
$ 21,568
5. Related Party Transactions:
Notes Payable - Related Parties:
As of August 31, 1996, notes payable - related parties consist of the
following:
Note payable to Frank Bauer, due on
demand with no stated interest. $ 13,387
========
Included in the above note is accrued interest payable of $7,311. The
interest was accrued through the date of acquisition, September 30,
`995, at which time further interest accrual was suspended in
accordance with the terms agreed to between the parties.
Other Transactions:
The Company has a management agreement with Knight Financial Limited, a
company owned by an officer and stockholder of the company. The
agreement provides for compensation of $24,000 per year plus stock
options for 100,000 shares under an Incentive Stock Option Plan,
exercisable at a price of $2 per share. Per the terms of the Merger
Agreement, the Company canceled the Management Agreement effective
August 31, 1996.
The Company has an employment agreement with the president of the Company's
wholly-owned subsidiary. The agreement was effective through December 31, 1995,
and has been extended for one (1) additional year. The agreement is for a base
salary of $52,000 plus a ten percent (10%) incentive based on the year and
adjusted net profits of the subsidiary. The
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Related Party Transactions: (Continued)
Other Transactions: (Continued)
net profits of the Company will be adjusted to exclude any incentive salary
paid pursuant to this agreement, any contributions to the pension or profit
sharing plans, any extraordinary gains or losses (including but not limited to
gains or losses on disposition of assets) and any provisions or refunds for
state or federal income taxes.
6. Notes Payable:
As of August 31, 1996, notes payable consist of the following:
10% note payable to High Tech, with monthly
installments of $879, including principal and
interest, due May, 1995; unsecured $ 2,594
=======
7. Obligation Under Capital Lease:
The Company is the lessee of office equipment with a cost of $9,561
under a capital lease agreement which expires in November, 1999. At
August 31, 1996, future minimum lease payments due under the capital
lease agreement are as follows:
Year Ended
December 31, Amount
1996 $ 3,851
1997 3,063
1998 3,063
1999 766
----------
Total minimum lease payments 10,743
Less: amount representing interest (2,107)
Present value of net minimum lease
payments 8,636
Less: current maturities of capital
lease obligations (2,649)
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Obligation Under Capital Lease: (Continued)
Non-current maturities of capital
lease obligations $ 5,987
========
The interest rate under the capital lease agreement is based on the
lessor's implicit rate of return at the inception of the lease.
8. Commitments and Contingencies:
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of accounts
receivable. The Company's accounts receivable primarily result from its
electronic security installation and monitoring, and reflects a
customer base throughout south Florida. The Company's contracts
receivable consist primarily of three (3) to five (5) year monitoring
contracts in south Florida. The contracts are non-cancellable and
secured by the monitoring equipment. Credit limits, ongoing credit
evaluation and account monitoring procedures are utilized to minimize
the risk of loss.
9. Stockholders' Equity:
Common Stock:
The Company has authorized the issuance of 100,000,000 shares of the
Company's common stock with a par value of $.001 each. At August 31,
1996, there were 3,226,902 shares issued and 3,216,824 shares
outstanding.
Treasury Stock:
Treasury stock is shown at cost, and as of August 31, 1996 consists of
10,078 shares.
As of August 31, 1996, stock subscriptions receivable consist of the
following:
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Stockholders' Equity: (Continued)
Stock Subscriptions Receivable.
8% note receivable from Langara Capital Foundation, principal and
interest due January 31, 1996; secured by 75,000 shares of Everest
Security Systems Corporation common
stock. This note receivable is in default. 160,050
------------
$ 201,358
10. Stock Option Plan:
The Company has issued stock options to various key employees and an
outside consulting firm. As of August 31, 1996, the Company has granted
options to purchase 174,720 and 10,000 shares of common stock at $2 and
$3 per share, respectively. On December 31, 2000, the options expire.
As of August 31, 1996, none of these options have been exercised.
In October, 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock Based Compensation", effective
for years beginning in 1996. As of August 31, 1996, the Company has not
determined if it will change its accounting policy for stock-based
compensation, or only provide the required financial statement
disclosures. As such, the impact on the Company's financial position
and results of operations is currently unknown. The Company does not
expect adoption to have a material effect on its financial position or
results of operations.
11. Deferred Income Taxes:
The timing differences that give rise to the deferred tax asset at
August 31, 1996, are presented below:
Net operating loss carry forward $ 48,500
Unrecognized holding loss on
available for sale securities 15,625
Allowance for doubtful accounts 6,825
70,950
Less: valuation allowance (70,950)
Net deferred tax asset $ -
=========
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. Deferred Income Taxes: (Continued)
At August 31, 1996, the Company has a net operating loss carry forward
for federal purposes of approximately $194,000, which expires in 2010.
As a result of the Tax Reform Act of 1986, the Company's net operating
loss carry forwards will be subject to significant annual limitations
on utilization in future years as a result of a greater than fifty
percent (50%) ownership change.
12. Monitoring Contracts:
The Company has contracts to perform monitoring services on various
security alarm installations. As of October 1, 1996, the Company
transferred all of their monitoring contracts to Guardian
International.
13. Statement of Cash Flows:
Non-Cash Investing and Financing Activities:
During the eight month period ended August 31, 1996, the Company
recognized investing and financing activities that affected assets,
liabilities and equity, but did not result in cash receipts or
payments. These non-cash activities consist of the following:
The Company issued 75,000 shares of common stock to pay debt
valued at $49,422.
The Company issued 22,000 shares of common stock for
consulting services valued at $2,200.
The Company accrued interest of $21,598 on stock subscriptions
receivable.
The Company recognized a loss on a loan receivable to a
related party valued at $28,100.
The Company had an unrecognized loss on investment in the
amount of $28,100.
The Company forgave a stock subscription receivable of
$120,000 in lieu of paying commission of $120,000 on stock
offering.
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
14. Major Customers:
For the eight month period ended August 31, 1996, two (2) customers
make up approximately twenty percent (20%) and twenty percent (20%) of
the Company's sales, respectively.
15. Commissions on Stock Issuance:
For the eight month period ended August 31, 1996, commissions paid on
stock issuance represents $120,000 in commissions which were paid in
the form of stock to a company for funds raised in an offering started
in 1995 and completed in 1996. The $120,000 was included in stock
subscriptions receivable at December 31, 1996. An additional $350,000
was paid in connection with a private offering in 1996.
<PAGE>
Exhibits
Exhibit Page
No. Description No.
3 (i) Articles of Incorporation dated October 30, 1986
Incorporated by reference to the Form 10-SB
Filed May 6, 1996
3 (i)(a) Amendment to the Articles of Incorporation
Incorporated by reference to the Form 10-SB
Filed May 6, 1996
3 (i)(b) Amendment to the Articles of Incorporation
Incorporated by reference to the Form 10-SB
Filed May 6, 1996
3 (i)(c) Amendment to the Articles of Incorporation
3 (ii) Bylaws
Incorporated by reference to the Form 10-SB
Filed May 6, 1996
4 Specimen Stock Certificate
10 (a) Share Purchase Agreement dated October 9, 1995
between Security Device Installers Inc. and
Everest Security Systems Corporation
Incorporated by reference to the Form 10-SB
Filed May 6, 1996
10 (b) Amendment to October 9, 1995 Share Purchase Agreement
Incorporated by reference to the Form 10-SB
Filed May 6, 1996
10 (b)(1) Executive Employment Agreement between Guardian
International, Inc. and Frank Bauer
10 (c) Consulting Agreement between G.M. Capital
Partners, Ltd. and Guardian International, Inc.
10 (d) Consulting Agreement between Harold Ginsburg and
46
<PAGE>
Guardian International, Inc.
10 (e) Consulting Agreement between Richard Ginsburg and
Guardian International, Inc.
10 (f) Employee Stock Option Agreement with
G.M. Capital Partners, Ltd.
10 (g) Employee Stock Option Agreement with
Frank Bauer Incorporated by reference to
the Form 10-SB Filed May 6, 1996
10 (h) Loan and Security Agreement between Heller Financial, Inc.
and Guardian International, Inc.
10 (h)(1) Stock Pledge Agreement
10 (h)(2) Guaranty
10 (h)(3) Bank Letter
10 (h)(4) Lock Box Service Agreement
10 (h)(5) Borrowing Base Certificate
10 (h)(6) Capital Appreciation Rights Agreement
10 (i) Modification Agreement with Heller Financial, Inc.
10 (j) Plan and Agreement of Merger, of Guardian International,
Inc. with and into Everest Security Systems
Corporation, incorporated by reference to Exhibit 2.1
AG. of the 8-K filed September 12, 1996.
21 Specialty Device Installers, Inc. and Federal Alarm Systems,
Inc., companies duly incorporated under the laws of
the State of Florida, are wholly owned subsidiaries
of the Registrant.
27 Financial Data Schedule
28 Guardian International, Inc. Incentive Stock Option Plan
Incorporated by reference to the Form 10-SB
Filed May 6, 1996
47
<PAGE>
EXHIBIT 3 (i)(c)
filed State of Nevada Dec. 18, 1996
CERTIFICATE OF AMENDMENT OF ARTICLE OF INCORPORATION
OF
GUARDIAN INTERNATIONAL, INC.
We the undersigned Richard Ginsburg, President and Sheilah
Ginsburg, Secretary, of Guardian International, Inc., a Nevada corporation (the
"Company"), do hereby certify:
That the Board of Directors of said corporation at a meeting
duly convened, held on the 14th day of November, 1996, adopted a resolution to
amend the original articles as follows:
RESOLVED, Article First is deleted in its entirety and the
following is inserted in lieu thereof:
"FIRST. The name of the corporation is Guardian
International, Inc."
RESOLVED, Article Fourth is deleted in its entirety and the
following is inserted in lieu thereof:
"FOURTH. The amount of the total authorized capital stock of
the Company is 100,485,035 shares, consisting of: (i) 100,000,000 shares of
'Class A Voting Common Stock,' par value $0.001 per share; and (ii) 484,035
shares of 'Class B Nonvoting Common Stock,' par value $0.001 per share.
Except as otherwise provided herein, all shares of
Class A Voting Common Stock and Class B Nonvoting Common Stock will be
identical and will entitle the holders thereof to the same rights and
privileges.
1. Voting Rights. The holders of Class A Voting Common Stock
will be entitled to one (1) vote per share on all matters to be voted on by the
corporation's stockholders, and except as otherwise required by law, the holders
of Class B Nonvoting Common Stock will have no right to vote their shares of
Class B Nonvoting Common Stock on any matters to be voted on by the
corporation's stockholders.
2. Dividends. When and as dividends are declared thereon,
whether payable in cash, property or securities of the corporation, the holders
of Class A Voting Common Stock and the holders of Class B Nonvoting Common Stock
will be entitled to share ratably according to the number of shares of Class A
Voting Common Stock or Class B Nonvoting Common Stock held by them, in such
dividends; provided, that if dividends are declared which are payable in shares
of Class A Voting Common Stock or Class B Nonvoting Common Stock, dividends will
be declared which
48
<PAGE>
are payable at the same rate on both classes of common stock, and the dividends
payable in shares of Class A Voting Common Stock to holders of Class A Voting
Common Stock, and the dividends payable in shares of Class B Nonvoting Common
Stock will be payable to the holders of Class B Nonvoting Common Stock.
3. Liquidation Rights. In the event any liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, the
holders of Class A Voting Common Stock and Class B Nonvoting Common Stock shall
be entitled to share ratably, according to the number of shares of Class A
Voting Common Stock or Class B Nonvoting Common Stock held by them, in the
remaining assets of the Company available for distribution to its stockholders.
4. Conversion of Class B Nonvoting Common Stock.
(a) At any time and from time to time, each
record holder of Class B Nonvoting Common Stock will be entitled to convert any
and all of the shares of such holder's Class B Nonvoting Common Stock into
the same number of shares of Class A Voting Common Stock at holder's election,
provided, that each holder of Class B Nonvoting Common Stock shall only be
entitled to convert any share or shares of Class B Nonvoting Common Stock to
the extent that after giving effect to such conversion such holder or its
affiliates shall not directly or indirectly own, control or have power to
vote a greater quantity of securities of any kind issued by the Company than
such holder and its affiliates are permitted to own, control or have
power to vote under any law or under any regulation, rule or other
requirement of any governmental authority at any time applicable to such holder
and its affiliates.
(b) Each conversion of shares of Class B Nonvoting Common Stock into
shares of Class A Voting Common Stock will be effected by the surrender of the
certificate or certificates representing the shares to be converted at the
principal office of the Company at any time during normal business hours,
together with a written notice by the holder of such Class B Nonvoting Common
Stock stating that such holder desires to convert the shares, or a stated number
of the shares, of Class B Nonvoting Common Stock represented by such certificate
or certificates into Class A Voting Common Stock and a written undertaking that
upon such conversion such holder and its affiliates will not directly or
indirectly own, control or have the power to vote a greater quantity of
securities of any kind issued by the Company than such holders and its
affiliates are permitted to own, control or have the power to vote under any
applicable law, regulation, rule or other governmental requirement. Such
conversion will be deemed to have effected as of the close of business on the
date on which certificate or certificates have been surrendered and such notice
has been received, and at such time the rights of the holder of the converted
Class B Nonvoting Common Stock as such holder will cease and the person or
persons in whose name or names the certificate or certificates for shares of
Class A Voting Common Stock are to be issued upon such conversion will be deemed
to have become the holder or holders of record the shares of Class A Voting
Common Stock represented thereby.
(c) Promptly after such surrender and the receipt of such
written notice,
49
<PAGE>
the Company will issue and deliver in accordance with the surrendering holder's
instructions (i) the certificate or certificates for the Class A Voting Common
Stock issuable upon such conversion and (ii) a certificate representing any
Class B Nonvoting Common Stock which was represented by the certificate or
certificates delivered to the Company in connection with such conversion but
which was not converted.
(d) If the Company in any manner subdivides or combines the outstanding
shares of one class of either Class A Voting Common Stock or Class B Nonvoting
Common Stock, the outstanding shares of the other class will be proportionately
subdivided or combined.
(e) In the case of, and as a condition to, any capital reorganization of, or
any reclassification of the capital stock of, the Company (other than a
subdivision or combination of shares of Class A Voting Common Stock or Class B
Nonvoting Common Stock into a greater or lesser number of shares (whether with
or without par value) or a change in the par value of Class A Voting Common
Stock or Class B Nonvoting Common Stock or from par value to no par value) or in
the case of, and as a condition to, the consolidation or merger of the Company
with or into another corporation (other than a merger in which the corporation
is the continuing corporation and which does not result in any reclassification
of outstanding shares of Class A Voting Common Stock or Class B Nonvoting Common
Stock), each share of Class B Nonvoting Common Stock shall be convertible into
the number of shares of stock or other securities or property receivable upon
such reorganization, reclassification, consolidation or merger by a holder of
the number of shares of Class A Voting Common Stock of the Company in which such
shares of Class B Nonvoting Common Stock was convertible immediately prior to
such reorganization, reclassification, consolidation or merger; and, in any such
case, appropriate adjustment shall be made in the application of the provisions
set forth in this paragraph with respect to the rights and interests thereafter
of the holders of Class B Nonvoting Common Stock to the end that the provisions
set forth in this paragraph (including provisions with respect to the conversion
rate) shall thereafter be applicable, as nearly as they reasonably may be, in
relation to any shares of stock or other securities or property thereafter
deliverable upon the conversion of the shares of Class B Nonvoting Common Stock.
(f) The shares of Class B Nonvoting Common Stock which are converted
into shares of Class A Voting Common Stock as provided herein shall not be
reissued.
(g) The Company will at all times reserve and keep available out of its
authorized but unissued shares of Class A Voting Common Stock or its treasury
shares, solely for the purpose of issue upon conversion of the Class B Nonvoting
Common Stock as provided above, such number of Class A Voting Common Stock as
shall then be issuable upon the conversion of all then outstanding shares of
Class B Nonvoting Common Stock (assuming that all such shares of Class B
Nonvoting Common Stock are held by persons entitled to convert such shares into
Class A Voting Common Stock).
(h) The issuance of certificates for Class A Voting Common Stock upon
the conversion of Class B Nonvoting Common Stock will be made without charge to
the holders of
50
<PAGE>
such shares for any issuance tax in respect thereof or other cost incurred by
the Company in connection with such conversion and the related issuance of Class
A Voting Common Stock. The Company will not close its books against the transfer
of Class B Nonvoting Common Stock or Class A Voting Common Stock issued or
issuable upon the conversion of Class B Nonvoting Common Stock in any manner
which would interfere with the timely conversion of Class B Nonvoting Common
Stock."
The number of shares of the corporation outstanding and
entitled to vote on an amendment to the Articles of Incorporation is 6,453,804;
that the said change and amendment have been consented to and approved by a
majority vote of the stockholders holding at least a majority of each class of
stock outstanding and entitled to vote thereon.
/s Richard Ginsburg
--------------------------------
Richard Ginsburg, President
/s Sheilah Ginsburg
--------------------------------
Sheilah Ginsburg, Secretary
State of ______Florida__________
County of___Broward __________
On November 14, 1996, personally appeared before me, a Notary
Public, Richard Ginsburg and Sheilah Ginsburg, who acknowledged that they
executed the above instrument.
/s L. Marlene Crossley
----------------------------
(Signature of Notary)
Notary Stamp
Commission exp. 08/11/00
51
<PAGE>
EXHIBIT 10 (c)
Guardian International Inc.
Mr. Richard Ginsburg, President
3880 N. 28 Terrace
Hollywood, FL
33020-1118
Dear Mr. Ginsburg:
This letter confirms the engagement agreement (the "Agreement") between
G.M. Capital Partners, Ltd. ("GMC") and Guardian International Inc. a Florida
Corporation, (hereinafter "Guardian" or the "Company") pursuant to which GMC
will furnish management consulting, financial advisory and investor relations
services. GMC will assist Guardian in the capacity as detailed below.
RESPONSIBILITY OF GMC
A. Subject to the terms and conditions hereof, GMC services will include, among
other things, a due diligence overview of the Company including; reviewing
Guardian's current financial position and projections relating to Guardian's
capital requirements, analyzing the proforma effects of the financing on such
projections, and rendering advice on methods of structuring such financing
("Financing").
B. It is expressly acknowledged and agreed by the parties hereto that GMC's
obligations do not insure the successful negotiation of or obtaining of any type
of Financing for Guardian and any efforts for obtaining Financing shall be on a
"best efforts" basis only. GMC is not a registered broker dealer.
C. The central task of GMC will be attracting suitable entities who are in the
business of or interested in making equity or debt investments in companies such
as Guardian. Our role will include assisting the Company in proposing an equity
or debt investment in Guardian to prospective investors, presenting your
analysis in support of the investment, and structuring and negotiating the
financial terms of the investment.
D. We will also assist in the coordination of the many parties involved and
attend to the numerous technical details required in arranging and finalizing
any transaction. These tasks often present substantive issues or other
difficulties and constitute the most time-consuming aspects of a Financing,
requiring an anticipation of problems and experienced coordination of attorneys
and other parties, as appropriate.
52
<PAGE>
2.INFORMATION
A. GMC will perform services for the Company in all areas generally considered
to be management consulting, financial advisory and investor relations,
including but not limited to the preparation and dissemination of financial
publicity, annual and interim reports for stockholders and the financial
community, preparation and dissemination of information concerning the Company's
operations, and consultation with respect to financial negotiations with
investment banking firms, lenders and private investors.
B. Information to be released by GMC will be disseminated to general,
financial and trade media, the investment banking community, banks and
statistical organizations, all as deemed necessary or appropriate by GMC and the
Company.
C. All information to be disseminated through GMC will be based upon material
furnished by the Company and will be released only after receipt by GMC of final
approval from the Company. The Company recognized that GMC may have, either at
the present time or in the future, obligations imposed upon it by the federal
securities laws to verify independently certain of the information contained in
release being made through it. Accordingly, the Company agrees that GMC shall
have the right to make such reasonable inquiries as it shall deem necessary or
appropriate of officers and employees of the Company and its counsel and
auditors with respect to information being released by GMC. The Company
recognizes that the accuracy and completeness of all information contained in
release ultimately rest with the Company and agrees to indemnify and hold GMC
harmless from and against any loss and expense arising out of a claim that my
information released by GMC is inaccurate or incomplete.
D. You acknowledge and understand that GMC, in order to perform its services
effectively under this agreement, and to satisfy such obligation as may be
imposed upon it by the federal securities laws, require the prompt receipt of
all material information with respect to the Company, its operations and its
prospects. Accordingly, you agree to furnish promptly to GMC copies of all
reports and other filings with the Securities and Exchange Commission, all
communications with Stockholders and all reports received from your auditors.
Furthermore, you recognize the necessity of promptly notifying GMC of all
material developments concerning the Company, its business and prospects and to
supply GMC with sufficient information necessary for GMC to make a determination
as to its compliance with its own procedures as well as any legal requirements.
3. COMPENSATION TO GMC
In consideration of our services as set forth above, GMC shall be entitled to
receive, and Guardian agrees to pay to GMC the following:
A. GMC will receive an initial payment of $5,000 to be paid with the
completion of the proposed funding of $10,000,000 (the "Initial Financing") for
Guardian.
53
<PAGE>
B. GMC will receive a success fee ("Success Fee") in the form of a cash payment
in the amount of ten percent (10%) of the gross proceeds of any private
Financing, including any form of equity, convertible debt, debt with warrants,
debt with equity incentives to the lender, or any other form of equity, debt or
guarantees obtained by or invested in Guardian payable upon closing or receipt
of funds by Guardian or any entity described in Paragraph 6., whichever is
earlier. In the event Guardian does a public financing or sells more than five
(5%) percent of Guardian to any party, GMC will be entitled to a cash payment in
the amount of three (3%) percent of the gross proceeds of the investment.
C. Guardian shall have sole discretion in determining what constitutes an
acceptable Financing as contemplated by this Agreement. GMC shall earn the
Success Fee only upon the closing or receipt of funds from a Financing as
described in 3.B, above, and not merely for presenting a financing option or
prospective investor which in Guardian's sole discretion is unacceptable.
D. GMC will be retained as Financial Advisor, Management Consultant and
Investors Relations firm for the Company at a fee of $5,000 per month. Excluding
the initial payment, monthly payments will commence on the first day on the
month following the placement of the Initial Financing and will be payable on
the first day of each month for twelve (12) consecutive months.
4. EXPENSE REIMBURSEMENT
Guardian agrees to reimburse GMC all amounts due and owing GMC, under the terms
of this Agreement, no later than fifteen (15) days after receiving an invoice
for all customary or reasonable out-of-pocket expenses, including but not
limited to, the cost of telephone calls, travel, facsimile transmission,
translation, interpretation, paper duplication, due diligence reports, postage
and delivery services, or fees of counsel incurred in connection with the
performance by GMC of its duties as contemplated by this Agreement. All
out-of-town travel, counsel, or third party consultant fees, and other
significant expenses (Over $250) will be approved by Guardian in advance.
Guardian will make arrangements directly with and be responsible for cost of
accountants, appraisers, counsel and other experts and for the costs of printing
and circulating a business plan, memorandum or other documents prepared in
connection with performing appropriate due diligence of this Financing. If we
must file a lawsuit to collect any outstanding fees, out-of-pocket expenses, or
other expenses due from Guardian, Guardian agrees to pay reasonable costs and
attorneys' fees for such action.
5.EXCLUSIVITY
A. From the effective date of this Agreement, Guardian and its officers
will not engage any other person or entity to serve as its agent or
representative to provide services similar to those
54
<PAGE>
to be provided by GMC through the term of this Agreement without the prior
written consent to GMC.
B. If for a period of two (2) years after successfully closing a Financing, as
contemplated under this Agreement, Guardian desires to commence any Transaction
(as hereinafter defined), GMC shall have the right of first refusal to act as
Guardian's financial advisors, to arrange for placement agents or underwriters,
as the case may be, with respect to my such Transaction or Transactions. For
purposes of this Agreement, the term "Transaction" shall include each of the
following; the purchase, sale, merger, consolidation or any other business
combination, in one or a series of transactions involving Guardian or my sale of
securities of Guardian or a New Entity as described below, effected pursuant to
a private sale or an underwritten public offering.
C. If Guardian decides to actively pursue any such Transaction and GMC exercises
the right of first refusal provided hereunder, GMC and Guardian will enter into
an agreement appropriate to the circumstances containing provisions for among
other things, compensation, indemnification, contribution, and representations
and warranties which are usual and customary for similar agreements entered into
by GMC or other investment bankers of national standing acting in similar
transactions. Guardian agrees that it will not enter into any such Transaction,
unless GMC has waived their right of first refusal with respect thereto or prior
to or simultaneously with the consummation of such Transaction, until adequate
provision is made with respect to the payment of compensation to GMC as
contemplated hereby.
6. ASSIGNMENT AND TRANSFER OF OBLIGATION
In the event that Guardian contributes, pledges, guarantees or otherwise conveys
any of its assets (including without limitation the assets of its subsidiaries
or affiliates to, or incurs any liabilities on behalf of, or grants the
authority to operate its businesses or affiliated businesses) to a new entity,
whether a corporation, partnership, sole proprietorship, or national person
("New Entity") for the purpose of obtaining Financing as contemplated by this
Agreement, then GMC will be compensated by Guardian for whatever funds were
received by the New Entity on the same basis as if the funds were invested
directly in Guardian. The parties further agree that all Guardian's rights and
obligations under the Agreement will be equally binding upon New Entity and that
Guardian will not enter into or create any agreement, undertaking or legal
obligation with a New Entity without requiring said New Entity to accept and
satisfy Guardian's right and obligations under this Agreement as if they were
their own.
7. TWO YEAR PROVISIONS
If, within two (2) years from the termination of this Agreement, Guardian or its
officers consummate any Financing with any party to whom Guardian or its
officers were introduced by GMC or who was contacted by GMC in connection with
its services for Guardian hereunder, or
55
<PAGE>
who received information prepared by GMC in connection with the Financing, then
Guardian shall pay to GMC the agreed upon compensation.
8. TERMINATION
This agreement shall terminate twelve (12) months from the above written date of
this Agreement unless extended in writing and signed by both parties. GMC shall
be paid by Guardian all fees earned through Termination Date together with
reimbursement of all expenses due hereunder. All such fees and reimbursement due
GMC shall be paid on or before the Termination Date. Notwithstanding anything
expressed or implied herein to the contrary, the terms and provisions of Section
2, 3, 4, 5, 6, 7, 9, 10, 11, 12, 13, 14, 15, and 16 shall survive the
termination of this Agreement.
9. INDEMNIFICATION
Since we will be acting on your behalf, it is our practice to receive
indemnification. Guardian agree to indemnify and hold harmless GMC against any
and all losses, claims, damages, liabilities or costs (and all actions in
respect thereof and my reasonable legal or other expenses in giving testimony or
furnishing documents in response to a subpoena or otherwise), including the
costs of investigating, preparing or defending any such action or claim whether
or not in connection with litigation in which GMC is a party, as and when
incurred, directly or indirectly, caused by, relating to, based upon, or arising
out of; (a) any financing (as defined in or contemplated by this engagement
letter agreement, as it may be amended from time to time (the "Agreement"); or
(b) GMC's acting for Guardian including without limitation, any act or omission
by GMC in connection with its acceptance of or of the performance or
nonperformance of its obligations under the Agreement; provided, however such
indemnity agreement shall not apply to any such loss, claim, damage, liability
or cost to the extent it is found to have resulted primarily and indirectly from
the gross negligence or willful misconduct of GMC. Guardian also agrees that GMC
shall not have any liability (whether direct or indirect, in contract or tort or
otherwise) to Guardian for or in connection with the engagement of GMC, except
for any such liability for losses, claims, damages, liabilities or expense that
is found to have resulted primarily and directly from GMC's gross negligence or
willful misconduct.
This Indemnification Agreement shall be in addition to my liability which
Guardian may otherwise have to GMC or its affiliates, and the indemnification
provided for shall extend to J.A. Michie (North American Business Agent), GMC's
officers, employees, agents, legal counsel and controlling persons of GMC within
the meaning of the Securities Act of 1933, as amended. All references to GMC in
this Indemnification Agreement shall be understood to include any of the
foregoing.
If any action proceeding, or investigation is commenced or claim is made as to
which GMC proposes to demand indemnification, it will notify Guardian with
reasonable promptness. Guardian reserves the right to assume the defense of GMC
with counsel of its choosing, which
56
<PAGE>
counsel shall be reasonably acceptable to GMC. Guardian will be liable for my
settlement of my claim against GMC made without its written consent. GMC may not
settle any claim without the consent of Guardian.
No person found liable for fraudulent misrepresentation shall be entitled to
contribution from my person who is not also found liable for such fraudulent
misrepresentation. Notwithstanding the foregoing, GMC shall not be obligate to
contribute an amount under this Agreement that exceeds the amount of fees GMC
previously received pursuant to this Agreement. If the indemnification provided
for in this Indemnification Agreement shall for any reason be unavailable to GMC
in respect of any loss, claim, damage, or liability, or my action in respect
thereof, referred to therein, then each Indemnifying Party shall, in lieu of
indemnifying such Indemnified Party, contribute to the amount paid or payable by
such Indemnified Party as a result of such loss, claim, damage, or liability, or
any action in respect thereof; (i) in such proportion as shall be appropriate to
reflect the relative benefits received by Guardian from the applicable
Financing; or (ii) if the allocation provided by clause (i) is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in such clause (i) but also the relative fault of
GMC with respect to the actions or inactions (including statements and
omissions) that resulted in such loss, claim, damage, or liability, or my action
in respect thereof, as well as any other relevant equitable considerations.
10. ENTIRE AGREEMENT
The Parties agree that the Agreement embodies the entire agreement and
understanding of the Parties and that no understanding or agreements, verbal or
otherwise, exists between the Parties except as set forth in the Agreement. Any
modification to the Agreement must he reduced to writing, signed by both
Parties, and attached to the Agreement to be effective.
It. SEVERABILITY
Should any section or any part of my section of the Agreement be rendered void,
invalid, or unenforceable by any court of law for any reason such determination
shall not render void, invalid, or unenforceable my other section or any part of
any section in the Agreement.
12. SURVIVAL OF REPRESENTATIONS
Each Party, for itself, and its successors, heirs, executors, administrators,
representatives, insures, agents, and assigns covenants and agrees that all
representations made hereunder and obligations created hereunder shall apply to
their successors and assigns provided however, that GMC shall not assign this
Agreement to a third party without the prior written consent of a duly
authorized representative of Guardian which consent shall not be unreasonably
withheld.
13. NOTICES
57
<PAGE>
Any required notices under this Agreement shall be made by overnight courier or
certified mail, postage prepaid and return receipt requested as follows:
If to GMC:
G.M. Capital Partners, Ltd.
Mr. Michael Macey
Hirzel House, Smith Street
St. Peters Port, Guernsey
Channel Islands, GY1 2NG
With copies to:
Mr. LA. Michie
North American Business Agent
G.M. Capital Partners, Ltd.
P.O. Box 231
Port Coquitlam, B.C.
V3C 3V7 Canada
If to Guardian:
Guardian International Inc.
Mr. Richard Ginsburg, President
3880 N. 29 Terrace
Hollywood, FL
33020-1118
14. CHOICE OF LAW
The validity and interpretation of this Agreement shall be governed by the laws
of the State of Florida, without giving effect to the State of Florida's choice
of law principle and all actions arising under this Agreement or arising out of
the operative facts represented by services performed pursuant to this Agreement
shall be resolved in the courts of the State of Florida.
15. HEADINGS
The headings are for informational purposes only and shall not constitute a part
of this Agreement.
16. NO WAIVER OF BREACH
Waiver of any one breach of the provisions of this Agreement shall not be deemed
58
<PAGE>
a waiver of any other breach of the same or any other provision of this
Agreement.
AGREED AND ACCEPTED:
Please confirm that the foregoing correctly sets forth our mutual understanding
by signing and returning the copy of this Agreement provided for that purpose.
Guardian International Inc. G.M. Capital Partners, Ltd.
Mr. Richard Ginsburg J.A. Michie
North America Business Agent
By: /s/Richard Ginsburg/ By:/s/J.A. Michie/
Title: President Title: North American Business
Agent
Date: Date:
59
<PAGE>
EXHIBIT 10 (d)
INDEPENDENT CONTRACTOR AGREEMENT
This Independent Contractor Agreement ("Agreement") is made and effective this
August 15, 1996, by and between Mr. Harold Ginsburg ("Consultant") and Guardian
International, Inc., a Nevada Corporation ("Company").
Now, therefore, Consultant and Company agree as follows:
1. Engagement.
Company hereby engages Consultant, and Consultant accepts engagement, to provide
to Company the following services:
Acquisition Consulting Relating to the purchase of security alarm companies and
accounts
1. Business Management Consulting
2. Term.
Consultant shall provide services to Company pursuant to this Agreement for a
term commencing on August 15, 1996 and ending on August 14, 1997.
3. Place of Work.
Consultant shall render services primarily at Consultant's offices, but will,
upon request, provide the services at Company offices or such other places as
reasonably requested by Company as appropriate for the performance of particular
services.
4. Time.
Consultant's daily schedule and hours worked under this Agreement on a given day
shall generally be subject to Consultant's discretion, provided that Consultant
and Company anticipate that Consultant shall work on average ten (10) hours per
week in the performance of services pursuant to this Agreement Company relies
upon Consultant to devote sufficient time as is reasonably necessary to fulfill
the spirit and purpose of this Agreement.
5. Payment.
Company shall pay Consultant five thousand dollars ($5,000) per month for
services performed
60
<PAGE>
pursuant to this Agreement. Payment shall be made on the fifteenth day of each
month.
6. Termination.
A. This Agreement may be terminated by Company as follows:
i. If Consultant is unable to provide the consulting
services by reason of temporary or permanent illness,
disability, incapacity or death.
ii. Breach or default of any obligation of Consultant
pursuant to Section 6, Covenant Not to Compete, or Section 7,
Confidentiality, of this Agreement.
iii. Breach or default by Consultant of any other material
obligation in this Agreement, which breach or default is not
cured within five (5) days of written notice from Company.
B. Consultant may terminate this Agreement as follows:
i. Breach or default of any material obligation of Company,
which breach or default is not cured within five (5) days of
written notice from Consultant.
ii. If Company files protection under the federal bankruptcy
laws, or any bankruptcy petition or petition for receiver is
commenced by a third party against Company, any of the
foregoing of which remains undismissed for a period of sixty
(60) days.
7. Independent Contractor.
Consultant is and throughout this Agreement shall be an independent contractor
and not an employee, partner or agent of Company. Consultant shall not be
entitled to nor receive any benefit normally provided to Company's employees
such as, but not limited to, vacation payment, retirement, health care or sick
pay. Company shall not be responsible for withholding income or other taxes from
the payments made to Consultant. Consultant shall be solely responsible for
filing all returns and paying any income, social security or other tax levied
upon or determined with respect to the payments made to Consultant pursuant to
this Agreement.
8. Tools and Supplies.
Unless otherwise agreed to by Company in advance, Consultant shall be solely
responsible for procuring, paying for and maintaining any computer equipment,
software, paper, tools or supplies necessary or appropriate for the performance
of Consultant's services hereunder.
9. Controlling Law.
61
<PAGE>
This Agreement shall be governed by and construed in accordance with the laws of
the State of Florida.
10. Headings.
The headings in this Agreement are inserted for convenience only and shall not
be used to define, limit or describe the scope of this Agreement or any of the
obligations herein.
11. Final Agreement.
This Agreement constitutes the final understanding and agreement between the
parties with respect to the subject matter hereof and supersedes all prior
negotiations, understandings and agreements between the parties, whether written
or oral. This Agreement may be amended, supplemented or changed only by an
agreement in writing signed by both of the parties.
12. Notices.
Any notice required to be given or otherwise given pursuant to this Agreement
shall be in writing and shall be hand delivered, mailed by certified mail,
return receipt requested or sent by recognized overnight courier service as
follows:
If to Consultant:
Mr. Harold Ginsburg
3651 N. 55th Avenue
Hollywood, FL 33021-2343
If to Company:
Guardian International, Inc.
3880 N. Terrace
Hollywood, FL
33020-1118
13. Severability.
If any term of this Agreement is held by a court of competent jurisdiction to be
invalid or unenforceable, then this Agreement, including all of the remaining
terms, will remain in full force and effect as if such invalid or unenforceable
term had never been included.
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of the
date first above written.
62
<PAGE>
Guardian International, Inc.
__/s Harold Ginsburg_____________ By: _______/s Richard Ginsburg____________
Harold Ginsburg Richard Ginsburg, President
63
<PAGE>
EXHIBIT 10 (e)
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement ("Agreement") is made and effective
this day of August, 1996, by and between Guardian International, Inc.
("Company") and Richard Ginsburg ("Executive").
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment.
Company hereby agrees to initially employ Executive as its President of the
Company and Executive hereby accepts such employment in accordance with the
terms of this Agreement and the terms of employment applicable to regular
employees of Company. In the event of any conflict or ambiguity between the
terms of this Agreement and terms of employment applicable to regular employees,
the terms of this Agreement shall control.
2. Duties of Executive.
The duties of Executive shall include the performance of all of the duties
typical of the office held by Executive as described in the bylaws of Company
and such other duties and projects as may be assigned by a superior officer of
Company, if any, or the board of directors of the Company. Executive shall
devote his entire productive time, ability and attention to the business of
Company and shall perform all duties in a professional, ethical and businesslike
manner. Executive will not, during the term of this Agreement, directly or
indirectly engage in any other business, either as an employee, employer,
consultant, principal, officer, director, advisor, or in any other capacity,
either with or without compensation, without the prior written consent of the
Company.
3. Compensation.
Executive will be paid compensation during this Agreement as follows:
A. A base salary of ninety thousand ($90,000) per year, payable in installments
according to Company's regular payroll schedule. The base salary shall be
adjusted at the end of each year of employment at the discretion of the board of
directors and said salary shall not be reduced below the initial base salary.
4. Benefits.
64
<PAGE>
A. Vacation. Executive shall be entitled to fourteen (14) paid vacation
days each year.
B. Sick Leave. Executive shall be entitled to sick leave and emergency
leave according to the regular policies and procedures of Company. Additional
sick leave or emergency leave over and above paid leave provided by Company, if
any, shall be unpaid and shall be granted at the discretion of the board of
directors.
C. Pension and Profit Sharing Plans. Executive shall be entitled to
participate in any pension or profit sharing plan or other type of plan adopted
by Company for the benefit of its officers and/or regular employees.
D. Expense Reimbursement. Executive shall be entitled to reimbursement for all
reasonable expenses, including travel and entertainment, incurred by
Executive in the performance of Executive's duties. Executive will maintain
records and written receipts as required by Company policy and reasonably
requested by the board of directors to substantiate such expenses.
E. Automobile. Company will provide to Executive the use of an automobile of
Executive's choice at a monthly installment or lease payment. Company agrees to
replace the automobile with a new one at Executive's request no more often than
once every two years. Company will pay all automobile operating expenses
incurred by Executive in the performance of an Executive's company duties.
Company will procure and maintain in force an automobile liability policy for
the automobile with coverage, including Executive, in the minimum amount of
$1,000,000 combined single limit on bodily injury and property damage.
5. Term and Termination.
A. The Initial Term of this Agreement shall commence on August 15, 1996 and it
shall continue in effect for a period of Five (5) years. Thereafter, the
Agreement shall be renewed upon the mutual agreement of Executive and Company.
This Agreement and Executive's employment may be terminated at Company's
discretion during the Initial Term, provided that Company shall pay to Executive
an amount equal to payment at Executive's base salary rate for the remaining
period of Initial Term.
B. In the event that Executive is in breach of any material obligation owed
Company in this Agreement, habitually neglects the duties to be performed under
this Agreement, engages in any conduct which is dishonest, damages the
reputation or standing of the Company, or is convicted of any criminal act or
engages in any act of moral turpitude, then Company may terminate this Agreement
upon five (5) days notice to Executive. In event of termination of the agreement
pursuant to this subsection, Executive shall be paid only at the then applicable
base salary rate up to and including the date of termination. Executive shall
not be paid any incentive salary payments or other compensation, prorated or
otherwise.
C. In the event Company is acquired, or is the non-surviving party in a merger,
or sells all or
65
<PAGE>
substantially all of its assets, this Agreement shall not be terminated and
Company guarantees that the transferee or surviving company is bound by the
provisions of this Agreement.
D. In the event Executive terminates this agreement or is subject to termination
under paragraph B. above, and because executive has had access to information
pertaining to the business of the Company which may be secret and confidential,
including the names, addresses and other data pertaining to customers and
employees, and formulas, the Executive agrees that, effective upon the date of
this Agreement, and for a period of two (2) years from the date of termination
from this Agreement, he will not, in or with respect to any geographical area
where the Company does business, directly or indirectly, be financially
interested in, or represent or render any advice or services to, any other
business which is competitive with that of the Company, nor remove from the
Company's premises either originals or copies in any form of the names,
addresses or telephone numbers of any customers or employees of the Company or
any other confidential or proprietary information; provided, however, that the
foregoing restriction shall not preclude the Executive from the ownership of
less than two (2%) percent of the voting securities of any company whose
securities are traded on a national securities exchange or in the over the
counter market, even if its business competes with that of the Company. Further,
the Executive agrees that, in the event he shall violate any of the restrictions
of this Section, Company will be without adequate remedy at law and will
therefore be entitled to enforce such restrictions by temporary or permanent
injunctive or mandatory relief obtained in action or proceeding instituted in
any court of competent jurisdiction without the necessity of proving damage
without prejudice to any other remedies it may have at law or in equity.
6. Notices.
Any notice required by this Agreement or given in connection with it, shall be
in writing and shall be given to the appropriate party by personal delivery or
by certified mail, postage prepaid, or recognized overnight delivery services;
If to Company:
Guardian International, Inc.
3880 N. 28 Terrace
Hollywood, FL
33020-1118
If to Executive:
Mr. Richard Ginsburg
P.O. Box 800207
Miami, FL
33280-0207
66
<PAGE>
7. Final Agreement.
This Agreement terminates and supersedes all prior understandings or agreements
on the subject matter hereof. This Agreement may be modified only by a further
writing that is duly executed by both parties.
8. Governing Law.
This Agreement shall be construed and enforced in accordance with the laws of
the state of Florida.
9. Headings.
Headings used in this Agreement are provided for convenience only and shall not
be used to construe meaning or intent.
10. No Assignment.
Neither this Agreement nor any or interest in this Agreement may be assigned by
Executive without the prior express written approval of Company, which may be
withheld by Company at Company's absolute discretion.
11. Severability.
If any term of this Agreement is held by a court of competent jurisdiction to be
invalid or unenforceable, then this Agreement, including all of the remaining
terms, will remain in full force and effect as if such invalid or unenforceable
term had never been included.
12. Arbitration.
The parties agree that they will use their best efforts to amicably resolve any
dispute arising out of or relating to this Agreement. Any controversy, claim or
dispute that cannot be so resolved shall be settled by final binding arbitration
in accordance with the rules of the American Arbitration Association and
judgment upon the award rendered by the arbitrator or arbitrators may be entered
in any court having jurisdiction thereof. Any such arbitration shall be
conducted in Florida, or such other place as may be mutually agreed upon by the
parties. Within fifteen (15) days after the commencement of the arbitration,
each party shall select one person to act as arbitrator, and the two arbitrators
so selected shall select a third arbitrator within ten (10) days of their
appointment. The prevailing party shall be entitled to costs plus expenses,
including attorney fees, associated with arbitration.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
67
<PAGE>
Guardian International Inc., A Nevada Corporation
By:
Authorized Signature
/s Richard Ginsburg
Richard Ginsburg
68
<PAGE>
EXHIBIT 10 (h)
LOAN AND SECURITY AGREEMENT
between
GUARDIAN INTERNATIONAL, INC.,
as Borrower,
and
HELLER FINANCIAL, INC.,
as Lender
As of November 16, 1994
<PAGE>
TABLE OF CONTENTS
SECTION 1 DEFINITIONS
1.1 Certain Defined Terms...........................................1
1.2 Accounting Terms............................................... 10
1.3 Other Definitional Provisions...................................11
SECTION 2 LOANS AND COLLATERAL
2.1 Loans...........................................................11
(A) Revolving Loan.......................................11
(B) Eligible Contracts...................................12
(C) Borrowing Mechanics..................................14
2.2 Interest........................................................14
2.3 Fees............................................................15
(A) Funding Fee; Additional Funding Fee..................15
(B) Capital Appreciation Rights...........................15
2.4 Payments and Prepayments........................................15
(A) Manner and Time of Payment...........................15
(B) Mandatory Prepayments................................16
(1) Overadvance .................................16
(2) Proceeds of Asset Dispositions................16
(3) Excess Cash Flow..............................16
(C) Voluntary Prepayments and Repayments................ 17
(D) Payments on Business Days........................... 17
2.5 Term of this Agreement......................................... 17
2.6 Statements; Application of Payments............................ 17
2.7 Grant of Security Interest..................................... 17
2.8 Taxes...........................................................18
(A) No Deductions .........................................18
(B) Changes in Tax Laws.....................................18
2.9 Exclusivity; Right of First Refusal.............................19
SECTION 3 CONDITIONS TO LOANS
3.1 Conditions to Initial Loans.................................... 19
(A) Closing Deliveries..................................... 19
(B) Security Interests..................................... 19
(C) Representations and Warranties......................... 19
(D) Fees................................................... 20
(E) No Default............................................. 20
(i)
<PAGE>
(F) Performance of Agreements............................. 20
(G) No Prohibition........................................ 20
(H) Margin Regulations.................................... 20
(I) No Litigation......................................... 20
3.2 Further Conditions to Later Loans..............................20
SECTION 4 BORROWER'S REPRESENTATIONS AND WARRANTIES
4.1 Organization, Powers, Capitalization...........................21
(A) Organization and Powers...............................21
(B) Capitalization........................................21
4.2 Authorization of Borrowing, No Conflict........................21
4.3 Financial Condition............................................22
4.4 Indebtedness and Liabilities...................................22
4.5 Account Warranties.............................................22
4.6 Names..........................................................22
4.7 Locations; FEIN................................................22
4.8 Title to Properties; Liens.....................................22
4.9 Litigation; Adverse Facts......................................22
4.10 Payment of Taxes...............................................23
4.11 Performance of Agreements......................................23
4.12 Employee Benefit Plans.........................................23
4.13 Intellectual Property..........................................23
4.14 Broker's Fees..................................................23
4.15 Environmental Compliance.......................................23
4.16 Solvency.......................................................24
4.17 Disclosure.....................................................24
4.18 Insurance......................................................24
4.19 Compliance with Laws...........................................24
4.20 Bank Accounts..................................................24
4.21 Subsidiaries...................................................24
4.22 Use of Proceeds and Margin Security............................25
4.23 Employee Matters...............................................25
4.24 Governmental Regulation........................................25
SECTION 5 AFFIRMATIVE COVENANTS
5.1 Financial Statements and Other Reports. ......................25
(A) Monthly Financials....................................25
(B) Quarterly Financials..................................26
(C) Year-End Financials...................................26
(D) Accountants' Certification and Reports................26
(E) Compliance Certificate................................26
(F) Borrowing Base Certificates...........................27
(ii)
<PAGE>
(G) Aging Reports........................................27
(H) Management Report....................................27
(I) Appraisals...........................................27
(J) Government Notices...................................27
(K) Events of Default, etc...............................27
(L) Trade Names..........................................27
(M) Locations............................................28
(N) Bank Accounts........................................28
(O) Litigation...........................................28
(P) Other Information....................................28
(Q) Projections..........................................28
5.2 Inspection....................................................28
5.3 Collateral Records............................................28
5.4 Account Covenants; Verification...............................29
5.5 Collection of Accounts and Payments...........................29
5.6 Endorsement...................................................29
5.7 Corporate Existence...........................................30
5.8 Payment of Taxes..............................................30
5.9 Maintenance of Properties; Insurance..........................30
5.10 Compliance with Laws..........................................30
5.11 Further Assurances............................................30
5.12 Collateral Locations..........................................30
SECTION 6 FINANCIAL COVENANT...........................................31
SECTION 7 NEGATIVE COVENANTS
7.1 Indebtedness and Liabilities. ...............................31
7.2 Guaranties....................................................31
7.3 Transfers, Liens and Related Matters..........................31
(A) Transfers............................................31
(B) Liens................................................32
(C) No Negative Pledges..................................32
(D) No Distributions.....................................32
7.4 Investments and Loans.........................................32
7.5 Restriction on Fundamental Changes...................32
7.6 Transactions with Affiliates..................................32
7.7 Environmental Liabilities.....................................32
7.8 Conduct of Business/Noncompetition............................32
7.9 Compliance with ERISA.........................................33
7.10 Tax Consolidations............................................33
7.11 Subsidiaries..................................................33
7.12 Fiscal Year...................................................33
(iii)
<PAGE>
7.13 Press Release; Public Offering Materials.......................33
7.14 Bank Accounts..................................................33
SECTION 8 DEFAULT, RIGHTS AND REMEDIES
8.1 Event of Default...............................................33
(A) Payment...............................................33
(B) Default in Other Agreements...........................33
(C) Breach of Certain Provisions..........................34
(D) Breach of Warranty....................................34
(E) Other Defaults Under Loan Documents...................34
(F) Change in Ownership...................................34
(G) Involuntary Bankruptcy; Appointment of Receiver, etc..34
(H) Voluntary Bankruptcy; Appointment of Receiver, etc....34
(I) Liens.................................................35
(J) Judgment and Attachments..............................35
(K) Dissolution...........................................35
(L) Injunction............................................35
(M) Invalidity of Loan Documents..........................35
(N) Failure of Security...................................35
(O) Damage, Strike, Casualty..............................35
(P) Licenses and Permits..................................36
8.2 Suspension of Commitments......................................36
8.3 Acceleration...................................................36
8.4 Remedies.......................................................36
8.5 Appointment of Attorney-in-Fact................................37
8.6 Limitation on Duty of Lender with Respect to Collateral. .....37
8.7 Application of Proceeds........................................37
8.8 License of Intellectual Property...............................38
8.9 Waivers, Non-Exclusive Remedies................................38
SECTION 9 MISCELLANEOUS
9.1 Assignments and Participations.................................38
9.2 Set Off........................................................38
9.3 Expenses and Attorneys' Fees...................................39
9.4 Indemnity......................................................39
9.5 Amendments and Waivers.........................................40
9.6 Notices........................................................40
9.7 Survival of Warranties and Certain Agreements..................41
9.8 Indulgence Not Waiver..........................................41
9.9 Marshaling; Payments Set Aside.................................41
9.10 Entire Agreement...............................................41
9.11 Independence of Covenants......................................41
(iv)
<PAGE>
9.12 Severability.................................................. 42
9.13 Headings................................................ ......42
9.14 Applicable Law. ....................................... ......42
9.15 Successors and Assigns.................................. ......42
9.16 No Fiduciary Relationship; Limitation of Liabilities.... ......42
9.17 Consent to Jurisdiction................................. ......42
9.18 Waiver of Jury Trial.................................... ......43
9.19 Construction............................................ ......43
9.20 Counterparts; Effectiveness............................. ......43
9.21 No Duty................................................. ......43
9.22 Exculpation............................................. ......43
(v)
<PAGE>
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is dated as of November 16, 1994 and
entered into by and between GUARDIAN INTERNATIONAL, INC., a Florida corporation
("Borrower"), with its principal place of business at 3880 North 28th Terrace,
Hollywood, Florida 33020 and HELLER FINANCIAL, INC., a Delaware corporation
("Lender"), with offices at 500 West Monroe Street, Chicago, Illinois 60661. All
capitalized terms used herein are defined in Section 1 of this Agreement.
WHEREAS, Borrower desires that Lender extend a credit facility to
Borrower to refinance existing Eligible Contracts (as defined herein) and
purchase new Eligible Contracts; and
WHEREAS, Borrower desires to secure its obligations under the Loan
Documents by granting to Lender a security interest in and lien upon certain of
Borrower's property; and
WHEREAS, Harold Ginsburg, an individual and Sheilah Ginsburg, an
individual, (collectively, "Guarantors" is willing to guaranty certain of the
obligations of Borrower to Lender under the Loan Documents in accordance with
the terms of the Guaranty (as defined below).
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, Borrower and Lender agree as follows:
SECTION 1 DEFINITIONS
1.1 Certain Defined Terms. The following terms used in this Agreement will
have the following meanings:
"Accounts" means, all "accounts" (as defined in the UCC) now owned or
hereafter created or acquired by Borrower, including all Eligible Contracts,
accounts receivable, contract rights and general intangibles relating thereto,
notes, drafts and other forms of obligations owed to or owned by Borrower
arising or resulting from the sale of goods or the rendering of services, all
proceeds thereof, all guaranties and security therefor, and all goods and rights
represented thereby or arising therefrom including the right of stoppage in
transit, replevin and reclamation.
"Additional Funding Fee" has the meaning assigned to that term in
subsection 2.3(A).
"Affiliate" means any Person (other than Lender): (a) directly or
indirectly controlling, controlled by, or under common control with, Borrower;
(b) directly or indirectly owning or holding five percent (5%) or more of any
equity interest in Borrower; or (c) five percent (5%) or more of whose voting
stock or other equity interest is directly or indirectly owned or held by
Borrower. For purposes of this definition, "control" (including with correlative
meanings, the terms "controlling", "controlled by" and "under common control
with") means the possession
-1-
<PAGE>
directly or indirectly of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities or by contract or otherwise.
"Aging Report" means a report duly executed by the chief executive
officer or chief financial officer of Borrower appropriately completed and in
the form attached hereto as Exhibit A.
"Agreement" means this Loan and Security Agreement as it may be
amended, supplemented or otherwise modified from time to time.
"Alarm System" means an residential home security system installed by a
Dealer and with respect to which Borrower has entered into a Contract or
purchased a Contract from a Dealer.
"Asset Disposition" means the disposition, whether by sale, lease,
transfer, loss, damage, destruction, condemnation or otherwise, of any or all of
the assets of Borrower.
"Borrower" has the meaning assigned to that term in the preamble to this
Agreement.
"Borrowing Base" has the meaning assigned to that term in subsection
2.1(A).
"Borrowing Base Certificate" means a certificate and assignment
schedule duly executed by an officer of Borrower appropriately completed and in
substantially the form of Exhibit B.
"Business Day" means any day excluding Saturday, Sunday and any day
which is a legal holiday under the laws of the States of Illinois or Florida, or
is a day on which banking institutions located in any such states are closed.
"Capital Appreciation Rights" means the right of Lender or its
successor or assign to participate in twenty-four and ninety-nine one hundredths
percent (24.99%) of the equity appreciation of Borrower, in accordance with the
terms of the CAR Documents.
"Capital Expenditures" means all expenditures for (including deposits),
or contracts for expenditures with respect to, any fixed assets or improvements,
or for replacements, substitutions or additions thereto, which have a useful
life of more than one year, including the direct or indirect acquisition of such
assets by way of increased product or service charges, offset items or
otherwise, including the principal portion of payments made during such period
under or with respect to Capital Leases.
"Capital Lease" means any lease of any property (whether real, personal
or mixed) that, in conformity with GAAP, should be accounted for as a capital
lease.
-2-
<PAGE>
"CAR Documents" means the documents, instruments and agreements
evidencing Lender's Capital Appreciation Rights.
"Cash Equivalents" means: (a) marketable direct obligations issued or
unconditionally guarantied by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within six (6) months from the date of acquisition thereof;
(b) commercial paper maturing no more than six (6) months from the date issued
and, at the time of acquisition, having a rating of at least A-1 from Standard &
Poor's Corporation or at least P-1 from Moody's Investors Service, Inc.; and (c)
certificates of deposit or bankers' acceptances maturing within six (6) months
from the date of issuance thereof issued by, or overnight reverse repurchase
agreements from, any commercial bank organized under the laws of the United
States of America or any state thereof or the District of Columbia having
combined capital and surplus of not less than $250,000,000 and not subject to
setoff rights in favor of such bank.
"Closing Certificate" means a certificate duly executed by the chief
executive officer or chief financial officer of Borrower appropriately completed
and in substantially the form of Exhibit C.
"Closing Date" means November 18, 1994.
"Collateral" has the meaning assigned to that term in subsection 2.7.
"Collecting Banks" has the meaning assigned to that term in subsection
5.5.
"Compliance Certificate" means a certificate duly executed by the chief
executive officer or chief financial officer of Borrower appropriately completed
and in substantially the form attached hereto as Exhibit D.
"Contract Obligor" means the residential homeowner obligated under a
Contract to make periodic payments to Borrower for alarm monitoring services.
"Contract" means a contract by and between a Contract Obligor and
Borrower or by and between a Contract Obligor and a Dealer and assigned to
Borrower, for the electronic monitoring of an Alarm System.
"Credit Score" means a credit report with respect to a Contract Obligor
prepared by a credit rating service selected by Lender at Borrower's sole
expense.
"Custodian" means Lender, or, at Lender's option, such other Person
designated by Lender and approved by Borrower (such approval not to be
unreasonably withheld or delayed), acting as agent for Lender, which at any time
is authorized by Lender in writing to maintain physical possession of the
Contracts.
-3-
<PAGE>
"Custody Agreement" means the agreement among Borrower, Lender and the
Custodian substantially in the form attached hereto as Exhibit E.
"Dealer" means a retail seller and installer of Alarm Systems that (i)
has been in the business of selling and installing Alarm Systems not less than
twenty-four (24) months on the date such Dealer installs an Alarm System, (ii)
maintains at all times business liability insurance of not less than $1,000,000,
(iii) provides warranty service and maintenance to each Alarm System sold by
such Dealer for a period of not less than one year from the date of sale or
installation, and (iv) has all legally required permits and licenses for the
conduct of its business.
"Default" means a condition or event that, after notice or lapse of
time or both, would constitute an Event of Default if that condition or event
were not cured or removed within any applicable grace or cure period.
"Default Rate" has the meaning assigned to that term in subsection 2.2.
"EBIDAT" means, without duplication, for any period, the following,
each calculated for such period: (a) Net Income; plus (b) any deduction of
income and franchise taxes made in the determination of Net Income; plus (c)
Interest Expenses paid or accrued and deducted in determining Net Income; plus
(d) amortization and depreciation deducted in determining Net Income; plus (e)
other non-cash charges (excluding accruals in the ordinary course of business)
to the extent included in determining Net Income.
"Eligible Contracts" has the meaning assigned to that term in sub-
section 2.1(B).
"Employee Benefit Plan" means any employee benefit plan within the
meaning of Section 3(3) of ERISA which (a) is maintained for employees of any
Loan Party or any ERISA Affiliate or (b) has at any time within the preceding
six (6) years been maintained for the employees of any Loan Party or any current
or former ERISA Affiliate.
"Environmental Laws" means any present or future federal, state or
local law, rule, regulation or order relating to pollution, waste, disposal,
industrial hygiene or the protection of human health or safety, plant life or
animal life, natural resources or the environment.
"Equipment" means all "equipment" (as defined in the UCC) now owned or
hereafter acquired by Borrower including, without limitation, all machinery,
motor vehicles, trucks, trailers, vessels, aircraft and rolling stock and all
parts thereof and all additions and accessions thereto and replacements
therefor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor statute and all rules and
regulations promulgated thereunder.
-4-
<PAGE>
"ERISA Affiliate", as applied to any Loan Party, means any Person who
is a member of a group which is under common control with any Loan Party, who
together with any Loan Party is treated as a single employer within the meaning
of Section 414(b) and (c) of the IRC.
"Event of Default" means each of the events set forth in subsection 8.1.
"Excess Cash Flow" means, for any period, without duplication, the
total of the following for Borrower, each calculated for such period: (a)
EBIDAT; plus (b) tax refunds actually received; plus (c) increases in deferred
taxes; less (d) Capital Expenditures (to the extent actually made in cash); less
(e) income and franchise taxes paid or accrued by shareholders of Borrower
attributable to income of Borrower (excluding accrued tax credits, tax
deductions and deferred income tax payments) and sales taxes to be remitted to
the Florida Department of Revenue with respect to Contracts; less (f) decreases
in deferred income taxes resulting from tax payments actually made by
shareholders of Borrower attributable to income to income of Borrower; less (g)
Interest Expenses (to the extent actually paid; less (h) scheduled amortization
of Indebtedness (other than the Loans) actually paid; less (i) the Servicing Fee
(to the extent actually paid); less (j) a per annum return of eight percent (8%)
on Principal's Equity Investment ("Principal's Return"); less (k) the amount, if
any, of Principal's Equity Investment actually distributed to or at the
direction of, or otherwise withdrawn by, Harold Ginsburg; and plus (l) decreases
in Working Capital (or less increases in Working Capital); provided that for
purposes of this definition, the following items will be excluded from
calculations of changes in Working Capital: cash, Cash Equivalents, the current
portion of long-term Indebtedness and the principal balance of the Loans. In the
event no moneys are available to be distributed to pay Principal's Return
pursuant to clause (j) of this definition, then Principal's Return will accrue
and may be distributed in subsequent periods to the extent moneys are available
pursuant to clause (j) of this definition.
"Federal Funds Effective Rate" means, for any day, the weighted average
of the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published on the
immediately following Business Day by the Federal Reserve Bank of New York or,
if such rate is not published for any Business Day, the average of the
quotations for the day of the requested Loan received by Lender from three
Federal funds brokers of recognized standing selected by Lender.
"Fiscal Year" means each twelve month period ending on the last day of
December in each year.
"Funding Date" means the date of each funding of a Loan.
"Funding Fee" has the meaning assigned to that term in subsection
2.3(A).
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public
-5-
<PAGE>
Accountants and statements and pronouncements of the Financial Accounting
Standards Board that are applicable to the circumstances as of the date of
determination.
"Guarantors" has the meaning assigned to that term in the preamble to
this Agreement.
"Guaranty" means the Guaranty executed and delivered by Guarantors,
substantially in the form of Exhibit F, as such agreement may hereafter be
amended, restated, supplemented or otherwise modified from time to time.
"Hazardous Material" means all or any of the following: (a) substances
that are defined or listed in, or otherwise classified pursuant to, any
applicable laws or regulations as "hazardous substances", "hazardous materials",
"hazardous wastes", "toxic substances" or any other formulation intended to
define, list or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity or
"EP toxicity"; (b) oil, petroleum or petroleum derived substances, natural gas,
natural gas liquids or synthetic gas and drilling fluids, produced waters and
other wastes associated with the exploration, development or production of crude
oil, natural gas or geothermal resources; (c) any flammable substances or
explosives or any radioactive materials; and (d) asbestos in any form or
electrical equipment which contains any oil or dielectric fluid containing
levels of polychlorinated biphenyl in excess of fifty parts per million.
"Indebtedness", as applied to any Person, means: (a) all indebtedness
for borrowed money; (b) obligations under leases which in accordance with GAAP
constitute Capital Leases; (c) notes payable and drafts accepted representing
extensions of credit whether or not representing obligations for borrowed money;
(d) any obligation owed for all or any part of the deferred purchase price of
property or services if the purchase price is due more than six months from the
date the obligation is incurred or is evidenced by a note or similar written
instrument; and (e) all indebtedness secured by any Lien on any property or
asset owned or held by that Person regardless of whether the indebtedness
secured thereby will have been assumed by that Person or is nonrecourse to the
credit of that Person.
"Ineligible Contracts" means Contracts described in Subsection 2.1(B)(2).
"Intangible Assets" means the amount of Borrower's intangible assets
(determined in conformity with GAAP) including, without limitation, goodwill,
trademarks, tradenames, licenses, organizational costs, deferred amounts,
covenants not to compete, unearned income and restricted funds, but excluding
Contracts, Accounts, demand or time deposits in financial institutions and
securities.
"Intellectual Property" means all of the Borrower's present and future
designs, patents, patent rights and applications therefor, trademarks and
registrations or applications therefor, trade names, inventions, copyrights and
all applications and registrations therefor, software or computer programs,
license rights, trade secrets, methods, processes, knowhow, drawings,
specifications, descriptions, and all memoranda, notes and records with respect
to any research
-6-
<PAGE>
and development, whether now owned or hereafter acquired by Borrower, all
goodwill associated with any of the foregoing, and proceeds of all of the
foregoing, including, without limitation, proceeds of insurance policies
thereon.
"Interest Expense" means, for any period and calculated for such
period, interest expenses actually paid to Lender with respect to the Loans in
accordance with the terms hereof.
"Interest Rate" has the meaning assigned to that term in subsection 2.2.
"Inventory" means all "inventory" (as defined in the UCC) now owned or
hereafter acquired by Borrower, wherever located including finished goods, raw
materials, work in process and other materials and supplies used or consumed in
Borrower's business and goods which are returned to or repossessed by Borrower,
but excluding Contracts.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor statute and all rules and regulations promulgated
thereunder.
"Lender" means Heller Financial, Inc., together with its successors and
permitted assigns pursuant to subsection 9.1.
"Lender's Depository Account" has the meaning assigned to that term in
subsection 5.5.
"Liabilities" will have the meaning given that term in accordance with
GAAP and will include Indebtedness.
"Lien" means any lien, mortgage, pledge, security interest, charge or
encumbrance of any kind, whether voluntary or involuntary, (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, and any agreement to give any security interest).
"Loan" or "Loans" means an advance or advances under the Revolving Loan
Commitment.
"Loan Documents" means this Agreement, the Guaranty, the Stock Pledge
Agreement, the CAR Documents, the Custody Agreement, and all other instruments,
documents and agreements executed by or on behalf of any Loan Party and
delivered concurrently herewith or at any time hereafter to or for Lender in
connection with the Loans and other transactions contemplated by this Agreement,
all as amended, restated, supplemented or modified from time to time.
"Loan Party" means, collectively, Borrower, Guarantors and any other
Person (other than Lender) which is or becomes a party to any Loan Document.
"Lockbox" has the meaning assigned to that term in subsection 5.5.
-7-
<PAGE>
"Material Adverse Effect" means (a) a material adverse effect upon the
business, operations, properties, assets or condition (financial or otherwise)
of any Loan Party on an individual basis or taken as a whole or (b) the
impairment of the ability of any Loan Party to perform its obligations under any
Loan Document to which it is a party or of Lender to enforce or collect any of
the Obligations.
"Maturity Date" means November 30, 1999.
"Maximum Revolving Loan Amount" has the meaning assigned to that term
in subsection 2.1(A).
"Net Income" means, for any period, Borrower's net income (or loss)
after income and franchise taxes determined in conformity with GAAP, but
excluding: (a) the income of any Person in which Borrower has an ownership
interest, unless such income is received by Borrower in a cash distribution; (b)
after-tax gains or losses from sales or other dispositions of assets (other than
inventory sold in the ordinary course of business); and (c) to the extent not
included in clauses (a) and (b) above, any after-tax extraordinary or
non-recurring non-cash gains or losses.
"Net Worth" means, as of any date, the sum of the capital stock and
additional paid-in capital plus retained earnings (or minus accumulated deficit)
of Borrower, calculated in conformity with GAAP.
"Obligations" means all obligations, liabilities and indebtedness of
every nature of each Loan Party from time to time owed to Lender under the Loan
Documents including the principal amount of all debts, claims and indebtedness,
accrued and unpaid interest and all fees, costs and expenses, whether primary,
secondary, direct, contingent, fixed or otherwise, heretofore, now and/or from
time to time hereafter owing, due or payable.
"Permitted Encumbrances" means the following types of Liens: (a) Liens
(other than Liens relating to claims under Environmental Laws or ERISA) for
taxes, assessments or other governmental charges not yet due and payable and
other than those being contested in good faith by appropriate proceedings
promptly instituted and diligently conducted and if Borrower has established
appropriate reserves as required in conformity with GAAP; (b) statutory Liens of
landlords, carriers, warehousemen, mechanics, materialmen and other similar
liens imposed by law, which are incurred in the ordinary course of business for
sums not more than thirty (30) days delinquent; (c) Liens incurred or deposits
made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, trade contracts, performance and return-of-money bonds and other
similar obligations (exclusive of obligations for the payment of borrowed
money); (d) easements, rights-of-way, restrictions, and other similar charges or
encumbrances not interfering in any material respect with the ordinary conduct
of the business of any Loan Party; (e) Liens for purchase money obligations
incurred in the ordinary course of Borrower's business, provided that (i) the
Indebtedness secured by any
-8-
<PAGE>
such Lien is permitted under subsection 7.1, and (ii) such Lien encumbers only
the asset so purchased; (f) Liens in favor of Lender, and (g) Liens set forth on
Schedule 1.1.
"Person" means and includes natural persons, corporations, limited
partnerships, general partnerships, joint stock companies, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts, business
trusts or other organizations, whether or not legal entities, and governments
and agencies and political subdivisions thereof.
"Prime Rate" means a variable rate of interest per annum equal to the
higher of (a) the rate of interest from time to time published by the Board of
Governors of the Federal Reserve System as the "Bank Prime Loan" rate in Federal
Reserve Statistical Release H.15(519) entitled "Selected Interest Rates" or any
successor publication of the Federal Reserve System reporting the Bank Prime
Loan rate or its equivalent, or (b) the Federal Funds Effective Rate. The
statistical release generally sets forth a Bank Prime Loan rate for each
Business Day. In the event the Board of Governors of the Federal Reserve System
ceases to publish a Bank Prime Loan rate or its equivalent, the term "Prime
Rate" will mean a variable rate of interest per annum equal to the highest of
the "prime rate", "reference rate", "base rate", or other similar rate announced
from time to time by The First National Bank of Chicago (with the understanding
that any such rate may merely be a reference rate and may not necessarily
represent the lowest or best rate actually charged to any customer by such
bank).
"Principal's Equity Investment" means $1,000,000, plus additional
paid-in capital contributed by Harold Ginsburg in exchange for shares of the
common capital stock of Borrower, exclusive of any retained Net Income with
respect thereto, less any amount distributed to or at the direction of Harold
Ginsburg pursuant to the definition of Excess Cash Flow, less the aggregate
principal amount of any financing at any time secured by Contracts owned by the
Borrower on the date hereof which have never been Eligible Contracts included in
the Borrowing Base.
"Projections" means Borrower's forecasted: (a) balance sheets; (b)
profit and loss statements; (c) cash flow statements; and (d) capitalization
statements, all prepared on a [division by division basis consistent with
Borrower's historical financial statements, together with appropriate supporting
details and a statement of underlying assumptions.
"Responsible Officer" means an officer of Borrower identified in
writing to Lender from time to time as having authority to borrow hereunder.
"Revolving Loan" means all advances made by Lender pursuant to
subsection 2.1(A) and any amounts added to the principal balance of the
Revolving Loan pursuant to this Agreement.
"Revolving Loan Commitment" means the commitment of Lender to make
Revolving Loans as set forth in subsection 2.1.
"Revolving Loan Commitment Termination Date" means November 30, 1995.
-9-
<PAGE>
"Servicing Fees" means, for each calendar month for Contracts then
included in the Borrowing Base, (i) $6.00 for each of the first 5,000 Contracts,
(ii) $5.00 for each of the next 2,500 Contracts, and (iii) $4.00 for each of all
remaining Contracts.
"Stock Pledge Agreement" means the Stock Pledge Agreement from
Guarantors to Lender, substantially in the form of Exhibit G, to secure the
payment and performance of the liabilities and duties of Guarantors under the
Guaranty.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than fifty percent (50%) of
the total voting power of shares of stock (or equivalent ownership or
controlling interest) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof.
"Tangible Net Worth" means an amount equal to: (a) Borrower's Net
Worth; less (b) Borrower's Intangible Assets; less (c) Borrower's prepaid
expenses; less (d) all obligations owed to Borrower by any Affiliate of
Borrower; and less (e) all loans by Borrower to officers, stockholders or
employees of Borrower.
"UCC" means the Uniform Commercial Code as in effect on the date hereof
in the State of Illinois, as amended from time to time, and any successor
statute.
"Working Capital" means: (a) current assets of Borrower; less (b)
current liabilities of Borrower; and less (c) the amount of any obligations
owed to Borrower by any Affiliate of Borrower.
1.2 Accounting Terms. For purposes of this Agreement, all accounting terms not
otherwise defined herein will have the meanings assigned to such terms in
conformity with GAAP. Financial statements and other information furnished to
Lender pursuant to subsection 5.1 will be prepared in accordance with GAAP as in
effect at the time of such preparation. In the event any "Accounting Changes"
(as defined below) will occur and such changes affect financial covenants,
standards or terms in this Agreement, then Borrower and Lender agree to enter
into negotiations in order to amend such provisions of this Agreement so as to
equitably reflect such Accounting Changes with the desired result that the
criteria for evaluating the financial condition of Borrower will be the same
after such Accounting Changes as if such Accounting Changes had not been made,
and until such time as such an amendment will have been executed and delivered
by Borrower and Lender, (A) all financial covenants, standards and terms in this
Agreement will be calculated and/or construed as if such Accounting Changes had
not been made, and (B) Borrower will prepare footnotes to each Compliance
Certificate and the financial statements required to be delivered hereunder that
show the differences between the financial statements delivered (which reflect
such Accounting Changes) and the basis for calculating financial covenant
compliance (without reflecting such Accounting Changes). "Accounting Changes"
means: (a) changes in accounting principles required by GAAP and implemented by
Borrower;
-10-
<PAGE>
(b) changes in accounting principles recommended by Borrower's certified public
accountants; and (c) changes in carrying value of Borrower's as the result of
any other adjustments that, in each case, were applicable to, but not included
in, the Pro Forma.
1.3 Other Definitional Provisions. References to "Sections", "subsections",
"Exhibits" and "Schedules" will be to Sections, subsections, Exhibits and
Schedules, respectively, of this Agreement unless otherwise specifically
provided. Any of the terms defined in subsection 1.1 may, unless the context
otherwise requires, be used in the singular or the plural depending on the
reference. In this Agreement, words importing any gender include the other
genders; the words "including," "includes" and "include" will be deemed to be
followed by the words "without limitation"; references to agreements and other
contractual instruments will be deemed to include subsequent amendments,
assignments, and other modifications thereto, but only to the extent such
amendments, assignments and other modifications are not prohibited by the terms
of this Agreement or any other Loan Document; references to Persons include
their respective permitted successors and assigns or, in the case of
governmental Persons, Persons succeeding to the relevant functions of such
Persons; and all references to statutes and related regulations will include any
amendments of same and any successor statutes and regulations.
SECTION 2 LOANS AND COLLATERAL
2.1 Loans
(A) Revolving Loan. Subject to the terms and conditions of this
Agreement and in reliance upon the representations and warranties of Borrower
herein set forth, Lender agrees to lend to Borrower from time to time an
aggregate amount not to exceed at any time $7,000,000 (the "Revolving Loan
Commitment"). Amounts borrowed under this subsection 2.1(A) may be repaid and
reborrowed at any time prior to the earlier of (i) the termination of the
Revolving Loan Commitment pursuant to subsection 8.2 or (ii) the Revolving Loan
Commitment Termination Date. Lender will have no obligation to make advances
under this subsection 2.1(A) to the extent any requested advance would cause the
balance of the Revolving Loans then outstanding to exceed the Maximum Revolving
Loan Amount.
(1) "Maximum Revolving Loan Amount" means, as of any date of
determination, the lesser of (a) the Revolving Loan Commitment and (b) the
Borrowing Base.
(2) "Borrowing Base" means, as of any date of determination
and with respect to each Eligible Contract, an amount equal to the lesser of:
(a) fifty percent (50%) of the product of (i) the monthly
payment required by the terms of such Eligible Contract to be
paid by the obligor to Borrower multiplied by (ii) the number
of calendar months then remaining in the term of such Eligible
Contract (excluding any renewal term), not to exceed sixty
(60) months, or
(b) Borrower's actual cost of acquiring such Eligible Contract
from a Dealer.
-11-
<PAGE>
(B) Eligible Contracts
"Eligible Contracts" means, as at any date of determination, the
aggregate of all Accounts that, in Lender's reasonable determination, meet all
of the following criteria and are not otherwise Ineligible Contracts:
(1) Contracts must meet all of the following criteria to be considered
Eligible Contracts:
(a) Installments under the Contracts are paid only
monthly or quarterly;
(b) The Contract Obligors own and reside in the
residences where the Alarm Systems are permanently installed as a fixture;
(c) Installments under the Contracts are in an amount not less
than $20 per month and not more than $50 per month; and provided that with
respect to all the Eligible Contracts included in the Borrowing Base, the
average installment is less than $30 per month;
(d) Each of the Contract Obligors has achieved a Credit
Score acceptable to Lender in its sole discretion (Beacon score of 400 minimum);
(e) The accounts for the Contracts have been transferred
into Borrower's central station;
(f) Borrower will have electronically inspected each
Alarm System, and the alarm panel has been placed on Borrower's own telephone
line;
(g) Each of the Contract Obligors has a homeowner's insurance
policy in full force and effect and the insurer has been notified that the
Contract Obligor has a monitored Alarm System;
(h) Each Alarm System has been encrypted with Borrower's
proprietary alarm monitoring computer software;
(i) Each Contract Obligor has purchased its Alarm System for a
minimum price of $300 or purchased a residence with an existing Alarm System,
and the fair market value of the Alarm System is not less than $300;
(j) Borrower has owned the Contract and monitored the
related Alarm System for not less than 5 Business Days;
(k) Borrower has physically inspected at least five
percent (5%) of the Alarm Systems;
-12-
<PAGE>
(l) At the time such Contracts are first included in the
Borrowing Base, no installment remains unpaid for more than thirty (30) days
after the due date specified therefor;
(m) Lender as received an opinion of counsel acceptable
to it that the form for each Contract complies with applicable law; and
(n) The Contracts are not otherwise Ineligible Contracts;
(2) the following Contracts are Ineligible Contracts:
(a) Contracts with respect to which, at any time after such
Contracts are first included in the Borrowing Base, any installment remains
unpaid for more than sixty (60) days after the due date specified therefor;
(b) Contracts due from a Contract Obligor whose residence
or principal place of business is located outside the United States of America;
(c) Contracts originated by any one Dealer to the extent that
adding such Contracts to the Borrowing Base will cause the amount of Contracts
from such Dealer included in the Borrowing Base to exceed, in the aggregate, an
amount equal to twenty percent (20%) of the Borrowing Base at any time on or
after the outstanding balance of the Loans is or has been more than $4,000,000;
(d) Contracts with respect to which the Contract Obligor
is an Affiliate of Borrower or a director, officer, agent, stockholder or
employee of Borrower or any of its Affiliates;
(e) Contracts with respect to which there is any
unresolved dispute with the respective Contract Obligor (but only to the extent
of such dispute);
(f) Contracts where the indebtedness thereunder is
evidenced by an "instrument" (as defined in the UCC) not in the possession of
Lender;
(g) Contracts with respect to which Lender does not have
a valid, first priority and fully perfected security interest;
(h) Contracts subject to any Lien except Permitted
Encumbrances;
(i) Contracts with respect to which the services giving
rise to such Contract have not been performed and accepted by such account
debtor;
(j) Contracts with respect to which the Contract Obligor is
located in New Jersey, Minnesota, or any other state denying creditors access to
its courts or rendering the Contracts unenforceable in the absence of a Notice
of Business Activities Report, business
-13-
<PAGE>
license or other similar filing, unless Borrower has either qualified as a
foreign corporation authorized to transact business in such state or has filed a
Notice of Business Activities Report or similar filing with, and has obtained
any such license or permit from, the applicable state agency for the then
current year;
(k) Any Contract with respect to which the Contract
Obligor is a creditor of Borrower;
(l) Any Contract that fails, in its form, origination,
servicing or enforcement, to comply with all applicable laws; and
(m) Contracts that do not meet the requirements of sub-
section 2.1(B)(1) for Eligible Contracts.
(C) Borrowing Mechanics. Advances hereunder will be in minimum amounts
of $50,000, which will be made not more often than once in any seven (7) day
period; provided, however, upon payment of the Additional Funding Fee Borrower
may request advances under the Revolving Loan Commitment in amounts less than
$50,000 and/or more frequently than once in any seven (7) day period. Not less
than four (4) Business Days prior to a requested Funding Date, Borrower will
give Lender telephonic notice by 11:00 a.m. (Chicago time) of the proposed
borrowing. Lender will not incur any liability to Borrower for acting upon any
telephonic notice that Lender believes in good faith to have been given by a
Responsible Officer authorized to borrow on behalf of Borrower or for otherwise
acting in good faith under this subsection 2.1(C). Lender will not make any
advance pursuant to any telephonic notice unless Lender has also received by
11:00 a.m. (Chicago time) on the date of such request, the Borrowing Base
Certificate and Aging Report dated such date and all other documents required
under subsection 3.2. The making of an advance pursuant to telephonic notice
will constitute a Loan under this Agreement. Each such advance to Borrower under
the Revolving Loan Commitment will be deposited in immediately available funds
in such account as Borrower may from time to time designate to Lender in
writing.
2.2 Interest. So long as no Event of Default has occurred and is continuing, the
Loans and all other Obligations will bear interest from the date such Loans are
made or such other Obligations become due to the date paid at a rate per annum
(meaning 360 days) equal to four percent (4%) plus the Prime Rate; provided,
however, that such rate will not exceed eighteen percent (18%) (the "Interest
Rate"). After the occurrence of an Event of Default and for so long as such
Event of Default continues, the Loans and all other Obligations will, at
Lender's option, bear interest at a rate per annum (meaning 360 days) equal to
three percent (3.0%) plus the Interest Rate (the "Default Rate"). Interest on
the Loans and all other Obligations will be computed on the daily principal
balance on the basis of a 360-day year for the actual number of days elapsed in
the period during which it accrues and will be payable monthly in arrears on the
first day of each month. Any publicly announced change in the Prime Rate will
result in an adjustment to the Interest Rate on the next Business Day.
-14-
<PAGE>
Notwithstanding any provision to the contrary contained in this
Agreement or the other Loan Documents, Borrower will not be required to pay, and
Lender will not be permitted to collect, any amount of interest in excess of the
maximum amount of interest permitted by law ("Excess Interest"). If any Excess
Interest is provided for or determined by a court of competent jurisdiction to
have been provided for in this Agreement or in any of the other Loan Documents,
then in such event: (1) the provisions of this subsection will govern and
control; (2) neither Borrower nor any Loan Party will be obligated to pay any
Excess Interest; (3) any Excess Interest that Lender may have received hereunder
will be, at Lender's option, (a) applied as a credit against the outstanding
principal balance of the Obligations or accrued and unpaid interest (not to
exceed the maximum amount permitted by law), (b) refunded to the payor thereof,
or (c) any combination of the foregoing; (4) the interest rate(s) provided for
herein will be automatically reduced to the maximum lawful rate allowed from
time to time under applicable law (the "Maximum Rate"), and this Agreement and
the other Loan Documents will be deemed to have been and will be, reformed and
modified to reflect such reduction; and (5) neither Borrower nor any Loan Party
will have any action against Lender for any damages arising out of the payment
or collection of any Excess Interest. Notwithstanding the foregoing, if for any
period of time interest on any Obligations is calculated at the Maximum Rate
rather than the applicable rate under this Agreement, and thereafter such
applicable rate becomes less than the Maximum Rate, the rate of interest payable
on such Obligations will remain at the Maximum Rate until Lender will have
received the amount of interest which Lender would have received during such
period on such Obligations had the rate of interest not been limited to the
Maximum Rate during such period.
2.3 Fees
(A) Funding Fee; Additional Funding Fee. On each Funding Date, Borrower
will pay to Lender the funding fee ("Funding Fee") in an amount equal to one
percent (1%) of the amount of Loan proceeds funded on that date. In addition, in
the event Borrower requests an advance in an amount less than $50,000 or
requests an advance more than once in any seven day period, and Lender, in its
sole discretion, makes an Advance pursuant to such request, Borrower will also
pay to Lender a fee (the "Additional Funding Fee") in the amount of $1,500.
Borrower has prior to the Closing Date, deposited with Lender the sum of $25,000
(the "Good Faith Deposit"). The Good Faith Deposit will be applied to the
Funding Fee and the Additional Funding Fee as and when due and payable
hereunder.
(B) Capital Appreciation Rights. On the Closing Date, Borrower
will issue to Lender the Capital Appreciation Rights.
2.4 Payments and Prepayments
(A) Manner and Time of Payment. One hundred percent (100%) of the funds
collected from the Contracts included in the Borrowing Base each week will be
paid to Lender by Collecting Banks pursuant to subsection 5.5 and the agreement
governing the Lockbox, and, so long as no Event of Default has occurred and is
continuing, will be applied by Lender in the
-15-
<PAGE>
following order: first, to payment of the Collecting Banks' fees and expenses
for their services; second, to payment to Borrower of accrued Servicing Fees and
for remittance to the Florida Department of Revenue in the amount of sales taxes
due with respect to Contracts in the Borrowing Base; third, to the payment of
costs or expenses incurred by Lender in connection with the Loans; fourth, to
any interest accrued at the Default Rate; fifth, to the payment of accrued and
unpaid interest at the Interest Rate; and thereafter, to the reduction of the
principal balance of the Loans. If the amount of the funds received by Lender
from the Collecting Banks with respect to any month is insufficient to pay in
full the amount of interest which accrues on the Loan for such month at the
Interest Rate, Borrower will pay the difference to Lender on or before the last
day of the following month. In the event Borrower receives any payments on any
of the Contracts pledged to Lender directly from any Contract Obligor, Borrower
will deliver such payments to the Collecting Banks within two (2) Business Days
following Borrower's receipt thereof unless Borrower will have received notice
from Lender requiring that all payments on the Contracts be paid directly to
Lender, in which event such payments will be delivered to Lender. Within fifteen
(15) days after the end of each calendar month, Borrower will deliver to Lender
a certificate of Borrower's chief executive officer or chief financial officer
demonstrating its calculation of the amount required to be paid.
(B) Mandatory Prepayments
(1) Overadvance. At any time that the aggregate outstanding
principal balance of the Revolving Loan exceeds the Maximum Revolving Loan
Amount, Borrower will promptly repay the Revolving Loan to the extent necessary
to reduce the outstanding principal balance to an amount that is equal to or
less than the Maximum Revolving Loan Amount, without assessment of a premium of
any kind, subject however to the Default Rate as herein provided.
(2) Proceeds of Asset Dispositions. Immediately upon receipt
by Borrower of proceeds of any Asset Disposition (in one or a series of related
transactions), which proceeds exceed $10,000 (it being understood that if the
proceeds exceed $10,000, the entire amount and not just the portion above
$10,000 will be subject to this paragraph), Borrower will prepay the Obligations
in an amount equal to such proceeds. All such prepayments will be applied as a
permanent reduction of the Revolving Loan Commitment. Nothing in this subsection
2.4(B) will be deemed to constitute Lender's consent to any Asset Disposition or
to waive the terms and conditions of subsection 7.3(A).
(3) Excess Cash Flow. Within fifteen (15) days of the end of
each calendar quarter, from the date hereof until the Capital Appreciation
Rights Payment Date (as defined in the CAR Documents), Borrower will pay to
Lender, as additional consideration for entering into this Agreement, an amount
equal to twenty-four and ninety-nine hundredths percent (24.99%) of Excess Cash
Flow. Concurrently with the making of any such payment, Borrower will deliver to
Lender a certificate of Borrower's chief executive officer or chief financial
officer demonstrating Borrower's calculation of the amount required to be paid.
-16-
<PAGE>
(C) Voluntary Prepayments and Repayments. Except as provided in
subsection 2.4(B), Borrower's Obligations may not be prepaid in whole or in part
prior to the Maturity Date.
(D) Payments on Business Days. Whenever any payment to be made
hereunder will be stated to be due on a day that is not a Business Day, the
payment may be made on the next succeeding Business Day and such extension of
time will be included in the computation of the amount of interest or fees due
hereunder.
2.5 Term of this Agreement. The Revolving Loan Commitment will (unless earlier
terminated) terminate on the Revolving Loan Commitment Termination Date. In
addition, this Agreement may be terminated as set forth in Section 8.3 hereof.
Unless due earlier upon acceleration or otherwise in accordance with the terms
of this Agreement, all Obligations will become immediately due and payable
without notice or demand on the Maturity Date. Notwithstanding any termination
of the Revolving Loan Commitment, until all Obligations have been fully paid and
satisfied, Lender will be entitled to retain security interests in and liens
upon all Collateral, and even after payment of all Obligations hereunder,
Borrower's obligation to indemnify Lender in accordance with the terms hereof
will continue.
2.6 Statements; Application of Payments. Lender will render a monthly statement
of account to Borrower. Such statement of account will constitute an account
stated unless Borrower makes written objection thereto within thirty (30) days
from the date such statement is mailed to Borrower. Borrower promises to pay all
of its Obligations as such amounts become due or are declared due pursuant to
the terms of this Agreement. After the occurrence and during the continuance of
an Event of Default, Borrower irrevocably waives the right to direct the
application of any and all payments at any time or times thereafter received by
Lender from or on behalf of Borrower, and Borrower hereby irrevocably agrees
that Lender will have the continuing exclusive right to apply and to reapply any
and all payments received at any time or times after the occurrence and during
the continuance of an Event of Default against the Obligations in such manner as
Lender may deem advisable notwithstanding any previous entry by Lender upon any
books and records.
2.7 Grant of Security Interest. To secure the payment and performance of the
Obligations, including all renewals, extensions, restructurings and refinancings
of any or all of the Obligations, Borrower hereby grants to Lender a continuing
security interest, lien and mortgage in and to all right, title and interest of
Borrower in the following property of Borrower, whether now owned or existing or
hereafter acquired or arising and regardless of where located (all being
collectively referred to as the "Collateral"): (A) Contracts that are included
in the Borrowing Base; (B) all Accounts and general intangibles relating to or
arising out of Contracts that are included in the Borrowing Base; (C) all
deposit accounts of Borrower maintained with any bank or financial institution
with respect to the Contracts; (D) all cash and other monies and property of
Borrower in the possession or under the control of Lender or any participant;
(E) all books, records, ledger cards, files, correspondence, computer programs
or other Intellectual Property, tapes, disks and related data processing
software that at any time evidence or contain information
-17-
<PAGE>
relating to any of the property described above or are otherwise necessary or
helpful in the collection thereof or realization thereon; and (F) proceeds of
all or any of the property described above, including, without limitation, the
proceeds of any insurance policies covering any of the above described property.
2.8 Taxes.
(A) No Deductions. Any and all payments or reimbursements made
hereunder will be made free and clear of and without deduction for any and all
taxes, levies, imposts, deductions, charges or withholdings, and all liabilities
with respect thereto; excluding, however, the following: taxes imposed on the
net income of Lender by the jurisdiction under the laws of which Lender is
organized or doing business or any political subdivision thereof and taxes
imposed on its net income by the jurisdiction of Lender's applicable lending
office or any political subdivision thereof (all such taxes, levies, imposts,
deductions, charges or withholdings and all liabilities with respect thereto
excluding such taxes imposed on net income, herein "Tax Liabilities"). If
Borrower will be required by law to deduct any such amounts from or in respect
of any sum payable hereunder to Lender, then the sum payable hereunder will be
increased as may be necessary so that, after making all required deductions,
Lender receives an amount equal to the sum it would have received had no such
deductions been made.
(B) Changes in Tax Laws. In the event that, subsequent to the Closing
Date, (1) any changes in any existing law, regulation, treaty or directive or in
the interpretation or application thereof, (2) any new law, regulation, treaty
or directive enacted or any interpretation or application thereof, or (3)
compliance by Lender with any request or directive (whether or not having the
force of law) from any governmental authority, agency or instrumentality:
(1) does or will subject Lender to any tax of any kind
whatsoever with respect to this Agreement, the other Loan Documents or any Loans
made hereunder, or change the basis of taxation of payments to Lender of
principal, fees, interest or any other amount payable hereunder (except for net
income taxes, or franchise taxes imposed in lieu of net income taxes, imposed
generally by federal, state or local taxing authorities with respect to interest
or commitment or other fees payable hereunder or changes in the rate of tax on
the overall net income of Lender); or
(2) does or will impose on Lender any other condition or
increased cost in connection with the transactions contemplated hereby or
participations herein; and the result of any of the foregoing is to increase the
cost to Lender of making or continuing any Loan hereunder, as the case may be,
or to reduce any amount receivable hereunder, then, in any such case, Borrower
will promptly pay to Lender, upon its demand, any additional amounts necessary
to compensate Lender, on an after-tax basis, for such additional cost or reduced
amount receivable, as determined by Lender with respect to this Agreement or the
other Loan Documents. If Lender becomes entitled to claim any additional amounts
pursuant to this subsection, it will promptly notify Borrower of the event by
reason of which Lender has become so entitled. A certificate as to any
additional amounts payable pursuant to the foregoing sentence
-18-
<PAGE>
submitted by Lender to Borrower will, absent manifest error, be final,
conclusive and binding for all purposes.
2.9 Exclusivity; Right of First Refusal.
(A) Exclusivity. Until the Revolving Loan Commitment Termination Date,
and without limitation of Section 7.3, Borrower will not sell, assign (by
operation of law or otherwise) or in any manner dispose of, grant any option
with respect to or otherwise seek to finance any Eligible Contract, other than
in favor of Lender pursuant to the terms and conditions hereof.
(B) Right of First Refusal. After the Revolving Loan Commitment
Termination Date and until the Obligations are paid in full, Borrower will not
sell, assign (by operation of law or otherwise) or in any manner dispose of,
grant any option with respect to or otherwise finance any Contract until after
Borrower has provided to Lender all information pertaining to such sale,
assignment, option or other financing arrangement and Lender, in its sole
discretion, has determined not to extend financing to Borrower on terms
identical in all material respects to those described in such information.
Lender will be deemed not to have exercised such right of first refusal on the
tenth (10th) Business Day after Lender's receipt of the information pertaining
to such proposed transaction. Nothing in this Section 2.10 will be deemed to
create any obligation on Lender's part to make a loan or otherwise extend credit
to Borrower.
SECTION 3 CONDITIONS TO LOANS
3.1 Conditions to Initial Loans and Later Loans. The obligations of Lender
to make Loans on the Closing Date and on each Funding Date are subject to
satisfaction of all of the conditions set forth below.
(A) Closing Deliveries. Lender will have received, in form and
substance reasonably satisfactory to Lender, all documents, instruments and
information identified on Schedule 3.1(A) and all other agreements, notes,
certificates, orders, authorizations, financing statements, mortgages and other
documents which Lender may at any time reasonably request. In particular, Lender
and its counsel will have reviewed and approved each form of Contract Borrower
proposes to pledge to Lender as an Eligible Contract.
(B) Security Interests. Lender will have received satisfactory evidence
that all security interests and liens granted to Lender pursuant to this
Agreement or the other Loan Documents have been duly perfected and constitute
first priority liens on the Collateral, subject only to Permitted Encumbrances.
(C) Representations and Warranties. The representations and warranties
contained herein and in the Loan Documents will be true, correct and complete in
all material respects on and as of that Funding Date to the same extent as
though made on and as of that date, except
-19-
<PAGE>
for any representation or warranty limited by its terms to a specific date and
taking into account any amendments to the Schedules or Exhibits as a result of
any disclosures made by Borrower to Lender after the Closing Date and approved
by Lender.
(D) Fees. Borrower will have paid the Funding Fee and any Additional
Funding Fee then due and payable.
(E) No Default. No event will have occurred and be continuing or would
result from the consummation of the requested borrowing that would constitute an
Event of Default or a Default.
(F) Performance of Agreements. Each Loan Party will have performed in
all material respects all agreements and satisfied all conditions which any Loan
Document provides will be performed by it on or before that Funding Date.
(G) No Prohibition. No order, judgment or decree of any court,
arbitrator or governmental authority will purport to enjoin or restrain Lender
from making any Loans.
(H) Margin Regulations. The making of the Loans requested on such
Funding Date will not violate Regulation G, Regulation T, Regulation U or
Regulation X of the Board of Governors of the Federal Reserve System.
(I) No Litigation. There will not be pending or, to the knowledge of
Borrower, threatened, any action, charge, claim, demand, suit, proceeding,
petition, governmental investigation or arbitration against or affecting any
Loan Party or any property of any Loan Party that has not been disclosed by
Borrower in writing, and there will have occurred no development in any such
action, charge, claim, demand, suit, proceeding, petition, governmental
investigation or arbitration that, in the opinion of Borrower, would reasonably
be expected to have a Material Adverse Effect.
3.2 Further Conditions to Later Loans. The obligations of Lender to make
Loans on the Closing Date and on each Funding Date are subject to satisfaction
of all of the conditions set forth below.
(A) Lender will have received a Custodian's certificate (as provided
for in the Custody Agreement) acknowledging receipt on behalf of Lender of the
original written agreement between Borrower and the Contract Obligors for each
of the Contracts being pledged to Lender as part of the Collateral for such
Funding Date.
(B) Lender will have received a request for funds and a Borrowing Base
Certificate, each in accordance with subsection 2.1(C).
(C) Lender will have received an Aging Report including all Eligible
Contracts included in the Borrowing Base.
-20-
<PAGE>
(D) Custodian will have received evidence that each Contract Obligor
purchased its Alarm System for a minimum price of $300.
(E) With respect to Contracts included for the first time in the
Borrowing Base, other than Contracts the form of which has been previously
approved by Lender for use in the jurisdiction where the applicable Contract
Obligor resides, Borrower will have provided to Lender a representative sample
of such Contracts and Lender and its counsel will have approved such sample
before the advance of funds on the Funding Date.
SECTION 4 BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce Lender to enter into this Agreement and to make Loans,
Borrower represents and warrants to Lender that the following statements are and
will be true, correct and complete:
4.1 Organization, Powers, Capitalization.
(A) Organization and Powers. Borrower is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and qualified to do business in the State of Florida. Borrower is
not doing business in any state other than the State of Florida. Borrower has
all requisite corporate power and authority to own and operate its properties,
to carry on its business as now conducted and proposed to be conducted and to
enter into each Loan Document.
(B) Capitalization. The authorized capital stock of Borrower is as set
forth on Schedule 4.1(B). All issued and outstanding shares of capital stock of
Borrower are duly authorized and validly issued, fully paid, nonassessable, free
and clear of all Liens other than those in favor of Lender and such shares were
issued in compliance with all applicable state and federal laws concerning the
issuance of securities. The capital stock of Borrower is owned by the
stockholders and in the amounts set forth on Schedule 4.1(B). No shares of the
capital stock of Borrower, other than those described above, are issued and
outstanding. Other than as described on Schedule 4.1(B), there are no preemptive
or other outstanding rights, options, warrants, conversion rights or similar
agreements or understandings for the purchase or acquisition from Borrower, of
any shares of capital stock or other securities of Borrower.
4.2 Authorization of Borrowing, No Conflict. Borrower has the corporate power
and authority to incur the Obligations and to grant security interests in the
Collateral. On the Closing Date, the execution, delivery and performance of the
Loan Documents by Borrower signatory thereto will have been duly authorized by
all necessary corporate and shareholder action. The execution, delivery and
performance by Borrower of each Loan Document and the consummation of the
transactions contemplated by this Agreement do not and will not be in
contravention of any applicable law, the corporate charter or bylaws of Borrower
or any agreement or order by which any Loan Party or Borrower's property is
bound. This Agreement is, and the other Loan Documents, when executed and
delivered will be, the legally valid and binding obligations of binding
obligations of Borrower, each enforceable against the Borrower,
-21-
<PAGE>
as applicable, in accordance with their respective terms, except as such
enforceability may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and (ii) equitable principles generally.
4.3 Financial Condition. All financial statements concerning Borrower which have
been or will hereafter be furnished by Borrower to Lender pursuant to this
Agreement have been or will be prepared in accordance with GAAP consistently
applied throughout the periods involved (except as disclosed therein) and do or
will present fairly the financial condition of the corporation covered thereby
as at the dates thereof and the results of their operations for the periods then
ended. The Projections to be delivered will be prepared by Borrower in light of
the past operations of the business of Borrower, and such Projections will
represent the good faith estimate of Borrower and its senior management
concerning the most probable course of its business as of the date such
Projections are prepared and delivered.
4.4 Indebtedness and Liabilities. As of the Closing Date, Borrower does not have
any Indebtedness or Liabilities except as reflected on the financial statements
attached as Exhibit H, or as incurred in the ordinary course of business.
4.5 Account Warranties. Borrower represents, warrants and covenants as to each
Account that, at the time of its creation, the Account is a valid, bona fide
account, representing an undisputed indebtedness incurred by the named account
debtor for goods actually sold and delivered or for services completely
rendered; to the best of Borrower's knowledge, there are no setoffs, offsets or
counterclaims, genuine or otherwise, against the Account; the Account does not
represent a sale to an Affiliate or a consignment, sale or return or a bill and
hold transaction; no agreement exists permitting any deduction or discount
(other than the discount stated on the invoice); Borrower is the lawful owner of
the Account and has the right to assign the same to Lender; the Account is free
of all security interests, liens and encumbrances other than those in favor of
Lender, and the Account is due and payable in accordance with its terms.
4.6 Names. Borrower does not conduct business and has not at any time during the
past five years conducted business under any name, trade name or fictitious
business name other than those names set forth on Schedule 4.6.
4.7 Locations; FEIN. Schedule 4.7 sets forth the location of Borrower's
principal place of business, the location of Borrower's books and records, the
location of all other offices of Borrower and all Collateral locations, and such
locations are Borrower's sole locations for its business and the Collateral.
Borrower's federal employer identification number is 65-0334701.
4.8 Title to Properties; Liens. Borrower has good, sufficient and legal title,
subject to Permitted Encumbrances, to all its respective material properties and
assets. Except for Permitted Encumbrances, all such properties and assets are
free and clear of Liens. To the best knowledge of Borrower after due inquiry,
there are no actual, threatened or alleged defaults with respect to any leases
of real property under which Borrower is lessee or lessor which would have a
Material Adverse Effect.
-22-
<PAGE>
4.9 Litigation; Adverse Facts. Except as set forth on Schedule 4.9, there are no
judgements outstanding against any Loan Party or affecting any property of any
Loan Party nor is there any action, charge, claim, demand, suit, proceeding,
petition, governmental investigation or arbitration now pending or, to the best
knowledge of Borrower after due inquiry, threatened against or affecting any
Loan Party or any property of any Loan Party. No Loan Party has received any
opinion or memorandum or legal advice from legal counsel to the effect that it
is exposed to any liability which could reasonably be expected to result in any
Material Adverse Effect.
4.10 Payment of Taxes. All tax returns and reports of Borrower required to be
filed by any of them have been timely filed, and all taxes, assessments, fees
and other governmental charges upon Borrower and upon its properties, assets,
income and franchises which are shown on such returns as due and payable have
been paid when due and payable, other than any such taxes being contested in
good faith by appropriate proceedings promptly instituted and diligently pursued
and with respect to which Borrower has established appropriate reserves in
accordance with GAAP. None of the United States income tax returns of Borrower
are under audit. No tax liens have been filed and no claims are being asserted
with respect to any such taxes. The charges, accruals and reserves on the books
of Borrower in respect of any taxes or other governmental charges are in
accordance with GAAP.
4.11 Performance of Agreements. Borrower is not in default in the performance,
observance or fulfillment of any of the obligations, covenants or conditions
contained in any material contractual obligation of Borrower, and no condition
exists that, with the giving of notice or the lapse of time or both, would
constitute such a default.
4.12 Employee Benefit Plans. Borrower and each ERISA Affiliate is in compliance
in all material respects with all applicable provisions of ERISA, the IRC and
all other applicable laws and the regulations and interpretations thereof with
respect to all Employee Benefit Plans. No liability has been incurred by
Borrower or any ERISA Affiliate which remains unsatisfied for any funding
obligation, taxes or penalties with respect to any Employee Benefit Plan.
4.13 Intellectual Property. Borrower owns, is licensed to use or otherwise
has the right to use, all Intellectual Property used in or necessary for the
conduct of its business as currently conducted and all such Intellectual
Property is identified on Schedule 4.13.
4.14 Broker's Fees. No broker's or finder's fee or commission will be
payable with respect to any of the other transactions contemplated hereby.
4.15 Environmental Compliance. Borrower has been and is currently in compliance
with all applicable Environmental Laws, including obtaining and maintaining in
effect all permits, licenses or other authorizations required by applicable
Environmental Laws. There are no claims, liabilities, investigations,
litigation, administrative proceedings, whether pending or threatened, or
judgments or orders relating to any Hazardous Materials asserted or threatened
-23-
<PAGE>
against Borrower or relating to any real property currently or formerly owned,
leased or operated by Borrower.
4.16 Solvency. As of the date of this Agreement, Borrower: (a) owns and will own
assets the fair saleable value of which are (i) greater than the total amount of
liabilities (including contingent liabilities) of Borrower and (ii) greater than
the amount that will be required to pay the probable liabilities of Borrower as
they mature; (b) has capital that is not unreasonably small in relation to its
business as presently conducted or any presently contemplated or undertaken
transaction; and (c) does not intend to incur and does not believe that it will
incur debts beyond its ability to pay such debts as they become due.
4.17 Disclosure. No representation or warranty of Borrower or any other Loan
Party contained in this Agreement, the financial statements, the other Loan
Documents, or any other document, certificate or written statement furnished to
Lender by or on behalf of any such Person for use in connection with the Loan
Documents contains any untrue statement of a material fact or omitted, omits or
will omit to state a material fact necessary in order to make the statements
contained herein or therein not misleading in light of the circumstances in
which the same were made. The Projections and pro forma financial information
contained in such materials are based upon good faith estimates and assumptions
believed by such Persons to be reasonable at the time made, it being recognized
by Lender that such projections as to future events are not to be viewed as
facts and that actual results during the period or periods covered by any such
projections may differ from the projected results. There is no material fact
known to Borrower that has had or will have a Material Adverse Effect and that
has not been disclosed herein or in such other documents, certificates and
statements furnished to Lender for use in connection with the transactions
contemplated hereby.
4.18 Insurance. Borrower maintains adequate insurance policies for public
liability and property damage for its business and properties, no notice of
cancellation has been received with respect to such policies and Borrower is in
compliance with all material conditions contained in such policies. Lender has
been named as an additional insured and loss payee, respectively, on all such
insurance policies.
4.19 Compliance with Laws. Borrower is in substantial compliance with all laws,
ordinances, rules, regulations, orders, policies, guidelines and other
requirements of any domestic or foreign government or any instrumentality or
agency thereof, having jurisdiction over the conduct of its business or the
ownership of its properties, the violation of which would subject Borrower or
any of its officers to criminal liability or have a Material Adverse Effect,
and, to Borrower's best knowledge, no violation of any such law, ordinance,
rule, regulation, order, policy, guideline or other requirement has been
alleged.
4.20 Bank Accounts. Schedule 4.20 sets forth the account numbers and
locations of all bank accounts of Borrower.
4.21 Subsidiaries. Borrower has no Subsidiaries.
-24-
<PAGE>
4.22 Use of Proceeds and Margin Security. Borrower will use the proceeds of all
Loans for proper business purposes (as described in the recitals to this
Agreement) consistent with all applicable laws, statutes, rules and regulations.
No portion of the proceeds of any Loan will be used by Borrower in any manner
that might cause the borrowing or the application of such proceeds to violate
Regulation G, Regulation U, Regulation T or Regulation X or any other regulation
of the Board of Governors of the Federal Reserve System or to violate the
Exchange Act.
4.23 Employee Matters. Except as set forth on Schedule 4.23, (a) neither
Borrower nor Borrower's employees is subject to any collective bargaining
agreement, (b) no petition for certification or union election is pending with
respect to the employees of Borrower and no union or collective bargaining unit
has sought such certification or recognition with respect to the employees of
Borrower, and (c) there are no strikes, slowdowns, work stoppages or
controversies pending or, to the best knowledge of Borrower after due inquiry,
threatened between any Loan Party and its respective employees, other than
employee grievances arising in the ordinary course of business which could
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect. Except as set forth on Schedule 4.23, Borrower has not
entered into any employment contract.
4.24 Governmental Regulation. None of the Loan Parties is, or after giving
effect to any loan will be, subject to regulation under the Public Utility
Holding Company Act of 1935, the Federal Power Act or the Investment Company Act
of 1940 or to any federal or state statute or regulation limiting its ability to
incur indebtedness for borrowed money.
SECTION 5 AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, so long as any of the Revolving Loan
Commitment hereunder will be in effect and until payment in full of all
Obligations, unless Lender will otherwise give its prior written consent,
Borrower will perform all covenants in this Section 5.
5.1 Financial Statements and Other Reports. Borrower will maintain a system of
accounting established and administered in accordance with sound business
practices to permit preparation of financial statements in conformity with GAAP.
Borrower will deliver to Lender the financial statements and other reports
described below, each in form and substance satisfactory to Lender.
(A) Monthly Financials. As soon as available and in any event within
twenty (20) days after the end of each calendar month, Borrower will deliver (1)
the balance sheet of Borrower as at the end of such month and the related
statements of income, stockholders' equity and cash flow for such month and for
the period from the beginning of the then current Fiscal Year to the end of such
month, and (2) a calculation of collections from Contracts pledged to Lender and
the application of funds as required by Section 2.4, all certified true and
correct by the president or chief financial officer of Borrower, subject to
normal recurring adjustment in accordance with GAAP.
-25-
<PAGE>
(B) Quarterly Financials. As soon as available and in any event within
forty-five (45) days after the end of each quarter of a Fiscal Year, Borrower
will deliver the balance sheet of Borrower as at the end of such period and the
related statements of income, stockholders' equity and cash flow for such
quarter of a Fiscal Year and for the period from the beginning of the then
current Fiscal Year to the end of such quarter of a Fiscal Year, all certified
true, correct and complete by the president or chief financial officer of
Borrower, subject to normal recurring adjustment in accordance with GAAP, and
such financial statements will have been reviewed by a firm of independent
certified public accountants selected by Borrower.
(C) Year-End Financials. As soon as available and in any event within
ninety (90) days after the end of each Fiscal Year, Borrower will deliver: (1)
the balance sheet of Borrower as at the end of such year and the related
statements of income, stockholders' equity and cash flow for such Fiscal Year;
(2) a schedule of the outstanding Indebtedness of Borrower describing in
reasonable detail each such debt issue or loan outstanding and the principal
amount and amount of accrued and unpaid interest with respect to each such debt
issue or loan; and (3) a report with respect to the financial statements from a
firm of independent certified public accountants selected by Borrower, which
report will be unqualified as to going concern and scope of audit and will state
that (a) such financial statements present fairly the financial position of
Borrower as at the dates indicated and the results of its operations and cash
flow for the periods indicated in conformity with GAAP applied on a basis
consistent with prior years and (b) that the examination by such accountants in
connection with such financial statements has been made in accordance with
generally accepted auditing standards.
(D) Accountants' Certification and Reports. Together with each delivery
of financial statements of Borrower pursuant to subsection 5.1(C), Borrower will
deliver (1) a written statement by its independent certified public accountants
(a) stating that the examination has included a review of the terms of this
Agreement as same relate to accounting matters and (b) stating whether, in
connection with the examination, any condition or event that constitutes a
Default or an Event of Default has come to their attention and, if such a
condition or event has come to their attention, specifying the nature and period
of existence thereof and (2) a letter addressed to Lender from such accountants
stating that such accountants have been informed that a primary intent of
Borrower was to have the professional services such accountants provided to
Borrower in preparing their audit report and the letter referred to in this
subsection 5.1(D) benefit or influence Lender, and identifying Lender as a party
that Borrower has indicated intends to rely on such professional services
provided to Borrower by such accountants. Promptly upon receipt thereof,
Borrower will deliver copies of all significant reports submitted to Borrower by
independent public accountants in connection with each annual, interim or
special audit of the financial statements of Borrower made by such accountants,
including the comment letter submitted by such accountants to management in
connection with their annual audit.
(E) Compliance Certificate. Together with the delivery of each set of
financial statements referenced in subparts (A), (B) and (C) of this subsection
5.1, Borrower will deliver to Lender a Compliance Certificate.
-26-
<PAGE>
(F) Borrowing Base Certificates. With each request for an advance
hereunder and in any event within five (5) days after the end of each calendar
month, Borrower will deliver a Borrowing Base Certificate and an Aging Report.
(G) Aging Reports. On the Closing Date, with each request for an
advance hereunder, within five (5) Business Days after the last day of each
month and from time to time upon the reasonable request of Lender, Borrower will
deliver to Lender, an aged trial balance of all then existing Eligible
Contracts.
(H) Management Report. Together with each delivery of financial
statements of Borrower pursuant to subsection 5.1(C), Borrower will deliver a
management report: (1) describing the operations and financial condition of
Borrower for the current Fiscal Year then elapsed (or for the Fiscal Year then
ended in the case of year-end financials); (2) setting forth in comparative form
the corresponding figures for the previous Fiscal Year and the corresponding
figures from the most recent Projections for the current Fiscal Year delivered
to Lender pursuant to 5.1(P); and (3) discussing the reasons for any significant
variations. The information above will be presented in reasonable detail and
will be certified by the chief financial officer of Borrower to the effect that
such information fairly presents the results of operations and financial
condition of Borrower as at the dates and for the periods indicated.
(I) Appraisals. From time to time, upon the request of Lender, Borrower
will obtain and deliver to Lender, at Borrower's expense, appraisal reports in
form and substance and from appraisers satisfactory to Lender, stating the then
current fair market and orderly liquidation values of all or any portion of the
Collateral.
(J) Government Notices. Borrowers will deliver to Lender promptly after
receipt copies of all notices, requests, subpoenas, inquiries or other writings
received from any governmental agency concerning any Employee Benefit Plan, the
violation or alleged violation of any Environmental Laws, the storage, use or
disposal of any Hazardous Material, the violation or alleged violation of the
Fair Labor Standards Act or Borrower's payment or non-payment of any taxes
including any tax audit.
(K) Events of Default, etc. Promptly upon any vice president or more
senior officer of Borrower obtaining knowledge of any of the following events or
conditions, Borrower will deliver a certificate of Borrower's chief executive
officer specifying the nature and period of existence of such condition or event
and what action Borrower has taken, is taking and proposes to take with respect
thereto: (1) any condition or event that constitutes an Event of Default or
Default; (2) any notice of default that any Person has given to Borrower or any
other action taken with respect to a claimed default; or (3) any Material
Adverse Effect.
(L) Trade Names. Borrower will give Lender at least thirty (30) days
advance written notice of any change of name or of any new trade name or
fictitious business name. Borrower's use of any trade name or fictitious
business name will be in compliance with all laws regarding the use of such
names.
-27-
<PAGE>
(M) Locations. Borrower will give Lender at least thirty (30) days
advance written notice of any change in Borrower's principal place of business
or any change in the location of its books and records or the Collateral or of
any new location for its books and records or the Collateral.
(N) Bank Accounts. Borrower will give Lender prompt notice of any
new bank accounts established by Borrower.
(O) Litigation. Promptly upon any officer of Borrower obtaining
knowledge of (1) the institution of any action, suit, proceeding, governmental
investigation or arbitration against or affecting any Loan Party or any property
of any Loan Party not previously disclosed by Borrower to Lender or (2) any
material development in any action, suit, proceeding, governmental investigation
or arbitration at any time pending against or affecting any Loan Party or any
property of any Loan Party which is reasonably likely to have a Material Adverse
Effect, Borrower will promptly give notice thereof to Lender and provide such
other information as may be reasonably available to them to enable Lender and
its counsel to evaluate such matter.
(P) Projections. As soon as available and in any event no later than
thirty (30) days prior to the end of each Fiscal Year of Borrower, Borrower will
deliver Projections of Borrower for the forthcoming Fiscal Year, presented on a
month by month basis.
(Q) Other Information. With reasonable promptness, Borrower will
deliver such other information and data with respect to any Loan Party or the
Collateral as Lender may reasonably request from time to time.
5.2 Inspection. Borrower at all times will have physically inspected not less
than five percent (5%) of the Alarm Systems to confirm that such Alarm Systems
are (A) installed as fixtures at the residences of the applicable Contract
Obligors, (B) connected to Borrower's dedicated telephone line, and (C)
otherwise in good condition and working order. Borrower will permit Lender and
any authorized representatives designated by Lender to visit and inspect any of
the properties of Borrower, including its financial and accounting records, and
to make copies and take extracts therefrom, and to discuss its affairs, finances
and business with its and their officers and independent public accountants, at
such reasonable times during normal business hours and as often as may be
reasonably requested. Borrower agrees to pay to Lender its actual expenses of
inspections and audits; provided, however, so long as no Default has occurred
and is continuing, Borrower will not be required to pay Lender's expenses for
more than two (2) such audits or inspections in any twelve (12) month period,
unless any audit reveals a discrepancy in excess of five percent (5%) in any of
the calculations reported to Lender, in which case Borrower will pay to Lender
the actual expenses of all such audits.
5.3 Collateral Records. Borrower will keep full and accurate books and
records relating to the Collateral and will mark such books and records to
indicate Lender's security interests in the Collateral.
-28-
<PAGE>
5.4 Account Covenants; Verification. Borrower will, at its own expense: (a)
cause all invoices evidencing Accounts and all copies thereof to bear a notice
that such invoices are payable to the lockboxes established in accordance with
subsection 5.5 and (b) use its best efforts to assure prompt payment of all
amounts due or to become due under the Accounts. No discounts, credits or
allowances will be issued, granted or allowed by Borrower to customers and no
returns will be accepted without Lender's prior written consent; provided, that
until Lender notifies Borrower to the contrary, Borrower may presume consent.
Borrower will immediately notify Lender in the event that a customer alleges any
dispute or claim with respect to an Account or of any other circumstances known
to Borrower that may impair the validity or collectibility of an Account. Lender
will have the right, at any time or times hereafter, to verify the validity,
amount or any other matter relating to an Account, by mail, telephone or in
person. After the occurrence of a Default or an Event of Default, Borrower will
not, without the prior consent of Lender, adjust, settle or compromise the
amount or payment of any Account, or release wholly or partly any customer or
obligor thereof, or allow any credit or discount thereon.
5.5 Collection of Accounts and Payments. Borrower will establish lockboxes and
blocked accounts (collectively, the "Lockbox") in Borrower's name with such
banks as are reasonably acceptable to Lender ("Collecting Banks") (subject to
irrevocable instructions acceptable to Lender as hereinafter set forth) to which
all Contract Obligors will directly remit all payments on Accounts and in which
Borrower will immediately deposit all cash payments constituting proceeds of
Collateral in the identical form in which such payment was made, whether by cash
or check. In addition, Lender will establish a depository account at each
Collecting Bank or at a centrally located bank (the "Lender's Depository
Account"). The Collecting Banks will acknowledge and agree, in a manner
satisfactory to Lender, that all payments made to the Lockbox are the sole and
exclusive property of Lender and that the Collecting Banks have no right of
setoff against the Lockbox and that all such payments received will be promptly
transferred to the Lender's Depository Account. Borrower hereby agrees that all
payments received by Lender, whether by cash, check, wire transfer or any other
instrument, made to such Lockbox or otherwise received by Lender and whether on
the Accounts or as proceeds of other Collateral or otherwise will be the sole
and exclusive property of Lender. Borrower will irrevocably instruct each
Collecting Bank that each Collecting Bank will promptly transfer all payments or
deposits to the Lockbox into the Lender's Depository Account. Borrower, and any
of its Affiliates, employees, agents or other Persons acting for or in concert
with Borrower, will, acting as trustee for Lender, receive, as the sole and
exclusive property of Lender, any monies, checks, notes, drafts or any other
payments relating to and/or proceeds of Accounts or other Collateral which come
into the possession or under the control of Borrower or any of Borrower's
Affiliates, employees, agents or other Persons acting for or in concert with
Borrower, and immediately upon receipt thereof, Borrower or such Persons will
remit the same or cause the same to be remitted, in kind, to the Lockbox or to
Lender at its address set forth in subsection 9.6 below.
5.6 Endorsement. Borrower hereby, constitutes and appoints Lender and all
Persons designated by Lender for that purpose as Borrower's true and lawful
attorney-in-fact, with power
-29-
<PAGE>
to endorse Borrower's name to any of the items of payment described in
subsection 5.5 above and all proceeds of Collateral that come into Lender's
possession or under Lender's control. Both the appointment of Lender as
Borrower's attorney and Lender's rights and powers are coupled with an interest
and are irrevocable until payment in full and complete performance of all of the
Obligations.
5.7 Corporate Existence. Borrower will at all times preserve and keep in
full force and effect its corporate existence and all rights and franchises
material to its business. Borrower will promptly notify Lender of any change in
its corporate structure.
5.8 Payment of Taxes. Borrower will pay all taxes, assessments and other
governmental charges imposed upon it or any of its properties or assets or with
respect to any of its franchises, business, income or property before any
penalty accrues thereon; provided that no such tax need be paid if Borrower is
contesting same in good faith by appropriate proceedings promptly instituted and
diligently conducted and if Borrower has established appropriate reserves as
will be required in conformity with GAAP.
5.9 Maintenance of Properties; Insurance. Borrower will maintain or cause to be
maintained in good repair, working order and condition all material properties
used in the business of Borrower and will make or cause to be made all
appropriate repairs, renewals and replacements thereof. Borrower will maintain
or cause to be maintained, with financially sound and reputable insurers, public
liability and property damage insurance with respect to its business and
properties against loss or damage of the kinds customarily carried or maintained
by corporations of established reputation engaged in similar businesses and in
amounts reasonably acceptable to Lender. Borrower will cause Lender to be named
as loss payee on all insurance policies relating to any Collateral and as
additional insured under all liability policies, in each case pursuant to
appropriate endorsements in form and substance satisfactory to Lender. Borrower
will apply any proceeds received from any policies of insurance relating to any
Collateral to the Obligations as set forth in subsection 2.4(B).
5.10 Compliance with Laws. Borrower will comply with the requirements of all
applicable laws, rules, regulations and orders of any governmental authority as
now in effect and which may be imposed in the future in all jurisdictions in
which Borrower is now doing business or may hereafter be doing business, other
than those laws the noncompliance with which would not have a Material Adverse
Effect.
5.11 Further Assurances. Borrower will from time to time, execute such financing
or continuation statements, documents, security agreements, reports and other
documents or deliver to Lender such instruments, certificates of title or other
documents as Lender at any time may reasonably request to evidence, perfect or
otherwise implement the guaranties and security for repayment of the Obligations
provided for in the Loan Documents.
5.12 Collateral Locations. Borrower will keep the Collateral at the
locations specified on Schedule 4.7; provided that Borrower will maintain with
the Custodian the originals of the
-30-
<PAGE>
Contracts pledged to Lender, subject to the terms of the Custody Agreement. With
respect to any new location (which in any event will be within the continental
United States), Borrower will execute such documents and take such actions as
Lender deems necessary to perfect and protect the security interests of the
Lender in the Collateral.
SECTION 6 FINANCIAL COVENANT
Borrower covenants and agrees that so long as the Revolving Loan Commitment
remains in effect and until payment in full of all Obligations, Borrower will at
all times maintain a Tangible Net Worth of at least $290,000.
SECTION 7 NEGATIVE COVENANTS
Borrower covenants and agrees that so long as the Revolving Loan Commitment
remains in effect and until payment in full of all Obligations, Borrower will
comply with all covenants in this Section 7.
7.1 Indebtedness and Liabilities. Borrower will not directly or indirectly
create, incur, assume, guaranty, or otherwise become or remain directly or
indirectly liable, on a fixed or contingent basis, with respect to any
Indebtedness except: (a) the Obligations; (b) Indebtedness existing on the
Closing Date and identified on Schedule 7.1; (c) Indebtedness secured by Liens
permitted under clause (e) of the definition of "Permitted Encumbrances" and (d)
unsecured Indebtedness in an aggregate outstanding amount not to exceed
$100,000. Except for Indebtedness described in the preceding sentence, Borrower
will not incur any Liabilities except for trade payables and normal accruals in
the ordinary course of business not yet due and payable or with respect to which
Borrower is contesting in good faith the amount or validity thereof by
appropriate proceedings promptly instituted and diligently pursued, and then
only to the extent that Borrower has established adequate reserves therefor, if
appropriate under GAAP.
7.2 Guaranties. Except for guaranties issued to Lender or endorsements of
instruments or items of payment for collection in the ordinary course of
business, Borrower will not guaranty, endorse, or otherwise in any way become or
be responsible for any obligations of any other Person, whether directly or
indirectly by agreement to purchase the indebtedness of any other Person or
through the purchase of goods, supplies or services, or maintenance of working
capital or other balance sheet covenants or conditions, or by way of stock
purchase, capital contribution, advance or loan for the purpose of paying or
discharging any indebtedness or obligation of such other Person or otherwise.
7.3 Transfers, Liens and Related Matters.
(A) Transfers. Borrower will not sell, assign (by operation of law or
otherwise) or otherwise dispose of, or grant any option with respect to any of
the Collateral, other than to Lender pursuant to the terms of this Agreement.
-31-
<PAGE>
(B) Liens. Except for Permitted Encumbrances, Borrower will not
directly or indirectly create, incur, assume or permit to exist any Lien on or
with respect to any of the Collateral or any proceeds, income or profits
therefrom.
(C) No Negative Pledges. Borrower will not enter into or assume any
agreement (other than the Loan Documents) prohibiting the creation or assumption
of any Lien upon its properties or assets, whether now owned or hereafter
acquired.
(D) No Distributions. Unless and until Borrower has complied with the
requirement of Section 2.4(B)(3), Borrower will not make any cash distributions
or dividends to shareholders of Borrower, or set aside any funds for such
purpose so long as no default or Event of Default has occurred and is continuing
or would result therefrom.
7.4 Investments and Loans. Borrower will not make or permit to exist investments
in or loans to any other Person, except: (a) Cash Equivalents; and (b) loans and
advances to employees of a reasonable amount for moving, entertainment, travel
and other similar expenses in the ordinary course of business.
7.5 Restriction on Fundamental Changes. Borrower will not: (a) enter into any
transaction of merger or consolidation, except where Borrower is the surviving
entity and maintains, after giving effect to such merger or consolidation, a
Tangible Net Worth at least equal to Borrower's Tangible Net Worth immediately
prior to such merger or consolidation; (b) liquidate, wind-up or dissolve itself
(or suffer any liquidation or dissolution); (c) convey, sell, lease, sublease,
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or any substantial part of its business or assets, whether now
owned or hereafter acquired; or (d) acquire by purchase or otherwise all or any
substantial part of the business or assets of, or stock or other evidence of
beneficial ownership of, any Person.
7.6 Transactions with Affiliates. Borrower will not, and will not permit any
Loan Party to, directly or indirectly, enter into or permit to exist any
transaction (including the purchase, sale or exchange of property or the
rendering of any service) with any Affiliate or with any officer, director or
employee of any Loan Party, except for transactions in the ordinary course of
and pursuant to the reasonable requirements of Borrower's business and upon fair
and reasonable terms which are fully disclosed to Lender and which are no less
favorable to Borrower than it would obtain in a comparable arm's length
transaction with an unaffiliated Person.
7.7 Environmental Liabilities. Borrower will not and will not permit any Loan
Party to: (a) violate any applicable Environmental Law; (b) dispose of any
Hazardous Materials (except in accordance with applicable law) into or onto or
from, any real property owned, leased or operated by any Loan Party; or (c)
permit any Lien imposed pursuant to any Environmental Law to be imposed or to
remain on any real property owned, leased or operated by any Loan Party.
7.8 Conduct of Business; Servicing Standard;Noncompetition. From and after
the Closing Date, Borrower will not engage in any business other than businesses
of the type engaged in by
-32-
<PAGE>
Borrower on the Closing Date and will not, without Lender's prior written
consent, which consent will not be unreasonably withheld, do business in any
state other than the State of Florida. Borrower will not discontinue the
servicing of Contracts pledged to Lender unless such servicing is first assumed
by another Person reasonably satisfactory to Lender, and Borrower will not
service the Contracts other than in a manner that meets the standards and
procedures generally accepted in the commercial finance industry, and with no
less than the same skill, care, diligence and prudence with which it services
and administers Contracts not pledged to Lender. Borrower will not permit any
Affiliate to operate a competing business in Florida, Georgia or Alabama.
7.9 Compliance with ERISA. Borrower will not establish any new Employee Benefit
Plan or amend any existing Employee Benefit Plan if the liability or increased
liability resulting from such establishment or amendment is material. Borrower
will not fail to establish, maintain and operate each Employee Benefit Plan in
compliance in all material respects with the provisions of ERISA, the IRC and
all other applicable laws and the regulations and interpretations thereof.
7.10 Tax Consolidations. Borrower will not file or consent to the filing of
any consolidated income tax return with any Person.
7.11 Subsidiaries. Borrower will not establish, create or acquire any new
Subsidiaries without Lender's prior written consent.
7.12 Fiscal Year. Borrower will not change its Fiscal Year.
7.13 Press Release; Public Offering Materials. Borrower will not and will not
permit any Loan Party to disclose the name of Lender in any press release or in
any prospectus, proxy statement or other materials filed with any governmental
entity relating to a public offering of the capital stock of any Loan Party.
7.14 Bank Accounts. Borrower will not establish any new bank accounts, or
amend or terminate any Blocked Account or lockbox agreement without Lender's
prior written consent.
SECTION 8 DEFAULT, RIGHTS AND REMEDIES
8.1 Event of Default. "Event of Default" will mean the occurrence or
existence of any one or more of the following:
(A) Payment. Failure to make payment of any of the Obligations
when due; or
(B) Default in Other Agreements. (1) Failure of Borrower to pay when
due, after the expiration of any applicable grace period, any principal or
interest on any Indebtedness, or (2) breach or default of Borrower with respect
to any Indebtedness, if such failure to pay, breach or default entitles the
holder to cause such Indebtedness having an individual principal amount
-33-
<PAGE>
in excess of $25,000 or having an aggregate principal amount in excess of
$50,000 to become or be declared due prior to its stated maturity; or
(C) Breach of Certain Provisions. Failure of Borrower to perform or comply
with any term or condition contained in subsections 5.1, 5.2, 5.5, 5.7, or 5.9
or contained in Section 6; or
(D) Breach of Warranty. Any representation, warranty, certification or
other statement made by any Loan Party in any Loan Document or in any statement
or certificate at any time given by such Person in writing pursuant or in
connection with any Loan Document is false in any material respect on the date
made; or
(E) Other Defaults Under Loan Documents. Borrower or any other Loan
Party defaults in the performance of or compliance with any term contained in
this Agreement or the other Loan Documents and such default is not remedied or
waived within fifteen (15) days after receipt by Borrower of notice from Lender
of such default (other than occurrences described in other provisions of this
subsection 8.1 for which a different grace or cure period is specified or which
constitute immediate Events of Default); or
(F) Change in Ownership. Any change of ownership occurs with respect to
more than fifty-one percent (51%) of the capital voting stock of Borrower, or of
such higher interest in Borrower as may be necessary to maintain control of
Borrower; or
(G) Involuntary Bankruptcy; Appointment of Receiver, etc. (1) A court
enters a decree or order for relief with respect to Guarantors, or Borrower in
an involuntary case under the Bankruptcy Code or any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, which decree or
order is not stayed or other similar relief is not granted under any applicable
federal or state law; or (2) the continuance of any of the following events for
forty-five (45) days unless dismissed, bonded or discharged: (a) an involuntary
case is commenced against Guarantors or Borrower, under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect; or (b) a
decree or order of a court for the appointment of a receiver, liquidator,
sequestrator, trustee, custodian or other officer having similar powers over
Guarantors or Borrower, or over all or a substantial part of their respective
property, is entered; or (c) an interim receiver, trustee or other custodian is
appointed without the consent of Guarantors or Borrower, for all or a
substantial part of the property of Guarantors or Borrower; or
(H) Voluntary Bankruptcy; Appointment of Receiver, etc. (1) An order
for relief is entered with respect to Guarantors or Borrower or Guarantors or
Borrower commences a voluntary case under the Bankruptcy Code or any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case or to the
conversion of an involuntary case to a voluntary case under any such law or
consents to the appointment of or taking possession by a receiver, trustee or
other custodian for all or a substantial part of its property; or (2) Guarantors
or Borrower makes any
-34-
<PAGE>
assignment for the benefit of creditors; or (3) the board of directors of
Guarantors or Borrower adopts any resolution or otherwise authorizes action to
approve any of the actions referred to in this subsection 8.1(H); or
(I) Liens. Any lien, levy or assessment is filed or recorded with
respect to or otherwise imposed upon all or any part of the Collateral or the
assets of Borrower by the United States or any department or instrumentality
thereof or by any state, county, municipality or other governmental agency
(other than Permitted Encumbrances) and such lien, levy or assessment is not
stayed, vacated, paid, bonded or discharged within ten (10) days; or
(J) Judgment and Attachments. Any money judgment, writ or warrant of
attachment, or similar process involving (1) an amount in any individual case in
excess of $25,000 or (2) an amount in the aggregate at any time in excess of
$50,000 (in either case not adequately covered by insurance as to which the
insurance company has acknowledged coverage) is entered or filed against
Borrower or any of its assets and remains undischarged, unvacated, unbonded or
unstayed for a period of thirty (30) days or in any event later than five (5)
days prior to the date of any proposed sale thereunder; or
(K) Dissolution. Any order, judgment or decree is entered against Borrower
decreeing the dissolution or split up of Borrower; or
(L) Injunction. Borrower is enjoined, restrained or in any way
prevented by the order of any court or any administrative or regulatory agency
from conducting all or any material part of its business and such order
continues for more than thirty (30) days; or
(M) Invalidity of Loan Documents. Any of the Loan Documents for any
reason, other than a partial or full release in accordance with the terms
thereof, ceases to be in full force and effect or is declared to be null and
void, or any Loan Party denies that it has any further liability under any Loan
Documents to which it is party, or gives notice to such effect; or
(N) Failure of Security. Lender does not have or ceases to have a valid
and perfected first priority security interest in the Collateral (subject to
Permitted Encumbrances), in each case, for any reason other than the failure of
Lender to take any action within its control; or
(O) Damage, Strike, Casualty. Any material damage to, or loss, theft or
destruction of, any Collateral, whether or not insured, or any strike, lockout,
labor dispute, embargo, condemnation, act of God or public enemy, or other
casualty which causes, for more than thirty (30) consecutive days beyond the
coverage period of any applicable business interruption insurance, the cessation
or substantial curtailment of revenue producing activities at any facility of
Borrower if any such event or circumstance could reasonably be expected to have
a Material Adverse Effect; or
-35-
<PAGE>
(P) Licenses and Permits. The loss, suspension or revocation of, or
failure to renew, any license or permit now held or hereafter acquired by
Borrower, if such loss, suspension, revocation or failure to renew could have a
Material Adverse Effect.
8.2 Suspension of Commitment. Upon the occurrence of any Default or Event of
Default, notwithstanding any grace period or right to cure, Lender, without
notice or demand, may immediately cease making additional Loans and the
Revolving Loan Commitment will be suspended; provided that, in the case of a
Default, if the subject condition or event is waived, cured or removed within
any applicable grace or cure period, the Revolving Loan Commitment will be
reinstated.
8.3 Acceleration. Upon the occurrence of any Event of Default described in the
foregoing subsections 8.1(G) or 8.1(H), all Obligations will automatically
become immediately due and payable, without presentment, demand, protest or
other requirements of any kind, all of which are hereby expressly waived by
Borrower, and the Revolving Loan Commitment will thereupon terminate. Upon the
occurrence and during the continuance of any other Event of Default, Lender may,
by written notice to Borrower, declare all or any portion of the Obligations to
be, and the same will forthwith become, immediately due and payable and the
Revolving Loan Commitment will thereupon terminate.
8.4 Remedies. If any Event of Default will have occurred and be continuing,
Lender may exercise in respect of the Collateral, in addition to all other
rights and remedies provided for herein or otherwise available to it, all the
rights and remedies of a secured party on default under the UCC (whether or not
the UCC applies to the affected Collateral) and may also (a) notify any or all
obligors on the Accounts to make all payments directly to Lender; (b) require
Borrower to, and Borrower hereby agrees that it will, at its expense and upon
request of Lender forthwith, assemble all or part of the Collateral as directed
by Lender and make it available to Lender at a place to be designated by Lender
which is reasonably convenient to both parties; (c) withdraw all cash in the
Lockbox and apply such monies in payment of the Obligations in the manner
provided in subsection 8.7; (d) without notice or demand or legal process, enter
upon any premises of Borrower and take possession of the Collateral; and (e)
without notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any of the Lender's
offices or elsewhere, at such time or times, for cash, on credit or for future
delivery, and at such price or prices and upon such other terms as Lender may
deem commercially reasonable. Borrower agrees that, to the extent notice of sale
will be required by law, at least ten (10) days notice to Borrower of the time
and place of any public sale or the time after which any private sale is to be
made will constitute reasonable notification. At any sale of the Collateral, if
permitted by law, Lender may bid (which bid may be, in whole or in part, in the
form of cancellation of indebtedness) for the purchase of the Collateral or any
portion thereof for the account of Lender. Lender will not be obligated to make
any sale of Collateral regardless of notice of sale having been given. Borrower
will remain liable for any deficiency. Lender may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to which it
was so adjourned. Lender will not be required to proceed against any
-36-
<PAGE>
Collateral but may proceed against Borrower directly. To the extent permitted by
law, Borrower hereby specifically waives all rights of redemption, stay or
appraisal which it has or may have under any law now existing or hereafter
enacted.
8.5 Appointment of Attorney-in-Fact. Borrower hereby constitutes and appoints
Lender as Borrower's attorney-in-fact with full authority in the place and stead
of Borrower and in the name of Borrower, Lender or otherwise, after the
occurrence and during the continuance of a Default, to take any action and to
execute any instrument that Lender may deem necessary or advisable to accomplish
the purposes of this Agreement, including: (a) to ask, demand, collect, sue for,
recover, compound, receive and give acquittance and receipts for moneys due and
to become due under or in respect of any of the Collateral; (b) to adjust,
settle or compromise the amount or payment of any Account, or release wholly or
partly any customer or obligor thereunder or allow any credit or discount
thereon; (c) to receive, endorse, and collect any drafts or other instruments,
documents and chattel paper, in connection with clause (a) above; (d) to file
any claims or take any action or institute any proceedings that Lender may deem
necessary or desirable for the collection of any of the Collateral or otherwise
to enforce the rights of Lender with respect to any of the Collateral; and (e)
to sign and endorse any invoices, freight or express bills, bills of lading,
storage or warehouse receipts, assignments, verifications and notices in
connection with Accounts and other documents relating to the Collateral. The
appointment of Lender as Borrower's attorney and Lender's rights and powers are
coupled with an interest and are irrevocable until payment in full and complete
performance of all of the Obligations.
8.6 Limitation on Duty of Lender with Respect to Collateral. Beyond the safe
custody thereof, Lender will have no duty with respect to any Collateral in its
possession or control (or in the possession or control of any agent or bailee)
or with respect to any income thereon or the preservation of rights against
prior parties or any other rights pertaining thereto. Lender will be deemed to
have exercised reasonable care in the custody and preservation of the Collateral
in its possession if the Collateral is accorded treatment substantially equal to
that which Lender accords its own property. Lender will not be liable or
responsible for any loss or damage to any of the Collateral, or for any
diminution in the value thereof, by reason of the act or omission of any
warehouseman, carrier, forwarding agency, consignee or other agent or bailee
selected by Lender in good faith.
8.7 Application of Proceeds. Upon the occurrence and during the continuance of
an Event of Default, the proceeds of any sale of, or other realization upon, all
or any part of the Collateral will be applied: first, to all fees, costs and
expenses incurred by Lender with respect to this Agreement, the other Loan
Documents or the Collateral; second, to all fees due and owing to Lender; third,
to accrued and unpaid interest on the Obligations; fourth, to the principal
amounts of the Obligations outstanding; and fifth, to any other indebtedness or
obligations of Borrower owing to Lender.
-37-
<PAGE>
8.8 License of Intellectual Property. Borrower hereby assigns, transfers and
conveys to Lender, effective upon the occurrence of any Event of Default
hereunder, the nonexclusive right and license to use all Intellectual Property
owned or used by Borrower together with any goodwill associated therewith, all
to the extent necessary to enable Lender to realize on the Collateral and any
successor or assign to enjoy the benefits of the Collateral. This right and
license will inure to the benefit of all successors, assigns and transferees of
Lender and its successors, assigns and transferees, whether by voluntary
conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of
foreclosure or otherwise. Such right and license is granted free of charge,
without requirement that any monetary payment whatsoever be made to Borrower by
Lender.
8.9 Waivers, Non-Exclusive Remedies. No failure on the part of Lender to
exercise, and no delay in exercising and no course of dealing with respect to,
any right under this Agreement or the other Loan Documents will operate as a
waiver thereof; nor will any single or partial exercise by Lender of any right
under this Agreement or any other Loan Document preclude any other or further
exercise thereof or the exercise of any other right. The rights in this
Agreement and the other Loan Documents are cumulative and are not exclusive of
any other remedies provided by law.
SECTION 9 MISCELLANEOUS
9.1 Assignments and Participations. Lender may assign its rights and delegate
its obligations under this Agreement to an Affiliate and further may assign, or
sell participations in, all or any part of the Loans, the Revolving Loan
Commitment or any other interest herein to an Affiliate or to another Person;
provided, however, that Lender will not so assign or participate to any Person
other than an Affiliate more then forty-nine percent (49%) of the Loans and
Revolving Loan Commitment or any other interest herein. In the case of an
assignment authorized under this subsection 9.1, the assignee will have, to the
extent of such assignment, the same rights, benefits and obligations as it would
if it were a Lender hereunder. Lender will be relieved of its obligations
hereunder with respect to the Revolving Loan Commitment or assigned portion
thereof. Borrower hereby acknowledges and agrees that any assignment will give
rise to a direct obligation of Borrower to the assignee and that the assignee
will be considered to be a "Lender". Lender may furnish any information
concerning Borrower in its possession from time to time to assignees and
participants (including prospective assignees and participants).
9.2 Set Off. In addition to any rights now or hereafter granted under applicable
law and not by way of limitation of any such rights, upon the occurrence of any
Event of Default, Lender and each participant is hereby authorized by Borrower
at any time or from time to time, without notice to Borrower or to any other
Person, any such notice being hereby expressly waived, to set off and to
appropriate and to apply any and all balances held by it at any of its offices
for the account of Borrower (regardless of whether such balances are then due to
Borrower and any other property at any time held or owing by that Lender or that
holder to or for the credit or for the account of Borrower against and on
account of any of the Obligations then outstanding; provided, that no
participant will exercise such right without the prior written consent of
Lender.
-38-
<PAGE>
Borrower hereby agrees, to the fullest extent permitted by law, that
any Lender or holder or participant may exercise its right of setoff with
respect to amounts in excess of its pro rata share of the Obligations (or, in
the case of a participant, in excess of its pro rata participation interest in
the Obligations) and that such Lender or holder or participant, as the case may
be, will be deemed to have purchased for cash in the amount of such excess,
participations in each other Lender's or holder's share of the Obligations.
9.3 Expenses and Attorneys' Fees. Whether or not the transactions contemplated
hereby will be consummated, Borrower agrees to promptly pay all fees, costs and
expenses incurred by Lender in connection with any matters contemplated by or
arising out of this Agreement or the other Loan Documents including the
following, and all such fees, costs and expenses will be part of the
Obligations, payable on demand and secured by the Collateral: (a) fees, costs
and expenses (including reasonable attorneys' fees, and fees of environmental
consultants, accountants and other professionals retained by Lender) incurred in
connection with the examination, review, due diligence investigation,
documentation and closing of the financing arrangements evidenced by the Loan
Documents; (b) fees, costs and expenses (including reasonable attorneys' fees,
fees of environmental consultants, accountants and other professionals retained
by Lender) incurred in connection with the review, negotiation, preparation,
documentation, execution and administration of the Loan Documents, the Loans,
and any amendments, waivers, consents, forbearances and other modifications
relating thereto or any subordination or intercreditor agreements; (c) fees,
costs and expenses incurred in creating, perfecting and maintaining perfection
of Liens in favor of Lender; (d) fees, costs and expenses incurred in connection
with forwarding to Borrower the proceeds of Loans including Lender's standard
wire transfer fee; (e) fees, costs, expenses and bank charges, including bank
charges for returned checks, incurred by Lender in establishing, maintaining and
handling lock box accounts, blocked accounts or other accounts for collection of
the Collateral; (f) fees, costs, expenses (including reasonable attorneys' fees)
and costs of settlement incurred in collecting upon or enforcing rights against
the Collateral or incurred in any action to enforce this Agreement or the other
Loan Documents or to collect any payments due from Borrower or any other Loan
Party under this Agreement or any other Loan Document or incurred in connection
with any refinancing or restructuring of the credit arrangements provided under
this Agreement, whether in the nature of a "workout" or in connection with any
insolvency or bankruptcy proceedings or otherwise.
9.4 Indemnity. In addition to the payment of expenses pursuant to subsection
9.3, whether or not the transactions contemplated hereby will be consummated,
Borrower agrees to indemnify, pay and hold Lender, and the officers, directors,
employees, agents, affiliates and attorneys of Lender and such holders
(collectively called the "Indemnitees") harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, expenses and disbursements of any kind or nature whatsoever
(including the fees and disbursements of counsel for such Indemnitees in
connection with any investigative, administrative or judicial proceeding
commenced or threatened, whether or not such Indemnitee will be designated a
party thereto) that may be imposed on, incurred by, or asserted against that
Indemnitee, in any manner relating to or arising out of this Agreement or the
other Loan
-39-
<PAGE>
Documents, the consummation of the transactions contemplated by this Agreement,
the statements contained in the commitment letters, if any, delivered by Lender,
Lender's agreement to make the Loans hereunder, the use or intended use of the
proceeds of any of the Loans or the exercise of any right or remedy hereunder or
under the other Loan Documents (the "Indemnified Liabilities"); provided that
Borrower will have no obligation to an Indemnitee hereunder with respect to
Indemnified Liabilities arising from the gross negligence or willful misconduct
of that Indemnitee as determined by a court of competent jurisdiction.
9.5 Amendments and Waivers. This Agreement together with the other Loan
Documents constitutes the entire agreement between Lender and Borrower, and no
amendment, modification, termination or waiver of any provision of this
Agreement or of the other Loan Documents, or consent to any departure by
Borrower therefrom, will be effective unless the same will be in writing and
signed by Lender and Borrower. Each amendment, modification, termination or
waiver will be effective only in the specific instance and for the specific
purpose for which it was given.
9.6 Notices. Unless otherwise specifically provided herein, all notices will be
in writing addressed to the respective party as set forth below and may be
personally served, telecopied or sent by overnight courier service or United
States mail and will be deemed to have been given: (a) if delivered in person,
when delivered; (b) if delivered by telecopy, on the date of transmission if
transmitted on a Business Day before 4:00 p.m. (Chicago time) or, if not, on the
next succeeding Business Day; (c) if delivered by overnight courier, two days
after delivery to such courier properly addressed; or (d) if by U.S. Mail, four
Business Days after depositing in the United States mail, with postage prepaid
and properly addressed.
If to Borrower: Guardian International, Inc.
3880 North 28th Terrace
Hollywood, Florida 33020
Attn: Harold Ginsburg
Telecopy No.: 305-926-1809
With a copy to: Joel D. Mayersohn, Esq.
Atlas Pearlman Trop & Borkson, P.A.
Suite 1900, 200 East Las Olas Boulevard
Fort Lauderdale, Florida 33301
Telecopy No.: 305-523-1952
If to Lender: Heller Financial, Inc.
Attn: Portfolio Manager, Secured
Receivables Finance Group
500 West Monroe Street; 15th Floor
Chicago, Illinois 60661
Telecopy No: (312) 441-7119
-40-
<PAGE>
With a copy to: HELLER FINANCIAL, INC.
Attn: Group General Counsel, Heller Real
Estate Financial Services
500 West Monroe Street, 15th Floor
Chicago, Illinois 60661
Telecopy No. (312) 441-7872
or to such other address as the party addressed will have previously designated
by written notice to the serving party, given in accordance with this subsection
9.6.
9.7 Survival of Warranties and Certain Agreements. All agreements,
representations and warranties made herein will survive the execution and
delivery of this Agreement and the making of the Loans hereunder.
Notwithstanding anything in this Agreement or implied by law to the contrary,
the agreements of Borrower set forth in subsections 9.3 and 9.4 will survive the
payment of the Loans and the termination of this Agreement.
9.8 Indulgence Not Waiver. No failure or delay on the part of Lender in the
exercise of any power, right or privilege hereunder will impair such power,
right or privilege or be construed to be a waiver of any default or acquiescence
therein, nor will any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any other right,
power or privilege.
9.9 Marshaling; Payments Set Aside. Lender will not be under any obligation to
marshal any assets in favor of any Loan Party or any other party or against or
in payment of any or all of the Obligations. To the extent that any Loan Party
makes a payment or payments to Lender or Lender enforces its security interests
or exercise its rights of setoff, and such payment or payments or the proceeds
of such enforcement or setoff or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside and/or required to be
repaid to a trustee, receiver or any other party under any bankruptcy law, state
or federal law, common law or equitable cause, then to the extent of such
recovery, the Obligations or part thereof originally intended to be satisfied,
and all Liens, rights and remedies therefor, will be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred.
9.10 Entire Agreement. This Agreement, and the other Loan Documents referred to
herein embody the final, entire agreement among the parties hereto and supersede
any and all prior commitments, agreements, representations, and understandings,
whether written or oral, relating to the subject matter hereof and may not be
contradicted or varied by evidence of prior, contemporaneous, or subsequent oral
agreements or discussions of the parties hereto. There are no oral agreements
among the parties hereto.
9.11 Independence of Covenants. All covenants hereunder will be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or be otherwise within the limitations of, another
-41-
<PAGE>
covenant will not avoid the occurrence of a Default or an Event of Default if
such action is taken or condition exists.
9.12 Severability. The invalidity, illegality or unenforceability in any
jurisdiction of any provision in or obligation under this Agreement or the other
Loan Documents will not affect or impair the validity, legality or
enforceability of the remaining provisions or obligations under this Agreement,
or the other Loan Documents or of such provision or obligation in any other
jurisdiction.
9.13 Headings. Section and subsection headings in this Agreement are included
herein for convenience of reference only and will not constitute a part of this
Agreement for any other purpose or be given any substantive effect.
9.14 APPLICABLE LAW. THIS AGREEMENT Will BE GOVERNED BY, AND Will
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS
OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES.
9.15 Successors and Assigns. This Agreement will be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
except that Borrower may not assign its rights or obligations hereunder without
the written consent of Lender.
9.16 No Fiduciary Relationship; Limitation of Liabilities.
(A) No provision in this Agreement or in any of the other Loan
Documents and no course of dealing between the parties will be deemed to create
any fiduciary duty by Lender to Borrower.
(B) Neither Lender, nor any affiliate, officer, director, employee,
attorney, or agent of Lender will have any liability with respect to, and
Borrower hereby waives, releases, and agrees not to sue any of them upon, any
claim for any special, indirect, incidental, or consequential damages suffered
or incurred by Borrower in connection with, arising out of, or in any way
related to, this Agreement or any of the other Loan Documents, or any of the
transactions contemplated by this Agreement or any of the other Loan Documents.
Borrower hereby waives, releases, and agrees not to sue Lender or any of
Lender's affiliates, officers, directors, employees, attorneys, or agents for
punitive damages in respect of any claim in connection with, arising out of, or
in any way related to, this Agreement or any of the other Loan Documents, or any
of the transactions contemplated by this Agreement or any of the transactions
contemplated hereby.
9.17 CONSENT TO JURISDICTION. BORROWER HEREBY CONSENTS TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE
COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT,
SUBJECT TO LENDER'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING
-42-
<PAGE>
OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS Will BE
LITIGATED IN SUCH COURTS. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE
AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY
AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS
AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE OBLIGATIONS.
9.18 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS. BORROWER AND LENDER ACKNOWLEDGE
THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP,
THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND
THE OTHER LOAN DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN
THEIR RELATED FUTURE DEALINGS. BORROWER AND LENDER FURTHER WARRANT AND REPRESENT
THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH
KNOWINGLY, WILLINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL.
9.19 Construction. Borrower and Lender each acknowledge that it has had the
benefit of legal counsel of its own choice and has been afforded an opportunity
to review this Agreement and the other Loan Documents with its legal counsel and
that this Agreement and the other Loan Documents will be construed as if jointly
drafted by Borrower and Lender.
9.20 Counterparts; Effectiveness. This Agreement and any amendments, waivers,
consents, or supplements may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered will be deemed an original, but all of which counterparts
together will constitute but one and the same instrument. This Agreement will
become effective upon the execution of a counterpart hereof by each of the
parties hereto.
9.21 No Duty. All attorneys, accountants, appraisers, and other professional
Persons and consultants retained by Lender will have the right to act
exclusively in the interest of Lender and will have no duty of disclosure, duty
of loyalty, duty of care, or other duty or obligation of any type or nature
whatsoever to Borrower or any of Borrower's shareholders or any other Person.
9.22 Exculpation. Subject to the provisions set forth below, neither Borrower
nor any Guarantors will be personally liable to pay the Loan and Lender agrees
to look solely to the Collateral and any other collateral heretofore, now, or
hereafter pledged by any party to secure
-43-
<PAGE>
the Loan. Notwithstanding the foregoing, Borrower and Guarantors, jointly and
severally, will be personally liable:
(A) for all losses, damages, costs and expenses including attorneys'
fees incurred by Lender as a result of (i) any failure after the
occurrence and during the continuance of any Event of Default (without
benefit of any applicable grace or cure period), to apply any portion
of the gross income from the operations of Borrower to the Loan or to
customary operating expenses of Borrower, (ii) any material
misrepresentation, fraud or any misappropriation of any funds deriving
from the Collateral, (iii) any intentional or material waste of the
Collateral or Borrower's equipment, (iv) any breach of subsection 7.8,
or (v) Borrower's breach of or default under any material term or
provision of the Contracts, and
(B) for repayment of the Loan and all other obligations of Borrower
under the Loan Documents in the event of (i) any breach of any of the
covenants in subsection 7.3 pertaining to transfers of interests and
additional encumbrances, (ii) the occurrence of an Event of Default
described in subsection 8.1 (F), (iii) any breach of subsection 7.8, or
(iv) the filing by Borrower, or the filing against Borrower by
Guarantors or any Affiliate of either of them, of any proceeding for
relief under any federal or state bankruptcy, insolvency or
receivership laws or any assignment for the benefit of creditors made
by Borrower; and
(C) for repayment of any amount due and payable pursuant to subsection
2.4(B)(1).
The foregoing will in no way limit or impair the enforcement against
the Collateral or any other security granted by the Loan Documents of any of the
Lender's rights and remedies pursuant to the Loan Documents.
-44-
<PAGE>
Witness the due execution hereof by the respective duly authorized
officers of the undersigned as of the date first written above.
HELLER FINANCIAL, INC. GUARDIAN INTERNATIONAL, INC.
By: ________________________ By: _________________________
Name: ________________________ Name: _________________________
Title: ________________________ Title: _________________________
Accepted and agreed for purposes of subsection 9.22:
- ----------------------------
HAROLD GINSBURG
- ----------------------------
SHEILAH GINSBURG
-45-
<PAGE>
EXHIBITS
A Aging Report
B Borrowing Base Certificate
C Closing Certificate
D Compliance Certificate
E Custody Agreement
F Guaranty
G Stock Pledge
H Financial Statements
SCHEDULES
1.1 Other Liens
3.1(A) List of Closing Documents
4.1(B) Capitalization of Borrower
4.6 Trade Names (Present and Past Five Years)
4.7 Location of Principal Place of Business, Books
and Records and Collateral
4.9 Litigation
4.13 Intellectual Property
4.20 Bank Accounts
4.23 Employee Matters
7.1 Indebtedness
<PAGE>
EXHIBIT 10 (h)(1)
STOCK PLEDGE AGREEMENT
This STOCK PLEDGE AGREEMENT (this "Pledge Agreement"), dated as of
November 16, 1994, is between HAROLD GINSBURG, an individual, and SHEILA
GINSBURG, an individual (collectively, jointly and severally "Guarantors"), and
HELLER FINANCIAL, INC., a Delaware corporation ("Lender").
WHEREAS, Lender and Guardian International, Inc., a Florida corporation
("Borrower"), have entered into a Loan and Security Agreement (as the same may
be amended, modified, supplemented or restated from time to time, the "Loan
Agreement"), pursuant to which Lender has agreed or to make loans and other
financial accommodations to Borrower (collectively, the "Loans") subject to the
terms and conditions set forth in the Loan Agreement; and
WHEREAS, one of the conditions to Lender's agreement to enter into the
Loan Agreement is that Guarantors shall have executed and delivered this Pledge
Agreement to secure the payment and performance of Guarantors' Obligations (as
hereinafter defined).
NOW, THEREFORE, in order to induce Lender to make the Loans, and for
other good and valuable consideration, the receipt and sufficiency of which
hereby are acknowledged, Guarantors and Lender hereby agree as follows:
1. Definitions. All capitalized terms not elsewhere defined in this Pledge
Agreement and defined in the Loan Agreement shall have the respective meanings
ascribed to such terms in the Loan Agreement. The following terms shall have the
following meanings in this Pledge Agreement:
Collateral: the Securities (as hereinafter defined) and all dividends,
distributions and other amounts or additional securities of Borrower or any
successor in interest to Borrower to which Guarantors or any successor in
interest to Guarantors (with or without additional consideration) is or becomes
entitled by virtue of the ownership by such Person of any of the Securities or
as the result of any corporate reorganization, merger, consolidation, stock
split, stock dividend, conversion, preemptive right or otherwise, and the
proceeds thereof.
Guarantors's Obligations: (i) any and all Indebtedness, due or to
become due, now existing or hereafter arising, of Guarantors to Lender pursuant
to the terms of this Pledge Agreement, the Guaranty or any other Loan Documents
to which Guarantors are a party, and (ii) the performance of the covenants of
Guarantors contained in this Pledge Agreement, the Guaranty and all other Loan
Documents to which Guarantors are a party.
Securities: the capital stock of Borrower and any warrants, options or
other rights to purchase capital stock of Borrower owned by Guarantors and
described in Exhibit A hereto, and duly executed assignments separate from
certificate satisfactory to Lender attached thereto.
-1-
<PAGE>
2. Pledge of Collateral. To secure payment and performance of Guarantors'
Obligations, Guarantors hereby jointly and severally pledge and deposit with
Lender the Securities and hereby assigns and grants to Lender a valid and
perfected first Lien in (i) the Securities and (ii) all other items of
Collateral now owned or hereafter acquired by Guarantors.
3. Representations, Warranties and Covenants. Guarantors hereby represents,
warrants and covenants to Lender, jointly and severally, as follows:
3.1 Authority. Guarantors have full power and authority to enter into,
execute, deliver and carry out the terms of the Loan Documents to which
they are a party and to incur the obligations provided for therein.
3.2 Restrictions. Guarantors are not a party to and have no knowledge
of any agreements restricting the transfer of any of the Collateral
other than as provided in the Loan Documents. Except as described in
the Loan Agreement, Guarantors have not granted any options for the
purchase of, or any calls, commitments or claims of any character
relating to, any of the Collateral to any Person.
3.3 Binding Agreements. This Pledge Agreement, when executed and
delivered, will constitute the valid and legally binding obligations of
Guarantors, enforceable against Guarantors in accordance with their
respective terms, except as such enforceability may be limited by (i)
applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally
and (ii) equitable principles.
3.4 Litigation. Except as set forth in the Loan Agreement, there are no
judgments outstanding against Guarantors or affecting any property of
Guarantors, nor is there any action, charge, claim, demand, suit,
proceeding, petition, governmental investigation or arbitration now
pending or, to the best of Guarantors's knowledge after due inquiry,
threatened against or affecting Guarantors or any property of
Guarantors.
3.5 Conflicting Agreements. Guarantors are not in default under any
agreement to which Guarantors are a party or by which Guarantors or any
of the property of Guarantors is bound, the effect of which default
might have a Material Adverse Effect. No authorization, consent,
approval or other action by, and no notice to or filing with, any
governmental body or any other Person which has not already been
obtained, taken or filed, as applicable, is required (i) for the
execution, delivery or, performance by Guarantors of this Pledge
Agreement or (ii) as a condition to the validity or, enforceability of
this Pledge Agreement, or the validity, enforceability or priority of
the security interests in favor of Lender, except for certain filings
to establish and perfect the security interests in favor of Lender. No
provision of any mortgage, indenture, contract, agreement, statute,
rule, regulation, judgment, decree or order binding on Guarantors or
affecting the property of Guarantors conflicts with, or requires any
consent which has not already been obtained under, or would in any way
prevent the execution, delivery or
-2-
<PAGE>
performance of the terms of any of the Loan Documents to which
Guarantors are a party. The execution, delivery and carrying out of the
terms of the Loan Documents will not constitute a default under, or
result in the creation or imposition of, or obligation to create, any
Lien upon the property of Guarantors pursuant to the terms of any such
mortgage, indenture, contract or agreement.
3.6 Taxes. Guarantors has filed or caused to be filed all tax returns
required to be filed, and has paid, or has made adequate provision for
the payment of, all taxes shown to be due and payable on such returns
or in any assessments made against Guarantors, and no tax liens have
been filed and no claims are being asserted in respect of such taxes
against Guarantors or any of the property of Guarantors.
3.7 Compliance with Applicable Laws. Guarantors are not in default with
respect to any judgment, order, writ, injunction, decree or decision of
any governmental body, which default could have a Material Adverse
Effect. Guarantors are in compliance with all applicable statutes and
regulations of all governmental bodies, a violation of which could have
a Material Adverse Effect.
3.8 No Misrepresentation. Neither this Pledge Agreement nor any
certificate, information or report furnished or to be furnished by or
on behalf of Guarantors to Lender in connection with any of the
transactions contemplated hereby, contains or will contain a
misstatement of material fact, or omits or will omit to state a
material fact required to be stated in order to make the statements
contained herein, taken as a whole, not misleading in the light of the
circumstances under which such statements were made. There is no fact,
other than information known to the public generally, that would be
expected to have a Material Adverse Effect that has not been disclosed
expressly to Lender in writing.
3.9 Burdensome Obligations. After giving effect to the transactions
contemplated by this Pledge Agreement and the other Loan Documents to
which Guarantors are a party, Guarantors (i) will not be a party to or
be bound by any franchise, agreement, deed, lease or other instrument,
or be subject to any restriction, which is so unusual or burdensome, so
as to cause a Material Adverse Effect, (ii) do not intend to incur, and
do not believe that Guarantors will incur, debts beyond Guarantors's
ability to pay such debts as they become due, (iii) own and will own
property, the fair saleable value of which is (A) greater than the
total amount of Guarantors's liabilities (including contingent
liabilities) and (B) greater than the amount that will be required to
pay the probable liabilities of Guarantors's then existing debts as
they become absolute and matured, and (iv) has and will have capital
that is not unreasonably small in relation to Guarantors's businesses
as presently conducted and as proposed to be conducted. Guarantors do
not presently anticipate that future expenditures needed to meet the
provisions of federal or state statutes, orders, rules or regulations
will be so burdensome so as to have a Material Adverse Effect.
-3-
<PAGE>
3.10 Collateral. With respect to the Collateral deposited by Guarantors
with Lender on the date hereof, (i) such Collateral represents 56% of
the issued and outstanding capital stock and warrants, options and
other rights to purchase capital stock of Borrower, (ii) Guarantors are
the legal and beneficial owner of such Collateral, (iii) such
Collateral is validly issued, fully paid and non-assessable and is
registered in the name of Guarantors, (iv) the pledge of such
Collateral pursuant to the terms of this Pledge Agreement, together
with delivery thereof, creates a valid and perfected first Lien on such
Collateral in favor of Lender, (v) the assignments separate from
certificate attached to the certificates representing such Collateral
have been duly executed and delivered by Guarantors to Lender, (vi)
none of such Collateral is subject to any Lien of any kind whatsoever,
except for the perfected first Lien on such Collateral granted to
Lender hereby, (vii) no authorization, approval or other action by, or
notice to or filing with, any governmental body is required for the
pledge by Guarantors of such Collateral pursuant to the terms of this
Pledge Agreement, (viii) until all of Borrower's Obligations and
Guarantors's Obligations have been paid and performed in full, subject
to the provisions of the Loan Agreement, Guarantors: (A) will not
create or permit to exist any Lien upon or with respect to the
Collateral, except for the first Lien thereon granted to Lender by this
Pledge Agreement, and (B) will not sell, transfer, convey, assign, or
otherwise divest Guarantors's interest in the Collateral, or any part
thereof, to any other Person.
4. Stock Splits, Stock Dividends.
4.1 Additional Securities. Guarantors agree that in the event that
Guarantors, by virtue of the ownership by Guarantors of the Collateral,
now are, or hereafter become, entitled (with or without additional
consideration) to other or additional securities as the result of any
corporate reorganization, merger, consolidation, stock split, stock
dividend, conversion or preemptive right or otherwise, Guarantors
shall:
4.1.1 Delivery. Cause the issuer of such additional securities
to deliver to Lender the certificates evidencing the ownership
by Guarantors of such additional securities and hereby
authorizes and empowers Lender to demand the same from such
issuer, and agrees if such certificates are delivered to
Guarantors, to take possession thereof in trust for Lender;
4.1.2 Assignment Separate from Certificate. Deliver to Lender
an assignment separate from certificate with respect to such
securities, executed in blank by Guarantors;
4.1.3 Representations and Warranties. Deliver to Lender a
certificate, executed by Guarantors and dated the date of such
pledge, as to the truth and correctness on such date of the
representations and warranties set forth in Section 3 hereof;
and
-4-
<PAGE>
4.1.4 Additional Documents. Deliver to Lender such other
certificates, forms and other instruments as Lender may
reasonably request in connection with such pledge.
4.2 Additional Collateral. Guarantors agree that such additional
securities shall constitute a portion of the Collateral and be subject
to this Pledge Agreement in the same manner and to the same extent as
the Securities pledged hereby to Lender on the date hereof.
5. Voting Power; Distributions. Unless and until an Event of Default shall have
occurred and be continuing, Guarantors shall be entitled to exercise all voting
powers in all corporate matters pertaining to the Collateral or otherwise, for
any purpose not inconsistent with, or in violation of, the provisions of any of
the Loan Documents. Only to the extent permitted under the Loan Agreement and
only so long as no Default or Event of Default has occurred and is continuing,
Guarantors may receive dividends or other distributions with respect to any
portion of the Collateral. If any such distributions are received by Guarantors
in violation of the terms of this Section 5, such distributions shall be (i)
held in trust by Guarantors on behalf of Lender, (ii) turned over to Lender by
Guarantors immediately upon receipt thereof and (iii) deemed to constitute a
portion of the Collateral pledged by Guarantors to Lender hereunder.
6. Default and Remedies.
6.1 Occurrence. The occurrence of any of the following shall
constitute an Event of Default hereunder:
6.1.1 Default under Loan Agreement. If an Event
of Default under the Loan Agreement shall occur.
6.1.2 Breach of Covenants. If Guarantors shall fail to observe
or perform any covenant or agreement (other than those
specifically addressed elsewhere in this Section 6.1) made by
Guarantors under this Pledge Agreement, and such failure shall
continue for a period of thirty (30) days after written notice
of such failure is given by Agent.
6.1.3 Breach of Warranty. If any representation or warranty
made by or on behalf of any Guarantors in or pursuant to this
Pledge Agreement shall prove to be false or misleading in any
material respect on the date made.
6.1.4 Collateral. If any material portion of the Collateral
shall be seized or taken by a governmental body or Person, or
Guarantors shall fail to maintain or cause to be maintained
the liens in the Collateral granted hereby and the priority of
such Liens as against any Person, or the title and rights of
Guarantors to any material portion of the Collateral shall
have become the subject matter of
-5-
<PAGE>
litigation which could reasonably be expected to result in
impairment or loss of the security provided by this Pledge
Agreement.
6.2 Remedies. If an Event of Default shall occur and be
continuing, Lender, at its option, may:
6.2.1 Registration. Cause the Collateral to be
registered in its name or in the name of its nominee;
6.2.2 Voting Power. Exercise all voting powers
pertaining to the Collateral and otherwise act with respect
thereto as though Lender were the owner thereof;
6.2.3 Distributions. Receive all dividends and
all other distributions of any kind whatsoever on all or any
part of such Collateral;
6.2.4 Collection, Conversion. Exercise any and
all rights of collection, conversion or exchange, and any and
all other rights, privileges, options or powers of Guarantors
pertaining or relating to such Collateral;
6.2.5 Sale of Collateral. Subject to any applicable state or
federal securities laws, sell, assign and deliver the whole,
or from time to time, any part of the Collateral at any
broker's board or at any private sale or at public auction,
with or without demand for performance or advertisement of the
time or place of sale or adjournment thereof or otherwise, and
free from any right of redemption (all of which hereby
expressly are waived by Guarantors) for cash, for credit or
for other property, for immediate or future delivery, and for
such price and on such terms as Lender in its sole discretion
may determine; and
6.2.6 Other Remedies. Exercise any other remedy
specifically granted under this Pledge Agreement, the
Guaranty, the other Loan Documents or now or hereafter
existing in equity, or at law, by virtue of statute or
otherwise.
With respect to the actions described in each of subsections 6.2.2 and
6.2.4 above, Guarantors hereby irrevocably constitutes and appoints
Lender its proxy and attorney-in-fact with full power of substitution
and acknowledges that the constitution and appointment of such proxy
and attorney-in-fact are coupled with an interest and are irrevocable.
6.3 Agreement to Sell Collateral. For the purposes of this Section 6,
an agreement to sell all or any part of the Collateral shall be treated
as a sale thereof and Lender shall be free to carry out such sale
pursuant to such agreement, and Guarantors shall not be entitled to the
return of any of the same subject thereto, notwithstanding the fact
that after Lender shall have entered into such an agreement, all Events
of Default hereunder
-6-
<PAGE>
may have been remedied or all of Borrower's Obligations and
Guarantors's Obligations may have been paid and/or performed in full.
6.4 Lender May Bid. At any sale made pursuant to Section 6.2 above,
Lender may bid for and purchase, free from any right of equity or
redemption on the part of Guarantors (the same hereby being waived and
released by Guarantors), any part or all of the Collateral that is
offered for sale, and Lender, upon compliance with the terms of sale,
may hold, retain and dispose of such Collateral without further
accountability therefor.
6.5 Proceeds of Sale. The proceeds of any sale of the whole or any part
of the Collateral and any other monies at the time held by Lender under
the provisions of this Pledge Agreement shall be applied in accordance
with the terms of the Loan Agreement.
6.6 No Duty of Lender. Lender shall not have any duty to exercise any
of the rights, privileges, options or powers or to sell or otherwise
realize upon any of the Collateral, as hereinbefore authorized, and
Lender shall not be responsible for any failure to do so or delay in so
doing.
6.7 Effect of Sale. Any sale of all or any portion of the Collateral
pursuant to Section 6.2 above shall operate to divest all right, title
and interest of Guarantors to the Collateral which is the subject of
any such sale.
6.8 Securities Act. Guarantors acknowledge that Lender may be unable to
effect a public sale of all or a part of the Collateral by reason of
certain prohibitions contained in the Securities Act, or that it may be
able to do so only after delay which might adversely affect the value
that might be realized upon the sale of the Collateral. Accordingly,
Guarantors agree that Lender, without the necessity of attempting to
cause any registration of the Collateral to be effected under the
Securities Act, may sell the Collateral or any part thereof in one or
more private sales to a restricted group of purchasers who may be
required to agree, among other things, that they are acquiring the
Collateral for their own account, for investment purposes only, and not
with a view toward the distribution or resale thereof. Guarantors agree
that any such private sale may be at prices or on terms less favorable
to the owner of the Collateral than would be the case if such
Collateral was sold at public sale, and that any such private sale
shall not be deemed not to have been made in a commercially reasonable
manner by virtue of such sale having been a private sale.
6.9 Notice. Lender shall give not less than ten (10) Business Days
prior written notice to Guarantors of any sale pursuant to this Section
6, and such sale shall be held at such time or times within ordinary
business hours. Guarantors hereby agree that such notice is
commercially reasonable.
-7-
<PAGE>
7. Lender's Obligations, Custodial Agreement, Performance Rights, Pledge Does
Not Make Lender Shareholder. Lender shall not have any duty to protect, preserve
or enforce rights against the Collateral other than a duty of reasonable
custodial care of any such Collateral in its possession, it being understood
that Lender shall (i) have no responsibility for (A) ascertaining or taking
action with respect to calls, conversions, exchanges, maturities, tenders or
other matters relating to the Collateral, whether or not Lender has or is deemed
to have knowledge of such matters, (B) taking any necessary steps to preserve
rights against any parties with respect to the Collateral or (C) making any
capital contributions or other payments on behalf of Guarantors and (ii) not be
deemed to be a shareholder of Borrower unless Lender purchases or otherwise
retains the applicable portion of the Collateral in connection with a
foreclosure.
8. Termination of Pledge Agreement. Upon the payment and performance in
full of all of Borrower's Obligations and Guarantors's Obligations, Lender shall
deliver to Guarantors the Collateral in its possession and this Pledge Agreement
thereupon shall terminate, subject to the provisions of the Loan Agreement.
9. Miscellaneous.
9.1 Exercise of Rights. Guarantors unconditionally agree that if an
Event of Default has occurred and is continuing, Lender may exercise
its rights and remedies hereunder prior to, concurrently with, or
subsequent to the exercise by Lender of its rights and remedies against
Guarantors or any other Person under any of the Loan Documents or
otherwise. The obligations of Guarantors under this Pledge Agreement
shall be absolute and unconditional and shall remain in full force and
effect without regard to, and shall not be released or discharged or in
any way affected by:
9.1.1 Amendments. Any amendment or modification of or
supplement to any of the Loan Documents;
9.1.2 Exercise or Non-Exercise of Rights. Any exercise or
non-exercise of any right or remedy under any of the Loan
Documents, or the granting of any postponements or extensions
for time of payment or other indulgences to Guarantors or any
other Person, or the settlement or adjustment of any claim or
the release or discharge or substitution of any Person
primarily or secondarily liable with respect to any of the
Loan Documents;
9.1.3 Bankruptcy. The institution of any bankruptcy,
composition, receivership or liquidation proceedings by or
against Guarantors, Borrower or any other Person; or
9.1.4 Other Defenses. Any other circumstance which otherwise
might constitute a defense to, or a discharge of, Guarantors
with respect to Borrower's Obligations and/or Guarantors's
Obligations.
-8-
<PAGE>
9.2 Rights Cumulative. Each and every right, remedy and power granted
to Lender hereunder, under the Guaranty and the other Loan Documents
shall be cumulative and in addition to any other right, remedy or power
specifically granted herein or now or hereafter existing in equity, at
law, by virtue of statute or otherwise and may be exercised by Lender,
from time to time, concurrently or independently and as often and in
such order as Lender may deem expedient. Any failure or delay on the
part of Lender in exercising any such right, remedy or power, or
abandonment or discontinuance of steps to enforce the same, shall not
operate as a waiver thereof or affect the right of Lender thereafter to
exercise the same, and any single or partial exercise of any such
right, remedy or power shall not preclude any other or further exercise
thereof or the exercise of any other right, remedy or power, and no
such failure, delay, abandonment or single or partial exercise of
rights of Lender hereunder shall be deemed to establish a custom or
course of dealing or performance among the parties hereto.
9.3 Modification. Any modification or waiver of any provision of this
Pledge Agreement, or any consent to any departure by Guarantors
therefrom, shall not be effective in any event unless the same is in
writing and signed by Lender and then such modification, waiver or
consent shall be effective only in the specific instance and for the
specific purpose given. Any notice to or demand on Guarantors in any
event not specifically required of Lender hereunder shall not entitle
Guarantors to any other or further notice or demand in the same,
similar or other circumstances unless specifically required hereunder.
9.4 Further Assurances. Guarantors agree that at any time, and from
time to time, after the execution and delivery of this Pledge
Agreement, Guarantors, upon the reasonable request of Lender and at the
expense of Guarantors, promptly will execute and deliver such further
documents and do such further acts and things as Lender reasonably may
request in order to effect fully the purposes of this Pledge Agreement
and to subject to the security interest created hereby any property
intended by the provisions hereof to be covered hereby. Guarantors and
Lender acknowledge their intent that, upon the occurrence of an Event
of Default, Lender shall receive, to the fullest extent permitted by
law, all rights necessary or desirable to obtain, use or sell the
Collateral, and to exercise all remedies available to Lender under the
Loan Documents, the Uniform Commercial Code or other applicable law.
Guarantors and Lender further acknowledge and agree that, in the event
of changes in law or governmental policy occurring subsequent to the
date hereof that affect in any manner Lender's rights of access to, or
use or sale of, the Collateral, or the procedures necessary to enable
Lender to obtain such rights of access, use or sale, Lender and
Guarantors shall amend this Pledge Agreement and any other Loan
Documents to which Guarantors is a party, in such manner as Lender
reasonably shall request, in order to provide Lender such rights to the
greatest extent possible consistent with then applicable law.
9.5 Preservation of Collateral. Guarantors agree that it will
warrant, preserve, maintain and defend, at the expense of Guarantors,
the right, title and interest of Lender
-9-
<PAGE>
in and to the Collateral and all right, title and interest represented
thereby against all claims, charges and demands of all Persons
whomsoever.
9.6 Notices. All notices and communications under this Pledge Agreement
shall be delivered in the manner set forth in the Loan Agreement, with
all notices to Guarantors to be sent to the address set forth in the
Loan Agreement for Borrower.
9.7 APPLICABLE LAW. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS
OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES.
9.8 Severability. The invalidity, illegality or unenforceability in any
jurisdiction of any provision in or obligation under this Pledge
Agreement or the other Loan Documents shall not affect or impair the
validity, legality or enforceability of the remaining provisions or
obligations under this Pledge Agreement, or the other Loan Documents or
of such provision or obligation in any other jurisdiction.
9.9 Successors and Assigns. This Pledge Agreement shall inure to the
benefit of the successors, assigns of Lender and shall be binding upon
the successors and assigns of Guarantors.
9.10 Counterparts. This Pledge Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all
of which when taken together shall be deemed to be one and the same
instrument.
9.11 Notation on Books. Concurrently with the execution and delivery
hereof, Guarantors shall cause Borrower to register in its corporate
books the security interests in and the pledge of the Collateral
affected hereby.
9.12 Joint and Several. Guarantors shall be jointly and severally
liable for the observance and performance of each of the covenants,
warranties and agreements of Guarantors hereunder and under the other
Loan Documents to which they are a party. Each of the representations
of Guarantors herein is made by Guarantors jointly and severally.
10. CONSENT TO JURISDICTION. GUARANTORS HEREBY CONSENT TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE
COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREE THAT,
SUBJECT TO LENDER'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. GUARANTORS ACCEPT
FOR THEMSELVES AND IN CONNECTION WITH THEIR PROPERTIES,
GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF
-10-
<PAGE>
THE AFORESAID COURTS AND WAIVE ANY DEFENSE OF FORUM NON CONVENIENS, AND
IRREVOCABLY AGREE TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION
WITH THIS PLEDGE AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE OBLIGATIONS.
11. WAIVER OF JURY TRIAL. GUARANTORS AND LENDER HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS. GUARANTORS AND LENDER ACKNOWLEDGE
THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP,
THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS PLEDGE
AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON
THE WAIVER IN THEIR RELATED FUTURE DEALINGS. GUARANTORS AND LENDER FURTHER
WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL,
AND THAT EACH KNOWINGLY, WILLINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
-11-
<PAGE>
IN WITNESS WHEREOF, Guarantors and Lender have caused this Pledge
Agreement to be executed as of the date first above written.
----------------------------------
HAROLD GINSBURG
----------------------------------
SHEILA GINSBURG
HELLER FINANCIAL, INC., a Delaware corporation
By: ______________________________
Name: _______________________________
Its: ______________________________
<PAGE>
EXHIBIT A
Description of Securities
Issued to
Description Guarantors and
Guarantors of Stock Outstanding
Harold Ginsburg Common Stock of 28 shares, represented by
Guardian certificate no. __.
International, Inc.
Sheila Ginsburg Common Stock of 28 shares, represented by
Guardian certificate no. __.
International, Inc.
Borrower Acknowledgment
The undersigned, as ______________ of Guardian International, Inc., a
_________ corporation (the "Corporation"), hereby acknowledges, on behalf of the
Corporation, the pledge of 56% of the issued and outstanding capital stock of
the Corporation pursuant to the terms of this Pledge Agreement.
GUARDIAN INTERNATIONAL, INC., a
Florida corporation
By: ______________________________
Name: ______________________________
Its: ______________________________
A-1
<PAGE>
EXHIBIT 10 (h)(2)
GUARANTY
This GUARANTY is dated as of November 16, 1994 by HAROLD GINSBURG, an
individual and SHEILAH GINSBURG, an individual (collectively, jointly and
severally "Guarantors") for the benefit of HELLER FINANCIAL, INC., a Delaware
corporation ("Lender"). All capitalized terms used but not otherwise defined
herein shall have the meanings ascribed to them in the "Loan Agreement" (as
hereinafter defined).
WHEREAS, Guarantors own 56% of the capital and voting stock in Guardian
International, Inc., a Florida corporation ("Borrower");
WHEREAS, Lender and Borrower have entered into a Loan and Security
Agreement dated as of (as the same may be amended, modified, supplemented or
restated from time to time, the "Loan Agreement"), pursuant to which Lender has
made loans and other financial accommodations to Borrower (collectively, the
"Loans");
WHEREAS, One of the conditions precedent to the effectiveness of the
Loan Agreement is the execution by Guarantors of this Guaranty and the
performance by Guarantors of their obligations hereunder.
NOW, THEREFORE, in order to induce Lender to enter into and accept the
Amendment, and for other good and valuable consideration, the receipt and
sufficiency of which hereby are acknowledged, Guarantors hereby agree as
follows:
1. Guaranty of Payment. Guarantors hereby jointly and severally, unconditionally
and irrevocably guaranty to Lender the punctual payment, whether at stated
maturity or by acceleration or otherwise, of Borrower's Obligations; provided,
however, that Guarantors's liability hereunder shall not exceed $700,000 plus
the costs and expenses incurred by Lender in enforcing the obligations of
Guarantors under this Guaranty. Guarantors shall not be liable for costs and
expenses incurred by Lender in enforcing Borrower's Obligations, except to the
extent such cost and expenses are included within the foregoing limitation.
Guarantors agree that this Guaranty is a present and continuing guaranty of
payment and not of collectibility, and that Lender shall not be required to
prosecute collection, enforcement or other remedies against Borrower, or to
enforce or resort to any of the Collateral or other rights or remedies
pertaining thereto, before calling on Guarantors for payment. Guarantors agree
that, upon an Event of Default Guarantors shall pay Borrower's Obligations to
Lender immediately upon demand, subject to the limitation set forth above in
this Section 1. Guarantors agree that one or more successive actions may be
brought against Guarantors as often as Lender deems advisable, until all of
Borrower's Obligations are paid and performed in full.
2. Continuing Guaranty. Guarantors agree that the obligations of Guarantors
pursuant to Paragraph 1 above and any other provision of any of the Loan
Documents shall be primary obligations, shall not be subject to any
counterclaim, set-off, abatement, deferment or defense based upon any claim that
Guarantors may have against Lender (other than any claim directly
-1-
<PAGE>
arising from the gross negligence or wilful misconduct of Lender), Borrower or
any other Person, and shall remain in full force and effect without regard to,
and shall not be released, discharged or affected in any way by any
circumstances or condition (whether or not Guarantors shall have any knowledge
thereof), including, without limitation:
(a) any lack of validity or enforceability of any of the Loan Documents;
(b) any termination, amendment, modification or other change in any of the
Loan Documents;
(c) any exchange, substitution or release of any Collateral or any failure
to perfect any Lien in any of the Collateral;
(d) any failure, omission or delay on the part of Borrower, Guarantors or
Lender to conform of comply with any term of any of the Loan Documents or any
failure of Lender to give notice of any Default or Event of Default;
(e) any waiver, compromise, release, settlement or extension of time of
payment or performance or observance of any of the obligations or agreements
contained in any of the Loan Documents;
(f) any action or inaction by Lender under or in respect of any of the Loan
Documents, any failure, lack of diligence, omission or delay on the part of
Lender to enforce, assert or exercise any right, power or remedy conferred on it
in any of the Loan Documents, or any other action or inaction on the part of
Lender;
(g) the death or incapacity of Guarantors or any voluntary or
involuntary bankruptcy, insolvency, reorganization, arrangement,
readjustment, assignment for the benefit of creditors, composition,
receivership, liquidation, marshalling of assets and liabilities or
similar events or proceedings with respect to Borrower or Guarantors,
as applicable, or any of their respective Property, or any action taken
by any trustee or receiver or by any court in any such proceeding;
(h) any merger or consolidation of Borrower into or with any Person, or any
sale, lease or transfer of any of the assets of Borrower or Guarantors to any
other Person;
(i) any change in the ownership of the capital stock of Borrower or any
change in the relationship between Borrower and Guarantors, or any termination
of any such relationship;
(j) to the extent permitted by law, any release or discharge by operation
of law of Guarantors from any obligation or agreement contained in any of the
Loan Documents; or
-2-
<PAGE>
(k) to the extent permitted by law, any other occurrence,
circumstance, happening or event, whether similar or dissimilar to the
foregoing and whether foreseen or unforeseen, which otherwise might
constitute a legal or equitable defense or discharge of the liabilities
of a guarantor or surety or which otherwise might limit recourse
against Borrower or Guarantors.
3. Waivers. Guarantors unconditionally waive, to the extent permitted by law,
(i) notice of any of the matters referred to in Paragraph 2 above, (ii) all
notices which may be required by statute, rule of law or otherwise, now or
hereafter in effect, to preserve intact any rights against Guarantors,
including, without limitation, any demand, presentment and protest, proof of
notice of non-payment under any of the Loan Documents and notice of any Default
or any Event of Default or any failure on the part of Guarantors or Borrower to
perform or comply with any covenant, agreement, term or condition of any of the
Loan Documents, (iii) any right to the enforcement, assertion or exercise
against Guarantors or Borrower of any right or remedy conferred under any of the
Loan Documents, (iv) any requirement of diligence on the part of any Person, (v)
any requirement to exhaust any remedies or to mitigate the damages resulting
from any default under any of the Loan Documents, and (vi) any notice of any
sale, transfer or other disposition of any right, title or interest of Lender
under any of the Loan Documents.
4. Subordination. Guarantors agree that any and all present and future
debts and obligations of Borrower to Guarantors hereby are subordinated to the
claims of Lender and hereby are assigned by Guarantors to Lender as security for
the repayment and performance of Borrower's Obligations.
5. Subrogation. Notwithstanding any payment or performance by Guarantors
pursuant to this Guaranty, for so long as any of Borrower's Obligations remain
unperformed or unpaid, Guarantors shall not be entitled to be subrogated to any
rights of Lender against Borrower. Unless and until Borrower's Obligations have
been paid and performed in full, Guarantors will not assign or otherwise
transfer any such claim to any other Person.
6. Reinstatement. The obligations of the Guarantors pursuant to this Guaranty
shall continue to be effective or automatically be reinstated, as the case may
be, if at any time payment of any of Borrower's Obligations is rescinded or
otherwise must be restored or returned by Lender upon the insolvency,
bankruptcy, dissolution, liquidation or reorganization of Guarantors or Borrower
or otherwise, all as though such payment had not been made.
7. Successors and Assigns. This Guaranty shall inure to the benefit of Lender,
its successors and assigns. This Guaranty shall be binding on the Guarantors,
his respective successors, assigns, heirs, executors and legatees, and shall
continue in full force and effect until all of Borrower's Obligations are paid
and performed in full.
8. No Waiver of Rights. Neither any delay in exercising nor any failure on
the part of Lender to exercise any right, power or privilege under this Guaranty
or any of the other Loan Documents shall operate as a waiver thereof, and no
single or partial exercise of any right,
-3-
<PAGE>
power or privilege shall preclude any other or further exercise thereof or the
exercise of any other power or right, or be deemed to establish a custom or
course of dealing or performance between the parties hereto. The rights and
remedies herein provided are cumulative and not exclusive of any rights or
remedies provided by law. No notice to or demand on Guarantors in any case shall
entitle Guarantors to any other or further notice or demand in the same, similar
or other circumstance.
9. Modification. The terms of this Guaranty may be waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought. No
amendment, modification, waiver or other change of any of the terms of this
Guaranty shall be effective without the prior written consent of Lender.
10. Costs and Expenses. Guarantors agree to pay promptly all costs and
expenses incurred by or on behalf of Lender (including, without limitation,
reasonable attorneys' fees and expenses) in enforcing the obligations of
Guarantors under this Guaranty.
11. CONSENT TO JURISDICTION. GUARANTORS HEREBY CONSENT TO THE JURISDICTION OF
ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS
AND IRREVOCABLY AGREES THAT, SUBJECT TO LENDER'S ELECTION, ALL ACTIONS OR
PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. GUARANTORS ACCEPT FOR THEMSELVES
AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE
NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF
FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT
RENDERED THEREBY IN CONNECTION WITH THIS PLEDGE AGREEMENT, THE OTHER LOAN
DOCUMENTS OR THE OBLIGATIONS.
12. APPLICABLE LAW. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY,
AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES.
13. WAIVER OF JURY TRIAL. GUARANTORS AND LENDER HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR THE OTHER
LOAN DOCUMENTS. GUARANTORS AND LENDER ACKNOWLEDGE THAT THIS
WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS
RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN
ENTERING INTO THIS PLEDGE AGREEMENT AND THE OTHER LOAN
DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN
THEIR RELATED FUTURE DEALINGS. GUARANTORS AND LENDER FURTHER
-4-
<PAGE>
WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL,
AND THAT EACH KNOWINGLY, WILLINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
14. WAIVER OF RIGHTS AGAINST BORROWER. NOTWITHSTANDING ANYTHING TO THE CONTRARY
WHICH MAY BE CONTAINED HEREIN, GUARANTORS HEREBY UNCONDITIONALLY AND IRREVOCABLY
AGREE THAT GUARANTORS (I) WILL NOT AT ANY TIME ASSERT AGAINST BORROWER (OR THE
BORROWER'S ESTATE IF THE BORROWER BECOMES BANKRUPT OR BECOMES THE SUBJECT OF ANY
CASE OR PROCEEDING UNDER THE BANKRUPTCY LAWS OF THE UNITED STATES OF AMERICA)
ANY RIGHT OR CLAIM, AT LAW OR IN EQUITY, TO INDEMNIFICATION, REIMBURSEMENT,
CONTRIBUTION, RESTITUTION OR PAYMENT FOR OR WITH RESPECT TO ANY AND ALL AMOUNTS
GUARANTORS MAY PAY OR BE OBLIGATED TO PAY TO LENDER, INCLUDING, WITHOUT
LIMITATION, BORROWER'S OBLIGATIONS AND ANY AND ALL OTHER OBLIGATIONS WHICH
GUARANTORS MAY PERFORM, SATISFY OR DISCHARGE, UNDER OR WITH RESPECT TO THIS
GUARANTY, AND (II) WAIVE AND RELEASE ALL SUCH RIGHTS AND CLAIMS, AT LAW OR IN
EQUITY, TO INDEMNIFICATION, REIMBURSEMENT, CONTRIBUTION, RESTITUTION OR PAYMENT
WHICH GUARANTORS MAY HAVE NOW OR AT ANY TIME AGAINST BORROWER (OR THE BORROWER'S
ESTATE IF THE BORROWER BECOMES BANKRUPT OR BECOMES THE SUBJECT OF ANY CASE OR
PROCEEDING UNDER THE BANKRUPTCY LAWS OF THE UNITED STATES OF AMERICA).
GUARANTORS FURTHER UNCONDITIONALLY AND IRREVOCABLY AGREE THAT GUARANTORS SHALL
HAVE NO RIGHT OF SUBROGATION, AND WAIVE ANY RIGHT TO ENFORCE ANY REMEDY WHICH
LENDER NOW HAS OR HEREAFTER MAY HAVE AGAINST BORROWER, AND WAIVES ANY DEFENSE
BASED UPON AN ELECTION OF REMEDIES BY LENDER, WHICH DESTROYS OR OTHERWISE
IMPAIRS ANY SUBROGATION RIGHTS OF GUARANTORS AND/OR THE RIGHT OF GUARANTORS TO
PROCEED AGAINST BORROWER FOR REIMBURSEMENT.
15. Joint and Several. Guarantors shall be jointly and severally liable for the
observance and performance of each of the covenants, warranties and agreements
of Guarantors hereunder and under the Loan Documents to which they are a party.
Each of the representations of Guarantors herein is made by Guarantors jointly
and severally.
-5-
<PAGE>
IN WITNESS WHEREOF, Guarantors have executed this Guaranty as of the
date first above written.
------------------------------
HAROLD GINSBURG
------------------------------
SHEILAH GINSBURG
-6-
<PAGE>
EXHIBIT 10 (h)(3)
Date
Bank
Address
Address
Attn:_______________
Re: COMPANY (Company)
Gentlemen:
Company has established Account Number ______________ and P.O. Box
______ at your bank for collection of checks and other funds from its customers.
You are hereby authorized and directed to deposit all checks and funds received
in P.O. Box _______ into Demand Deposit Account Number____________ (the
"Depository Account") maintained at your bank in the name of Heller Financial,
Inc. for itself and as Agent for the Lenders ("Heller"). These instructions are
effective as of ______________, and cannot be revoked, modified or amended
without the prior written consent of Heller.
By your acceptance hereof, you agree: (i) to act as agent for, and
under the exclusive direction of, Heller with respect to the above described
funds; (ii) that payments received in the P.O. Box are sole and exclusive
property of Heller and Heller's interest therein is superior to any interest
that you may have or claim with respect thereto; and (iii) that, unless you are
otherwise directed by Heller, any payments made to the P.O Box will be promptly
transferred by you to the Depository Account, without any deduction or set-off,
except as noted in Heller Financial, Inc.'s account opening letter dated
_________________.
HELLER FINANCIAL, INC., for COMPANY
itself and as agent for the
lenders
By:__________________________ By:________________________
Title:_______________________ Title:_____________________
The undersigned hereby accepts and agrees to act as agent for the
exclusive benefit of Heller and to comply with the foregoing instructions.
BANK
By:________________________
Title:_____________________
Date:______________________
<PAGE>
Prepared by and return to:
==========================
- --------------------------
EXHIBIT (h)(4)
LOCKBOX SERVICE AGREEMENT
This Lockbox Service Agreement ("Lockbox Agreement") is entered into as
of __________________, 19__, by and between NATIONAL COMMUNITY BANK OF NEW
JERSEY, ("Bank"), PIERCE DAVIDSON ASSOCIATES, LP, ("Customer"), and HELLER
FINANCIAL, INC., a Delaware corporation ("Lender"), subject to the following
conditions.
1. Remittance Collection. Pursuant to Customer's Authorization
hereinafter granted, Bank will collect all mail from P.O.
Drawer No._________ (the "Lockbox"), at frequent intervals
each business day. Bank will remove and inspect the contents.
all mail which does not contain a remittance will be sent to
Customer.
Bank agrees to process remittances only in accordance with written
instructions received from Lender or as herein provided. However, in
the event that such written instructions conflict with this Lockbox
Agreement, the terms of this Lockbox Agreement will control.
Remittances will be handled as follows:
(a) Inspection of Checks. Bank will verify that each item is
payable to Lender or any substantially similar payee
("Payee"). Items not so payable will not be deposited and will
be sent to Lender for disposition.
(b) Adjustments. Bank will make the following standard
adjustments or dispositions unless otherwise agreed
between Bank, Lender and Customer:
Undated checks. Undated checks will be sent to Lender
for disposition.
Missing payee. All items received which do not
designate the name of a payee will be sent to Lender
for disposition.
Postdated items. Items dated five or more business
days after the date of receipt (including such date)
will be sent to Lender.
Differing amounts. If the written and numeric
amounts of an item differ, Bank will process using
<PAGE>
numeric amount and if returned unpaid, the check
will be sent to Lender for disposition.
Unsigned items. Items which do not bear the
drawer's signature will be processed and if
returned unpaid will be sent to Lender for disposition.
Restrictive Endorsements. Items with restrictive
endorsements such as "paid in full" or the like, will
be sent to Lender for disposition. Bank shall use its
best efforts to identify and forward items having
restrictive endorsements. Bank shall not be liable
for any loss or delay resulting from a failure to
identify and forward to Lender items having
restrictive endorsements; provided Bank uses its best
efforts regarding same.
Foreign items. Items drawn on foreign banks in
foreign currency will be sent to Lender for
disposition. Checks drawn on foreign banks payable in
U.S. currency will receive normal processing.
2. Deposits; Transfer; and Disbursements.
(a) Bank will endorse all items as follows:
"Credited to the account of Payee, lack of endorsement
guaranteed," _______________________________________,
Demand Deposit Account No. ______________________.
(b) All checks shall be deposited into an interest bearing
account maintained by Bank (the "Rent Account"). all
funds shall be accumulated in the Rent Account each
month. Unless Lender directs Bank in writing to the
contrary, Borrower, Bank and Lender hereby agree that on
or before the tenth (10th) day of each calendar month the
Bank will wire transfer to Lender by Federal Funds the
amount of the checks and any other funds received in the
lock box. Lender hereby grants Bank a limited right of
claim or offset, but solely with respect to those items
which are returned unpaid.
(c) All items (i.e., checks, drafts or money orders) received will
be microfilmed in processing sequence. This film record will
be maintained by Bank for five (5) years. Photocopies of
filmed items will be provided upon Lender's or Customer's
request and upon payment of photocopying charges currently in
effect.
(d) On or before the fifth (5th) day of each calendar month,
Customer shall provide Lender with a current rent roll for the
prior month showing the amount due from each tenant and the
amount paid by tenant during the prior
<PAGE>
month, additions or deletions made to the rent roll during the
prior month, as well as any other documents which Lender may
request in Lender's sole absolute discretion.
(e) Bank shall provide Lender and Customer with a monthly
statement showing all deposits and disbursements from the Rent
Account and the date of such deposit or disbursement.
3. Returned Items. Items which are returned unpaid because of insufficient
or uncollected funds after presentment will be processed for a second
time. Items processed for a second time which are again returned unpaid
because of insufficient or uncollected funds after presentment will be
returned to Lender. Bank will give Lender and Customer prompt notice of
any unpaid item which may be so charged back or debited.
4. Authority of Bank. Customer has authorized, or hereby authorizes, the
Newark, New Jersey Postmaster or other relevant authority to grant Bank
and Lender unrestricted and exclusive access to the Post Office Box for
the purpose of obtaining all mail placed therein. Bank's appointment by
Customer as Customer's agent is limited as follows:
(a) To have unrestricted and exclusive access to the Post
Office Box for the purpose of obtaining the mail as
described above; and
(b) To endorse for deposit as described above any items and other
evidences of payment, which are for deposit to Customer's
account. Bank's appointment as Customer's agent is for the
specific, limited and restricted purpose of endorsement for
deposit as described herein.
5. Standard of Care. Except as otherwise provided herein, Bank
will exercise reasonable care in the performance of its duties
under this Lockbox Agreement.
6. Limitation of Liability. Bank will have no liabilities to
-----------------------
Customer or Lender other than those imposed upon it by law for
its own lack of good faith or its own failure to exercise
reasonable care. Reasonable care in the handling of items of
deposit shall be measured by the standard of the
reasonableness of the banking procedures established for the
transaction involved. Mere clerical error, inadvertence or an
honest mistake of judgment will not constitute a failure to
perform such obligations or a failure to exercise reasonable
care, and in no case will be deemed wrongful.
7. Indemnification. With respect to all claims of third parties,
Customer agrees to reimburse and indemnify Bank for, and hold
it harmless against, any loss, liability, claim or controversy
of any kind arising out of, or in connection with, the
<PAGE>
performance by Bank of its duties and obligations under this Lockbox
Agreement, as well as the costs and expenses, including (but not
limited to) reasonable attorney's fees, of defending against any claim
or liability arising out of or relating to this Lockbox Agreement;
provided, however, that the foregoing shall not apply unless Bank has
acted in accordance with the reasonable commercial standards of the
banking business.
8. Fees and Expenses. For its services hereunder, Bank shall be
-----------------
entitled to collect a fee in accordance with that certain
proposal letter from Bank to Customer dated May 20, 1992,
which fee shall be paid by Customer, a copy of which is
attached hereto as Exhibit "B" and is incorporated herein by
this reference. During the term of this Lockbox Agreement,
pricing for services provided hereunder will be reviewed semi-
annually and fees will be adjusted accordingly.
9. Modification. This Lockbox Agreement may be modified only by
a written amendment signed by all parties.
10. Duration. This Lockbox Agreement will remain in effect until terminated
by Lender or Bank. Lender or Bank may terminate this Lockbox Agreement
by written notice to the other parties to be effective thirty (30) days
after receipt of notice by the other parties. Such notice may be
transmitted by registered United States mail or by personal delivery to
the address herein designated.
11. Notices; Mailing of Material to Customer or Lender.
(a) The respective addresses at which notices for which
provision is made hereunder are as follows:
(1) To Customer as follows:
Pierce Davidson Associates
535 Secaucus Road
Secaucus, New Jersey 07094
Attention: Mr. Mark Bava
(2) To Bank as follows:
National Community Bank of New Jersey
113 West Essex Street
Maywood, New Jersey 07607
Attention: Nancy Altbrandt
(3) To Lender as follows:
Heller Financial, Inc.
500 West Monroe Street, Suite 1500
Chicago, Illinois 60661
Attention: Mr. Thomas Pacha
<PAGE>
(b) Bank will send a copy of all notices, statements, mail, checks
not accepted for deposit and any other material sent to
Customer or Lender in connection with this Lockbox Agreement
to the other of Customer or Lender at their respective
addresses set forth in paragraph 11(a) hereof.
12. Notices to Tenants. Customer shall complete a notice to each tenant in
the Franklin Tower Office Building in the form attached hereto as
Exhibit A and shall return the notices to Lender within ten (10) days
of the execution of this Lockbox Agreement. Lender shall then forward
the notices to the tenants.
13. Governing Law. This Lockbox Agreement shall be governed by
and construed in accordance with the internal laws of the
State of New Jersey.
14. Bank shall be fully protected in acting on any order or direction by
Lender respecting the Lock Box, the items received therein and the
related deposit account without making any inquiry whatsoever as to
Lender's right or authority to give such order or direction or as to
the application of any payment made pursuant thereto.
15. It is agreed that the Bank will not be responsible for any loss or
delay resulting from any cause or causes which are unavoidable and
beyond its reasonable control, or in any event, for any consequential
damages incurred by either Lender or Borrower.
16. Borrower agrees to indemnify and reimburse the bank for any
reasonable costs and expenses incurred, including without
limitation, legal fees and costs for inside and outside
counsel and all postal and bank services charges incurred in
connection with this agreement, the Lock Box Account and
Deposit Account and in the event Lender sends notice as
defined in paragraph it thereupon gives the bank likewise the
same indemnities.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Lockbox
Agreement to be executed by their duly authorized officers all as of the day and
year first above written.
BANK:
NATIONAL COMMUNITY BANK
OF NEW JERSEY
By:___________________________
Title:________________________
Date:_________________________
CUSTOMER:
PIERCE DAVIDSON ASSOCIATES, L.P.
By:____________________________
Title:_________________________
Date:__________________________
LENDER:
HELLER FINANCIAL, INC.
By:____________________________
Title:_________________________
Date:__________________________
<PAGE>
EXHIBIT A
(Tenant's Name)
-------------------------------
(Tenant's Address)
===============================
-------------------------------
(Date)
Dear Tenant:
You are hereby notified that, effective with the lease payment for
January, 1991, all payments for rent and other amounts due under your lease
should be sent as follows:
===============================
-------------------------------
Please make your checks payable to __________________________. This
arrangement shall remain in effect until you receive written notice to the
contrary from ______________________________.
Please sign the enclosed copy of this notice to acknowledge your
agreement to abide by it and return the signed copy in the enclosed
self-addressed, stamped envelope to Heller Financial, Inc.
Sincerely,
-----------------------------
By:__________________________
Acknowledge and Agreed,
- ------------------------
[Tenant]
<PAGE>
EXHIBIT 10 (h)(5)
BORROWING BASE CERTIFICATE
_______________, 199_
Heller Financial, Inc.
500 West Monroe Street
15th Floor
Chicago, Illinois 60661
Attention: Portfolio Manager,
Secured Receivables Finance Group
Ladies and Gentlemen:
Pursuant to the Loan and Security Agreement dated November __, 1994
(the "Loan Agreement") with Guardian International, Inc. ("Borrower"), Borrower
hereby requests a Loan in the principal amount of ________________. This
Borrowing Base Certificate confirms the telephone notice of a requested
borrowing made prior to 11:00 a.m. (Chicago time) today. The aggregate amount of
Loans outstanding, including the Loan requested herewith, is not more than the
amount of the Borrowing Base. Borrower has not requested a Loan with the seven
(7) day period ending on the date hereof. The requested Funding Date as [not
less than four Business Days after date]. All capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to them in the Loan
Agreement.
1. Aggregate of monthly payments required
by Eligible Contracts $__________
2. Aggregate number of months remaining,
on Eligible Contracts, not to exceed
60 months for any one Eligible Contract ___________
3. Product of line 1 multiplied by line 2 $__________
4. Product of line 3 multiplied by 50%
(Borrowing Base) $__________
5. Present outstanding principal balance of Loans
(to be completed by Lender) $__________
6. Amount of Loan requested hereby $__________
7. Total of lines 5 and 6 (must be less than
lesser of $7,000,000 and line 4) $__________
<PAGE>
An Aging Report is attached hereto and a copy of such Aging Report was
delvered to the Custodian by [describe method of transmittal] for delivery on
[date of delivery], together with the original counterparts of the Contracts
reflected thereon, and the Schedule of Contracts required by the Custody
Agreement.
Also attached hereto is evidence that (a) each of the Contract Obligors
under Contracts reflected on the attached Aging Report but not previously part
of the Borrowing Base has achieved a Beacon Credit Score of at least 400, and
(b) each of the Contract Obligors under Contracts reflected on the attached
Aging Report but not previously part of the Borrowing base, has purchased its
Alarm System for a minimum price of $300 or purchased a residence with an
existing Alarm System, and the fair market value of the Alarm System is not less
than $300.
All of the Contracts described on the attached Aging Report are
Eligible Contracts, and meet all of the following criteria:
(a) Installments under the Contracts are paid only monthly or
quarterly;
(b) The Contract Obligors own and reside in the residences where the
Alarm Systems are permanently installed as a fixture;
(c) Installments under the Contracts are in an amount not
less than $20 per month and not more than $50 per
month; and with respect to all the Eligible Contracts
included in the Borrowing Base, the average
installment is less than $30 per month;
(d) Each of the Contract Obligors has achieved a Beacon Credit Score
of at least 400;
(e) The accounts for the Contracts have been transferred into
Borrower's central station;
(f) Borrower has electronically inspected each Alarm System, and the
alarm panel has been placed on Borrower's own telephone line;
(g) Each of the Contract Obligors has a homeowner's
insurance policy in full force and effect and the
insurer has been notified that the Contract Obligor
has a monitored Alarm System;
(h) Each Alarm System has been encrypted with Borrower's proprietary
alarm monitoring computer software;
(i) Each Contract Obligor has purchased its Alarm System
for a minimum price of $300 or purchased a residence
with an existing Alarm System, and the fair market
value of the Alarm System is not less than $300;
<PAGE>
(j) Borrower has owned the Contract and monitored the related Alarm
System for not less than five (5) Business Days;
(k) Borrower has physically inspected at least five percent (5%) of
the Alarm Systems;
(l) With respect to Contracts first included in the
Borrowing Base, no installment remains unpaid for
more than thirty (30) days after the due date
specified therefor; and
(m) The Contracts are not otherwise Ineligible Contracts.
On the date hereof, all representations and warranties in the Loan
Agreement are true and correct. No Default or Event of Default has occurred and
is continuing on the date hereof.
Please disburse any funds advanced pursuant hereto in accordance with
the following instruction:
===========================
---------------------------
GUARDIAN INTERNATIONAL, INC.
By: __________________________
Name: __________________________
Its: Responsible Officer
<PAGE>
EXHIBIT 10 (h)(6)
CAPITAL APPRECIATION RIGHTS AGREEMENT
This Capital Appreciation Rights Agreement (this "Agreement") is dated
as of November 16, 1994, and is between GUARDIAN INTERNATIONAL, INC., a Florida
corporation ("Company"), with its principal place of business at 3880 North 28th
Terrace, Hollywood, Florida 33020, and HELLER FINANCIAL, INC., a Delaware
corporation ("Heller") having an office at 500 West Monroe Street, Chicago,
Illinois 60661.
WHEREAS, Company and Heller, as lender, are parties to that certain
Loan and Security Agreement of even date herewith (as the same may hereafter be
amended, modified or supplemented from time to time, the "Loan Agreement"),
pursuant to which Heller may make certain loans to Company in the maximum amount
of up to $7,000,000;
WHEREAS, as an inducement to Heller to enter into the Loan Agreement,
Company has agreed to execute and deliver this Agreement to Heller; and
WHEREAS, Heller has allocated certain consideration for the right to
receive the "Capital Appreciation Payment" (as defined herein).
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not otherwise defined herein shall
have the meanings ascribed to such terms in the Loan Agreement, as in effect on
the date hereof, regardless of whether the Loan Agreement shall be hereafter
amended or terminated. When used herein, the following terms shall have the
following meanings:
"Applicable Adjustment" means an amount determined from time to time
pursuant to all Dilutive Transactions which shall have occurred, equal to the
product obtained by multiplying (i) the Multiplier, by (ii) the aggregate of all
Dilutive Consideration which the Company has received on or prior to the
applicable date.
"Capital Appreciation Payment" shall have the meaning ascribed thereto
in paragraph 2 hereof.
"Capital Appreciation Payment Obligation" means the obligation of the
Company to make the Capital Appreciation Payment to the Holders pursuant to the
terms hereof.
"Common Stock" means shares of (i) common stock of the Company par
value $1.00 per share, and/or (ii) any other class of capital stock or security
of the Company hereafter authorized having the right to share in distributions
of either earnings or assets of the Company without limit in amount or
percentage.
1
<PAGE>
"Company Payment Notice" shall have the meaning ascribed thereto in
subparagraph 3(b) hereof.
"Company Payment Period" means the period commencing on the ninth (9th)
anniversary of the date hereof and ending on the tenth (10th) anniversary of the
date hereof.
"Current Market Value" means, as to any security on any date specified
herein, the average of the daily closing prices for the thirty (30) consecutive
trading days before such date, excluding any trades which are not bona fide
arm's length transactions. The closing price for each day shall be:
(i) if any such security is listed or admitted for trading on
any national securities exchange, the last sale price of such security
or the mean of the closing bid and asked prices therefor if no such
sale occurred, in each case as officially reported on the principal
securities exchange on which such security is listed; or
(ii) if not listed or admitted for trading on any national
securities exchange and if quoted in the over-the-counter market as
shown by the National Association of Securities Dealers, Inc. Automated
Quotation System, or any similar system of automated dissemination of
quotations of security prices then in common use in the United States,
the mean between the closing high bid and low asked quotations of any
such security, as reported by any member firm of the New York Stock
Exchange selected by the Company; or
(iii) if not listed, admitted or quoted as described in
clauses (i) or (ii) above, the mean between the high bid and low asked
quotations for any such security as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, as
reported by any member firm of the New York Stock Exchange selected by
the Company; or
(iv) if such security is quoted on a national securities or
central market system in lieu of a market or quotation system described
in any of clauses (i), (ii) and (iii) above, then the closing price
shall be determined in the manner set forth in clause (ii) above if bid
and asked quotations are reported but actual transactions are not, and
in the manner set forth in clause (i) above if actual transactions are
reported.
"Dilutive Consideration" means the Fair Value of the consideration
received by the Company in return for issuing Common Stock in any Dilutive
Transaction, determined in accordance with the definitions of Dilutive
Transaction and Non-Dilutive Transaction.
"Dilutive Transaction" means any transaction in which the Company
issues shares of its Common Stock in return for per share consideration which is
less than the greater of (i) the then Net Book Value Per Share, or (ii) the then
Fair Value Per Share. For purposes hereof, the consideration received by the
Company for issuing any shares of Common Stock shall be valued
2
<PAGE>
in accordance with the terms of the definition of Non-Dilutive Transaction. Any
exercise by Robert Kasky of rights to the issuance or other purchase from the
Company of up to ten percent (10%) percent of the number of issued and
outstanding shares of Common Stock of the Company shall be excluded from the
definition of the term "Dilutive Transaction."
"Event of Default" means any of (i) the breach of any warranty or
representation made by the Company herein; (ii) the failure by the Company to
comply with any covenant contained herein for a period of thirty (30) days after
the Company obtains knowledge thereof; or (iii) an "Event of Default" (as
defined in the Loan Agreement).
"Excess Dividends" means all dividends, distributions and repurchases
of or with respect to the Company's capital stock made from and after the date
hereof, other than: (i) dividends and distributions paid in the form of shares
of capital stock of the Company; and (ii) dividends or distributions with
respect to which the Holders receive a portion of the total amount distributed
equal to the total amount distributed multiplied by the Multiplier then in
effect.
"Exercising Holder" means a Holder holding, at the time in question, a
majority in interest of the Capital Appreciation Payment Obligation. If there is
no Holder holding a majority in interest and Heller is a Holder at such time,
then Heller shall be the Exercising Holder. If there is no Holder holding a
majority in interest and Heller is not a Holder at such time, then Holders
holding, at the time in question, a majority in interest of the Capital
Appreciation Payment Obligation shall collectively be referred to as the
Exercising Holder.
"Fair Value" means, (1) with respect to the Company, the fair value of
the Company at the time; (2) with respect to the Common Stock of the Company,
the aggregate fair value of all Common Stock of the Company at the time, and (3)
with respect to any other entity, or any securities, property or services as to
which a determination of Fair Value must be made hereunder, the fair value of
such entity, securities, property or service at the applicable time. In each of
the foregoing cases, Fair Value shall be determined in accordance with the
applicable provisions of the following:
(i) If, at the time of any determination of Fair Value of the
Company, or Fair Value of the Common Stock of the Company, the Company
shall have effected a public offering of Common Stock, or if the
Company shall have become a reporting company under the Securities
Exchange Act of 1934, as amended (or any successor statute), and, in
either case, shares of Common Stock are actively traded on a public
market at the time, then the Fair Value of the Company and its
Subsidiaries, or Fair Value of the Common Stock of the Company, shall
be equal to the "Current Market Value" of the Common Stock per share
multiplied by the total number of shares of outstanding Common Stock at
such time.
(ii) If, at the time of any determination of Fair Value, the
provisions of (i) above are not applicable, Fair Value shall be
determined as mutually agreed by the Exercising Holder and the Company
(by action of the Company's board of directors) or, if the
3
<PAGE>
Exercising Holder and Company cannot agree, as provided below in this
subparagraph (ii):
(A) Upon any request to pay, or determination of the
Company to pay, the Capital Appreciation Payment Obligation or
the occurrence of any other event hereunder which gives rise
to a requirement to determine "Fair Value" hereunder, the
Exercising Holder and the Company shall have thirty (30) days
to determine and mutually agree upon Fair Value. If the
Exercising Holder and the Company cannot agree upon Fair Value
within such period, the parties shall have an additional ten
(10) days to select an Independent Investment Banking Firm
which they shall mutually agree upon to determine "Fair
Value." If the Exercising Holder and the Company cannot
mutually agree upon an Independent Investment Banking Firm
within such period, each of them shall have an additional
fifteen (15) days to select an Independent Investment Banking
Firm, and the two Independent Investment Banking Firms
selected by the parties shall then have fifteen (15) days to
select a further Independent Investment Banking Firm. If no
third Independent Investment Banking Firm can be agreed upon
by the first two Independent Investment Banking Firms, such
third Independent Investment Banking Firm shall be an
Independent Investment Banking Firm selected by an arbitrator
chosen in accordance with the rules for commercial arbitration
of the American Arbitration Association then in effect. The
Independent Investment Banking Firm selected by mutual
agreement or as provided in the preceding two sentences is
referred to herein as the "Arbiter".
(B) The Arbiter shall determine the fair value of the
Company, or the fair value of the Common Stock of the Company,
or of the applicable other entity, security, property or
services (as applicable), and deliver its opinion in writing
to the Company and to the Holders. The terms of engagement of
the Arbiter shall require the Arbiter to deliver such written
opinion to the Company and the Holders within sixty (60) days
following submission of such value determination to the
Arbiter.
(C) For purposes of making any determination of fair
value of the Company, or the fair value of the Common Stock of
the Company, the Arbiter shall:
(1) assume that all Excess Dividends through the date
of determination were retained by the Company;
(2) reflect any liability of the Company for
Indebtedness;
(3) disregard any liability of the Company or any of
its Subsidiaries for stock appreciation rights, or
for puts, liquidation rights or repurchase
obligations with respect to capital stock;
4
<PAGE>
(4) make a reduction in fair value to reflect Arbiter
Expenses (as defined below) to be borne by the
Company; and
(5) take into account all other relevant economic
factors, including, without limitation, any
transaction costs incurred by the Company, and
including (a) the value of the Company and its
Subsidiaries as a going concern assuming the sale of
one hundred percent (100%) of the capital stock of
the Company to a single purchaser in an arms-length
transaction between a willing seller and a willing
buyer with neither under any compulsion to buy or
sell, and (b) if the Arbiter determines that fair
value may be maximized by selling each severable
business unit comprising the Company and its
Subsidiaries separately, the sum of the values of
such severable business units.
In addition, with respect to any determination of
Fair Value made after any merger or consolidation involving
the Company in which the Company is not the surviving
corporation, Fair Value of the Common Stock of the Company
shall mean the Fair Value of the lines of business and related
assets, liabilities and operations of the surviving
corporation which are successors to the lines of business
conducted by the Company immediately prior to such merger or
consolidation.
Fair Value under this subparagraph (ii)(C) shall be
determined based upon the Arbiter's opinion as follows: (X) if
such opinion expresses fair value in terms of a range of
values, the mean of such range shall be deemed to be Fair
Value, or (Y) if such opinion expresses fair value as an
absolute number, such number shall be deemed to be Fair Value.
(D) Any determination of Fair Value made in
accordance with clauses (A), (B) and (C) of this subparagraph
(ii) shall be conclusive and binding on the Company and the
Holders for the purposes of determining the amount payable
pursuant to the request for payment of the Capital
Appreciation Payment Obligation or other event which gave rise
to the requirement hereunder to make such determination of
Fair Value.
(E) The out-of-pocket fees and expenses of the
Holders and the Company in retaining the Independent
Investment Banking Firms to select the Arbiter and all fees,
costs and expenses of the Arbiter (collectively, the "Arbiter
Expenses") shall be borne equally by the Company and Holders.
(iii) Notwithstanding the provisions of (ii) hereof, for
purposes hereof, in the event of
(A) a Total Sale of All Equity, or
5
<PAGE>
(B) any Market Event involving a sale of all of the
capital stock of the Company as to which the consideration
received is solely cash, or
(C) any Market Event involving a sale of all or
substantially all of the assets of the Company as to which the
consideration received is solely cash;
then, in each such case, the Fair Value of the Company and its
Subsidiaries, or of the Common Stock of the Company, as applicable,
shall be equal to the Market Value thereof determined in accordance
with the definition of Market Value.
"Fair Value Per Share" means, at any relevant time, an amount
determined by dividing (A) by (B), with (A) being equal to the Fair Value of the
Company at such time (determined in accordance with the definition of Fair
Value) and (B) being equal to the number of shares of Common Stock of the
Company then issued and outstanding.
"Holder" means Heller and each other Person to whom Heller or any
transferee shall have assigned or transferred its rights to receive any part of
the Capital Appreciation Payment under this Agreement. "Holders" shall mean all
such Persons at any given time.
"Holder Payment Notice" shall have the meaning ascribed thereto in
Section 3(a).
"Holder Payment Period" means the period commencing on the earliest to
occur of (i) the occurrence of an Event of Default; (ii) payment in full of the
Loans; or (iii) the occurrence of a Market Event, and ending on the tenth (10th)
anniversary of the date hereof.
"Independent Investment Banking Firm" means an investment banking firm
of nationally recognized standing with experience in valuing businesses.
"Market Event" means (i) any merger or consolidation of the Company
with or into any corporation; (ii) a sale or disposition of all or substantially
all of the assets of the Company; (iii) any public offering by the Company of
any of its capital stock; (iv) any sale or other disposition by the Company or
an Affiliate of the Company of shares of the Company's Common Stock
constituting, on a cumulative basis, more than twenty percent (20%) of the
number of shares of Common Stock then outstanding; or (v) any sale or other
disposition of the capital stock of the Company (either in one sale or in a
series of sales) constituting more than twenty percent (20%) of the outstanding
capital stock of the Company, other than, in each instance in clauses (i), (ii),
(iv) and (v) above, to or with a stockholder of the Company, an Affiliate of the
Company or an Affiliate of a stockholder of the Company.
"Market Value" means the value of the Company as established by the
most recent Market Event, if any, occurring not more than one hundred twenty
(120) days prior to the relevant determination date. For purposes hereof, the
Market Value of the Company, any assets of the Company or any capital stock of
the Company disposed of shall be the Fair Value thereof
6
<PAGE>
immediately prior to such Market Event (determined in accordance with the
definition of Fair Value), except that:
(i) if the Market Event is a Total Sale of All Equity, then
(A) Market Value of the Company shall be equal to the aggregate
consideration received or receivable by all Rights Holders in such
transaction and (B) if any consideration received by the Rights Holders
is property, the value of such property shall be the Fair Value thereof
as of the date immediately prior to closing of such Total Sale of All
Equity;
(ii) with respect to any Market Event described in clause (ii)
of the definition of Market Event, the Market Value of the Company, or
of the Common Stock of the Company, as applicable, determined in
connection therewith shall include an appropriate adjustment for any
liabilities of the selling entity which are not assumed by the
purchaser;
(iii) with respect to any Market Event involving a sale of all
of the capital stock of the Company as to which the consideration
received is solely cash, Market Value shall be equal to the cash
received or receivable; and
(iv) with respect to any Market Event involving a sale of all
or substantially all of the assets of the Company as to which the
consideration received is solely cash, Market Value shall be equal to
the cash received minus all liabilities of the Company which are not
assumed by the purchaser.
"Multiplier" means, initially, a fraction, the numerator of which is
twenty-four and ninety-nine hundredths (24.99) and the denominator of which is
one hundred (100).
The Multiplier shall be adjusted from time to time only upon the
occurrence of any of the following events:
(i) In the event of any stock split, stock combination,
reverse stock split or other similar event, the numerator and the
denominator of the Multiplier shall each be adjusted to reflect the
effect of such event by multiplying each by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding
after such event and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such event; and
(ii) Each time (if ever) the Company shall issue any shares of
Common Stock in a Non-Dilutive Transaction, the denominator of the
Multiplier shall be increased by the number of shares so issued.
"Net Book Value" means (i) the total assets of the Company, plus (ii)
all Excess Dividends declared and paid by the Company from the date hereof to
the date of any determination thereof, less the total liabilities of the Company
(excluding any liabilities with
7
<PAGE>
respect to the Capital Appreciation Payment Obligation and excluding any
liabilities of the Company for stock appreciation rights or for puts,
liquidation rights or repurchase obligations with respect to capital stock), in
each instance, determined in accordance with GAAP and as of the end of the most
recent month ended prior to the date upon which the requirement to make such
determination arose.
"Net Book Value Per Share" means, at any relevant time, an amount
determined by dividing (A) by (B), with (A) being equal to the Net Book Value of
the Company; and (B) being equal to the number of shares of Common Stock of the
Company then issued and outstanding.
"Non-Dilutive Transaction" means any transaction in which the Company
issues shares of its Common Stock in return for per share consideration which
equals or exceeds the greater of (i) the then Net Book Value Per Share or (ii)
the then Fair Value Per Share. For purposes hereof, and for the purposes of the
definition of Dilutive Transaction, the consideration received by the Company in
connection with any issuance of Common Stock shall be valued as follows:
(A) In the case of cash, the net amount received by the
Company from such issuance after deduction of all costs and expenses
incurred, unless such transaction was a public offering of Common
Stock, in which case consideration received by the Company shall be
equal to the gross amount paid by the purchasers of such Common Stock.
(B) In the case of securities received by the Company, the
Current Market Value of such securities, if ascertainable; otherwise
the Fair Value thereof (in either case as of the date immediately prior
to the date of such issuance of Common Stock).
(C) In the case of other property or services received by the
Company, the Fair Value of such property or services as of the date
immediately prior to the date of such issuance of Common Stock;
provided that any such services shall have been performed prior to the
date of such issuance; otherwise such services shall be valued at zero.
(D) In the event that shares of Common Stock are issued or
sold together with other securities or other assets of the Company for
a consideration which covers both and is not allocated, the value of
the shares of Common Stock issued shall be equal to the difference
between (1) the aggregate value of the consideration received
(determined in accordance herewith), and (2) the value of such other
securities or property transferred by the Company (determined using the
Current Market Value of such securities, if ascertainable, and the Fair
Value of such other property and any such securities as to which
Current Market Value is not ascertainable).
(E) In case any shares of Common Stock shall be issued in
connection with any merger or consolidation in which the Company is the
surviving corporation, the amount of consideration therefor shall be
deemed to be the Fair Value of the other corporations which are parties
to such merger or consolidation (determined as of the date immediately
8
<PAGE>
prior to such merger or consolidation) minus (1) any cash received by
any of the stockholders of such other corporations solely in their
capacities as stockholders by reason of such merger or consolidation,
and (2) the Fair Value of any other consideration received by any
stockholders of such other corporations solely by reason of their
capacities as stockholders by reason of such merger or consolidation.
(F) If any of such shares of Common Stock shall be issued
pursuant to exercise of options or warrants or any other rights to
purchase shares of Common Stock, or conversion of any Indebtedness, the
consideration received by the Company shall be equal to (1) any
consideration previously received by the Company (valued in accordance
herewith) pursuant to issuance of such options, warrants or other
rights, together with (2) any additional consideration received by the
Company (valued in accordance herewith) pursuant to such exercise,
including the amount of any Indebtedness converted; provided that (i)
if such options or warrants or other rights to purchase shares of
Common Stock were issued as incentives or any form of compensation,
such options, warrants or other rights shall be valued at zero, and
(ii) if any options, warrants or other such rights are issued in
connection with the issue or sale of other securities of the Company in
a transaction in which no specific consideration is allocated to such
options, warrants or other rights, such options, warrants or other
rights shall be deemed to have been issued for no consideration.
"Payment Notice" means either a Company Payment Notice or a Holder
Payment Notice, or both.
"Principal's Equity Investment" means, on the date of determination,
$1,000,000, plus additional paid-in capital contributed by Harold Ginsburg in
exchange for shares of the common capital stock of Company, exclusive of any
retained "Net Income" (as defined in the Loan Agreement) with respect thereto,
plus a per annum return of eight percent (8%) thereon, less any amount
distributed to or at the direction of Harold Ginsburg pursuant to the definition
of "Excess Cash Flow" (as defined in the Loan Agreement), less the aggregate
principal amount of any financing at any time secured by Contracts owned by the
Company on the date hereof which have never been Eligible Contracts included in
the Borrowing Base.
"Rights Holders" means, at any time, collectively, all stockholders of
the Company at such time and all holders of any options, warrants or other
rights to acquire any shares of capital stock of the Company at such time.
"Securities Act" means the Securities Act of 1933, as amended, and any
successor Federal statute, and the rules and regulations of the Securities and
Exchange Commission, or any successor agency thereto, promulgated thereunder,
all as the same shall be in effect from time to time.
"Total Sale of All Equity" means a transaction which meets each of the
following requirements:
9
<PAGE>
(i) all Rights Holders at such time shall agree to sell and
shall sell and deliver to a third party which is not an Affiliate of
any of such stockholders all of their ownership interests in the
Company, or the Company shall consummate a merger or consolidation of
the Company in which the Company is not the surviving corporation and
not more than ten percent (10%) of the Rights Holders shall have
exercised any dissenters' rights;
(ii) no Person which was a Rights Holder prior to consummation
of such transaction shall receive or be entitled to receive any equity
interest in the purchaser as part of the transaction;
(iii) no part of the consideration received by any Person
which was a Rights Holder prior to consummation of such transaction
shall be based upon the post-closing performance, financial or
otherwise, of the Company, the purchaser or any Affiliate of the
purchaser, unless all Rights Holders and the Holders hereof shall
collectively share ratably in any such consideration based upon their
respective ownership interests in the Company and assuming that the
Holders hereof shall be deemed to be holders of an aggregate number of
shares of Common Stock equal to the then applicable numerator of the
Multiplier multiplied by the percentage of the total Capital
Appreciation Payment Obligation which is then unpaid and outstanding;
and
(iv) no Person which was a Rights Holder prior to the
consummation of such transaction shall enter into any agreement with
the purchaser or any Affiliate of the purchaser pursuant to which such
Rights Holder shall be entitled to receive compensation (whether for
consulting services, non-compete agreements, full-time employment or
otherwise) from the Company, the purchaser or any Affiliate of the
purchaser, except for employment or consulting agreements providing for
reasonable compensation for actual services to be rendered and not
exceeding three (3) years in duration; and
(v) each Person which was a Rights Holder prior to
consummation of such transaction and did not exercise dissenters'
rights in respect thereof executes and delivers to the Holders a
certificate addressed to the Holders certifying, with respect to the
Rights Holder executing the same, that each of the conditions specified
in (i), (ii), (iii) and (iv) above is true and correct with respect to
such Rights Holder, in form and substance satisfactory to the
Exercising Holder; provided, that if, prior to consummation of such
transaction, the Company shall have effected a public offering of
Common Stock or shall have become a reporting company under the
Securities and Exchange Act of 1934, as amended, then this requirement
(v) may be satisfied by delivery to the Holders of a certificate
executed by each of the directors of the Company and by its chief
executive officer, its chief financial officer and the President of
each Division, certifying such matters (x) unconditionally as to
himself, and (y) to his knowledge with respect to other Rights Holders
who are then employed by or officers of the Company.
2. Capital Appreciation Payment Obligation. The Company hereby agrees to
pay to the Holders, at the time specified herein, a payment (the "Capital
Appreciation Payment") computed
10
<PAGE>
in the manner hereinafter set forth. The Capital Appreciation Payment shall be
paid in one installment and shall be equal to the product obtained by (a)
multiplying (I) the greater of (A) the Market Value of the Common Stock of the
Company, as determined by any Market Event relating to the Company occurring
within one hundred twenty (120) days prior to the date upon which payment of the
Capital Appreciation Payment is requested and (B) the then Fair Value of the
Common Stock of the Company as of the date a Payment Notice is given, in each
instance, determined in accordance with this Agreement, by (II) the Multiplier
then in effect, and (b) subtracting therefrom Principal's Equity Investment. In
the event a Dilutive Transaction shall have occurred prior to the date on which
the Capital Appreciation Payment is made, the amount determined in accordance
with the foregoing shall then be reduced by any Applicable Adjustment then in
effect.
3. Timing and Method of Capital Appreciation Payment.
(a) At any time during the Holder Payment Period, the Exercising Holder
may elect to require the Company to pay the Capital Appreciation Payment;
provided, however, that a Holder Payment Notice given in respect of a Market
Event may be given prior to the commencement of the Holder Payment Period. The
Exercising Holder shall elect to receive such payment by delivering to the
Company, with a copy to each other Holder, a written notice (a "Holder Payment
Notice") specifying (i) a proposed payment date at least sixty (60) days
following the date of such notice and (ii) such Holder's estimate of Fair Value.
If at any time during the period commencing on the date of
issuance of a Holder Payment Notice and ending on the date of payment of a
Capital Appreciation Payment in response thereto, the Company shall have or
obtain knowledge of any Market Event which may reasonably be expected to occur
within six (6) months following such payment, the Company shall promptly notify
the Holders thereof in writing. After receipt of such notice, the Exercising
Holder may withdraw the Holder Payment Notice.
If any Holder is a lender or participant under the Loan
Agreement and the Capital Appreciation Payment to be paid would result in an
"Event of Default" thereunder, then such Holder shall permanently waive such
"Event of Default". Furthermore, the Company shall not be obligated to pay the
Capital Appreciation Payment, if such payment would result in an "Event of
Default" under the Loan Agreement, unless such "Event of Default" is permanently
waived by Lender in accordance with the terms of the Loan Agreement.
(b) At any time during the Company Payment Period, the Company may
elect to pay the Capital Appreciation Payment to the Holders upon issuance of a
written notice (a "Company Payment Notice") to all Holders specifying (i) a
proposed payment date at least thirty (30) days following the date of such
notice and (ii) the Company's estimate of the Fair Value of the Company. The
Company shall not be entitled to make any Capital Appreciation Payment pursuant
to a Company Payment Notice unless any "Event of Default" then existing or
arising therefrom is permanently waived by the Lender in accordance with the
terms of the Loan
11
<PAGE>
Agreement. The amount of the Capital Appreciation Payment shall be
determined in accordance with Section 2 hereof.
(c) Upon determination of the amount of the Capital Appreciation
Payment in accordance with the terms of this Agreement, the Company shall, as
promptly as practicable and in any event within ten (10) days of such
determination, cause to be paid to each Holder that portion of such payment
required to be paid to such Holder in accordance herewith. Such payment shall be
made by wire transfer of immediately available funds to an account in any bank
located in the United States designated by such Holder for such purpose.
4. Adjustment for Subsequent Events.
(a) Promptly upon receipt of a Holder Payment Notice, or simultaneously
with the delivery of a Company Payment Notice, the Company shall either (i)
certify to the Holders that the Company has no knowledge of any Market Event
which may be reasonably expected to be consummated or with respect to which a
definitive agreement may be executed within six months after the date of payment
of the Capital Appreciation Payment or (ii) disclose any such Market Event to
Holders, describing such Market Event in reasonable detail.
(b) Only if the Market Value of the Company as the result of such
transaction exceeds the valuation of the Company which would otherwise serve as
the basis for determining the amount of the Capital Appreciation Payment, then
the value of such Market Event shall be included in the determination of Market
Value of the Company. If the Fair Value of the Company as the result of such
transaction is less than the valuation of the Company which would otherwise
serve as the basis for determining the amount of the Capital Appreciation
Payment, then the value of such Market Event shall be disregarded.
5. Financial and Business Information.
(a) So long as the Loan Agreement shall be in effect, the Company shall
provide to each Holder from time to time copies of all reports and other
financial data which the Company is obligated to provide to Agent and the
Lenders under the Loan Agreement at the same times as such reports and other
financial data are required to be provided to Agent and such Lenders.
(b) If this Agreement shall remain in effect following termination of
the Loan Agreement, the Company shall continue to deliver to each Holder all
information, reports and other financial data which would have been deliverable
under subsections 5.1(B) and (C) of the Loan Agreement at the times when such
items would have been deliverable had the Loan Agreement remained in effect, and
copies of all required filings made by the Company with the Securities and
Exchange Commission or any successor agency thereto, and, except after such
time, if ever, as the Company shall have effected a public offering of any of
its securities or shall have become a reporting company under the Securities and
Exchange Act of 1934, as amended, with reasonable promptness, such other
business or financial data as from time to time may be reasonably requested by
such Holder.
12
<PAGE>
6. No Impairment or Amendment. The Company shall not by any action including,
without limitation, any amendment of its charter, any reorganization, transfer
of assets, consolidation, merger, dissolution, issuance or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Agreement, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate to protect the rights of each Holder
against impairment. Without limiting the generality of the foregoing, the
Company will use its best efforts to obtain all such authorizations, exemptions
or consents from any public regulatory body having jurisdiction thereof as may
be necessary to enable the Company to perform its obligations under this
Agreement.
7. Availability of Information. The Company will cooperate with each Holder in
supplying such information as may be necessary for such Holder to complete and
file any information reporting forms now or hereafter required by the Securities
and Exchange Commission or any successor agency thereto (and any state
securities commissions or equivalent agencies) as a condition to the
availability of an exemption from the Securities Act (or any applicable state
securities laws) for the transfer of such Holder's Capital Appreciation
Certificate in whole or in part.
8. Covenants. The Company hereby agrees to comply with all covenants contained
in Section 7 of the Loan Agreement during the term thereof, which covenants by
this reference are hereby incorporated herein and made a part hereof, mutatis
mutandis. Company will not sell or issue any shares of capital stock which is
not Common Stock or other equity securities which are not convertible or
exchangeable into Common Stock including warrants or rights or options to
purchase.
9. Intentionally Deleted.
10. Interest; Indemnification. The Company shall indemnify, save and hold
harmless each Holder from and against any and all liability, loss, cost, damage,
reasonable attorneys' and accountants' fees and expenses, court costs and all
other out-of-pocket expenses incurred in connection with or arising from an
Event of Default hereunder or otherwise in connection with such Holder's
enforcing its rights under this Agreement. If the Company fails to pay when due
and required to be paid hereunder any amounts payable under this Agreement, the
Company shall pay to the Holders entitled to receive such amounts interest at
the rate which would be applicable under the Loan Agreement after the occurrence
and during the continuance of an Event of Default until paid in full.
11. Termination. Subject to the provisions of Section 4 hereof, this Agreement
and the Capital Appreciation Payment Obligation hereunder shall terminate upon
the payment of the Capital Appreciation Payment Obligation in full pursuant to
the terms hereof. If payment of the Capital Appreciation Payment Obligation has
not been requested on or prior to the tenth (10th) anniversary of the date
hereof, the obligation of the Company to make payment shall, upon such tenth
(10th) anniversary date, become immediately due and payable without further
notice.
13
<PAGE>
12. Remedies. The Company stipulates that the remedies at law of the Holders in
the event of any default or threatened default by the Company in the performance
of or compliance with any of the terms of this Agreement are not and will not be
adequate and that, to the fullest extent permitted by law, such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
13. Priority. Each Holder hereby severally agrees that, in the event of any
proceeding under the Bankruptcy Code, such Holder's right to receive any payment
of the Capital Appreciation Payment shall be junior to all claims of creditors
of the Company, and shall be pari passu with the rights of holders of any Common
Stock to receive any cash, property or securities of the Company in such
proceeding with respect to the remainder of the Capital Appreciation Payment.
14. Parties. Whenever in this Agreement reference is made to any of the parties
hereto, such reference shall be deemed to include, wherever applicable, a
reference to the successors and assigns of the Company and the Holders. This
Agreement shall be binding upon, and shall inure to the benefit of, the Company
and each Holder and their respective successors and permitted assigns. No
assignment by the Company of any of its obligations hereunder shall relieve the
Company of such obligations except to the extent actually performed by such
assignee and no acceptance of any performance by any such assignee shall act as
a waiver, novation or other release by any Holder of its rights hereunder
against the Company with respect to any unperformed obligations of the Company
hereunder.
15. Applicable Law; Jurisdiction; Severability; Waiver.
(a) THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF
THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES.
(b) The invalidity, illegality or unenforceability in any jurisdiction
of any provision in or obligation under this Agreement shall not affect or
impair the validity, legality or enforceability of the remaining provisions or
obligations under this Agreement or of such provision or obligation in any other
jurisdiction.
(c) COMPANY HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY
AGREES THAT, SUBJECT TO LENDER'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING
OUT OF OR RELATING TO THIS AGREEMENT SHALL BE LITIGATED IN SUCH COURTS. COMPANY
ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND
UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND
WAIVES ANY DEFENSE OF FORUM NON
14
<PAGE>
CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY
IN CONNECTION WITH THIS AGREEMENT.
(d) COMPANY AND HELLER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT. COMPANY AND HELLER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL
INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED
ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO
RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. COMPANY AND HELLER FURTHER
WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL,
AND THAT EACH KNOWINGLY, WILLINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
16. Paragraph Titles. The paragraph titles contained in this Agreement
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreement between the parties.
17. Notices. Unless otherwise specifically provided herein, any notice or other
communication required or permitted to be given shall be in writing addressed to
the respective party as set forth below and may be personally served,
telecopies, telexed or sent by overnight courier service or United States mail
and shall be deemed to have been given: (a) if delivered in person, when
delivered; (b) if delivered by telecopy or telex, on the date of transmission if
transmitted on a Business Day before 4:00 p.m. (Chicago time) or, if not, on the
next succeeding Business Day; (c) if delivered by overnight courier, two days
after delivery to such courier properly addressed; or (d) if by U.S. Mail, four
Business Days after deposited in the United States mail, with postage prepaid
and properly addressed.
Notices shall be addressed as follows:
(a) If to Heller, at:
Heller Financial, Inc.
500 West Monroe Street; 15th Floor
Chicago, Illinois 60661
Attn: Portfolio Manager
Secured Receivables
Finance Group
Facsimile: (312) 441-7119
15
<PAGE>
With a copy to:
Heller Financial, Inc.
500 West Monroe Street; 15th Floor
Chicago, Illinois 60661
Attn: Group General Counsel,
Heller Real Estate
Financial Services
Facsimile: (312) 441-7872
(b) If to any other Holder, at such address as shall have
been designated in writing by such Holder to the
Company and the other Holders.
(c) If to the Company at:
Guardian International, Inc.
3880 North 28th Terrace
Hollywood, Florida 33020
Attn: Harold Ginsburg
Facsimile: 305-926-1809
or to such other address as the party addressed shall have previously designated
in written notice to the serving party, given in accordance with this Section
17. A notice not given as provided above shall, if it is in writing, be deemed
given if and when actually received by the party to whom given.
18. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and supersedes all other
understandings, oral or written, with respect to the subject matter hereof.
19. Holders Not Stockholders. Nothing contained in this Agreement shall be
construed as conferring upon any Holder any shareholder's rights in the Company
whatsoever, including, but not limited to, any right to purchase any shares of
capital stock of the Company, any right to cast a vote on, consent to or to
receive notices of any stockholder meetings of the Company or any election of
directors of the Company or any right to engage in any other matters reserved by
general corporate law to shareholders.
20. Transfers by Heller. Heller may assign, sell or otherwise transfer its
rights under this Agreement to an Affiliate, and further may assign, sell,
otherwise transfer its rights under this Agreement to any Person; provided,
however, that Heller shall not so assign, sell or otherwise transfer more than
forty-nine percent (49%) of its rights under this Agreement to a Person other
than an Affiliate.
16
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as
of the day and year first above written.
HELLER FINANCIAL, INC., a GUARDIAN INTERNATIONAL, INC., a
Delaware corporation Florida corporation
Name: _________________________ Harold Ginsburg
Title: _________________________ President
17
<PAGE>
EXHIBIT 10 (i)
Guardian International, Inc.
Loan No. 94-163
MODIFICATION AGREEMENT
THIS MODIFICATION AGREEMENT (this "Agreement") is made as of the ____
day of November, 1995, by and among GUARDIAN INTERNATIONAL, INC., a Florida
corporation ("Borrower"), HAROLD GINSBURG and SHEILAH GINSBURG (collectively,
"Guarantors"), and HELLER FINANCIAL, INC., a Delaware corporation (hereinafter
referred to as "Lender"), with reference to the following:
RECITALS:
A. Lender has heretofore made a loan (the "Loan") to Borrower in
accordance with the terms of that certain Loan and Security Agreement dated
November 16, 1994 between Borrower and Lender (the "Loan Agreement").
B. Borrower has requested that Lender approve a restructuring of the
Loan, and Lender has agreed to such restructuring, and to otherwise modify the
terms and conditions of the Loan Documents, in accordance with the terms and
conditions hereinafter set forth.
C. All capitalized terms used herein shall have the meanings
ascribed thereto in the Loan Agreement unless otherwise defined herein.
NOW, THEREFORE, in consideration of the recitals set forth above, the
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged by
all parties, Borrower and Lender do hereby agree as follows:
1. Recitals. The recitals to this Agreement are fully incorporated herein
by this reference thereto with the same force and effect as though restated
herein.
2. Modification of Loan Agreement. The Loan Agreement shall be and is
hereby modified as follows: a. Section 1.1 shall be modified as follows: (i) The
term "Revolving Loan Commitment Termination Date" shall mean November 30, 1996
(rather than November 30, 1995);
(ii) The following defined terms shall be added:
<PAGE>
"A-Credit Eligible Contract" means an
Eligible Contract on a residential property with a
consumer with a credit rating of "A" or better.
"Monthly Payment" means the monthly payment
required by the terms of each Eligible Contract or,
in the event any Eligible Contract requires payments
to be made quarterly or on some other periodic basis,
the pro rata portion of such payment calculated on a
monthly basis.
"Weighted Average Term" means the average
remaining term of all Eligible Contracts, with each
Eligible Contract weighted on the basis of the
Monthly Payment required by the terms of such
Eligible Contract to be paid by the obligor
thereunder to Borrower.
b. Section 2.1(A)(2) of the Loan Agreement is hereby deleted in its
entirety and restated as set forth below as if originally set forth therein:
"(2) "Borrowing Base" means, as of any date of determination and with
respect to each Eligible Contract, an amount equal to the following:
(a) with respect to each A-Credit Eligible Contract, and
provided that all such A-Credit Eligible Contracts collectively have a Weighted
Average Term of at least eighteen (18) months, the product of (i) the Monthly
Payment required by the terms of such A-Credit Eligible Contract to be paid by
the obligor to Borrower, multiplied by (ii) forty (40); provided, however, that
in no event shall the aggregate outstanding principal balance of advances made
against A-Credit Eligible Contracts in accordance with this subsection (a) at
any time exceed ten percent (10%) of the outstanding principal balance of the
Loan.
(b) with respect to each Eligible Contract other than A-
Credit Eligible Contracts for which advances have been made in accordance with
subsection (a) above, and provided that all such Eligible Contracts collectively
have a Weighted Average Term of at least eighteen (18) months, the product of
(i) the Monthly Payment required by the terms of such Eligible Contract to be
paid by the obligor to Borrower, multiplied by (ii) thirty-four (34).
Notwithstanding the foregoing: (A) in no event shall the outstanding
principal balance of the Loan at any time exceed the product of (1) the Monthly
Payments required to be paid by all obligors under all Eligible Contracts,
multiplied by (2) thirty-five (35); and (B) the Borrowing Base
2
<PAGE>
may be reduced by Lender, in Lender's reasonable discretion, at any time after
the rate of non-renewal of Eligible Contracts by Contract Obligors exceeds eight
percent (8%)."
"(c) Installments under the Contracts are in an amount not less than
$15 per month and not more than $425 per month; provided that with respect to
all the Eligible Contracts included in the Borrowing Base, the weighted average
installment is less than $95 per month; and provided further that no more than
ten percent (10%) of all the Eligible Contracts included in the Borrowing Base
shall require installments of $300 or greater per month;"
d. The first sentence of Section 2.2 of the Loan Agreement is
hereby modified to provide that the "Interest Rate" shall be equal to
three percent (3%) plus the Prime Rate (rather than four percent (4%)
plus the Prime Rate).
3. Modification of Loan Documents. Each of the Loan Documents are hereby
modified to provide that all references therein to the Loan Agreement or to any
of the other Loan Documents shall be deemed to constitute references to the Loan
Agreement or such other Loan Document as modified by this Agreement.
4. Execution of Other Documents. At Lender's request, Borrower hereby
agrees to execute and deliver promptly to Lender such other documents as Lender,
in its reasonable discretion, shall deem necessary or appropriate to reaffirm
Borrower's obligations under the Loan Documents, as modified hereby, to evidence
the loan modification transaction contemplated herein and/or to perfect or
otherwise secure Lender's interest in the Collateral.
5. No Defenses, Counterclaims. Each of Borrower and the Guarantors
hereby represent and warrant to, and covenants with, Lender that as of the date
hereof, (a) Borrower and the Guarantors have no defenses, offsets or
counterclaims of any kind or nature whatsoever against Lender with respect to
the Loan or any of the Loan Documents, or any action previously taken or not
taken by Lender with respect thereto or with respect to any security interest,
encumbrance, lien or collateral in connection therewith to secure the
liabilities of Borrower or the Guarantors, and (b) that Lender has fully
performed all obligations to Borrower and the Guarantors which it may have had
or has on and of the date hereof.
6. Costs. Borrower shall pay or cause to be paid to Lender, in the manner
provided herein all fees and expenses of Lender relating to the modification of
the Loan, this Agreement and the transactions contemplated herein, including,
without limitation, fees and expenses of Lender's outside and in-house counsel
and related expenses (the
3
<PAGE>
"Costs"). Without limitation to the foregoing, as a condition precedent to the
effectiveness of this Agreement Borrower shall deliver to Lender, concurrently
with its execution and delivery hereof to Lender, a certified check or cashiers'
check in the sum of $1,500.00 in payment of Lender's in-house attorneys' fees in
connection with the preparation of this Agreement.
7. Release. Each of Borrower and the Guarantors, on its or his or her,
as the case may be, own behalf and on behalf of its or his or her, as the case
may be, representatives, partners, agents, employees, servants, officers,
directors, shareholders, subsidiary, affiliated and related companies,
successors and assigns (hereinafter collectively referred to as the "Borrowing
Group") waives, releases and forever discharges Lender, and its officers,
directors, subsidiary, affiliated and related companies, agents, servants,
employees, shareholders, representatives, successors, assigns, attorneys,
accountants, assets and properties, as the case may be (hereinafter referred to
as the "Lender Group") from and against all manner of actions, cause and causes
of action, suits, debts, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements, promises,
obligations, liabilities, costs, expenses, losses, damages, judgments,
executions, claims and demands, of whatsoever kind or nature, in law or in
equity, whether known or unknown, whether or not concealed or hidden, arising
out of or relating to any matter, cause or thing whatsoever, that any of the
Borrowing Group, jointly or severally, may have had, or now have or that may
subsequently accrue against the Lender Group by reason of any matter or thing
whatsoever through the date hereof arising out of or in any way connected to,
directly, or indirectly, the Loan and/or any of the other Loan Documents.
Borrower and Guarantors acknowledge and agree that Lender is specifically
relying upon the representations, warranties, covenants and agreements contained
herein and that such representations, warranties, covenants and agreements
constitute a material inducement to enter into this Agreement.
8. Reaffirmation. Except as may be expressly set forth herein to the
contrary, the Loan Documents remain unmodified and all other terms and
conditions of the Loan Documents remain in full force and effect. Without
limitation to the foregoing, Borrower hereby acknowledges and reaffirms its
promise to pay to Lender (a) the outstanding principal balance of the Loan, all
accrued interest thereon and all other Obligations in accordance with the terms
of the Loan Agreement, and in any event no later than the Maturity Date, and (b)
the "Capital Appreciation Payment" described in that certain Capital
Appreciation Rights Agreement dated as of November 16, 1994 between Borrower and
Lender, in accordance with the terms thereof. Notwithstanding anything to the
contrary stated herein, to the extent that the terms and conditions of this
Agreement conflict with the terms and conditions of the Loan Documents, the
terms of this Agreement shall control. Borrower, Guarantors and Lender expressly
state, declare and acknowledge that this Agreement is intended only to modify
Borrower's, Guarantors' and Lender's continuing obligations in the manner set
forth herein, and is not intended as a novation.
4
<PAGE>
9. Guaranty Reaffirmation. By countersigning this Agreement, Guarantors
hereby consent to the terms and provisions hereof, hereby agree that the
execution and delivery hereof by Borrower shall not in any way affect
Guarantor's obligations under the Guaranty, as same may have been amended by
this Agreement, and hereby reaffirms all of Guarantor's obligations thereunder.
10. Counterparts. This Agreement may be signed in counterparts, each of
which shall be deemed an original and all of which together shall be deemed one
agreement.
11. Choice of Law. This Agreement shall be governed and construed under the
laws of the State of Illinois, without regard to the conflict of laws and
principles thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
GUARANTORS: BORROWER:
________________________ GUARDIAN INTERNATIONAL, INC.,
HAROLD GINSBURG a Florida corporation
By: ____________________________
________________________ Harold Ginsburg,
SHEILAH GINSBURG President
LENDER:
HELLER FINANCIAL, INC., a
Delaware corporation
By:__________________________
Name:________________________
Its:__________________________
5
<PAGE>
EXHIBIT 27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,175,129
<SECURITIES> 59,375
<RECEIVABLES> 553,052
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,874,455
<PP&E> 678,466
<DEPRECIATION> (278,977)
<TOTAL-ASSETS> 7,719,007
<CURRENT-LIABILITIES> 589,039
<BONDS> 0
0
0
<COMMON> 6,454
<OTHER-SE> 2,317,801
<TOTAL-LIABILITY-AND-EQUITY> 7,719,007
<SALES> 2,276,536
<TOTAL-REVENUES> 2,344,619
<CGS> 452,737
<TOTAL-COSTS> 1,546,056
<OTHER-EXPENSES> 950,186
<LOSS-PROVISION> (151,623)
<INTEREST-EXPENSE> 400,051
<INCOME-PRETAX> 798,563
<INCOME-TAX> 63,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (214,623)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
